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, 1998
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 JANUARY 31, 1998
Class A Common Stock - 7,628,544 shares.
Class B Common Stock - 1,062,041 shares.
1
INDEX
-----
PART I FINANCIAL INFORMATION Page
- ------------------------------- ----
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS FOR 3
THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1997 AND 1998 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1998 4
AND DECEMBER 31, 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE NINE MONTHS ENDED DECEMBER 31, 1997 AND
1998 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
In this Report, "Odetics," the "Company," "we," "us," and "our"
collectively refers to Odetics, Inc. and its subsidiaries.
2
PART 1 FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
Consolidated Statement of Operations 1997 1998 1997 1998
---------- ---------- ---------- ----------
Net sales and contract revenues:
Net sales $21,650 $16,210 $60,753 $52,550
Contract revenues 2,654 3,957 7,129 9,519
---------- ---------- ---------- ----------
$24,304 $20,167 $67,882 $62,069
Costs and expenses:
Cost of sales 14,483 10,846 40,966 36,737
Cost of contract revenues 1,387 2,624 4,135 6,151
Selling, general and administrative expenses 5,888 7,360 18,267 23,071
Research and development expenses 2,352 2,731 6,661 8,098
Interest expense, net 175 445 291 1,279
---------- ---------- ---------- ----------
24,285 24,006 70,320 75,336
---------- ---------- ---------- ----------
Loss from continuing operations before taxes 19 (3,839) (2,438) (13,267)
Income taxes (benefit) 8 0 (975) 0
---------- ---------- ---------- ----------
Loss from continuing operations 11 (3,839) (1,463) (13,267)
Income from discontinued operations, net of income taxes (217) 0 2,089 0
---------- ---------- ---------- ----------
Net income (loss) ($206) ($3,839) $626 ($13,267)
========== ========== ========== ==========
Basic and diluted earnings (loss) per share:
Continuing operations $0.00 ($0.49) ($0.22) ($1.77)
Discontinued operations ($0.03) $0.00 $0.31 $0.00
---------- ---------- ---------- ----------
Earnings per share ($0.03) ($0.49) $0.09 ($1.77)
========= ========= ========= =========
Weighted average number of shares outstanding 7,265 7,890 6,794 7,493
========= ========= ========= =========
Revenues by segment:
ITS $1,609 $4,483 $3,933 $10,400
Video Products 15,785 12,167 44,367 40,684
Telecom Products 6,910 3,517 19,582 10,985
---------- ---------- ---------- ----------
$24,304 $20,167 $67,882 $62,069
========== ========== ========== ==========
See notes to consolidated financial statements.
-3-
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1998 1998
ASSETS (unaudited)
--------- ------------
Current Assets
Cash $1,131 $ 1,055
Trade accounts receivable, net 15,048 13,979
Current portion of ATL note receivable 3,249 0
Receivable from ATL 1,553 0
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,583 2,571
Inventories:
Finished goods 569 584
Work in process 2,176 898
Materials and supplies 18,065 14,985
-------- -------
Total inventories 20,810 16,467
Prepaid expenses 1,592 1,685
Income taxes receivable 1,039 1,029
Deferred income taxes 1,558 1,558
-------- -------
Total Current Assets 48,563 38,344
Property, plant and equipment
Land 2,090 2,060
Buildings and improvements 18,481 18,620
Equipment, furniture and fixtures 29,318 30,497
-------- -------
49,889 51,177
Less accumulated depreciation (26,550) (28,742)
-------- -------
Net property, plant and equipment 23,339 22,435
Long term ATL note receivable less current
portion 6,770 0
Goodwill, net of accumulated amortization 5,850 9,288
Other Assets 4,268 7,913
------- -------
Total Assets $88,790 $77,980
======= =======
See notes to consolidated financial statements.
- 4 -
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands)
March 31, December 31,
1998 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
--------- -----------
Current Liabilities
Trade accounts payable $13,672 $8,433
Accrued payroll and related 5,093 4,697
Accrued expenses 2,083 1,811
Income taxes payable 0 1
Contract loss accrual 4,541 4,034
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,580 1,198
Current portion of long-term debt 1,598 1,886
------- -------
Total current liabilities 28,567 22,060
Revolving line of credit 12,800 3,940
Long-term debt - Less current portion 8,200 9,559
Deferred income taxes 643 1,388
Minority interest - 316
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; 7,622,560 shares of
class A and 1,062,041 shares of
class B issued and outstanding at
December 31, 1998 - $.10 par value 726 869
Paid-in capital 45,240 57,329
Treasury stock (239) (240)
Note receivable from associates (3,377) (171)
Retained earnings (3,795) (17,062)
Accumulated other comprehensive income:
Accumulated foreign currency translation 25 (8)
------- -------
Total stockholders' equity 38,580 40,717
------- -------
Total liabilities and stockholders' equity $88,790 $77,980
======= =======
See notes to consolidated financial statements.
- 5 -
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
December 30,
-----------------------
1997 1998
-------- ---------
Operating activities
Net income (loss) $ 626 $(13,267)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Income from discontinued operations (2,089) 0
Depreciation and amortization 2,488 3,627
Provision for losses on accounts receivable 99 228
Provision (Benefit) for deferred income taxes (282) 174
Gain on sale of assets 13 0
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable 3,284 2,308
(Increase) Decrease in net costs and estimated
earnings in excess of billings (1,478) 50
(Increase) Decrease in inventories (1,776) 4,343
(Increase) Decrease in prepaids and other assets (1,132) (2,606)
Increase (Decrease) in accounts payable and
accrued expenses (3,973) (3,866)
-------- --------
Net cash provided by (used in) operating activities (4,220) (9,009)
Investing activities
Purchases of property, plant, and equipment (2,773) (1,903)
Purchase of net assets of acquired business (2,597) 0
Repayment of long term note receivable 2,166 10,019
-------- --------
Net cash used in investing activities (3,204) 8,116
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 36,051 32,997
Principal payments on line of credit, long-term
debt and capital lease obligations (31,236) (40,210)
Proceeds from issuance of common stock 1,515 8,030
--------- --------
Net cash provided by (used in) financing activities 6,330 817
--------- --------
Increase (decrease) in cash (1,094) (76)
Cash at beginning of year 1,865 1,131
--------- --------
Cash at December 31 $ 771 $ 1,055
========= ========
See notes to consolidated financial statements.
- 6 -
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
- ------
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal
recurring accruals except for adjustments to present the Company's
former subsidiary, ATL Products, Inc. as a discontinued operation (See
Note 4), necessary to present fairly the consolidated financial
position of Odetics, Inc as of December 31, 1998 and the consolidated
results of operations and cash flows for the three and nine month
periods ended December 31, 1997 and 1998. 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, 1998 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, 1998 filed with the Securities and Exchange Commission.
Note 2 - Income Taxes
- ------
Income tax expense (benefit) for the three and nine month periods ended
December 31, 1997 and 1998 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 has not provided income tax benefit for
the losses incurred in fiscal 1999 due to the uncertainty as to the
ultimate realization of the benefit.
Note 3 - Long-Term Debt
- ------
(in thousands)
March 31, December 31,
1998 1998
--------- ------------
Line of credit $12,800 $ 3,940
Mortgage note 9,218 8,446
Contracts payable 580 3,000
------- -------
22,598 15,386
Less current portion 1,598 1,887
------- -------
$21,000 $13,499
======= =======
7
NOTE 4 - On March 13, 1997, ATL completed an initial public offering of
- ------ 1,650,000 shares of its Class A Common Stock, at an initial public
offering price of $11 per share. Following the Offering, the Company's
beneficial ownership interest in ATL was reduced to 82.9%. On October
31, 1997, the Company completed a tax-free spin-off of its remaining
interest in ATL to the Company's stockholders, pursuant to which each
holder of the Company's Class A and Class B Common Stock (collectively
the "Common Stock") as of October 31, 1997, received approximately 1.1
shares of Class A Common Stock of ATL for each share of the Company's
Common Stock then held. In connection with the spin-off, the financial
statements of the Company have been restated to reflect continuing
operations and the discontinued operations of ATL. The ATL net sales
included in the discontinued operations for the periods being reported
are as follows:
(in thousands)
December 31, December 31,
1997 1998
------------ ------------
Quarter Ended $ 5,935 $0
Nine Months Ended $47,404 $0
NOTE 5 - Legal Proceedings
- ------ The Company brought an action against Storage Technology Corporation
("StorageTek") in the Eastern District Court of Virginia alleging that
StorageTek had infringed the Company's patent covering robotics tape
cassette handling systems (United States Patent No. 4,779,151).
StorageTek counterclaimed alleging that the Company infringed several
of StorageTek's patents. Prior to trial, the court dismissed two of
the infringement claims against the Company and the third claim was
resolved between the parties. In January 1996, the jury determined
that the patent claims were not infringed under the doctrines of
equivalents based upon a claim construction defined by the court prior
to the trial. The jury also concluded that the Company's patent was
not invalid. In June 1997, the United States Court of Appeals for the
Federal Circuit vacated the lower court's claim construction and
findings of noninfringement of the Company's patent. The appellate
court remanded the case for consideration of infringement under a
proper claim construction. In August 1997, the appellate court denied
a petition for rehearing requested by StorageTek. The case was returned
to the Federal District Court for retrial, and in March 1998, the jury
awarded the Company damages in the amount of $70.6 million. In June
1998, the U.S. District Court for the Eastern District of Virginia
granted an injunction against StorageTek enjoining StorageTek from
making, selling or using any infringing devices, including the ACS4400,
PowderHorn, Wolfcreek and Genesis automated tape library systems that
include a pass through port. In June 1998, the U.S. District Court
issued an order requesting the parties to brief the issues of whether
StorageTek's motion for judgment as a matter of law should have been
granted, and whether the injunction previously ordered by the court
against StorageTek should be stayed pending appeal. In August 1998,
the judge in the case issued a ruling to overturn the $70.6 million
jury verdict previously awarded the Company and entered judgment as a
matter of law in favor of StorageTek. Odetics has appealed the judge's
ruling to the United States Court of Appeals for the Federal Circuit.
8
NOTE 6 - Earnings per Share
- ------ In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform
to the Statement 128 requirements.
NOTE 7 - Comprehensive Income
- ------ As of December 29, 1997, the Company adopted SFAS 130, "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's
net income (loss) or stockholders' equity. SFAS 130 requires foreign
currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity to be included in other
comprehensive income.
The components of comprehensive income (loss) for the nine months
ended December 31, 1997 and 1998 are as follows:
1997 1998
---- ----
Net income (loss) $626 $(13,267)
Foreign currency translation adjustment 8 (33)
---- --------
Comprehensive income (loss) $634 $(13,300)
==== ========
NOTE 8 - Recent Accounting Pronouncements
- ------ In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires
publicly-held companies to report financial and descriptive
information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The statement
also requires additional disclosures with respect to products and
services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods
presented.
9
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 the Company. 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 involve risks and
uncertainties, and include, among other things, statements concerning the
Company's incubator strategy, projected revenues, funding and cash requirements,
supply issues, market acceptance of new products, 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." The Company's 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. The Company 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 or to
update the reasons why actual results differ from those anticipated in the
forward looking statements.
Results of Operations
General. On October 31, 1997, the Company completed the spin-off of its
82.9% interest in ATL by distributing the Company's 8,005,000 shares of Class A
Common Stock to the Company's stockholders of record on October 31, 1997. In
connection with the spin-off, the Company's financial statements have been
restated to reflect the continuing operations and discontinued operations.
Discontinued operations reflect the Company's interest in the operations of ATL
for the periods presented. Commencing with the period ended December 31, 1998
the Company defined its business segments as Video Products, Telecom Products,
and ITS. The Video Products segment includes the Company's Broadcast Division
("Broadcast") and its Gyyr Inc. subsidiary ("Gyyr"). The Telecom Products
segment includes the Company's Communications Division ("Communications") which
manufactures timing and synchronization products, and the business of Mariner
Networks Inc., a wholly owned subsidiary. The ITS segment represents the
Company's 93% owned subsidiary Odetics ITS, Inc. ("ITS").
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 intelligent transportation systems 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 17.0% to $20.2 million for the three month period ended December 31
1998, compared to $24.3 million in the corresponding period of the prior fiscal
year, and decreased 8.6% to $62.1 million for the nine month period ended
December 31, 1998 compared to $67.9 million in the corresponding period of the
prior fiscal year. In June 1997, the Company acquired certain assets of the
Transportation Systems business of Rockwell International, which were
consolidated into ITS. The 49.1% and 33.5% increase in contract revenues in the
three and nine month periods ended December 31, 1998, respectively, reflects the
revenue contribution in the current year of the acquired ITS business.
Net sales decreased 25.1% to $16.2 million for the three month period ended
December 31, 1998, compared to $21.7 million in the corresponding period of the
prior fiscal year, and decreased 13.5% to $52.6 million for the nine month
period ended December 31, 1998 compared to $60.8 million in the corresponding
period of the prior fiscal year. Net sales in the three month and nine month
periods ended December 31, 1998 compared to the corresponding periods of the
prior year reflects decreased sales in the Company's Broadcast division, its
Gyyr business, and its Communications division, partially offset by increased
sales of ITS. Net sales in Broadcast declined as a result of continued delays
in the delivery and acceptance of its new Roswell control system. Gyyr's net
sales decreased primarily as a result of reduced unit sales of certain models of
its time video lapse tape decks and reduced unit sales of certain of its video
10
multiplexer products. The reduction in Gyyr's net sales reflects principally
reflects reduced purchases by certain of its OEM customers who sell to the
banking industry which has undergone substantial consolidation in the current
year. Communications revenues decreased in the three and nine month periods
ended December 31, 1998 compared to the corresponding periods of the prior year
primarily as a result of a significant reduction in sales of timing and
synchronization products to a significant customer, LGIC of Korea. Sales to this
customer have been negatively impacted by adverse economic conditions in Asia.
Increased sales of ITS in the three and nine month periods ended December 31,
1998 reflect increased units sales of the Company's Vantage product line, video
based traffic intersection control products.
Gross Profit. Gross profit as a percent of net sales was unchanged at
33.1% for the three month period ended December 31, 1998 compared to the
corresponding period in the prior fiscal year, and decreased to 30.1% for the
nine month period ended December 31, 1998 compared to 32.6% for the same period
in the prior fiscal year. The decrease in gross profit as a percent of net sales
for the nine month period ended December 31, 1998 principally reflects the
decline in sales of high margin synchronization system sales in the
Communications division. Gross profit performance as a percent of net sales for
the nine month period of the current fiscal year was also negatively impacted by
low margins in the Broadcast operations in the first and third quarters of the
current fiscal year.
Gross profit as a percent of contract revenues decreased to 33.7% for the
three months ended December 31, 1998 compared to 47.7% in the comparable period
of the prior fiscal year, and decreased to 35.4% for the nine month period ended
December 31, 1998 compared to 42.0% in the same period of the prior fiscal year.
The decline in gross profits on contract revenues for the three and nine month
periods ended December 31, 1998 reflects a change in mix of active contracts in
ITS toward lower margin contracts, and the adjustment of loss reserves on
certain contracts. The Company also continues to experience declining margins on
space recorder contracts in fiscal 1999 compared to fiscal 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 25.0% to $7.4 million (or 36.5% of total net
sales and contract revenues) in the three months ended December 31, 1998
compared to $5.9 million (or 24.2% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Selling, general and
administrative expense for the nine month period ended December 31, 1998
increased 26.3% to $23.1 million (or 37.2% of total net sales and contract
revenues) compared to $18.3 million (or 26.9% of total net sales and contract
revenues) for the same period of the prior fiscal year. Compared to the
immediately preceding quarter ended September 30, 1998, selling, general and
administrative expense decreased 4.6% from $7.7 million. The increase in
selling, general and administrative expense in absolute dollars and as a percent
of net sales and contract revenues in the three and nine month periods ended
December 31, 1998 compared to the previous fiscal year periods relates primarily
to investments in sales and marketing to support planned growth in Gyyr,
Broadcast and ITS. For the nine months ended December 31, 1998, the increase
also relates to the acquisition of ICI and certain assets of the Transportation
Systems business of Rockwell International noted above. The principal expense
categories that increased include administrative and sales labor, advertising
and promotion to support new products and markets, and costs related to
international expansion.
Research and Development Expense. Research and development expense
increased 16.1% to $2.7 million (or 13.5% of total net sales and contract
revenues) in the three month period ended December 31, 1998 compared to $2.4
million (or 9.7% of total net sales and contract revenues) in the corresponding
period of the prior fiscal year. Research and development expense for the nine
month period ended December 31, 1998 increased 21.6% to $8.1 million (or 13.0%
of total net sales and contract revenues) compared to $6.7 million (or 9.8% of
total net sales and contract revenues) in the corresponding period of the prior
fiscal year. The increase in research and development expense in the three and
nine month periods ended December 31,1998 compared to the previous fiscal year
periods principally reflects increased product development activity in
Broadcast, Gyyr and Mariner Networks, Inc. Broadcast product development
activity reflects continued development of Roswell for enhanced features and
functionality. Gyyr completed development of its dome products for facility
monitoring and expanded its multiplexer product line and
11
launched a new internet based security product called Tango. The Company's
Mariner Networks, Inc subsidiary continued development of Dexter, a broadband
communications interface product. For competitive reasons, the Company closely
guards the confidentiality of its specific development projects. The increase in
product development expense relates primarily to development labor and related
benefits, prototype material cost and consulting fees. The acquisition of ICI
and the related development activities for access control products for Gyyr also
contributed to the increase in product development expense for the nine months
ended December 31, 1998. The acquisition of certain assets of the Transportation
Systems business of Rockwell International did not materially impact the
increase in current year research and development expenses.
Interest Expense, Net. Interest Expense, Net reflects interest income and
interest expense as follows:
Three Months Nine Months
Ended Dec. 31 Ended Dec. 31
-------------- ----------------
1997 1998 1997 1998
----- ---- ------ ------
(in thousands)
Interest Expense $416 $445 $1,067 $1,474
Interest Income 241 0 776 195
---- ---- ------ ------
Interest Expense, Net $175 $445 $ 291 $1,279
==== ==== ====== ======
Interest expense primarily reflects interest on the Company's line of
credit borrowings and mortgage interest. The increase in interest expense for
the three and nine month periods ended December 31, 1998 compared to the prior
fiscal year reflects an increase in the Company's average outstanding borrowings
on its line of credit facility. Interest income in the three and nine month
periods ended December 31, 1997 was derived primarily from a note receivable due
to the Company from ATL. The note was paid off in full by ATL in July 1998,
resulting in a reduction in interest income in the three and nine month periods
ended December 31, 1998.
Income Taxes. No income tax benefit was provided on the net loss of the
Company for the three month and nine month periods ended December 31, 1998 since
management has determined that the Company cannot meet the criteria for
recognition of the resulting deferred tax asset. In the three month period ended
December 31, 1997, the pre-tax loss from the Company's discontinued operations,
ATL was greater than the pre-tax income for the Company's continuing operations.
Furthermore, in the nine month period ended December 31, 1997, the pre-tax
income from the Company's discontinued operations, was greater than the pre-tax
loss from the Company's continuing operations. Accordingly, as a result of
intra-period tax allocation, the Company recorded a provision (benefit) for
income taxes from discontinued operations of ($144,000) and $1,392,000 and a
provision (benefit) for income taxes from continuing operations of $8,000 and
($975,000) for the three month periods and nine month periods ended December 31,
1997, respectively.
12
Liquidity and Capital Resources
The Company has incurred negative cash flow from operating activities of
$9.0 million for the nine months ended December 31, 1998 principally as a result
of net losses totaling $13.3 million that were incurred during the period. The
impact of the net losses in the nine months ended December 31, 1998 to operating
cash flows has been mitigated by inventory and accounts receivable liquidations
aggregating approximately $6.7 million. During the nine months ended December
31, 1998, the Company's cash flow requirements have been met primarily with
advances on its line of credit with its principal banks. In December 1998, the
Company entered into a new line of credit relationship with Transamerica
Business Credit for a $17.0 million line of credit providing for borrowings at
prime plus 2.0% (9.75% at January 31, 1999). This relationship replaced the
Company's previous relationship with Imperial Bank and Comerica Bank-California.
The Company believes that the structure of the line of credit facility with
Transamerica Business Credit is better suited to meet the Company's business
requirements. The Company's borrowings under the line of credit relationship
with Transamerica Business Credit are secured by substantially all of the
Company's assets.
On December 18, 1998, the Company completed a private placement of
1,191,323 of its Class A Common Stock to raise $7.3 million in net proceeds.
Subject to shareholder approval, an additional 308,528 shares of the Company's
Class A Common will be sold as part of the offering for approximately $2.0
million. The proceeds from the offering are to be used for general working
capital purposes.
The Company anticipates that net cash flow generated by operating
activities, together with funds available under the Company's line of credit and
proceeds from the private placement of Common Stock, will enable the Company to
execute its current operating plans and meet its obligations on a timely basis
for at least the next twelve months.
Year 2000
The Company is addressing problems associated with its computer systems as
the year 2000 approaches. Many existing computer systems and applications, and
other control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. These
problems are expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Year 2000 Problem."
The Company has evaluated each of its products and believes that each is
substantially year 2000 compliant. The Company has adopted the British
Standards Institute standard for its statements of compliance regarding the year
2000. The Company believes that it is not possible to determine whether all of
its customers' products into which the Company's products are incorporated will
be year 2000 compliant because the Company has little or no control over the
design, production and testing of its customers' products.
The Year 2000 Problem could affect the systems, transaction processing
computer applications and devices used by the Company to operate and monitor all
major aspects of its business, including financial systems (such as general
ledger, accounts payable, and payroll), customer services, infrastructure,
master production scheduling, materials requirement planning, networks and
telecommunications systems. The Company believes that it has identified
substantially all of the major systems, software applications and related
equipment used in connection with its internal operations that must be modified
or upgraded in order to minimize the possibility of a material disruption to its
business. The Company is currently in the process of modifying and upgrading
all affected systems and expects to complete this process during the calendar
year 1999. Because most of the software applications used by the Company are
recent versions of vendor supported, commercially available products, the
Company has not incurred, and does not expect in the future to incur,
significant costs to upgrade these applications as year 2000 compliant versions
are released
13
by the respective vendors. Systems such as telephone, networking,
test equipment, and security systems at the Company's facilities may also be
affected by the Year 2000 Problem. The Company is currently assessing the
potential effect of and costs of remediating the Year 2000 Problem on its
facility systems. The Company estimates that the total cost to the Company of
completing any required modifications, upgrades or replacements of these systems
will not have a material adverse effect on the company's business, financial
condition or result of operations.
The Company presently estimates that the total cost of addressing its year
2000 issues will be approximately $500,000. This estimate was derived utilizing
numerous assumptions, including the assumption that the Company has already
identified its most significant year 2000 issues and that the plans of its third
party suppliers will be fulfilled in a timely manner without cost to the
Company. However, there can be no guarantee that these assumptions are
accurate, and actual results could differ materially from those anticipated.
The Company is currently developing contingency plans to address the year
2000 issues that may pose a significant risk to its on-going operations. Such
plans could include accelerated replacement of affected equipment or software,
temporary use of back-up equipment or software or the implementation of manual
procedures to compensate for system deficiencies. However, there can be no
assurance that any contingency plans implemented by the Company would be
adequate to meet the Company's needs without materially impacting its
operations, that any such plan would be successful or that the Company's results
of operations would not be materially and adversely affected by the delays and
inefficiencies inherent in conducting operations in an alternative manner.
14
RISK FACTORS
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly operating results have fluctuated and are likely to continue to
fluctuate due to a number of factors, many of which are not within our control.
Factors that could affect our revenues include the following:
. our significant investment in research and development for our subsidiaries
and divisions;
. our ability to develop, introduce, market and gain market acceptance of new
products applications and product enhancements in a timely manner;
. the size and timing of significant customer orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. our ability to control costs;
. changes in our pricing policies and the pricing policies of our suppliers and
competitors, 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;
. technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our divisions;
. deferrals of customer orders in anticipation of new products, applications or
product enhancements;
. the Asian economic crisis and instability;
. 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 typically consist of a relatively
small number of large customer orders. As a result, the timing of a small
number of orders can 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.
Because of the factors listed above and other risks discussed below, our
future operating results could be below the expectations of securities analysts
and/or investors. If that happens, the trading price of our common stock could
be adversely affected.
We Have Experienced Substantial Losses and Expect Future Losses. For the
years ended March 31, 1998 and the nine months ended December 31, 1998, we had
net losses of $6.6 million and $13.3 million, respectively. We may not 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. In addition, in order to implement our
incubator strategy successfully, we expect to continue to make significant
investments in each of our business divisions. As a result, we may continue to
experience losses which could cause the market price of our stock to decline.
Our Incubator Strategy 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 divisions, both for
research and development, and also to develop a separate infrastructure for each
of our divisions, sufficient to allow the division to function as an independent
public company. We expect to continue to invest heavily in the development of
our divisions with the goal of conducting additional public offerings. We may
not recognize the benefits of
15
this investment for a significant period of time, if at all. Our ability to
complete an initial public offering of any of our divisions and spin-off our
interest to our stockholders will depend upon numerous factors, including:
. the overall performance and results of operations of the particular division
. the potential market for our division;
. our ability to assemble and retain a broad, qualified management team for the
division;
. our financial position and cash requirements;
. the division's customer base and product line;
. the current tax treatment of spin-off transactions; and
. general economic and market conditions.
We may not be able to complete a successful initial public offering of any
of our divisions in the near future, or at all. Even if we do complete
additional public offerings, we may decide not to spin-off a particular
division, 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.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. In particular,
we will need to modify certain of our products to accommodate the anticipated
deployment of digital television and the corresponding phase-out of analog
transmissions. We will also have 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 recent shift towards providing more
software solutions may create additional challenges for us, particularly in our
Broadcast Division where we have identified software based automation solutions
as a key competitive differentiator. 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.
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, 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:
. Roswell (our automated facility management system for broadcast television
stations);
. Bowser (our visual asset manager);
16
. Vortex (our high performance dome product);
. Digi Scan Pro (our advanced digital multiplexer);
. Vantage One (our single camera traffic detection system);
. Lane Tracker (our lane departure warning system); and
. Dexter (our networking access device).
Market acceptance of our new products depends upon numerous factors,
including our ability to resolve technical challenges in a timely and cost-
effective manner, 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. 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 our 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 Lane
Tracker 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 Lane Tracker.
We May Need to Raise Additional Capital. We recently raised approximately
$7.3 million in a private placement in December 1999. We may need to raise
additional capital in the near future, either through additional bank borrowings
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
divisions;
. 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.
We Depend on International Sales. International product sales represented
approximately 30%, 36% and 34% of our total net sales and contract revenues for
the fiscal years ended March 31, 1996, 1997 and 1998, respectively.
International business operations are subject to other inherent risks,
including:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
17
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. reduced protection for intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political 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 affect 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.
Our Operating Results Have Been Adversely Affected by the Asian Economic
Crisis. Our telecommunications products are sold principally to LGIC of Korea.
As a result of economic instability in Asia, particularly in Korea, our sales in
this region have declined over 70% in the current fiscal year and may continue
to decline in the future. It is possible that these sales could be further
impacted by the currency devaluations and related economic problems in this
region.
We Need to Manage Growth and the Integration of Our Acquisitions.. Over the
past year, we have significantly expanded our operations and made several
substantial acquisitions of diverse businesses, including Intelligent Controls,
Inc., IMIS, Meyer Mohaddes & Associates, Inc. and certain assets of the
Transportation Systems business of Rockwell International. A key element of our
business strategy involves expansion through the acquisition of complementary
businesses, products and technologies. Acquisitions may require significant
capital infusions and, in general, acquisitions also involve a number of special
risks, including:
. 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;
. 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.
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.
Acquisitions, combined with the expansion of our business divisions 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
18
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. Substantially all of the sales by our
subsidiary, Odetics ITS, Inc., and a portion of our sales by our Communications
Division were derived from contracts with governmental agencies, either as a
general contractor, subcontractor or supplier. 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;
. 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. While we often benefit from cost savings on these contracts, 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.
Our Target Markets are Highly Competitive. 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 has further 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.
19
We Depend on Key Personnel for Our Success. 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.
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. 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, decreasing from
$20.375 in October 1997 to $4.25 in October 1998. We may not be able to
increase or sustain the current market price of our common stock in the future.
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;
. shortages announced by suppliers;
. announcements of technological innovations or new products;
. acquisitions or businesses, products or technologies;
. changes in pending litigation;
. our ability to spin-off any division;
. applications or product enhancements by us or by our competitors; and
. changes in financial estimates by securities analysts.
20
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.
We Are Controlled by Certain of Our Officers and Directors. As of December
31, 1998, our officers and directors beneficially owned a majority of the total
combined voting power of the outstanding shares of 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 Charter Documents, Stock Structure, Stockholder Rights Plan and Certain
Provisions of Delaware Law May Have Anti-Takeover Effects. Certain provisions
of our certificate of incorporation, bylaws, stockholder rights plan and under
Delaware law could make it difficult for a third party to acquire us, even
though an acquisition might be beneficial to our stockholders. Our Class A
common stock entitles the holder to 1/10th 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 the Company's
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. These provisions also could limit the
price that investors might be willing to pay in the future for shares of our
common stock. 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, as well as additional
shares of Class B common stock. This preferred stock could adversely affect the
voting power or other rights of the holders of Class A common stock. Our future
issuance of preferred stock or Class B common stock or of rights to purchase
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. Each right entitles the
holder to purchase one one-thousandth of a share of our junior participating
preferred stock at an exercise price of $60. 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.
Delaware corporate law also contains provisions that can affect the ability
to acquire a company. With certain exceptions, we cannot engage in any
"business combination" with a person or group of persons who own 15% or more of
our common stock. This restriction is in effect for three years after the time
that the person or persons acquired 15% of our common stock. However, if we
follow certain procedures in connection with approving a proposed business
combination, the restriction does not apply. Delaware corporate law contains
provisions that can affect the ability to take over a company. With certain
exceptions, we cannot engage in any "business combination" with a person or
group of persons who own 15% or more of our common stock. This restriction is
in effect for three years after the time that the person or persons acquired 15%
of our common stock. However, if we follow certain procedures in connection
with approving a proposed business combination, the restriction does not apply.
The Board of Directors has the power to determine if we will follow these
procedures.
21
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These systems and software products will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies may need to be upgraded
to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Although our
core products are designed to be Year 2000 compliant, it is difficult to ensure
that our products contain all necessary date code changes. We are in the
process of updating our existing information systems to become Year 2000
compliant. We have established an internal task force to evaluate our current
status and state of readiness for the Year 2000. We believe the most
significant impact of the Year 2000 issues will be the readiness of our
suppliers, distributors, customers and lenders with whom we must interact. This
evaluation is still at an early stage. We are in the early stages of developing
contingency plans to address our inability to remedy these issues and we may not
have fully identified the Year 2000 impact. As such, we may not be able to
update our systems and products or resolve the other Year 2000 issues without
disrupting our business or without incurring significant expense. Our failure
to address these issues on a timely basis or at all could result in lost
revenues, increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, financial condition and results of operations.
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.
22
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company brought an action against Storage Technology Corporation
("StorageTek") in the Eastern District Court of Virginia alleging that
StorageTek had infringed the Company's patent covering robotics tape cassette
handling systems (United States Patent No. 4,779,151). StorageTek
counterclaimed alleging that the Company infringed several of StorageTek's
patents. Prior to trial, the court dismissed two of the infringement claims
against the Company and the third claim was resolved between the parties. In
January 1996, the jury determined that the patent claims were not infringed
under the doctrine of equivalents based upon a claim construction defined by the
court prior to the trial. The jury also concluded that the Company's patent was
not invalid. In June 1997, the United States Court of Appeals for the Federal
Circuit vacated the lower court's claim construction and findings of
noninfringement of the Company's patent. The appellate court remanded the case
for consideration of infringement under a proper claim construction. In August
1997, the appellate court denied a petition for rehearing requested by
StorageTek. The case has been returned to the Federal District Court for
retrial, and in March 1998, the jury awarded the Company damages in the amount
of $70.6 million. In June 1998, the U.S. District Court for the Eastern
District of Virginia granted an injunction against StorageTek enjoining
StorageTek from making, selling or using any infringing devices, including the
ACS4400, PowderHorn, Wolfcreek and Genesis automated tape library systems that
include a pass through port. In June 1998, the U.S. District Court issued an
order requesting the parties to brief the issues of whether StorageTek's motion
for judgment as a matter of law should have been granted, and whether the
injunction previously ordered by the court against StorageTek should be stayed
pending appeal. In August 1998, the judge in the case issued a ruling to
overturn the $70.6 million jury verdict previously awarded the Company and
entered judgment as a matter of law in favor of StorageTek. Odetics has appealed
the judge's ruling to the United States Court of Appeals for the Federal
Circuit.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities. During the three months ended
December 31, 1998, the Company issued an aggregate of 1,191,323 shares of its
Class A Common Stock to accredited investors at a purchase price of $6.625 per
share in connection with the Company's private placement. Cruttenden Roth
Incorporated acted as placement agent in this offering.
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) None
23
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 15, 1999
-------------------
24