SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-08762
---------
ODETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2588496
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 South Manchester Avenue
Anaheim, California 92802
(Address of principal executive office) (Zip Code)
(714) 774-5000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of November 8, 2001
Class A Common Stock 9,542,889 shares.
Class B Common Stock 1,035,841 shares.
1
INDEX
PART I FINANCIAL INFORMATION Page
----
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS FOR 3
THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2001 4
AND SEPTEMBER 30, 2001 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND
2001 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 14
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 29
ABOUT MARKET RISKS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 29
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 31
SIGNATURES 32
In this Report, "Odetics," the "Company," "we," "us," and "our"
collectively refers to Odetics, Inc. and its subsidiaries.
2
PART I. FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED statements of operations
(in thousands except per share amounts)
(unaudited)
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Net sales and contract revenues:
Net sales $ 13,994 $ 10,302 $ 28,529 $ 21,002
Contract revenues 4,850 5,675 9,632 11,359
------------ ------------ ------------ ------------
Total net sales and contract revenues 18,844 15,977 38,161 32,361
Costs and expenses:
Cost of sales 11,187 6,253 22,695 13,430
Cost of contract revenues 3,052 3,575 6,311 7,395
------------ ------------ ------------ ------------
Gross Profit 4,605 6,149 9,155 11,536
------------ ------------ ------------ ------------
Selling, general and administrative expense 9,440 6,408 19,636 13,418
Research and development expense 4,094 2,318 7,862 4,455
Minority interest in earnings of subsidiary -- 174 -- 174
Restructuring charge -- 1,422 -- 1,422
------------ ------------ ------------ ------------
Total operating expenses 13,534 10,322 27,498 19,469
------------ ------------ ------------ ------------
Operating loss (8,929) (4,173) (18,343) (7,933)
------------ ------------ ------------ ------------
Non-operating items:
Other income -- 1,072 19,055 1,072
Interest expense, net (429) (1,190) (901) (1,785)
------------ ------------ ------------ ------------
Loss from continuing operations before (9,358) (4,291) (189) (8,646)
extraordinary loss
Loss from discontinued operations (including loss
disposal of $8,361) (2,908) (10,873) (4,647) (13,843)
Extraordinary loss from early extinguishment of debt -- -- -- (450)
------------ ------------ ------------ ------------
Net loss $ (12,266) $ (15,164) $ (4,836) $ (22,939)
============ ============ ============ ============
Loss per share (basic and diluted):
Loss from continuing operations before
extraordinary item $ (0.97) $ (0.41) $ (0.02) $ (0.82)
Loss from discontinued operations $ (0.30) $ (1.03) $ (0.49) $ (1.31)
Extraordinary loss from the early
extinguishment of debt -- -- -- $ (0.04)
------------ ------------ ------------ ------------
Loss per share $ (1.27) $ (1.43) $ (0.51) $ ($2.17)
============ ============ ============ ============
Shares used in calculating loss per share
Basic and diluted 9,664 10,579 9,456 10,566
============ ============ ============ ============
See notes to consolidated financial statements
3
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
March 31, 2001
2001 (unaudited)
-------- -------------
ASSETS
Current assets
Cash $ 2,218 $ 4,605
Trade accounts receivable, net 14,300 12,105
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,296 3,032
Inventories:
Finished goods 1,611 1,019
Work in process 51 141
Materials and supplies 8,991 5,704
-------- ----------
Total inventories 10,653 6,864
Prepaid expenses 992 2,068
Assets held for disposal 5,639 336
-------- ----------
Total current assets 37,098 29,010
Property, plant and equipment:
Land 2,060 2,060
Buildings and improvements 18,982 18,997
Equipment, furniture and fixtures 33,540 29,086
-------- ----------
54,582 50,143
Less accumulated depreciation (34,405) (31,590)
-------- ----------
Net property, plant and equipment 20,177 18,553
Goodwill, net 10,622 7,696
Other assets 164 7
-------- ----------
Total assets $ 68,061 $ 55,266
======== ==========
See notes to consolidated financial statements.
4
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
September 30,
March 31, 2001
2001 (unaudited)
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 8,954 $ 8,616
Accrued payroll and related 4,255 6,906
Accrued expenses 2,352 3,095
Contract loss accrual 2,290 2,219
Billings in excess of costs and estimated earnings on
Uncompleted contracts 2,575 1,661
Revolving line of credit 13,471 --
Current portion of long-term debt 6,990 15,895
-------- --------
Liabilities of discontinued operations 1,996 4,519
-------- --------
Total current liabilities 42,883 42,911
Long-term debt, less current portion 4,800 499
Minority interest -- 6,410
Stockholders' equity
Preferred stock, authorized 2,000,000 shares;
none issued -- --
Common stock, authorized 10,000,000 shares of
Class A and 2,600,000 shares of Class B;
9,542,889 shares of Class A and 1,035,841 shares
of Class B issued and outstanding at
September 30, 2001 - $.10 par value 1,050 1,058
Paid-in capital 78,548 86,045
Treasury stock (1) (1)
Notes receivable from associates (51) (51)
Retained earnings (58,732) (81,671)
Accumulated other comprehensive income (436) 66
-------- --------
Total stockholders' equity 20,378 5,446
-------- --------
Total liabilities and stockholders' equity $ 68,061 $ 55,266
======== ========
See notes to consolidated financial statements.
5
ODETICS, INC.
UNAUDITED CONSOLIDATED statements of CASH FLOWS
(in thousands)
Six Months Ended
September 30,
-----------------------
2000 2001
-------- --------
Operating activities
Loss from continuing operations $ (4,836) $ (9,096)
Loss from discontinued operations -- (13,843)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 2,461 2,126
Amortization of warrants -- 369
Asset impairments and costs to exit - Mariner Networks -- 8,361
Minority interest in earnings of subsidiary -- 174
Loss on sale of Iteris common stock -- 1,021
Provisions for losses on accounts receivable 46 102
Gain on sale of product lines -- (2,579)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 261 2,093
(Increase) decrease in net costs and
estimated earnings in excess of billings 1,178 (650)
(Increase) decrease in inventories (1,785) 6
(Increase) decrease in prepaids and other assets 169 (951)
Change in net assets of discontinued operations -- (535)
(Increase) decrease in accounts payable and
accrued expenses 223 1,799
-------- --------
Net cash used in operating activities (2,283) (11,603)
Investing activities
Purchases of property, plant and, equipment (1,465) (177)
Proceeds from sale of product lines -- 9,884
Other (565) 502
-------- --------
Net cash provided by (used in) investing activities (2,030) 10,209
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 15,176 19,197
Principal payments on line of credit, long-term
debt and capital lease obligations (22,742) (22,326)
Proceeds from sale of Iteris common stock -- 1,922
Proceeds from sale of Iteris preferred stock -- 4,988
Proceeds from issuance of common stock 16,870 --
-------- --------
Net cash provided by financing activities 9,304 3,781
-------- --------
Increase in cash 4,991 2,387
Cash at beginning of year 4,880 2,218
-------- --------
Cash at September 30 $ 9,871 $ 4,605
======== ========
Non cash transaction
Issuance of stock to former MMA shareholders $ 250 $ 250
Issuance of warrants -- 1,357
Conversion of note payable and accrued interest into Iteris Common
stock -- 4,203
See notes to consolidated financial statements.
6
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation and Operations
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal recurring
accruals, except as disclosed elsewhere in the notes to consolidated financial
statements, necessary to present fairly the consolidated financial position of
Odetics, Inc. and its subsidiaries as of September 30, 2001 and the consolidated
results of its operations and cash flows for the three and six months ended
September 30, 2000 and 2001. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the Unites States have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain amounts in the fiscal year 2001 financial
statements have been reclassified to conform with the 2002 presentation.
It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The results
of operations for the three and six months ended September 30, 2001 are not
necessarily indicative of those to be expected for the entire year. The
accompanying consolidated financial statements should be read in conjunction
with our Annual Report on Form 10-K/A for the year ended March 31, 2001 filed
with the Securities and Exchange Commission.
During the six months ended September 30, 2001, we used $11.6 million of
cash to fund our operations, which reflects our net loss of $22.9 million
reduced by non-cash charges including $8.4 million related to asset impairment
write-downs and reserves for costs to exit Mariner Networks and $2.5 million for
depreciation and amortization. Significant financing and investing activities
during the six months ended September 30, 2001 are discussed below.
In April 2001, we completed the sale of our Vortex Dome and Quarterback
Controller product lines for $1.1 million in net cash proceeds. The proceeds
were approximately equal to the book value of the net assets sold, and were used
to reduce the outstanding borrowings on our bank line of credit.
In May 2001, we received $16.0 million pursuant to a promissory note
secured by a first trust deed on our principal facilities in Anaheim,
California. This promissory note is due in May 2002 and bears annual interest at
a rate of 10.0%. In connection with this note, we issued warrants to the lender
to purchase 426,667 shares of our Class A common stock at an exercise price of
$4.00 per share. We allocated approximately $1.3 million of the loan proceeds to
the warrant, and will accrete that amount to interest expense over the term of
the loan. If we prepay this note prior to November 25, 2001, the lender, at its
option, may convert up to $1.6 million of the principal amount of this note into
shares of our Class A common stock at a conversion price of $4.00 per share.
Of the $16.0 million proceeds from this note, we used approximately $6.0
million to retire the pre-existing first trust deed on our Anaheim real
property, which included a prepayment penalty of $.45 million. This prepayment
penalty is reflected as an extraordinary item in the accompanying consolidated
statement of operations. We also used approximately $5.9 million of the proceeds
to reduce the outstanding borrowings under our bank line of credit. We used the
balance of the proceeds from this financing, after payment of the related
expenses, for general working capital purposes.
In August 2001, Iteris issued 1,781,268 shares of its Series A preferred
stock to an institutional investor in exchange for $5.0 million in cash. In
addition, Iteris issued 1,343,645 shares of its Series A
7
preferred stock and 547,893 shares of its common stock in exchange for $500,000
in cash and the retirement of its $3.75 million Subordinated Convertible
Promissory Note plus related accrued interest of $0.4 million. Concurrently,
Odetics sold in a secondary transaction, $1.9 million of its shares of Iteris
common stock to a group of investors, which included management of Odetics and
Iteris. Following this financing, Odetics ownership of Iteris decreased from
93.0% to 67.5%.
Iteris used approximately $2.6 million of the proceeds from this financing
to reduce the outstanding borrowings under our bank line of credit. In addition,
Odetics used the $1.4 million of the proceeds that it received on its sale of
Iteris common stock to further reduce the outstanding borrowings under its bank
line of credit.
In August 2001, Iteris secured its own $5.0 million operating line of
credit for its working capital needs. We believe that Iteris' cash reserves,
together with available borrowings under this line of credit, will enable Iteris
to meet its current obligations and execute its operating plans for at least the
next twelve months.
In September 2001, we completed the sale of substantially all of the
assets and certain of the liabilities of our CCTV Products division of Gyyr
Incorporated for $8.8 million in cash, plus the assumption of a $1.0 million
indebtedness. In connection with this transaction, we recorded a non-operating
gain of $2.5 million in the three months ended September 30, 2001. We used the
proceeds from this transaction to retire the remaining obligations due under our
bank line of credit, which has now expired, and to fund severance obligations
and other general working capital requirements.
In September 2001, we discontinued the operations of our wholly owned
subsidiary, Mariner Networks, Inc. The aggregate losses recognized to exit the
Mariner operations approximate $8.4 million and are included in the loss from
discontinued operations in our consolidated statements of operations for the
three and six months ended September 30, 2001.
We expect that our operations will continue to use net cash for the
foreseeable future. During fiscal 2002, we expect to have an ongoing need to
raise cash by securing additional debt or equity financing, or by divesting
certain assets to fund our operations. We are currently considering the sale and
leaseback of our principal facilities in Anaheim, California. We cannot be
certain that our plan to sell and leaseback our facilities will be successful or
that we will be able to secure other debt or equity financing. Our future cash
requirements will be highly dependent upon our ability to control expenses, as
well as the successful execution of the revenue plans by each of our business
units. As a result, any projections of future cash requirements and cash flows
are subject to substantial uncertainty.
These conditions, together with our recurring operating losses, raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.
NOTE 2 - Recent Accounting Pronouncements
In June 2001, the FASB issued Statement No. 141, Business Combinations
("Statement 141"), and No. 142, Goodwill and Other Intangible Assets ("Statement
142") effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives
8
will no longer be amortized but will be subject to annual impairment tests in
accordance with Statements 141 and 142. Other intangible assets will continue to
be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003. Application of
the nonamortization provisions of Statement 142 is expected to result in the
reduction in amortization expense of approximately $1.7 million per year. During
fiscal 2003, we will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of April 1, 2002. We have not
yet determined what the effect of these tests will have on our earnings and
financial position.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("Statement 144"), which is
effective for fiscal years beginning after December 15, 2001. Under Statement
144, assets held for sale are included in discontinued operations if the
operations and cash flows will be or have been eliminated from our ongoing
operations and we will not have any significant continuing involvement in the
operations of the component. In the three months ended September 30, 2001, we
adopted the provisions of Statement 144, effective as of April 1, 2001. The
impact of the adoption is discussed in Note 8.
NOTE 3 - Income Taxes
Income tax expense (benefit), if any, for the three and six months ended
September 30, 2000 and 2001 has been provided at the estimated annualized
effective tax rates. We did not provide income tax benefit for the losses
incurred in the three and six months ended September 30, 2000 and 2001 due to
the uncertainty as to the ultimate realization of the benefit.
NOTE 4 - Long-Term Debt
March 31, September 30,
2001 2001
--------- -------------
(in thousands)
Mortgage note $ 5,874 $15,013
Notes payable 4,750 1,233
Contracts payable 1,166 148
------- -------
11,790 16,394
Less current portion 6,990 15,895
------- -------
$ 4,800 $ 499
======= =======
NOTE 5 - Legal Proceedings
On October 11, 1999, Odetics settled a patent infringement case it had
brought against Storage Technology Corporation ("StorageTek"). Pursuant to the
settlement agreement, StorageTek agreed to pay Odetics a license fee totaling
$100.0 million for use of Odetics' United States Patent No. 4,779,151. Under the
agreement, the license fee was payable in three installments: $80.0 million upon
signing of the
9
agreement, and two annual installments of $10.0 million payable in each of
October 2000 and 2001. On June 12, 2000, Odetics and StorageTek amended the
agreement, whereby StorageTek agreed to pay a final discounted payment of $17.8
million immediately in full settlement of the $20.0 million otherwise due to
complete the settlement. Accordingly, Odetics recognized non-operating income in
that amount in the three months ended June 30, 2000.
NOTE 6 - Comprehensive Income (loss)
The components of comprehensive income (loss) for the three months and six
months ended September 30, 2000 and 2001 are as follows in thousands:
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- ----------------------
2000 2001 2000 2001
-------- -------- ------- --------
Net loss $(12,266) $(15,164) $(4,836) $(22,939)
Foreign currency translation
adjustment (83) 157 (565) 502
-------- -------- ------- --------
Comprehensive loss $(12,349) $(15,007) $(5,401) $(22,437)
======== ======== ======= ========
NOTE 7 - Business Segment Information
We currently operate in three reportable segments: intelligent
transportation systems ("ITS"), video products, which include products for the
television broadcast and video security markets, and telecom products. Selected
financial information for Odetics' reportable segments for the three and six
months ended September 30, 2000 and 2001 are as follows (in thousands):
Video Telecom
ITS Products Products Total
-------- -------- ------- --------
Three Months Ended
September 30, 2000
Revenue from external customers $ 6,544 $ 8,375 $ 1,598 $ 16,517
Intersegment revenues -- 1,553 -- 1,553
Segment income (loss) (1,243) (4,156) (1,358) (6,757)
Three Months Ended
September 30, 2001
Revenue from external customers 9,637 5,160 1,180 15,977
Intersegment revenues -- -- -- --
Segment income (loss) (1,032) (1,195) (942) (1,105)
10
The following table reconciles segment revenues and loss to consolidated
revenues and loss from continuing operations:
Three Months Ended
September 30,
-----------------------
2000 2001
-------- --------
(in thousands)
Total revenues for reportable segments $ 18,070 $ 15,977
Non-reportable segment revenues 2,327 --
Other revenues -- --
Elimination of intersegment sales (1,553) --
-------- --------
Total consolidated revenues 18,844 15,977
======== ========
Total profit or loss for reportable segments (6,757) (1,105)
Other profit or loss (787) 880
Unallocated amounts:
Corporate and other expenses (1,385) (1,454)
Special charge -- (1,422)
Interest expense (429) (1,190)
-------- --------
Loss from continuing operations $ (9,358) $ (4,291)
======== ========
Video Telecom
ITS Products Products Total
-------- -------- ------- --------
Six Months Ended
September 30, 2000
Revenue from external customers $ 12,321 $ 18,589 $ 2,704 $ 33,614
Intersegment revenues -- 2,780 -- 2,780
Segment income (loss) (3,624) (7,370) (1,653) $(12,647)
Six Months Ended
September 30, 2001
Revenue from external customers 17,349 12,588 2,424 32,361
Intersegment revenues 0 0 0 0
Segment income (loss) 1,035 (2,228) (2,002) (3,195)
11
The following table reconciles segment revenues and loss to consolidated
revenues and loss from continuing operations before income taxes in thousands:
Six Months Ended
September 30,
-----------------------
2000 2001
-------- --------
(in thousands)
Total revenues for reportable segments 36,394 $ 32,361
Non-reportable segment revenues 4,547 --
Other revenues -- --
Elimination of intersegment sales (2,780) --
-------- --------
Total consolidated revenues 38,161 32,361
Total profit or loss for reportable segments (12,647) (3,195)
Other profit or loss (1,566) 211
Unallocated amounts:
Corporate and other income (expenses) 14,925 (2,455)
Special charge -- (1,422)
Interest expense (901) (1,785)
-------- --------
Loss from continuing operations $ (189) $ (8,646)
======== ========
NOTE 8 - Discontinued Operations
In September 2001, in connection with our continued cost control efforts
and the slowdown in the telecommunications industry, our Board of Directors
approved a plan to immediately discontinue the operations of Mariner Networks,
Inc., a wholly-owned subsidiary included in our telecom products segment. We
anticipate that the operating assets of Mariner will be sold within the next
twelve months. The aggregate losses recognized to write down the assets of
Mariner to fair value less cost to sell were approximately $6.7 million. In
addition, we accrued $ 1.7 million for severance and other costs to exit the
Mariner operation. These write-downs and costs are included in the loss from
discontinued operations in the consolidated statements of operations for the
three months ended September 30, 2001.
Mariner's revenue and loss before income taxes reported as discontinued
operations for the three and six months ended September 30, 2001 and 2000 are as
follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
2000 2001 2000 2001
------- ------- ------- -------
Revenue $ 181 $ 96 $ 488 $ 366
Loss before taxes (2,908) (2,512) (4,647) (5,482)
12
The net assets of Mariner consisted of the following at September 30, 2001
September 30,
2001
-------------
Accounts and notes receivable 0
Inventories and other assets 151
Property, plant and equipment 185
-----
Assets held for disposal 336
Accounts and notes payable 2,642
Accrued and other liabilities 1,877
-----
Liabilities of discontinued operations 4,519
=====
NOTE 9 - Restructuring
In September 2001, as a result of the sale of the Gyyr products division
and the discontinuation of Mariner Networks, we reorganized our CCTV European
operations and reduced our Corporate staff. The reorganization of the European
operations included the discontinuation of our Odetics Europe Ltd., Gyyr Europe
Ltd. Mariner France and Mariner Europe Ltd. operations, and the transition of
our Broadcast and MAXxess international operations to branch office operations.
As result, we incurred severance and other costs totaling $1.4 million.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto contained in this Report
and in the Annual Report on Form 10-K/A of Odetics. When used in this Report,
the words "expect(s)," "feel(s)," "believe(s)," "intends," "plans," "will,"
"may," "anticipate(s)" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements include, among other
things, statements concerning projected revenues, expenses and results of
operations, funding and cash requirements, supply issues, market acceptance of
new products, our business strategy, and involve a number of risks and
uncertainties, including without limitation, those set forth at the end of this
Item 2 under the caption "Risk Factors." Our actual results may differ
materially from any forward-looking statements discussed herein. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation to republish
revised forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
General. We define our business segments as ITS, video products and
telecom products. The ITS segment consists of our majority-owned subsidiary,
Iteris, Inc. The video products segment includes our wholly-owned subsidiaries,
Broadcast, Inc. and MAXxess, Inc. (previously known as Gyyr Incorporated). The
telecom products segment consists of Zyfer, Inc., our wholly-owned subsidiary
(formerly known as our Communications division). In April 2001, Gyyr separated
its operations into two divisions, the Gyyr CCTV Products division, which
manufactures analog and digital storage solutions, and the Gyyr Electronic
Access Control division, which manufactures enterprise security management
systems. In September 2001, we sold substantially all of the assets and certain
liabilities of the Gyyr CCTV Products division. In connection with the sale, we
changed the name of Gyyr to MAXxess, Inc. to reflect the focus of the business
on Electronic Access Control systems.
All references to our subsidiaries in this report include the prior
business and results of operations of such subsidiaries as our business units
prior to their incorporation.
In September 2001, in connection with continued cost control efforts and
the slowdown in the telecommunications industry, our Board of Directors approved
the immediate discontinuation of Mariner Networks, Inc., our wholly-owned
subsidiary. Mariner had previously been included within our telecom products
segment. We anticipate that the operating assets of Mariner will be sold within
the next twelve months. The aggregate losses recognized to exit the Mariner
operations approximate $8.4 million and are included in the loss from
discontinued operations in the consolidated statements of operations for the
three months ended September 30, 2001
In September 2001, as a result of the sale of the Gyyr CCTV Products
Division product lines and the discontinuation of Mariner Networks we
reorganized our European operations and reduced our Corporation staff. The
reorganization of the European operations included the discontinuation of our
Odetics Europe Ltd., Gyyr Europe Ltd. Mariner France and Mariner Europe Ltd.
operations, and the transition
14
of our Broadcast and MAXxess international operations to branch office
operations with the intent of lowering our international costs. As result, we
incurred severance and other costs totaling $1.4 million.
Net Sales and Contract Revenues. Net sales and contract revenues consist
of (i) sales of products and services to commercial and municipal agencies ("net
sales") and (ii) revenues derived from contracts with state, county and
municipal agencies for ITS projects ("contract revenues"). Contract revenues
also include revenue from contracts with agencies of the United States
government and foreign entities for space recorders used for geographical
information systems. Total net sales and contract revenues decreased 15.2% to
$16.0 million for the three months ended September 30, 2001, compared to $18.8
million in the corresponding period of the prior fiscal year, and decreased
15.2% to $32.4 million for the six months ended September 30, 2001, compared to
$38.2 million in the corresponding period of the prior fiscal year.
Net sales decreased 26.4% to $10.3 million for the three months ended
September 30, 2001, compared to $14.0 million in the corresponding period of the
prior fiscal year and decreased 26.4% to $21.0 million for the six months ended
September 30, 2001, compared to $28.5 million in the corresponding period of the
prior fiscal year. This decrease in the three and six months ended September 30,
2001 primarily reflects decreased sales in Broadcast and MAXxess, offset in part
by increased sales of Iteris products. Iteris sales growth reflects increased
unit sales of Vantage video detection systems and increased sales of Autovue
lane departure warning systems. Iteris represented 45.4% of net sales in the
three months ended September 30, 2001, compared to 18.0% of net sales in the
three months ended September 30, 2000. In the three months ended December 31,
2000, Broadcast determined it would not pursue continued sales opportunities for
its Roswell facility management system and shifted the focus of its business to
sales of its AIRO Automation systems. The decrease in Broadcast revenues
reflects sales of a narrower product line in the three months and six months
ended September 30, 2001 and generally soft market conditions in the North
American market for broadcast systems sales. During the three months ended June
30, 2001, MAXxess divested its Vortex Dome and Quarterback Controller product
lines. In early September 2001, Odetics completed the sale of the Gyyr CCTV
Products division. CCTV product sales in second three months ended September 30,
2001 includes sales only through the date of divestiture. The decrease in
MAXxess sales in the three and six month periods ended September 30, 2001
reflects generally soft market conditions in the current fiscal year,
exacerbated by the market response to the divestiture of the CCTV products
division.
Contract revenues increased 17.0% to $5.7 million for the three months
ended September 30, 2001, compared to $4.9 million in the corresponding period
of the prior fiscal year and increased 17.9% to $11.4 million for the six months
ended September 30, 2001 compared to $9.6 million in the corresponding period of
the prior fiscal year. The increase in contract revenues in the three months
ended September 30, 2001 reflects an increase in Iteris' contract revenues for
ITS projects, partially offset by decreased contract revenues in Zyfer.
Gross Profit. Gross profit on net sales increased to 39.3% for the three
months ended September 30, 2001 compared to 20.1% in the corresponding period in
the prior fiscal year. Gross profit on net sales increased to 36.1% for the six
months ended September 30, 2001 compared to 20.4% in the corresponding period in
the prior fiscal year. The increases in the three and six month periods compared
to the corresponding periods of the prior fiscal year primarily reflects
increased gross margin on net sales in Broadcast, MAXxess and Iteris. Broadcast
experienced an improved gross margin as a result of its focus on the sale of
higher margin AIRO Automation systems. MAXxess' gross profits improved primarily
as a result
15
of lower costs related to product support, warranty and obsolescence compared to
the corresponding period of the prior fiscal year. The improvement in the gross
profit in Iteris reflects increased absorption of manufacturing overhead on a
significant increase in Vantage sales in the three and six months ended
September 30, 2001 compared to the corresponding periods of the prior fiscal
year.
Gross profit on contract revenues was substantially unchanged in both
Zyfer and Iteris in the three and six months ended September 30, 2001, compared
to the corresponding periods of the prior fiscal year.
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased 32.1% to $6.4 million (or 40.1% of total net
sales and contract revenues) in the three months ended September 30, 2001
compared to $9.4 million (or 50.1% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Selling, general and
administrative expense decreased 31.7% to $13.4 million (or 41.5% of total net
sales and contract revenues) in the six months ended September 30, 2001 compared
to $19.6 million (or 51.5% of total net sales and contract revenues) in the
corresponding period of the prior fiscal year. The fiscal 2001 restructuring
resulted in substantial decreases in selling, general and administrative expense
in Broadcast, MAXxess and Iteris in the three months and six months ended
September 30, 2001 compared to the corresponding periods of the prior fiscal
year.
Research and Development Expense. Research and development expense
decreased 43.4% to $2.3 million (or 14.5% of total net sales and contract
revenues) in the three months ended September 30, 2001 compared to $4.1 million
(or 21.7% of total net sales and contract revenues) in the corresponding period
of the prior fiscal year. Research and development expense decreased 43.3% to
$4.5 million (or 13.8% of total net sales and contract revenues) in the six
months ended September 30, 2001 compared to $7.9 million (or 20.6% of total net
sales and contract revenues) in the corresponding period of the prior fiscal
year. The fiscal 2001 restructuring resulted in substantial decreases in
research and development expenditures in the three and six months ended
September 30, 2001 in each of the our business units compared to the
corresponding periods of the prior fiscal year. The decreases were primarily in
the areas of payroll and related benefits, prototype material cost and
consulting fees. For competitive reasons, we closely guard the confidentiality
of our specific development projects.
Restructuring Charge. During the three months ended September 30, 2001 we
incurred costs related to the restructuring of our European operations, and the
continued downsizing of our corporate cost structure. These costs included
approximately $1.0 million for severance charges and $.4 million for the
impairment of long lived assets.
Other Income. During the three months ended September 30, 2001 we
recognized a gain of $2.5 million on the sale of the assets of the Gyyr CCTV
product line. Also during the three months ended September 30, 2001, we sold in
a secondary transaction, $1.9 million of our Iteris common stock to a group of
investors, which included management of Odetics and Iteris. We incurred a loss
on this sale of $1.0 million that has been included in other income. In
connection with a promissory note secured by our Anaheim real property, we
issued warrants to the lender to purchase 426,667 shares of our Class A common
stock at an exercise price of $4.00 per share. We allocated approximately $1.3
million of the loan proceeds to the warrant, and incurred $370,000 in
amortization expense related to the warrant that has been included in other
income.
16
Interest Expense, Net. Interest expense, net reflects interest income and
interest expense as follows:
Three Months Ended Six Months Ended
September 30, September 30,
------------------- --------------------
2000 2001 2000 2001
------ ------- ------- -------
Interest expense $ 536 $ 1,190 $ 1,075 $ 1,785
Interest income 107 -- 174 --
------ ------- ------- -------
Interest expense, net $ 429 $ 1,190 $ 901 $ 1,785
====== ======= ======= =======
Interest expense primarily reflects interest on our line of credit borrowings
and mortgage interest. Interest income in the three and six months ended
September 30, 2000 was derived from short-term investments of excess cash
deposits. The increase in interest expense for the three and six months ended
September 30, 2001 compared to the corresponding periods in the prior fiscal
year reflects the combined effect of an increase in Odetics' average outstanding
borrowings, and an increased interest rate charge on line of credit borrowings
in the current fiscal year
Extraordinary Item. The extraordinary loss incurred in the six months
ended September 30, 2001 related to a prepayment penalty on the retirement of
our mortgage note payable resulting from the refinancing of our Anaheim real
property.
Income Taxes. We have not provided income tax benefit for the losses
incurred in the three and six months ended September 30, 2001 due to the
uncertainty as to the ultimate realization of the related benefit.
Liquidity and Capital Resources
During the six months ended September 30, 2001, we used $11.6 million of
cash to fund operations, which reflects our net loss of $22.9 million reduced by
non-cash charges including $8.4 million related to assets impairment write downs
and reserves for costs to exit Mariner Networks and $2.5 million for
depreciation and amortization. Significant financing and investing activities
during the six months ended September 30, 2001 are discussed below.
In April 2001, we concluded the sale of our Vortex Dome and Quarterback
Controller product lines for $1.1 million in net cash proceeds. The proceeds
were approximately equal to the book value of the net assets sold, and were used
to reduce outstanding borrowings due on our bank line of credit.
In May 2001, we received $16.0 million pursuant to a promissory note
secured by a first trust deed on our principal facilities in Anaheim,
California. This promissory note is due in May 2002 and bears annual interest at
a rate of 10.0%. In connection with this note, we issued warrants to the lender
to purchase 426,667 shares of our Class A common stock at an exercise price of
$4.00 per share. We allocated approximately $1.3 million of the loan proceeds to
the warrant, and will accrete that amount to interest expense over the term of
the loan. If we prepay this note prior to November 25, 2001, the lender, at its
option, may convert up to $1.6 million of the principal amount of the note into
shares of our Class A common stock at a conversion price of $4.00 per share.
Of the $16.0 million proceeds received from this note, we used
approximately $6.0 million to retire the pre-existing first trust deed on our
Anaheim real property, which included a prepayment
17
penalty of $.45 million. This prepayment penalty is reflected as an
extraordinary item in the accompanying consolidated statement of operations, and
$5.9 million to reduce borrowings due under our bank line of credit. We used the
balance of the proceeds from this financing, after payment of the related
expenses, for general working capital purposes.
In August 2001, Iteris issued 1,781,268 shares of its Series A preferred
stock to our institutional investors in exchange for $5.0 million in cash. In
addition, Iteris issued 1,343,645 shares of its Series A preferred stock and
547,893 shares of its common stock in exchange for $500,000 in cash and the
retirement of its $3.75 million Subordinated Convertible Promissory Note, which
it entered into in January 2000, plus related accrued interest of $0.4 million.
As part of the transaction, Odetics sold in a secondary transaction, $1.9
million of its shares of Iteris common stock to a group of investors, which
included management of Odetics and Iteris. Following this financing, Odetics
ownership of Iteris decreased from 93.0% to 67.5%.
In August 2001, Iteris secured its own $5.0 million operating line of
credit for its working capital needs. We believe that Iteris' cash reserves,
together with available borrowings on its line of credit, will enable it to meet
its current obligations and execute its operating plans for at least the next
twelve months.
In September 2001, we completed the sale of substantially all of the
assets and certain of the liabilities of our Gyyr CCTV Products division for
$8.8 million in cash, plus the assumption of $1.0 million in debt. In connection
with the transaction, we recorded a non-operating gain in the three months ended
September 30, 2001 of $2.5 million. We used the proceeds from the transaction to
retire the remaining obligations due under our previous bank line of credit,
which has now expired, and to fund severance obligations and other general
working capital requirements.
In September 2001, we discontinued the operations of our wholly-owned
subsidiary, Mariner Networks Inc. The aggregate losses recognized to exit the
Mariner operations approximate $8.4 million, and are included in the loss from
discontinued operations in our consolidated statements of operations for the
three months ended September 30, 2001.
We expect that our operations will continue to use net cash for the
foreseeable future. During fiscal 2002, we expect to have an ongoing need to
raise cash by securing additional debt or equity financing, or by divesting
certain assets to fund our operations. We are currently considering the sale and
leaseback of our principal facilities in Anaheim, California. We cannot be
certain that our plan to sell and leaseback our facilities will be successful or
that we will be able to secure other debt or equity financing. Our future cash
requirements will be highly dependent upon our ability to control expenses as
well as the successful execution of the revenue plans by each of our businesses.
As a result, any projections of future cash requirements and cash flows are
subject to substantial uncertainty.
These conditions, together with our recurring operating losses, raise
substantial doubt about our ability to continue is a going concern. Our
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.
18
RISK FACTORS
Before deciding to invest in our company or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this Report and in our other filings with
the SEC, including our Annual Report on Form 10-K/A for the year ended March 31,
2001, as well as our subsequent reports on Forms 10-Q and 8-K. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price for our
common stock could decline and you may lose all or part of your investment.
We Have Experienced Substantial Losses and Expect Future Losses. We
experienced net losses of $22.9 million for the six months ended September 30,
2001, $49.8 million for the year ended March 31, 2001, and $38.7 million for the
year ended March 31, 2000. In January 2001, we announced the reorganization of
our business in order to reduce our operating expenses and negative cash flow,
which included the downsizing of our operations in Gyyr and Broadcast, and a 25%
reduction in our total work force. In the second fiscal quarter of 2001, we
experienced further downsizing in connection with our sale of the Gyyr CCTV
Products division and the discontinuation of the business of our Mariner
Networks subsidiary. We cannot assure you that our efforts to downsize our
operations will improve our financial performance, or that we will be able to
achieve profitability on a quarterly or annual basis in the future. Most of our
expenses are fixed in advance, and we generally are unable to reduce our
expenses significantly in the short-term to compensate for any unexpected delay
or decrease in anticipated revenues. As a result, we may continue to experience
losses, which would make it difficult to fund our operations and achieve our
business plan, and could cause the market price of our common stock to decline.
We Will Need to Raise Additional Capital in the Future and May Not Be Able
to Secure Adequate Funds on Terms Acceptable to Us, or at All. We have generated
significant net losses in recent periods, and have experienced negative cash
flows from operations in the amount of $11.6 million for the six months ended
September 30, 2001, and $20.1 million for the year ended March 31, 2001. We may
need to raise additional capital in the future. Our $16.0 million promissory
note with Castle Creek Technology Partners LLC is due and payable in May 2002
and is secured by our real property in Anaheim, California that comprises our
principal facilities. Our Iteris subsidiary also currently maintains a $5.0
million line of credit which expires in August 2004. Substantially all of the
assets of Iteris have been pledged to the lender to secure the outstanding
indebtedness under this facility ($0.6 million was outstanding at October 31,
2001). Even though we retired our bank line of credit in this quarter, we also
incurred cash obligations in the amount of $3.0 million payable over the next 12
months related to our discontinuation of Mariner Networks and the reorganization
of our European operations. We may need to sell or refinance our real property
or raise additional capital in the near future, either through bank borrowings,
other debt or equity financings, or the divestiture of business units or select
assets. We cannot assure you that any additional capital will be available on a
timely basis, on acceptable terms, or at all. These conditions, together with
our recurring losses and cash requirements, raise substantial doubt about our
ability to continue as a going concern.
Our capital requirements will depend on many factors, including:
o our ability to control costs;
19
o market acceptance of our products and the overall level of sales of
our products;
o our ability to generate operating income;
o increased research and development funding, and required investments
in our business units;
o increased sales and marketing expenses;
o technological advancements and our competitors' response to our
products;
o capital improvements to new and existing facilities;
o potential acquisitions of businesses and product lines;
o our relationships with customers and suppliers; and
o general economic conditions including the effects of the current
economic slowdown and international conflicts.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If additional
funds are raised through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders will be reduced and such securities
may have rights, preferences and privileges senior to our common stock.
Additional financing may not be available on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products, expand our sales and marketing
programs, take advantage of future opportunities or respond to competitive
pressures.
We are Exposed to the Risks Associated with the Recent Worldwide Economic
Slowdown and Related Uncertainties. Concerns about inflation, decreased consumer
confidence, reduced corporate profits and capital spending, and recent
international conflicts and terrorist and military actions have resulted in a
downturn in worldwide economic conditions, particularly in the United States. As
a result of these unfavorable economic conditions, we have experienced a
slowdown in customer orders, cancellations and rescheduling of backlog and
higher overhead costs. In addition, recent political and social turmoil related
to international conflicts and terrorist acts can be expected to put further
pressure on economic conditions in the U.S. and worldwide. These political,
social and economic conditions make it extremely difficult for our customers,
our suppliers and us to accurately forecast and plan future business activities.
If such conditions continue or worsen, our business, financial condition and
results of operations will likely be materially and adversely affected.
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly revenues and operating results have fluctuated and are likely to
continue to vary from quarter to quarter due to a number of factors, many of
which are not within our control. Factors that could affect our revenues
include, among others, the following:
o our ability to raise additional capital or monetize our real
property;
o our significant investment in research and development for our
subsidiaries and business units;
o our ability to control costs;
20
o international conflicts and acts of terrorism;
o our ability to develop, introduce, market and gain market acceptance
of new products applications and product enhancements in a timely
manner;
o the size, timing, rescheduling or cancellation of significant
customer orders;
o the introduction of new products by competitors;
o the availability of components used in the manufacture of our
products;
o changes in our pricing policies and the pricing policies by our
suppliers and competitors, pricing concessions on volume sales, as
well as increased price competition in general;
o the long lead times associated with government contracts or required
by vehicle manufacturers;
o our success in expanding and implementing our sales and marketing
programs;
o the effects of technological changes in our target markets;
o our relatively small level of backlog at any given time;
o the mix of sales among our business units;
o deferrals of customer orders in anticipation of new products,
applications or product enhancements;
o the risks inherent in our acquisitions of technologies and
businesses;
o risks and uncertainties associated with our international business;
o currency fluctuations and our ability to get currency out of certain
foreign countries; and
o general economic and political conditions.
In addition, our sales in any quarter may consist of a relatively small
number of large customer orders. As a result, the timing of a small number of
orders may impact our quarter to quarter results. The loss of or a substantial
reduction in orders from any significant customer could seriously harm our
business, financial condition and results of operations.
Due to all of the factors listed above and other risks discussed in this
report, our future operating results could be below the expectations of
securities analysts or investors. If that happens, the trading price of our
common stock could decline. As a result of these quarterly variations, you
should not rely on quarter-to-quarter comparisons of our operating results as an
indication of our future performance.
Our Operating Strategy for Developing Companies is Expensive and May Not
Be Successful. Our business strategy historically has required us to make
significant investments in our business units, both for research and
development, and also to develop a separate infrastructure for certain of our
business units, sufficient to allow the unit to function as an independent
company. We expect to continue to invest in the development of certain of our
business units with the goal of achieving profitability in each of our business
21
units, and to a lesser extent, to monetize those business units for the benefit
of our stockholders through an initial public offering, spin-off or sale to a
strategic buyer. We may not recognize the benefits of this investment for a
significant period of time, if at all. Our ability to achieve profitability in
any business unit, to complete any private or public offerings of securities by
any of our business units, and/or to spin-off our interest in the business unit
to our stockholders will depend upon many factors, including:
o the overall performance and results of operations of the particular
business unit;
o the potential market for our business unit;
o our ability to assemble and retain a qualified management team for
the business unit;
o our financial position and cash requirements;
o the business unit's customer base and product line;
o the current tax treatment of spin-off and sale transactions, and our
ability to obtain favorable determination letters from the Internal
Revenue Service; and
o general economic and market conditions, including the receptiveness
of the stock markets to initial public offerings and private
placements.
We may not be able to achieve profitability in our business units, to
complete a successful private or public offering or to spin-off of any of our
business units in the near future, or at all. During fiscal 2001, we attempted
to complete the initial public offering of Iteris, but withdrew the offering due
to adverse market conditions. Even if we are able to achieve profitability and
the market is receptive to public offerings, we may decide not to complete any
further offerings, spin-off a particular business unit, or to delay the spin-off
until a later date.
We Must Keep Pace with Rapid Technological Change to Remain Competitive.
Our target markets are in general characterized by the following factors:
o rapid technological advances;
o downward price pressure in the marketplace as technologies mature;
o changes in customer requirements;
o frequent new product introductions and enhancements; and
o evolving industry standards and changes in the regulatory
environment.
Our future success will depend upon our ability to anticipate and adapt to
changes in technology and industry standards, and to effectively develop,
introduce, market and gain broad acceptance of new products and product
enhancements incorporating the latest technological advancements.
We believe that we must continue to make substantial investments to
support ongoing research and development in order to remain competitive. We need
to continue to develop and introduce new products that incorporate the latest
technological advancements in hardware, storage media, operating system software
and applications software in response to evolving customer requirements. Our
business and results
22
of operations could be adversely affected if we do not anticipate or respond
adequately to technological developments or changing customer requirements. We
cannot assure you that any such investments in research and development will
lead to any corresponding increase in revenue.
Our Future Success Depends on the Successful Development and Market
Acceptance of New Products. We believe our revenue growth and future operating
results will depend on our ability to complete development of new products and
enhancements, introduce these products in a timely, cost-effective manner,
achieve broad market acceptance of these products and enhancements, and reduce
our product costs. We may not be able to introduce any new products or any
enhancements to our existing products on a timely basis, or at all. In addition,
the introduction of any new products could adversely affect the sales of our
certain of our existing products.
Our future success will also depend in part on the success of several
recently introduced products including CommSync II, a Zyfer solution for secure,
high speed, point-to-point communications; AutoVue, our lane departure warning
system; and Airo 9.0, our broadcast automation solution. Market acceptance of
our new products depends upon many factors, including our ability to accurately
predict market requirements and evolving industry standards, our ability to
resolve technical challenges in a timely and cost-effective manner and achieve
manufacturing efficiencies, the perceived advantages of our new products over
traditional products and the marketing capabilities of our independent
distributors and strategic partners. Our business and results of operations
could be seriously harmed by any significant delays in our new product
development. Certain of our new products could contain undetected design faults
and software errors or "bugs" when first released by us, despite our testing. We
may not discover these faults or errors until after a product has been installed
and used by our customers. Any faults or errors in our existing products or in
any new products may cause delays in product introduction and shipments, require
design modifications or harm customer relationships, any of which could
adversely affect our business and competitive position.
We currently outsource the manufacture of our AutoVue product line to a
single manufacturer. This manufacturer may not be able to produce sufficient
quantities of this product in a timely manner or at a reasonable cost, which
could materially and adversely affect our ability to launch or gain market
acceptance of AutoVue.
We Have Significant International Sales and Are Subject to Risks
Associated with Operating in International Markets. International sales
represented 13% of our net sales and contract revenues for the six months ended
September 30, 2001, 20% for the fiscal year ended March 31, 2001, and 19% for
the fiscal year ended March 31, 2000. During the three months ended September
30, 2001, we reorganized our European operations, which included the
discontinuation of our Odetics Europe Ltd., Gyyr Europe Ltd. Mariner France and
Mariner Europe Ltd. operations, and the transition of our Broadcast and MAXxess
international operations to branch office operations with the intent of lowering
our international costs. This reorganization may result in significantly lower
international sales in future periods, unanticipated liabilities related to the
closures, and may not achieve the anticipated cost savings. We may also face
challenges in managing and transitioning our international operations as we have
not traditionally operated through branch offices. In addition, the recent
terrorist attacks in the United States and heightened security may adversely
impact our international sales and could make our international operations more
expensive.
International business operations are also subject to other inherent
risks, including, among others:
o unexpected changes in regulatory requirements, tariffs and other
trade barriers or restrictions;
23
o longer accounts receivable payment cycles;
o difficulties in managing and staffing international operations;
o potentially adverse tax consequences;
o the burdens of compliance with a wide variety of foreign laws;
o import and export license requirements and restrictions of the
United States and each other country in which we operate;
o exposure to different legal standards and reduced protection for
intellectual property rights in some countries;
o currency fluctuations and restrictions; and
o political, social and economic instability.
We believe that international sales will continue to represent a
significant portion of our revenues, and that continued growth and profitability
may require further expansion of our international operations. Nearly all of our
international sales from this point on are denominated in U.S. dollars. As a
result, an increase in the relative value of the dollar could make our products
more expensive and potentially less price competitive in international markets.
We do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations.
Any of these factors may adversely effect our future international sales
and, consequently, effect our business, financial condition and operating
results. Furthermore, as we increase our international sales, our total revenues
may also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world.
We Need to Manage Growth and the Integration of Our Acquisitions. Over the
past few years, we have expanded our operations and made several substantial
acquisitions of diverse businesses, including Intelligent Controls, Inc.,
International Media Integration Services, Ltd., Meyer Mohaddes Associates, Inc.,
Viggen Corporation, and certain assets of the Transportation Systems business of
Rockwell International. A key element of our business strategy involves
expansion through the acquisition of complementary businesses, products and
technologies. Acquisitions may require significant capital infusions and, in
general, acquisitions also involve a number of special risks, including:
o potential disruption of our ongoing business and the diversion of
our resources and management's attention;
o the failure to retain or integrate key acquired personnel;
o the challenge of assimilating diverse business cultures, and the
difficulties in integrating the operations, technologies and
information system of the acquired companies;
o increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
o the incurrence of unforeseen obligations or liabilities;
24
o potential impairment of relationships with employees or customers as
a result of changes in management; and
o increased interest expense and amortization of acquired intangible
assets.
Acquisitions may also materially and adversely affect our operating
results due to large write-offs, contingent liabilities, substantial
depreciation, deferred compensation charges or goodwill amortization, or other
adverse tax or audit consequences.
Our competitors are also soliciting potential acquisition candidates,
which could both increase the price of any acquisition targets and decrease the
number of attractive companies available for acquisition. We cannot assure you
that we will be able to consummate any additional acquisitions, successfully
integrate any acquisitions or realize the benefits anticipated from any
acquisition.
To the extent we complete any additional acquisitions, such acquisitions
are expected to place a significant strain on our resources. To accommodate
acquisitions, we anticipate that we will be required to implement a variety of
new and upgraded operational and financial systems, procedures and controls,
including the improvement of our accounting and other internal management
systems. All of these updates will require substantial additional expense as
well as management effort. Our failure to manage growth and integrate our
acquisitions successfully could adversely affect our business, financial
condition and results of operations.
We Depend on Government Contracts and Subcontracts and Face Additional
Risks Related to Fixed Price Contracts. A significant portion of the sales by
Iteris and a portion of our sales by Zyfer were derived from contracts with
governmental agencies, either as a general contractor, subcontractor or
supplier. Government contracts represented approximately 25% and 26% of our
total net sales and contract revenues for the years ended March 31, 2000 and
2001, respectively, and 35% for the three months ended September 30, 2001. We
anticipate that revenue from government contracts will continue to increase in
the near future. Government business is, in general, subject to special risks
and challenges, including:
o long purchase cycles or approval processes;
o competitive bidding and qualification requirements;
o performance bond requirements;
o delays in funding, budgetary constraints and cut-backs; and
o milestone requirements and liquidated damage provisions for failure
to meet contract milestones.
In addition, a large number of our government contracts are fixed price
contracts. As a result, we may not be able to recover for any cost overruns.
These fixed price contracts require us to estimate the total project cost based
on preliminary projections of the project's requirements. The financial
viability of any given project depends in large part on our ability to estimate
these costs accurately and complete the project on a timely basis. In the event
our costs on these projects exceed the fixed contractual amount, we will be
required to bear the excess costs. These additional costs adversely affect our
financial condition and results of operations. Moreover, certain of our
government contracts are subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in our net
sales in any given quarter. Our inability to address any of the foregoing
concerns or the loss or renegotiation of any material government contract could
seriously harm our business, financial condition and results of
25
operations.
The Markets in Which We Operate Are Highly Competitive and Have Many More
Established Competitors. We compete with numerous other companies in our target
markets and we expect such competition to increase due to technological
advancements, industry consolidations and reduced barriers to entry. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our business, financial
condition and results of operations. Many of our competitors have far greater
name recognition and greater financial, technological, marketing and customer
service resources than we do. This may allow them to respond more quickly to new
or emerging technologies and changes in customer requirements. It may also allow
them to devote greater resources to the development, promotion, sale and support
of their products than we can. Recent consolidations of end users, distributors
and manufacturers in our target markets have exacerbated this problem. As a
result of the foregoing factors, we may not be able to compete effectively in
our target markets and competitive pressures could adversely affect our
business, financial condition and results of operations.
We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel
and We Do Not Have Employment Agreements with Any Key Personnel. Due to the
specialized nature of our business, we are highly dependent on the continued
service of our executive officers and other key management, engineering and
technical personnel, particularly Joel Slutzky, our Chief Executive Officer and
Chairman of the Board, and Gregory A. Miner, our Chief Operating Officer and
Chief Financial Officer. We do not have any employment contracts with any of our
four officers or key employees. Mr. Slutzky has announced a phased succession
plan for Odetics, pursuant to which he would turn over his Chief Executive
Officer position to Mr. Miner. Mr. Slutzky's retirement or the loss of any of
our key personnel could seriously harm our development and marketing efforts,
and could adversely affect our business. Our success will also depend in large
part upon our ability to continue to attract, retain and motivate qualified
engineering and other highly skilled technical personnel. Competition for
employees, particularly development engineers, is intense. We may not be able to
continue to attract and retain sufficient numbers of such highly skilled
employees. Our inability to attract and retain additional key employees or the
loss of one or more of our current key employees could adversely affect upon our
business, financial condition and results of operations.
We May Not be Able to Adequately Protect or Enforce Our Intellectual
Property Rights. If we are not able to adequately protect or enforce the
proprietary aspects of our technology, competitors could be able to access our
proprietary technology and our business, financial condition and results of
operations will likely be seriously harmed. We currently attempt to protect our
technology through a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements and similar
means. Despite our efforts, other parties may attempt to disclose, obtain or use
our technologies or solutions. Our competitors may also be able to independently
develop products that are substantially equivalent or superior to our products
or design around our patents. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of the United States.
As a result, we may not be able to protect our proprietary rights adequately in
the United States or abroad.
From time to time, we have received notices that claim we have infringed
upon the intellectual property of others. Even if these claims are not valid,
they could subject us to significant costs. We have engaged in litigation in the
past, and litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of the proprietary rights
of others. Litigation may also be necessary to defend against claims of
infringement or invalidity by others. An adverse outcome in litigation or any
similar proceedings could subject us to significant liabilities to third
parties, require us to
26
license disputed rights from others or require us to cease marketing or using
certain products or technologies. We may not be able to obtain any licenses on
terms acceptable to us, or at all. We also may have to indemnify certain
customers or strategic partners if it is determined that we have infringed upon
or misappropriated another party's intellectual property. Any of these results
could adversely affect on our business, financial condition and results of
operations. In addition, the cost of addressing any intellectual property
litigation claim, both in legal fees and expenses, and the diversion of
management resources, regardless of whether the claim is valid, could be
significant and could seriously harm our business, financial condition and
results of operations.
The Trading Price of Our Common Stock Is Volatile. The trading price of
our common stock has been subject to wide fluctuations in the past. Since
January 2000, our Class A common stock has traded at prices as low as $1.24 per
share and as high as $29.44 per share. If our stock price declines below $1.00
for an extended period of time, our common stock may be delisted from the Nasdaq
National Market and there may not be a market for our stock. We may not be able
to increase or sustain the current market price of our common stock in the
future. As such, you may not be able to resell your shares of common stock at or
above the price you paid for them. The market price of our common stock could
continue to fluctuate in the future in response to various factors, including,
but not limited to:
o quarterly variations in operating results;
o our ability to control costs and improve cash flow;
o shortages announced by suppliers;
o announcements of technological innovations or new products by our
competitors, customers or us;
o acquisitions or businesses, products or technologies;
o changes in pending litigation or new litigation;
o changes in investor perceptions;
o our ability to spin-off any business unit;
o applications or product enhancements by us or by our competitors;
and
o changes in earnings estimates or investment recommendations by
securities analysts.
The stock market in general has recently experienced volatility, which has
particularly affected the market prices of equity securities of many high
technology companies. This volatility has often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock. In the past, companies that have
experienced volatility in the market price of their securities have been the
subject of securities class action litigation. If we were to become the subject
of a class action lawsuit, it could result in substantial losses and divert
management's attention and resources from other matters.
We Are Controlled by Certain of Our Officers and Directors. As of November
9, 2001, our officers and directors beneficially owned approximately 28% of the
total combined voting power of the outstanding shares of our Class A common
stock and Class B common stock. As a result of their stock
27
ownership, our management will be able to significantly influence the election
of our directors and the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions, regardless of how our other
stockholders may vote. This concentration of voting control may have a
significant effect in delaying, deferring or preventing a change in our
management or change in control and may adversely affect the voting or other
rights of other holders of common stock.
Our Stock Structure and Certain Anti-Takeover Provisions May Affect the
Price of Our Common Stock. Certain provisions of our certificate of
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to our
stockholders. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. Our Class A common
stock entitles the holder to one-tenth of one vote per share and our Class B
common stock entitles the holder to one vote per share. The disparity in the
voting rights between our common stock, as well as our insiders' significant
ownership of the Class B common stock, could discourage a proxy contest or make
it more difficult for a third party to effect a change in our management and
control. In addition, our Board of Directors is authorized to issue, without
stockholder approval, up to 2,000,000 shares of preferred stock with voting,
conversion and other rights and preferences superior to those of our common
stock, as well as additional shares of Class B common stock. Our future issuance
of preferred stock or Class B common stock could be used to discourage an
unsolicited acquisition proposal.
In March 1998, we adopted a stockholder rights plan and declared a
dividend of preferred stock purchase rights to our stockholders. In the event a
third party acquires more than 15% of the outstanding voting control of our
company or 15% of our outstanding common stock, the holders of these rights will
be able to purchase the junior participating preferred stock at a substantial
discount off of the then current market price. The exercise of these rights and
purchase of a significant amount of stock at below market prices could cause
substantial dilution to a particular acquiror and discourage the acquiror from
pursuing our company. The mere existence of a stockholder rights plan often
delays or makes a merger, tender offer or proxy contest more difficult.
We Do Not Pay Cash Dividends. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends on either class of
our common stock in the foreseeable future.
We May Be Subject to Additional Risks. The risks and uncertainties
described above are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business operations.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Substantially all of our debt outstanding at September 30, 2001 is fixed
rate of interest and, accordingly, we do not have significant exposure to
changes in interest rates. In addition, we believe that the carrying value of
our debt outstanding approximate fair value.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Annual Meeting of the Stockholders of Odetics, Inc.
held on September 14, 2001, the following proxies were tabulated representing
748,573 shares of Class A Common Stock or 78.4% of the eligible voting share,
and 872,987 shares of Class B Common Stock or 84.3% of the eligible voting
shares voted in the following manner:
Proposal I: Election of the Board of Directors
Total Vote for Total Vote Withheld
Class A Common Stock Each Director From Each Director
-------------------- ------------- ------------------
Crandall Gudmundson 738,675 9,898
Jerry F. Muench 738,675 9,898
Class A and Class
B Common Stock
Voting Together
As A Single Class For Withheld
----------------- -------------- -------------
Joel Slutzky 1,607,733 13,826
Kevin Daly 1,610,647 10,913
Tom Thomas 1,610,554 11,006
Gregory A. Miner 1,609,522 12,037
John W. Seazholtz 1,610,632 10,928
Paul E. Wright 1,610,397 11,163
29
Proposal II: To approve the Amendment of the Certificate of Incorporation of
Odetics to increase the aggregate number of authorized shares of
Class A common stock from 10,000,000 to 50,000,000 shares.
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- ------------------
For 719,320 857,581
Against 27,633 15,096
Abstain 1,620 310
Proposal III: To approve the Amendment to Odetics' 1997 Stock Incentive Plan to
increase the number of shares of Class A Common Stock authorized
for issuance over the term of the plan by 475,000 shares, from
1,330,000 shares to 1,805,000 shares.
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- ------------------
For 718,406 862,378
Against 28,284 10,299
Abstain 1,883 310
Proposal IV: The approval and ratification of the sale and issuance of an
aggregate of 70,126 shares of Class A common stock to Joel Slutzky,
The Company's the Chief Executive Officer and Chairman of the Board
of Odetics at a purchase price of $14.26 per share, as required by
the rules of the Nasdaq National Market.
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- ------------------
For 403,098 608,366
Against 13,977 2,899
Abstain 1,096 150
Non-Vote 330,402 261,572
Proposal V: The ratification of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending March 31, 2002.
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- ------------------
For 743,970 872,652
Against 3,304 100
Abstain 1,299 235
30
Item 5. OTHER INFORMATION
NONE.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2001 ODETICS, INC.
(Registrant)
By /s/ Gregory A. Miner
---------------------------------------
Gregory A. Miner
Vice President, Chief Financial Officer
By /s/ Gary Smith
---------------------------------------
Gary Smith
Vice President, Controller
(Principal Accounting Officer)
32