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 December 31, 2000
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 0-10605
-------
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 92802
Anaheim, California (Zip Code)
(Address of principal executive office)
(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 February 12, 2001
Class A Common Stock 9,463,416 shares.
Class B Common Stock 1,035,841 shares.
INDEX
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PART I FINANCIAL INFORMATION Page
----------------------------- ----
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS FOR 3
THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1999 AND 2000 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2000 4
AND DECEMBER 31, 2000 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE NINE MONTHS ENDED DECEMBER 31, 1999 AND
2000 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 16
ABOUT MARKET RISKS
PART II OTHER INFORMATION
- -------------------------
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 24
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
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 Nine Months Ended
Ended December 31, December 31,
--------------------- -----------------------
1999 2000 1999 2000
---- ---- ---- ----
Net sales and contract revenues:
Net sales $ 15,171 $ 14,070 $ 47,875 $ 43,087
Contract revenues 4,436 4,798 13,979 14,430
-------- --------- -------- ---------
Total net sales and contract revenues 19,607 18,868 61,854 57,517
Costs and expenses:
Cost of sales 13,920 14,086 37,930 37,307
Cost of contract revenues 3,225 2,891 10,197 9,202
-------- --------- -------- ---------
Gross Profit 2,462 1,891 13,727 11,008
-------- --------- -------- ---------
Selling, general and administrative expense 9,214 10,119 26,566 32,052
Research and development expense 3,964 5,237 12,172 15,411
Special charge 0 6,285 0 6,285
-------- --------- -------- ---------
Total operating expenses 13,178 21,641 38,738 53,748
-------- --------- -------- ---------
Loss from operations (10,716) (19,750) (25,011) (42,740)
-------- --------- -------- ---------
Non-operating items
Other income (38,437) 0 (38,437) (19,055)
Interest expense, net 454 201 1,821 1,102
-------- --------- -------- ---------
Income (loss) before taxes 27,267 (19,951) 11,605 (24,787)
-------- --------- -------- ---------
Income tax benefit 6,575 0 0 0
-------- --------- -------- ---------
Net loss $ 20,692 ($19,951) $ 11,605 ($24,787)
======== ========= ======== =========
Earnings (loss) per share:
Basic $2.27 ($1.90) $1.28 ($2.53)
======== ========= ======== =========
Diluted $2.18 ($1.90) $1.24 ($2.53)
======== ========= ======== =========
Weighted average number of shares
outstanding
Basic 9,128 10,494 9,076 9,802
======== ========= ======== =========
Diluted 9,485 10,494 9,353 9,802
======== ========= ======== =========
See notes to consolidated financial statements
3
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2000 2000
--------- ------------
ASSETS
Current assets
Cash $ 4,880 $ 948
Trade accounts receivable, net 13,576 14,791
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,283 2,872
Inventories:
Finished goods 1,203 1,164
Work in process 859 241
Materials and supplies 16,150 15,310
--------- --------
Total inventories 18,212 16,715
Prepaid expenses 1,978 1,475
Income taxes receivable 0 0
Deferred income taxes 0 0
--------- --------
Total current assets 41,929 36,801
Property, plant and equipment:
Land 2,060 2,060
Buildings and improvements 18,868 18,981
Equipment, furniture and fixtures 33,328 35,360
--------- --------
54,256 56,401
Less accumulated depreciation (33,520) (35,260)
--------- --------
Net property, plant, and equipment 20,736 21,141
Capitalized software costs, net 6,482 2,208
Goodwill, net 12,004 11,033
Other assets 699 169
--------- --------
Total assets $ 81,850 $ 71,352
========= ========
See notes to consolidated financial statements.
4
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands)
March 31, December 31,
2000 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 10,702 $ 12,593
Accrued payroll and related 4,892 4,731
Accrued expenses 2,313 2,132
Contract loss accrual 3,056 2,593
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,303 2,017
Revolving line of credit 3,706 6,812
Other current liabilities 0 0
Current portion of long-term debt 3,102 2,214
------------ ------------
Total current liabilities 29,074 33,092
Long-term debt, less current portion 11,666 10,023
Other liabilities 5,000 0
Deferred income taxes 0 0
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;
9,453,516 shares of Class A and 1,045,741
shares of Class B issued and outstanding at
December 31, 2000 - $.10 par value 923 1,050
Paid-in capital 61,200 78,569
Treasury stock (22) (1)
Notes receivable from associates (61) (61)
Accumulated deficit (26,192) (50,978)
Accumulated other comprehensive income 262 (342)
------------ ------------
Total stockholders' equity 36,110 28,237
------------ ------------
Total liabilities and stockholders' equity $ 81,850 $ 71,352
============ ============
See notes to consolidated financial statements.
5
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
December 31,
-----------------------
1999 2000
--------- ----------
Operating activities
Net income (loss) $ 11,605 $(24,787)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 4,624 7,490
Provision for losses on accounts receivable 0 46
Provision for deferred income taxes 233 0
Other 0 (604)
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,146 (1,261)
(Increase) Decrease in net costs and
estimated earnings in excess of billings 46 1,125
(Increase) Decrease in inventories 1,146 1,497
(Increase) Decrease in prepaids and other
assets (3,361) 1,037
Increase (Decrease) in accounts payable and
accrued expenses (5,154) 1,083
--------- ----------
Net cash provided by (used in) operating activities 13,285 (14,374)
Investing activities
Purchases of property, plant, and equipment (1,914) (2,145)
Software development costs (331) 0
--------- ----------
Net (cash) used in investing activities (2,245) (2,145)
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 22,456 19,894
Principal payments on line of credit, long-term
debt and capital lease obligations (28,875) (24,319)
Proceeds from issuance of common stock 1,158 17,012
--------- ----------
Net cash provided by (used in) financing activities (5,261) 12,587
--------- ----------
Increase in cash 5,779 (3,932)
Cash at beginning of year 787 4,880
--------- ----------
Cash at December 31 $ 6,566 $ 948
========= ==========
Non cash transaction
MMA purchase price adjustment $ 0 $ 505
========= ==========
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, necessary to present fairly the consolidated
financial position of Odetics, Inc. as of December 31, 2000 and the
consolidated results of operations and cash flows for the three and
nine month periods ended December 31, 1999 and 2000. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of
operations for the three and nine month periods ended December 31, 2000
are not necessarily indicative of those to be expected for the entire
year. The accompanying financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended March 31, 2000 filed with the Securities and Exchange Commission.
Odetics has a $17.0 million line of credit with Transamerica Business
Credit that provides for borrowings at prime plus 2.0% (11.5% at
December 31, 2000). At December 31, 2000, Odetics had $6.8 million of
outstanding borrowings on this line of credit. Odetics borrowing under
this line of credit are secured by substantially all of its assets. The
line of credit with Transamerica Business Credit expired on December
31, 2000 and Odetics received an extension on the line until February
28, 2001 to allow time for it to negotiate a financing arrangement with
another lender. Odetics has executed a non-binding letter of intent
with another lender to secure a line of credit and is working to
complete the financing with the new lender. Although Odetics
anticipates that it will be successful in negotiating the new financing
agreement, there can be no assurance that its efforts will be
successful.
The Odetics strategy of incubating companies for eventual spin-off or
sale has historically required significant investments of cash. Odetics
recently announced reductions to its operating expenses and staffing
levels accompanied by its announcement that it was planning to operate
to a revised business model focused on narrowing its quarterly
operating costs and negative cash flow. In spite of its revised
business model, Odetics is anticipating that it will continue to incur
net losses and negative operating cash flow for at least several
quarters and is dependent upon completing other transactions to provide
necessary liquidity. Odetics is currently exploring several
alternatives for meeting its liquidity requirements, including the
monetization of its real property used for its principal facilities,
the re-negotiation of its credit facilities, the sale of additional
equity in its Iteris subsidiary, and the sale of certain of its
businesses to strategic buyers. Odetics anticipates that it will be
successful in its efforts to continue to finance its capital
requirements and that it will be able to execute its current operating
plans and meet its obligations on a timely basis for at least the next
twelve months.
NOTE 2 - Income Taxes
- ------
Income tax expense (benefit), if any, for the three and nine month
periods ended December 31, 1999 and 2000 has been provided at the
estimated annualized effective tax rates based on the estimated income
tax liability or assets and change in deferred taxes for their
respective fiscal years. Deferred taxes result primarily from temporary
differences in the reporting of income for financial statement and
income tax purposes. These differences relate principally to the use
of accelerated cost recovery depreciation methods for tax purposes,
capitalization of interest and taxes for tax purposes, capitalization
of computer software costs for financial statement purposes, deferred
compensation, other payroll accruals, reserves for inventory and
accounts receivable for financial statement purposes and general
business tax credit and alternative minimum tax credit carryforwards
for tax purposes. The Company did not provide income tax benefit for
the losses incurred three month and nine month periods ended December
31, 2000 due to the uncertainty as to the ultimate realization of the
benefit at that time.
NOTE 3 - Long-Term Debt
- ------
March 31, December 31,
2000 2000
--------- ------------
(in thousands)
Mortgage note $ 7,027 $ 6,099
Notes payable 5,750 4,750
Contracts payable 1,991 1,388
------- -------
14,768 12,237
Less current portion 3,102 2,214
------- -------
$11,666 $10,023
======= =======
7
NOTE 4 - Legal Proceedings
- ------
On October 11, 1999, Odetics settled a patent infringement case it had
brought against Storage Technology Corporation ("StorageTek"). Pursuant
to an agreement, StorageTek agreed to pay the Company a license fee
totaling $100.0 million for use of the Company's 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 agreement, and
two annual installments of $10.0 million payable in each of October
2000 and 2001. In connection with the initial payment, the Company
received $38.4 million, net of legal fees and other direct expenses,
which was reflected as royalty income in the Company's statement of
operations in its fiscal year ended March 31, 2000.
On June 12, 2000, the Company 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, included in non-operating
income in the nine months ended December 31, 2000 is $17.8 million,
which was recognized in the quarter ended June 30, 2000.
NOTE 5 - Comprehensive Income
- ------
The components of comprehensive income (loss) for the three months and
nine months ended December 31, 1999 and 2000 are as follows in
thousands:
Three Months Nine Months
-------------- -------------
1999 2000 1999 2000
------- --------- ------- ---------
Net (loss) $20,692 $(19,951) $11,605 $(24,787)
Foreign currency translation 218 (39) 219 (604)
adjustment
------- --------- ------- ---------
Comprehensive (loss) $20,910 $(19,990) $11,824 $(25,391)
======= ========= ======= =========
NOTE 6 - Business Segment Information
- ------
The Company operates in three reportable segments: intelligent
transportation systems, video products, which includes products for the
television broadcast and video security markets, and
telecommunications. Selected financial information for the Company's
reportable segments for the three month and nine month periods ended
December 31, 1999 and 2000 follows in thousands:
8
Intelligent Video Telecom
(in thousands) Transportation Products Products Total
-------------- -------- -------- -----
Three months ended 12/31/99
Revenue from external customers 6,243 8,867 1,925 17,035
Intersegment revenues 0 2,113 26 2,139
Segment income (loss) (491) (5,440) (2,498) (8,429)
(in thousands)
Three months ended 12/31/00
Revenue from external customers 7,707 7,220 2,037 16,964
Intersegment revenues 0 1,254 74 1,328
Segment income (loss) (659) (6,976) (3,020) (10,655)
The following reconciles segment income to consolidated income before
income taxes in thousands:
3 months ended 3 months ended
December 31, 1999 December 31, 2000
----------------- -----------------
Revenue
Total revenues for reportable segments 19,174 18,292
Non-reportable segment revenues 2,572 1,904
Other revenues 0 0
Elimination of intersegment sales (2,139) (1,328)
---------- ----------
Total consolidated revenues 19,607 18,868
Total profit or loss for reportable segments (8,429) (10,655)
Other profit or loss 37,724 (1,487)
Unallocated amounts:
Corporate and other expenses (1,574) (1,323)
Special charge 0 (6,285)
Interest expense (454) (201)
---------- ----------
Income (loss) before income taxes 27,267 (19,951)
Intelligent Video Telecom
Transportation Products Products Total
-------------- -------- -------- ------
Nine months ended 12/31/99
Revenue from external customers 17,448 30,193 7,630 55,271
Intersegment revenues 0 4,617 66 4,683
Segment income (loss) (1,947) (10,997) (5,317) (18,261)
Nine months ended 12/31/00
Revenue from external customers 20,028 25,809 5,157 50,994
Intersegment revenues 0 4,034 116 4,150
Segment income (loss) (4,283) (14,346) (8,434) (27,063)
9
The following reconciles segment income to consolidated income before
income taxes in thousands:
9 months ended 9 months ended
December 31, 1999 December 31, 2000
----------------- -----------------
Revenue
Total revenues for reportable segments $ 59,954 $ 55,144
Non-reportable segment revenues 6,583 6,523
Other revenues 0 0
Elimination of intersegment sales (4,683) (4,150)
________ ________
Total consolidated revenues 61,854 57,517
Total loss for reportable segments (18,261) (27,063)
Other profit or (loss) 36,348 (3,939)
Unallocated amounts:
Corporate and other expenses (4,661) 13,602
Special charge 0 (6,285)
Interest expense (1,821) (1,102)
________ ________
Loss before income taxes $ 11,605 $(24,787)
10
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 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 and results of operations, funding and
cash requirements, supply issues, market acceptance of new products, the Odetics
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." Odetics' 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. Odetics undertakes 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 Video Products, Telecom
Products, and Intelligent Transportation Systems ("ITS"). The Video Products
segment includes our Broadcast, Inc. and our Gyyr Incorporated subsidiaries.
The Telecom Products segment includes Zyfer, Inc., which manufactures timing and
synchronization products, and Mariner Networks, Inc., a wholly owned subsidiary,
which manufactures multi-service access devices for the telecommunications
industry. The ITS segment consists of Odetics' 93% owned subsidiary Iteris,
Inc.
In January 2000, we announced the reorganization of our business to reduce
our operating expenses and improve our cash flow. We downsized our operations
(i) in Broadcast to focus on software content management and delivery, (ii) in
Gyyr to focus on data storage and (iii) to reduce the operations, cost structure
of each of our operating units domestically and in Europe. In connection with
this reorganization, we reduced our workforce by approximately 25%.
Net Sales and Contract Revenues. Net sales and contract revenues consist
of (i) sales of products and services to commercial and municipal customers
("net sales") and (ii) revenues derived from contracts with state, county and
municipal agencies for ITS ("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 3.8% to $18.9 million for the three
months ended December 31, 2000 compared to $19.6 million in the corresponding
period of the prior fiscal year. Total net sales and contract revenues decreased
7.0% to $57.5 million for the nine months ended December 31, 2000 compared to
$61.9 million in the corresponding period of the prior fiscal year. Contract
revenues increased 8.2% to $4.8 million for the three months ended December 31,
2000 compared to $4.4 million in the corresponding period of the prior fiscal
year. Contract revenues increased 3.2% to $14.4 million for the nine months
ended December 31, 2000 compared to $14.0 million in the corresponding period of
the prior fiscal year. Contract revenues in Iteris increased 9.3% and 8.6% in
the three and nine months ended December 31, 2000, respectively, compared to the
corresponding periods of the prior fiscal year resulting from the increased
growth in the transportation management systems business of Iteris. Iteris has
continued to execute on its plans to aggressively compete for new contracts for
ITS projects. The increases in Iteris were offset by decreased contract
revenues in Zyfer. The decrease in year to date contract revenues in Zyfer
reflects declining sales of geographical information systems.
Net sales decreased 7.3% to $14.1 million for the three months ended
December 31, 2000 compared to $15.2 million in the corresponding period of the
prior fiscal year. Net sales decreased 10.0% to $43.1 million for the nine
months ended December 31, 2000 compared to $47.9 million in the
11
corresponding period of the prior fiscal year. The decrease in net sales in the
three months ended December 31, 2000 compared to the corresponding period of the
prior year primarily reflects the net effect of a decrease in sales of Gyyr
products and an increase in sales of Iteris products. Gyyr net sales decreased
24% to $7.3 million during the three months ended December 31, 2000 compared to
the corresponding period of the prior fiscal year. Gyyr revenues during the
quarter were negatively impacted by an increasingly competitive market and
reduced unit sales of analog time lapse recorders.
The decrease in net sales in the nine months ended December 31, 2000
compared to the corresponding period of the prior year reflects declining sales
in each business unit of Odetics other than Iteris, offset in part by increased
Iteris net sales. Iteris net sales in the three and nine months ended December
31, 2000 primarily reflects increased unit sales of its Vantage video detection
products. Mariner Networks net sales during the nine months ended December 31,
2000 were negligible, as Mariner did not begin shipping its Dexter family of
multi-service access devices until December 2000. Broadcast net sales decreased
during the nine months ended December 31, 2000 compared to the corresponding
period of the prior fiscal year as Broadcast experienced declining sales of its
Roswell Automation System in fiscal 2001. Gyyr net sales decreased during the
nine months ended December 31, 2000 compared to the corresponding period of the
prior fiscal year as Gyyr experienced increased competitive market conditions
for its line of analog based time-lapse recorders during the current year
period. Zyfer net sales remained relatively stable during the nine months ended
December 31, 2000 compared to the corresponding period of the prior fiscal year.
Gross Profit. Gross profit on net sales for the three and nine months
ended December 31, 2000 is net of charges of $3.1 million for the write-off of
inventories associated with discontinued product lines. Gross profit on net
sales for the three months ended December 31, 2000, before the effect of these
write-offs, was 22.1% compared to gross profit on net sales of 8.3% in the
corresponding period in the prior fiscal year. Gross profit for the nine months
ended December 31, 2000, before the effect of the these write-offs, was 20.6%,
and was relatively unchanged compared to gross profit on net sales for the
corresponding period of the prior fiscal year. The increase in gross profit
performance, before the adjustments for the write-off of inventory, in the three
months ended December 31, 2000 compared to the corresponding period of the prior
fiscal year, primarily reflects improving gross profit on a 67.1% increase in
Vantage product sales in the current year. In addition, gross profit on net
sales in the three months ended December 31, 1999 included the impact of pricing
concessions to certain customers and adjustments to inventory reserves and
capitalized software related to a product transition in Mariner Networks that
resulted from the loss of a major customer.
Gross profit on contract revenues increased to 39.8% for the three months
ended December 31, 2000 compared to 27.3% in the comparable period of the prior
fiscal year. For the nine months ended December 31, 2000, gross profit margin on
contract revenues increased to 36.2% from 27.1% in the comparable period of the
prior fiscal year. The increase in gross profit on contract revenues for the
three and nine months ended December 31, 2000 primarily reflects improved gross
profits on contract revenues in Zyfer and Iteris in the current fiscal year.
The Company recognizes contract revenues and related gross profits using
percentage of completion contract accounting, and the related gross profits
recognized in any given period will be affected by the underlying mix of
contract activity.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 9.8% to $10.1 million (or 53.6% of total net
sales and contract revenues) in the three months ended December 31, 2000
compared to $9.2 million (or 46.9% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Selling, general and
administrative expense increased 20.7% to $32.1 million (or 55.7% of total net
sales and contract revenues) for the nine months ended December 31, 2000
compared to $26.6 million (or 43.0% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Selling, general and
administrative expense in each of our business units reflects the unique growth
attributes and maturity of each operation, and the increases experienced in the
three and nine months ended December 31, 2000 were primarily incurred in Mariner
Networks and Iteris. Mariner Networks' selling, general and administrative
expense increased 224.6% and 149.9 % in the three
12
and nine months ended December 31, 2000, respectively, compared to the prior
year periods as a result of its organizational development required to support
the roll-out of its Dexter 3000 product family beginning in December 2000.
Iteris experienced increased selling, general and administrative expense as a
result of its build up of its administrative infrastructure required to prepare
for spin-off from Odetics, which was originally planned in the three months
ended June 30, 2000. As a result of the aborted public offering and spin-off in
the current fiscal year, selling, general and administrative expense in the nine
months ended December 31, 2000 included a charge of approximately $360,000
relating to the write-off deferred public offering costs.
Research and Development Expense. Research and development expense
increased 32.1% to $5.2 million (or 27.8% of total net sales and contract
revenues) in the three months ended December 31, 2000 compared to $4.0 million
(or 20.2% of total net sales and contract revenues) in the corresponding period
of the prior fiscal year. For the nine months ended December 31, 2000, research
and development expense increased 26.7% to $15.4 million (or 26.8% of total net
sales and contract revenues) compared to $12.2 million (or 19.7% of total net
sales and contract revenues) in the corresponding period of the prior fiscal
year. The increase in research and development expense for the three and nine
months ended December 31, 2000 principally reflects increased product
development expense in Zyfer, Mariner Networks and Iteris. Zyfer's research and
development expense increased 34.8% in the nine months ended December 31, 2000
compared to the same period of the prior year as a result of the development of
StealthKey(TM) , its product offering for secured network communications.
Mariner Networks increased research and development expense by 44.1% and 24.2%
in the three and nine months ended December 31, 2000, respectively, compared to
the prior periods as a result of the continued development of its Dexter 3000
product family. Dexter 3000 represents a new offering of multi-service access
products for the telecommunications industry. Mariner began limited shipments
of the Dexter product in December 2000 and expects to continue to experience
significant development expenses for expanded functionality and performance of
the product. Iteris' research and development expense increased 100.6% and
85.8% in the three and nine months ended December 31, 2000, respectively,
compared to the prior year periods as a result of development efforts supporting
its AutoVue product and the development of solutions for Personalized Traveler
Information. In December 2000, Iteris substantially reduced its spending
related to the development of Personalized Traveler Information systems and
expects that these expenses will continue to decline both in absolute dollars
and as a percentage of net sales and contract revenues in future quarters. For
competitive reasons, we closely guard the confidentiality of our specific
development projects.
Interest Expense, Net. Interest Expense, Net reflects interest income and
interest expense as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1999 2000 1999 2000
------- ------- ------- -------
(in thousands)
Interest Expense......... 454 277 1,821 1,352
Interest Income.......... -- 76 -- 250
------- ------- ------- -------
Interest Expense, Net.... 454 201 1,821 1,102
Interest expense primarily reflects interest on our line of credit
borrowings and mortgage interest. Interest income in the three and nine months
ended December 31, 2000 was derived from short-term investments of cash
deposits. The decrease in interest expense for the three and nine months ended
December 31, 2000 compared to the prior fiscal periods primarily reflects a
decrease in our average outstanding borrowings on our line of credit facility.
Income Taxes. On October 11, 1999, Odetics settled its litigation with
Storage Technology Corporation ("StorageTek") pursuant to which StorageTek
agreed to pay license fees to Odetics of $100.0 million. Odetics realized
royalty income of approximately $38.4 million in the three months ended December
31, 1999 as a result of the settlement, and recorded related tax expense of $6.6
million. The tax expense
13
recognized in the three months ended December 31, 1999 offset previous benefits
recognized in the three months ended September 30, 1999 so that no benefit or
expense was recognized for the nine months ended December 31, 1999. We did not
recognize any tax benefits in the three and nine months ended December 31, 2000
because management determined that we could not meet the criteria for the
recognition of the resulting deferred tax asset.
Liquidity and Capital Resources
We reported net losses of $24.8 million in the nine months ended December
31, 2000 compared to net losses of $11.6 million in the corresponding period in
1999. Net losses recognized in the nine months ended December 31, 2000 were net
of non-operating gains of $19.1 million relating to a litigation settlement with
StorageTek, and included charges totaling $9.4 million related to staffing
reductions and reorganization. The total $9.4 million in charges were incurred
in the three months ended December 31, 2000 and included $3.1 million of charges
to cost of sales and a $6.3 million charge classification within operating
expenses. Approximately $1.3 million of the charges incurred during the three
months ended December 31, 2000 were related to severance payments for staffing
reductions, and the balance of the non-cash charges related to asset write-downs
and reserves in connection with the discontinuation of certain products, as well
as deferred offering costs. We also used $14.4 million of net cash to fund the
operating losses for working capital requirements during the nine months ended
December 31, 2000. We used $2.1 million of net cash during the nine months
ended December 31, 2000 to finance capital equipment purchases.
We have a $17.0 million line of credit with Transamerica Business Credit
that provides for borrowings at prime plus 2.0% (11.5% at December 31, 2000).
At December 31, 2000, $6.8 million was outstanding on this line of credit. Our
borrowings under this line of credit are secured by substantially all of our
assets. The line of credit with Transamerica Business Credit expired on
December 31, 2000 and we have received an extension on the line until February
28, 2001 to allow us to negotiate a financing arrangement with another lender.
We have executed a non-binding letter of intent with another lender to secure a
line of credit and we are working to complete the financing with the new lender.
Although we anticipate that we will be able to successfully negotiate the new
financing agreement, we can not assure you that our efforts will be successful.
During the nine months ended December 31, 2000, Odetics recognized non-
operating income in connection with the settlement with StorageTek and the sale
of certain assets of our solid state recorder product line. In October 1999, we
settled litigation with StorageTek in exchange for license fees payable to us of
$100.0 million, $80.0 million of which was paid on the settlement date. In June
2000, we amended the settlement agreement with StorageTek to provide for the
acceleration of the payment of the $20.0 million still owed Odetics. Under the
terms of the amendment, StorageTek paid us $17.8 million in the three months
ended June 30, 2000 to complete the settlement. We recognized non-operating
income in the amount of $17.8 million, and used the cash proceeds to pay down
borrowings on our line of credit during the three months ended June 30, 2000.
During the three months ended June 30, 2000, Odetics sold certain assets of its
solid state recording product line for $1.5 million in cash. In connection with
this sale, we recorded a non-operating gain of $1.2 million in the six months
ended September 30, 2000. During the three months ended December 31, 2000,
Odetics negotiated the sale of certain assets of its Zyfer business. This
transaction was completed in February 2001 and Odetics received proceeds of
$375,000 in cash related to the sale. The proceeds were approximately equal to
the net assets sold, and we expect any resulting gain or loss on this
transaction will be immaterial.
In July 1999, Odetics sold an option to Manchester Capital LLC for an
aggregate purchase price of $5.0 million to purchase certain real property of
Odetics consisting of approximately 14 acres located at 1515 South Manchester
Avenue, Anaheim, California. Odetics used the proceeds of the option sale for
general working capital purposes. In August 2000, Odetics repurchased this
option from Manchester Capital LLC for $5.6 million.
14
Our strategy of incubating companies for eventual spin-off or sale has
historically required significant investments of cash. We recently announced
reductions in our operating expenses and staffing levels accompanied by our
announcement that we were planning to operate to a revised business model
focused on narrowing our quarterly operating costs and negative cash flow. In
spite of our revised business model, we are anticipating that we will continue
to incur net losses and negative operating cash flow for at least several
quarters and we are dependent upon completing other transactions to provide
necessary liquidity. We are currently exploring several alternatives for
meeting our liquidity requirements, including the monetization of the real
property used for our principal facilities, the re-negotiation of our credit
facilities, the sale of additional equity in our Iteris subsidiary, and the sale
of certain of our businesses to strategic buyers. We anticipate that we will be
successful in our efforts to continue to finance our capital requirements and
that we will be able to execute our current operating plans and meet our
obligations on a timely basis for at least the next twelve months.
Pending Adoption of Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards
for recording derivatives in interim and annual financial reports requiring that
all derivative instruments be recorded as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and therefore we will adopt the new requirements effective with the filing
of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. We do
not anticipate that the adoption of SFAS No. 133 will have a significant impact
on our results of operations, financial position or cash flows.
Pending Adoption of Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101). SAB No. 101 summarizes the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We review our sales contracts on an ongoing basis to ensure our
compliance with SAB No. 101. We do no anticipate that adoption of SAB 101 will
have a material impact on previously reported or future results of operations,
financial position or cash flows.
15
RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing the shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
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:
. our significant investment in research and development for our
subsidiaries and business units;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
. our ability to control costs;
. the size, timing, rescheduling or cancellation of significant customer
orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. 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;
. the long lead times associated with government contracts or required by
vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. the effects of technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our business units;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the risks inherent in our acquisitions of technologies and businesses;
. Risks and uncertainties associated with our international business;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and market 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.
We Have Experienced Substantial Losses and Expect Future Losses. We have
experienced significant operating losses of $42.7 million for the nine months
ended December 31, 2000, $38.7 million for the year ended March 31, 2000 and
$18.3 million for the year ended March 31, 1999. In January 2001,
16
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. We cannot assure you that this reorganization 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 could cause the market price of our common stock to decline.
We May Need Additional Capital in the Future and May Not Be Able to Secure
Adequate Funds on Terms Acceptable to Us. Our line of credit facility expired
on December 31, 2000. While we have received an extension on this facility
until February 28, 2001, we will need to obtain a new line of credit from
another lender in the near future. Substantially all of our assets have been
pledged to our existing lender to secure the outstanding indebtedness under this
facility ($6.8 million at December 31, 2000). We have received a non-binding
letter of intent from another lender to secure a $25 million line of credit, but
we cannot assure you that we will be able to obtain this line of credit on a
timely basis, on acceptable terms, or at all. Even if we are able to secure a
new line of credit, we anticipate that we will need to raise additional capital
in the near future, either through additional bank borrowings, the monetization
of certain real property, the divestiture of business units or select assets, or
other debt or equity financings. Our capital requirements will depend on many
factors, including:
. market acceptance of our products;
. increased research and development funding, and required investments in
our business units;
. our ability to generate operating income;
. technological advancements and our competitors' response to our
products;
. capital improvements to new and existing facilities;
. increased sales and marketing expenses; and
. potential acquisitions of businesses and product lines; and additional
working capital needs.
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 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.
Our Operating Strategy for developing companies is Expensive and May Not Be
Successful. We have initiated a business strategy called our incubator strategy,
which is expensive and highly risky. The goal of this strategy is to nurture and
develop companies that can be spun-off to our stockholders. This strategy has in
the past 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 public company. We expect to continue to invest heavily in the
development of certain of our business units with the goal of conducting
additional public offerings. We may not recognize the benefits of this
investment for a significant period of time, if at all. Our ability to complete
an initial public offering of any of our business units and/or spin-off our
interest to our stockholders will depend upon many factors, including:
. the overall performance and results of operations of the particular
business unit;
. the potential market for our business unit;
. our ability to assemble and retain a broad, qualified management team
for the business unit;
. our financial position and cash requirements;
17
. the business unit's customer base and product line;
. the current tax treatment of spin-off transactions and our ability to
obtain favorable determination letters from the Internal Revenue
Service; and
. general economic and market conditions, including the receptiveness of
the stock markets to initial public offerings.
We may not be able to complete a successful initial public offering or
spin-off of any of our business units in the near future, or at all. During
fiscal 2000, we attempted to complete the initial public offering of Iteris. We
withdrew the offering due to adverse market conditions. Even if we do complete
additional public offerings, we may decide not to 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:
. rapid technological advances;
. downward price pressure in the marketplace as technologies mature;
. changes in customer requirements;
. frequent new product introductions and enhancements; and
. 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 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 DVMS, our family of digital time-lapse
recorders; AutoVue, our lane departure warning system; and Dexter, our multi-
service access device.
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. We have experienced delays in the past
in the introduction of new products, particularly with our Roswell system, which
we recently discontinued. 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
18
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 anticipate that we will 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 product sales represented
approximately 19% of our total net sales and contract revenues for the fiscal
year ended March 31, 2000, approximately 27% for the fiscal year ended March 31,
1999 and approximately 34% for the fiscal year ended March 31, 1998.
International business operations are subject to inherent risks, including,
among others:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers or restrictions;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. import and export license requirements and restrictions of the United
States and each other country in which we operate;
. exposure to different legal standards and reduced protection for
intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. 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. Our international
sales are currently denominated primarily 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, on our business 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, certain assets of the Transportation Systems business of
Rockwell International, and the Security Products Division of Digital Systems
Processing, Inc. 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:
. potential disruption of our ongoing business and the diversion of our
resources and management's attention;
. the failure to retain or integrate key acquired personnel;
19
. the challenge of assimilating diverse business cultures, and the
difficulties in integrating the operations, technologies and information
system of the acquired companies;
. increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
result of changes in management; and
. 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.
Acquisitions, combined with the expansion of our business units and recent
growth has placed and is expected to continue to place a significant strain on
our resources. To accommodate this growth, 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 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 23% and 25% of our
total net sales and contract revenues for the year ended March 31, 2000 and the
nine months ended December 31, 2000, respectively. 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:
. long purchase cycles;
. competitive bidding and qualification requirements;
. performance bond requirements;
. delays in funding, budgetary constraints and cut-backs; and
. 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 operations.
20
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
officers or key employees. The loss of any of these persons would seriously harm
our development and marketing efforts, and would 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 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.
21
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. In 2000, our
Class A common stock has traded at prices as low as $4 3/16 per share and as
high as $29 7/16 per share. 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:
. quarterly variations in operating results;
. our ability to control costs and improve cash flow;
. shortages announced by suppliers;
. announcements of technological innovations or new products by our
competitors, customers or us;
. acquisitions or businesses, products or technologies;
. changes in pending litigation or new litigation;
. changes in investor perceptions;
. our ability to spin-off any business unit;
. applications or product enhancements by us or by our competitors; and
. 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 volatilities 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 December
31, 2000, 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 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. In addition, holders of
the Class B common stock are presently entitled to elect six of our nine
directors. 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.
22
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 the 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.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Most of the Company's debt outstanding at December 31, 2000 is fixed rate
debt and, accordingly, the Company does not have significant exposure to changes
in interest rates.
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
NONE
Item 5. OTHER INFORMATION
NONE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
24
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.
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)
Dated: February 14, 2001
25