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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 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 0-10605
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ODETICS, INC.
(Exact name of registrant as specified in its charter)
California 95-4054321
(State or other jurisdiction (I.R.S. Employer
of 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 AUGUST 08, 2001
Class A Common Stock--9,542,889 shares.
Class B Common Stock--1,035,841 shares.
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INDEX
Page
----
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE MONTHS ENDED JUNE 30, 2000
AND 2001 (UNAUDITED)......................................... 2
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2001
AND JUNE 30, 2001 (UNAUDITED)................................ 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED JUNE 30, 2000 AND
2001 (UNAUDITED)............................................. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................. 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 21
ITEM 5. OTHER INFORMATION............................................. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 21
SIGNATURES .............................................................. 22
In this Report, "Odetics," the "Company," "we," "us" and "our" collectively
refers to Odetics, Inc. and its subsidiaries.
1
PART I FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months
Ended June 30,
----------------
2000 2001
------- -------
Net sales and contract revenues:
Net sales.................................................. $14,842 $10,970
Contract revenues.......................................... 4,782 5,684
------- -------
Total net sales and contract revenues.................... 19,624 16,654
Costs and expenses:
Cost of sales.............................................. 11,764 7,816
Cost of contract revenues.................................. 3,259 3,820
------- -------
Gross profit............................................. 4,601 5,018
------- -------
Selling, general and administrative expense................ 11,144 8,509
Research and development expense........................... 4,610 3,239
------- -------
Total operating expenses................................. 15,754 11,748
------- -------
Loss from operations......................................... (11,153) (6,730)
------- -------
Non-operating items
Other income............................................... 19,055 0
Interest expense, net...................................... (472) (595)
------- -------
Net income (loss) before extraordinary item.................. 7,430 (7,325)
------- -------
Extraordinary loss from the early extinguishment of debt..... 0 (450)
Income taxes................................................. 0 0
------- -------
Net income (loss) after taxes and extraordinary item......... $ 7,430 $(7,775)
======= =======
Earnings (loss) per share:
Basic
Income (loss) before extraordinary item.................. $ 0.80 $ (0.70)
Extraordinary loss from the early extinguishment of
debt.................................................... 0.00 (0.04)
------- -------
Net income (loss) per share.............................. $ 0.80 $ (0.74)
======= =======
Diluted
Income (loss) before extraordinary item.................. $ 0.78 $ (0.70)
Extraordinary loss from the early extinguishment of
debt.................................................... 0.00 (0.04)
------- -------
Net income (loss) per share.............................. $ 0.78 $ (0.74)
======= =======
Shares used in calculating earnings (loss) per share:
Basic...................................................... 9,249 10,552
======= =======
Diluted.................................................... 9,528 10,552
======= =======
See notes to consolidated financial statements.
2
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, June 30,
2001 2001
--------- -----------
(Audited) (Unaudited)
ASSETS
------
Current assets
Cash......................................................... $ 2,218 $ 2,249
Trade accounts receivable, net............................... 14,380 12,976
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... 3,296 2,835
Inventories:
Finished goods............................................... 1,644 1,644
Work in process.............................................. 51 510
Materials and supplies....................................... 11,371 8,960
-------- --------
Total inventories........................................ 13,066 11,114
Prepaid expenses............................................. 1,078 1,870
-------- --------
Total current assets..................................... 34,038 31,044
Property, plant and equipment:
Land......................................................... 2,060 2,060
Buildings and improvements................................... 18,982 18,991
Equipment, furniture and fixtures............................ 35,359 35,501
-------- --------
56,401 56,552
Less accumulated depreciation................................ (35,266) (35,727)
-------- --------
Net property, plant and equipment............................ 21,135 20,825
Capitalized software costs, net............................... 2,090 1,971
Goodwill, net................................................. 10,622 10,394
Other assets.................................................. 176 21
-------- --------
Total assets............................................. $ 68,061 $ 64,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Trade accounts payable....................................... $ 10,644 $ 10,013
Accrued payroll and related.................................. 4,559 4,707
Accrued expenses............................................. 2,354 2,244
Contractual loss accrual..................................... 2,290 2,219
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 2,575 2,221
Revolving line of credit...................................... 13,471 7,651
Current portion of long-term debt............................ 6,990 20,539
-------- --------
Total current liabilities..................................... 42,883 49,594
Long-term debt, less current portion.......................... 4,800 94
Stockholders' equity
Preferred stock, 2,000,000 shares authorized; none issued
Common stock, 10,000,000 shares of Class A and 2,600,000
shares of Class B authorized; 9,542,889 shares of Class A
and 1,035,841 shares of Class B issued and outstanding at
June 30, 2001, $.10 par value............................... 1,050 1,058
Paid-in capital.............................................. 78,548 80,159
Treasury stock............................................... (1) (1)
Notes receivable from associates............................. (51) (51)
Accumulated deficit.......................................... (58,732) (66,507)
Accumulated other comprehensive income....................... (436) (91)
-------- --------
Total stockholders' equity.................................... 20,378 14,567
-------- --------
Total liabilities and stockholders' equity.................... $ 68,061 $ 64,255
======== ========
See notes to consolidated financial statements.
3
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months
Ended June 30,
------------------
2000 2001
-------- --------
Operating activities
Net income (loss)........................................ $ 7,430 $ (7,775)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,037 1,212
Provision for losses on accounts receivable............ 0 8
Gain on sale of product line........................... 0 (116)
Changes in operating assets and liabilities:
(increase) decrease in accounts receivable........... 1,334 1,396
(Increase) decrease in net costs and estimated
earnings in excess of billings...................... 614 107
(Increase) decrease in inventories................... (958) 1,115
(Increase) decrease in prepaids and other assets..... (290) (637)
(Decrease) in accounts payable and accrued expenses.. (1,726) (664)
-------- --------
Net cash provided by (used in) operating activities........ 7,441 (5,354)
Investing activities
Purchases of property, plant and, equipment.............. (727) (464)
Proceeds from sale of product line....................... 0 1,112
Other.................................................... (482) 345
-------- --------
Net cash provided by (used in) investing activities........ (1,209) 993
Financing activities
Proceeds from revolving line of credit and long-term
borrowings.............................................. 6,782 16,659
Principal payments on line of credit, long-term debt and
capital lease obligations............................... (10,850) (12,279)
Proceeds from issuance of common stock................... 309 12
-------- --------
Net cash provided by (used in) financing activities........ (3,759) 4,392
-------- --------
Increase in cash........................................... 2,473 31
Cash at beginning of year.................................. 4,880 2,218
-------- --------
Cash at June 30............................................ $ 7,353 $ 2,249
======== ========
Non-cash transaction
Stock issuance to former shareholders of Meyer, Mohaddes
Associates, Inc......................................... $ 0 $ 250
Issuance of warrants..................................... 0 1,357
See notes to consolidated financial statements.
4
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 June 30, 2001 and the consolidated results of operations
and cash flows for the three months ended June 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. The results of
operations for the three months ended June 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 the
Company's Annual Report on Form 10-K/A for the year ended March 31, 2001 filed
with the Securities and Exchange Commission.
During the three months ended June 30, 2001 we used $5.4 million of cash to
fund operations, which reflects our net loss of $7.8 million reduced for non-
cash charges of $1.2 million for depreciation and amortization, and an
aggregate of $2.5 million for reductions in accounts receivable and inventories
during the period. Significant financing and investing activities during the
three months ended June 30, 2001 and subsequent 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 net assets sold, and were used to
reduce borrowings due on our line of credit with Transamerica Business Credit
("Transamerica").
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 loan, we issued warrants to this lender to
purchase 426,667 shares of our Class A common stock at an exercise price of
$4.0 per share. We allocated approximately $1.3 million of the loan proceeds to
the warrant, and will accreted that amount to interest expense over the term of
the loan. If we prepay this note prior to six months following its issuance,
the lender, at its option, may convert up to $1.6 million of the principal
amount of the note into our Class A common stock at a conversion price of $4.0
per share.
Of the $16.0 million proceeds received from the promissory 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 $450,000 which is
reflected as an extraordinary item in the accompanying condensed consolidated
statement of operations, and $5.9 million to reduce borrowings due Transamerica
under our line of credit, in accordance with the terms of the forbearance
agreement. We used the balance of the proceeds from this financing, after
payment of expenses, for general working capital purposes.
At June 30, 2001 we had $7.7 million outstanding on a line of credit with
Transamerica. Although this line expired on December 31, 2000, we received an
extension until July 31, 2001. Due to the breach of certain financial and other
covenants under this line of credit, we entered into a forbearance agreement in
May 2001 with Transamerica that expired on July 31, 2001, and was subsequently
extended until November 2001. Under the terms of the forbearance agreement, the
Company is prohibited from making further borrowings under the line of credit.
On August 1, 2001 we concluded a transaction that provided for the issuance
of shares of Iteris Series A Preferred Stock and Iteris common stock to two
institutional investors in exchange for $5.5 million in cash. In
5
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
addition, Iteris' $3.75 million Subordinated Convertible Promissory Note, which
it entered into in January 2000, plus related accrued interest of $.7 million,
was converted to common stock of Iteris. As part of the transaction, Odetics
sold in a secondary transaction, $1.4 million of its Iteris common stock to a
group of investors, which included Odetics and Iteris management. Iteris used
$2.6 million of the proceeds it received from the financing to reduce amounts
owed under the Odetic's line of credit with Transamerica, and received in
exchange a release as a co-borrower from the Transamerica line of credit
agreement. Odetics also paid Transamerica $1.4 million that it received on the
sale of its Iteris shares. The payments to Transamerica reduced the Company's
remaining obligations under the line of credit to approximately $3.5 million at
August 1, 2001.
In connection with the financing, Iteris also received a letter of intent
from a lender for an operating line of credit providing for borrowings up to
$5.0 million. The cash received by Iteris in the financing transaction and any
amounts Iteris may borrow under its line of credit is reserved for their
working capital needs. We believe that Iteris' cash reserves plus available
borrowings on its line of credit will enable it to meet its obligations and
execute its operating plans. Following the transaction, Odetics ownership of
Iteris has been diluted from 93% to 67.5%
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 until they return to profitability and
positive operating cash flow. We are currently considering the sale and
leaseback of our principal operating facilities in Anaheim, California and are
in negotiations with a financial institution to provide a new line of credit.
We cannot be certain that our plan to sell and leaseback our facilities will be
successful, that we will be able to secure a new line of credit on terms
acceptable to us, or at all, or that our existing lender will continue to
extend our existing borrowing relationship. 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 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--Income Taxes
Income tax expense (benefit), if any, for the three months ended June 30,
2000 and 2001 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. Odetics did not provide income tax
benefit for the losses incurred in the three months ended June 30, 2001 due to
the uncertainty as to the ultimate realization of the benefit at that time.
Because of Odetics' net operating loss carryforwards and tax credit
carryforwards available at June 30, 2000, no provision for income taxes was
recorded for the three months ended June 30, 2000.
6
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Long-Term Debt
March 31, June 30,
2001 2001
--------- --------
(in thousands)
Mortgage note............................................. $ 5,874 $ --
Notes payable............................................. 4,750 19,393
Contracts payable......................................... 1,166 1,240
------- -------
11,790 20,633
Less current portion...................................... 6,990 20,539
------- -------
$ 4,800 $ 94
======= =======
Note 4--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 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 quarter ended June 30,
2000.
Note 5--Comprehensive Income
The components of comprehensive income (loss) are as follows (in thousands):
Three Months Ended
June 30,
-------------------
2000 2001
--------- ---------
Net income (loss)...................................... $ 7,430 $ (7,775)
Foreign currency translation adjustment................ (482) 345
-------- ---------
Comprehensive income (loss)............................ $ 6,948 $ (7,431)
======== =========
Note 6--Business Segment Information
Odetics operates 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 months ended June
30, 2000 and 2001 are as follows (in thousands):
Intelligent
Transportation Video Telecom
Systems Products Products Total
-------------- -------- -------- -------
Three months ended June 30, 2000
Revenue from external customers..... $5,777 $10,214 $1,360 $17,351
Intersegment revenues............... -- 1,227 28 1,255
Segment loss........................ (2,381) (3,214) (1,688) (7,283)
Three months ended June 30, 2001
Revenue from external customers..... 7,711 7,428 1,515 16,654
Intersegment revenues............... -- -- -- --
Segment income (loss)............... 32 (1,291) (4,019) (5,278)
7
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following reconciles segment income (loss) to consolidated income (loss)
before income taxes (in thousands):
Three Months
Ended June 30,
----------------
2000 2001
------- -------
Total revenues for reportable segments.................... $18,606 $16,654
Non-reportable segment revenues........................... 2,273 --
Elimination of intersegment sales......................... (1,255) --
------- -------
Total consolidated revenues............................... 19,624 16,654
Total income or loss for reportable segments.............. (7,283) (5,278)
Other income or loss...................................... (1,125) (2)
Unallocated amounts:
Corporate and other expenses.............................. (1,515) (1,450)
Royalty income............................................ 17,825 --
Special charge............................................ -- (450)
Interest expense.......................................... (472) (595)
------- -------
Income (loss) before income taxes......................... $ 7,430 $(7,775)
======= =======
Note 7--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 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.
Odetics 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
reduction in amortization expense of $1.9M per year. During fiscal 2003,
Odetics will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of April 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of Odetics.
8
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 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 ITS. The video products segment includes our wholly owned subsidiaries,
Broadcast, Inc. and Gyyr, Incorporated. The telecom products segment includes
Zyfer, Inc., our wholly-owned subsidiary (formerly known as our Communications
division) and Mariner Networks, Inc., our wholly-owned subsidiary. The ITS
segment consists of Odetics' majority owned subsidiary, Iteris, Inc. In April
2001, Gyyr separated its operations into two divisions, Gyyr CCTV Products,
which manufactures analog and digital storage solutions, and Gyyr Electronic
Access Control, which manufactures enterprise security management systems. All
references to our subsidiaries in this report include the prior business and
results of operations of such subsidiaries as business units of Odetics prior
to their incorporation.
During the quarter ended December 31, 2000, we effected a restructuring (the
"fiscal 2001 restructuring") to reduce our overall expenses and to further
focus our business development on those areas that we believe provide the
opportunity for the highest return on stockholder capital. This restructuring
included a reduction of approximately 25% of our total workforce and the
discontinuation of certain product lines.
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 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 15.1% to
$16.7 million for the three months ended June 30, 2001, compared to $19.6
million in the corresponding period of the prior fiscal year.
Net sales decreased 26.1% to $11.0 million for the three months ended June
30, 2001, compared to $14.8 million in the corresponding period of the prior
fiscal year. This decrease primarily reflects decreased sales in Broadcast and
Gyyr, offset in part by an 85.6% increase in sales of Iteris products. Iteris
represented 24.5% of net sales in the three months ended June 30, 2001 compared
to 9.8% of net sales in the three months ended June 30, 2000. In the quarter
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 on sales of its AIRO Automation systems. The decrease in
Broadcast revenues reflects sales of a narrower product line in the three
months ended June 30, 2001 and generally soft market conditions in the
North American market for broadcast systems sales. During the three months
ended June 30, 2001, Gyyr divested its Vortex Dome and Quarterback Controller
product lines. As such, the decrease in Gyyr sales in the three months ended
June 30, 2001also reflects sales of a narrower product line.
9
Contract revenues increased 18.9% to $5.7 million for the three months ended
June 30, 2001 compared to $4.8 million in the corresponding period of the prior
fiscal year. The increase in contract revenues in the three months ended June
30, 2001 reflects an increase in Iteris' contract revenues for ITS projects,
and an increase in revenues in Zyfer from contracts related to geographical
information systems.
Gross Profit. Gross margin on net sales increased to 28.8% for the three
months ended June 30, 2001 compared to 20.7% in the corresponding period in the
prior fiscal year. This increase primarily reflects increased gross margin on
net sales in Broadcast, Gyyr and Iteris. Broadcast experienced an improved
gross margin as a result of its focus on the sale of higher margin AIRO
Automation systems. Gyyr's gross margin also improved primarily as a result 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
margin in Iteris reflects increased absorption of manufacturing overhead on an
85.6% increase in Vantage sales in the three months ended June 30, 2001
compared to the corresponding period of the prior fiscal year. Gross margins on
contract revenues was substantially unchanged in both Zyfer and Iteris in the
three months ended June 30, 2001 compared to the corresponding period of the
prior fiscal year.
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased 23.6% to $8.5 million (or 51.1% of total net
sales and contract revenues) in the three months ended June 30, 2001 compared
to $11.1 million (or 56.8% 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, Gyyr and Iteris in the three months ended June 30, 2001
compared to the corresponding period of the prior fiscal year. In Mariner
Networks, we experienced a 59.4% increase of selling, general and
administrative expense compared to the corresponding period of the prior fiscal
year to support the introduction of the Dexter product line which began
shipping in the three months ended June 30, 2001. Our general and
administrative expense which are aggregated with sales and marketing expense in
our statements of operations, decreased approximately 23.7% in the three months
ended June 30, 2001 compared to the corresponding period of the prior fiscal
year primarily due to general cost reduction efforts begun in December 2000.
Research and Development Expense. Research and development expense decreased
29.7% to $3.2 million (or 19.5% of total net sales and contract revenues) in
the three months ended June 30, 2001 compared to $4.6 million (or 23.5% 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
research and development expenditures in the three months ended June 30, 2001
in each of the Odetics businesses, other than Mariner Networks, compared to the
corresponding period of the prior fiscal year. Such decreases were primarily in
the areas of payroll and related benefits, prototype material cost and
consulting fees. Mariner Networks research and development expense increased
30.9% in the three months ended June 30, 2001 compared to the corresponding
period of the prior fiscal year to support continued development of its
Dexter 3000 product family of multi-service access devices. For competitive
reasons, Odetics closely guards the confidentiality of its specific development
projects.
Interest Expense, Net. Interest expense, net reflects interest income and
interest expense as follows:
Three Months Ended
June 30,
------------------
2000 2001
--------- ---------
(in thousands)
Interest expense...................................... $ 539 $ 595
Interest income....................................... 67 0
--------- ---------
Interest expense, net................................. $ 472 $ 595
========= =========
Interest expense primarily reflects interest on Odetics' line of credit
borrowings and mortgage interest. Interest income in the three months ended
June 30, 2000 was derived from short-term investments of excess
10
cash deposits. The increase in interest expense for the three months ended June
30, 2001 compared to the corresponding period in the prior fiscal year reflects
an increase in Odetics' outstanding borrowings.
Extraordinary Item. The extraordinary loss incurred in the three months
ended June 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 months ended June 30, 2001 due to the uncertainty as to
the ultimate realization of the related benefit. Because of our net operating
loss carryforwards and the credit carryforwards available at June 30, 2000, no
provision for income taxes was recorded in the three months ended June 30,
2000.
Liquidity and Capital Resources
During the three months ended June 30, 2001, we used $5.4 million of cash to
fund operations, which reflects our net loss of $7.8 million reduced for non-
cash charges of $1.2 million for depreciation and amortization, and an
aggregate of $2.5 million for reductions in accounts receivable and inventories
during the period. Significant financing and investing activities during the
three months ended June 30, 2001 and subsequent 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 borrowings due on our line of credit with Transamerica Business
Credit ("Transamerica").
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 loan, we issued warrants to this lender to
purchase 426,667 shares of our Class A common stock at an exercise price of
$4.0 per share. We allocated approximately $1.3 million of the loan proceeds to
the warrant, and will accreted that amount to interest expense over the term of
the loan. If we prepay this note prior to six months following its issuance,
the lender, at its option, may convert up to $1.6 million of the principal
amount of the note into our Class A common stock at a conversion price of
$4.0 per share.
Of the $16.0 million proceeds received from the promissory 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 $450,000 which is
reflected as an extraordinary item in the accompanying condensed consolidated
statement of operations, and $5.9 million to reduce borrowings due Transamerica
under our line of credit, in accordance with the terms of the forbearance
agreement. We used the balance of the proceeds from this financing, after
payment of expenses, for general working capital purposes.
At June 30, 2001, we had approximately $7.7 million outstanding on a line of
credit with Transamerica. Although this line expired on December 31, 2000, we
received an extension until July 31, 2001. Due to the breach of certain
financial and other covenants under this line of credit, we entered into a
forbearance agreement in May 2001 with Transamerica that expired on July 31,
2001, and was subsequently extended until November 2001. Under the terms of the
forbearance agreement, the Company is prohibited from making further borrowings
under the line of credit.
On August 1, 2001, we concluded a transaction that provided for the issuance
of shares of Iteris Series A preferred stock and Iteris common stock to two
institutional investors in exchange for $5.5 million in cash. In addition,
Iteris' $3.75 million Subordinated Convertible Promissory Note, which it
entered into in January 2000, plus related accrued interest of $.7 million, was
converted to common stock of Iteris. As part of the transaction, Odetics sold
in a secondary transaction, $1.4 million of its Iteris common stock to a group
of
11
investors, which included Odetics and Iteris management. Iteris used $2.6
million of the proceeds it received from the financing to reduce amounts owed
under the Odetic's line of credit with Transamerica, and received in exchange a
release as a co-borrower from the Transamerica line of credit agreement.
Odetics also paid Transamerica $1.4 million that it received on the sale of its
Iteris shares. The payments to Transamerica reduced the Company's remaining
obligations under the line of credit to approximately $3.5 million at August 1,
2001.
In connection with the financing, Iteris also received a letter of intent
from a lender for an operating line of credit providing for borrowings up to
$5.0 million. The cash received by Iteris in the financing transaction and any
amounts Iteris may borrow under its line of credit is reserved for their
working capital needs. We believe that Iteris' cash reserves plus available
borrowings on its line of credit will enable it to meet its obligations and
execute its operating plans. Following the transaction, Odetics ownership of
Iteris decreased from 93.0% to 67.5%
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 until they return to profitability and
positive operating cash flow. We are currently considering the sale and
leaseback of our principal facilities in Anaheim, California and are in
negotiations with a financial institution to provide a new line of credit. We
cannot be certain that our plan to sell and leaseback our facilities will be
successful, that we will be able to secure a new line of credit on terms
acceptable to us, or at all, or that our existing lender will continue to
extend our existing borrowing relationship. 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 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.
12
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.
We Have Experienced Substantial Losses and Expect Future Losses. We
experienced operating losses of $6.7 million for the three months ended June
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. 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 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. Our line of
credit facility expired on December 31, 2000. While we have received an
extension on this facility until November 30, 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 ($3.5 million at August 1, 2001). We cannot
assure you that we will be able to obtain a new 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. These conditions, together with our recurring
losses, raise substantial doubt about our ability to continue as a going
concern. Our capital requirements will depend on many factors, including:
. our ability to control costs;
. our ability to generate operating income;
. increased research and development funding, and required investments in
our business units;
. market acceptance of our products;
. technological advancements and our competitors' response to our
products;
. capital improvements to new and existing facilities;
. increased sales and marketing expenses;
. 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.
13
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 control costs;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
. 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.
Our Operating Strategy for Developing Companies is Expensive and May Not Be
Successful. Our business strategy entails intensive business development
activities, which are expensive and highly risky. The goal of this strategy is
to 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
in the development of certain of our business units with the goal of obtaining
additional capital to support further investment and eventually completing
additional public offerings. We may not recognize the benefits of this
investment for a significant
14
period of time, if at all. Our ability to complete private financings or 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;
. 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 private or public offering or
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 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.
15
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 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 product sales
represented 14% for the three months ended June 30, 2001, 20% for the fiscal
year ended March 31, 2001, and approximately 19% for the fiscal year ended
March 31, 2000. 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. Many of our
international sales are currently 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, 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
16
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;
. 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 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 34% for the quarter ended June 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:
. long purchase cycles or approval processes;
. 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.
17
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.
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. 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
18
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.
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 $1.88 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:
. 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 June 21,
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 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.
19
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Substantially all of Odetics' debt outstanding at June 30, 2001 is fixed
rate debt and accordingly, Odetics does not have significant exposure to
changes in interest rates.
20
PART II--OTHER INFORMATION
ITEM 1. 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 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 quarter ended June 30, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities. During the three months ended June 30,
2001, Odetics issued 78,740 shares of Class A Common Stock to the former
shareholders of Meyer, Mohaddes & Associates in connection with the merger
of the MMA Acquisition Corp, a subsidiary of Iteris, Inc. with and into
MMA. No underwriters participated in this transaction. This transaction was
exempt from registration by virtue of Section 4(2) of the Securities Act of
1933. Also during the three months ended June 30, 2001, Odetics entered
into a Securities Purchase Agreement with Castle Creek Technology Partners.
Pursuant to this agreement, Odetics issued to Castle Creek Technology
Partners a one-year senior convertible promissory note in the original
principal amount of $16.0 million. Castle Creek has the right to convert
all or a portion of the principal amount of the note into shares of Class A
common stock of Odetics under certain circumstances. If Odetics prepays
this note prior to November 29, 2001, Castle Creek will have the right to
convert up to $1.6 million of the original principal amount into 400,000
shares of Class A common stock. If Odetics has not paid off the note by
maturity on May 29, 2002, Castle Creek may convert all of the unpaid
obligations under this note into that number of shares of Class A common
stock that would result from dividing the amount of the unpaid obligations
by the lesser market price (as defined in the note) for the Class A common
stock on either May 29, 2002, or the date Castle Creek delivers to Odetics
a notice of conversion of the indebtedness. In connection with this
financing, Odetics also issued a warrant to Castle Creek for the purchase
of 426,667 shares of Class A common stock at an exercise price of $4.00 per
share. Odetics may also be required to issue additional warrants to Castle
Creek in the future under certain circumstances. No underwriters
participated in this transaction. This transaction was exempt from
registration by virtue of Section 4(2) of the Securities Act of 1933.
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
27. Financial Data Schedule
(b) Reports on Form 8-K
In connection with the Securities Purchase Agreement with Castle Creek
Technology Partners on May 29, 2001, Odetics filed a Form 8-K on June 1,
2001. Under the terms of the agreement, Castle Creek purchased from Odetics
a one-year senior convertible promissory note secured by a deed of trust
for real property located at 1515 S. Manchester Ave., Anaheim, CA. for
sixteen million dollars ($16.0 million).
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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)
/s/ Gregory A. Miner
By: _________________________________
Gregory A. Miner
Vice President and Chief Operating
Officer
(Principal Financial Officer)
/s/ Gary Smith
By: _________________________________
Gary Smith
Vice President and Controller
(Principal Accounting Officer)
Dated: August 14, 2001
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