SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 OCTOBER 31, 1998
Class A Common Stock - 6,437,221 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 SIX MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1998 4
AND SEPTEMBER 30, 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE SIX MONTHS ENDED SEPTEMBER 30, 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 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 20
SECURITY HOLDERS
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.
2
PART 1 FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1997 1998 1997 1998
-------- -------- -------- --------
Net sales and contract revenues:
Net sales $19,163 $19,283 $39,103 $36,340
Contract revenues 2,943 2,840 4,475 5,562
------- ------- ------- -------
Total net sales and contract revenues 22,106 22,123 43,578 41,902
Costs and expenses:
Cost of sales 13,270 13,345 26,483 25,891
Cost of contract revenues 1,851 1,712 2,748 3,527
Selling, general and administrative expense 6,428 7,718 12,379 15,711
Research and development expense 2,285 2,763 4,309 5,367
Interest expense, net 112 476 116 834
------- ------- ------- -------
23,946 26,014 46,035 51,330
------- ------- ------- -------
Loss from continuing operations before taxes (1,840) (3,891) (2,457) (9,428)
Income taxes benefit (736) 0 (983) 0
------- ------- ------- -------
Net loss from continuing operations (1,104) (3,891) (1,474) (9,428)
Income from discontinued operations, net of
income taxes 1,319 0 2,306 0
------- ------- ------- -------
Net income $ 215 $(3,891) $ 832 $(9,428)
======= ======= ======= =======
Earnings (loss) per share:
Continuing operations $ (0.16) $ (0.54) $ (0.22) $ (1.30)
Discontinued operations $ 0.19 $ 0.00 $ 0.35 $ 0.00
------- ------- ------- -------
Earnings per share $ 0.03 $ (0.54) $ 0.13 $ (1.30)
======= ======= ======= =======
Weighted average number of shares outstanding 6,810 7,271 6,633 7,268
======= ======= ======= =======
See notes to consolidated financial statements.
- 3 -
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, September 30,
1998 1998
ASSETS (unaudited)
----------- -------------
Current Assets
Cash $ 1,131 $ 618
Trade accounts receivable, net 15,048 13,228
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 3,100
Inventories:
Finished goods 569 570
Work in process 2,176 981
Materials and supplies 18,065 15,364
-------- --------
Total inventories 20,810 16,915
Prepaid expenses 1,592 1,435
Income taxes receivable 1,039 1,029
Deferred income taxes 1,558 1,558
-------- --------
Total Current Assets 48,563 37,883
Property, plant and equipment
Land 2,090 2,090
Buildings and improvements 18,481 18,597
Equipment, furniture and fixtures 29,318 30,790
-------- --------
49,889 51,477
Less accumulated depreciation (26,550) (28,352)
-------- --------
Net property, plant and equipment 23,339 23,125
Long term ATL note receivable less current portion 6,770 0
Goodwill, net of accumulated amortization 5,850 5,633
Other Assets 4,268 6,210
-------- --------
Total Assets $ 88,790 $ 72,851
======== ========
See notes to consolidated financial statements.
- 4 -
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands)
March 31, September 30,
1998 1998
(unaudited)
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $13,672 $ 9,668
Accrued payroll and related 5,093 4,697
Accrued expenses 2,083 2,512
Income taxes payable 0 0
Contract loss accrual 4,541 4,176
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,580 2,640
Current portion of long-term debt 1,598 1,979
------- --------
Total current liabilities 28,567 25,672
Revolving line of credit 12,800 6,700
Long-term debt - Less current portion 8,200 9,922
Deferred income taxes 643 884
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; 6,158,762 shares of
class A and 1,062,041 shares of
class B issued and outstanding at
September 30, 1998 - $.10 par value 726 723
Paid-in capital 45,240 45,240
Treasury stock (239) (240)
Note receivable from associates (3,377) (2,773)
Retained earnings (3,795) (13,224)
Accumulated other comprehensive income:
Accumulated foreign currency translation 25 (53)
------- --------
Total stockholders' equity 38,580 29,673
------- --------
Total liabilities and stockholders' equity $88,790 $ 72,851
======= ========
See notes to consolidated financial statements.
- 5 -
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
September 30,
-------------------
1997 1998
-------- --------
Operating activities
Net income (loss) $ 832 $ (9,428)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Income from discontinued operations (2,306) 0
Depreciation and amortization 1,504 2,314
Minority interest in earnings of subsidiary 0 0
Provision for losses on accounts receivable 66 132
Provision (Benefit) for deferred income taxes (811) 251
Gain on sale of assets 13 0
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable 3,281 1,688
(Increase) Decrease in net costs and estimated
earnings in excess of billings (1,174) 543
(Increase) Decrease in inventories (756) 3,895
(Increase) Decrease in prepaids and other assets (783) (528)
Increase (Decrease) in accounts payable and
accrued expenses (2,013) (3,810)
-------- --------
Net cash provided by (used in) operating activities (2,147) (4,943)
Investing activities
Purchases of property, plant, and equipment (1,469) (1,588)
Purchase of net assets of acquired business (2,249) 0
Repayment of long term note receivable 1,357 10,019
-------- --------
Net cash used in investing activities (2,361) 8,431
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 23,700 22,538
Principal payments on line of credit, long-term
debt and capital lease obligations (21,212) (26,535)
Proceeds from issuance of common stock 644 (4)
-------- --------
Net cash provided by (used in) financing activities 3,132 (4,001)
-------- --------
Increase (decrease) in cash (1,376) (513)
Cash at beginning of year 1,865 1,131
-------- --------
Cash at September 30 $ 489 $ 618
======== ========
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. ("ATL") as a discontinued
operation (See Note 4), necessary to present fairly the consolidated
financial position of Odetics, Inc. (the "Company") as of September
30, 1998 and the consolidated results of operations and cash flows
for the three and six month periods ended September 30, 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 six month
periods ended September 30, 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 six month periods
ended September 30, 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.
Note 3 - Long-Term Debt
------
(in thousands)
March 31, September 30,
1998 1998
-------- ------------
Line of credit $12,800 $ 6,700
Mortgage note 9,218 8,709
Contracts payable 580 3,192
------- -------
22,598 18,601
Less current portion 1,598 1,979
------- -------
$21,000 $16,622
======= =======
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)
September 30, September 30,
1997 1998
------------ -------------
Quarter Ended $22,902 $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.
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 include, among other
things, statements concerning projected revenues, funding and cash requirements,
supply issues, market acceptance of new products, the Company's incubator
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." 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.
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.
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 were
approximately unchanged at $22.1 million for the three month period ended
September 30 1998, compared to the corresponding period of the prior fiscal
year, and decreased 3.8% to $41.9 million for the six month period ended
September 30, 1998 compared to $43.6 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 the Company's Odetics ITS business ("ITS"). The 24.3%
increase in contract revenues in the six months ended September 30, 1998
reflects the revenue contribution in the current year of the acquired ITS
business.
Net sales were approximately unchanged at $19.3 million for the three month
period ended September 30, 1998, compared to the corresponding period of the
prior fiscal year, and decreased 7.1% to $36.3 million for the six month period
ended September 30, 1998 compared to $39.1 million in the corresponding period
of the prior fiscal year. Net sales in the three months ended September 30, 1998
compared to the corresponding period of the prior year, included increases in
sales of the Company's Broadcast division ("Broadcast") and Gyyr Incorporated
subsidiary ("Gyyr"), which were offset by decreased net sales in the Company's
Communications division ("Communications"). The increase in Broadcast net sales
reflects the revenue contribution from sales of Roswell, a new software based
control automation product which began deliveries in the quarter ended September
30, 1998. Gyyr net sales increased in the three and six month periods ended
compared to the corresponding periods of the prior year primarily as a result of
revenue contribution related to its acquisition of Intelligent Controls Inc.
("ICI") in October 1997. Communications revenues decreased in the three and six
month periods ended September 30, 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.
10
The decrease in net sales for the six months ended September 30, 1998
compared to the corresponding period of the prior year reflects increased Gyyr
sales as noted above, and increased ITS product sales, offset by decreases in
net sales in Broadcast and Communications. The increase in ITS products sales
principally reflects the delivery and installation of an urban traffic center
system to the city of Jinan in the People's Republic of China in addition to
increased units sales of the Vantage Plus vehicle detection system. Decreased
net sales in Broadcast for the six months ended September 30, 1998 reflects the
delay in the delivery of Roswell until the three month period ended September
30, 1998. Broadcast net sales increased 59% in the three month period ended
September 30, 1998 compared to the immediately preceding three month period.
Gross Profit. Gross profit as a percent of net sales was unchanged at
30.8% for the three month period ended September 30, 1998 compared to the
corresponding period in the prior fiscal year, and decreased to 28.8% for the
six month period ended September 30, 1998 compared to 32.3% for the same period
in the prior fiscal year. The decrease in gross profit as a percent of net sales
for the six month period ended September 30, 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 six month period of the current fiscal year was also negatively impacted by
low margins in the Broadcast operations in the first quarter of the current
fiscal year.
Gross profit as a percent of contract revenues increased to 39.7% for the
three months ended September 30, 1998 compared to 37.1% in the comparable period
of the prior fiscal year, and decreased to 36.6% for the six month period ended
September 30, 1998 compared to 38.6% in the same period of the prior fiscal
year. The improvement in gross profit as a percent of contract revenues for the
three months ended September 30, 1998 reflects improved contract margins on ITS
contracts, which has been partially offset by declining gross profits on space
recorder contracts. The decline in gross profits on contract revenues for the
six month period reflects the continued negative impact of declining margins on
space recorder contracts.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 20.1% to $7.7 million (or 34.9% of total net
sales and contract revenues) in the three months ended September 30, 1998
compared to $6.4 million (or 29.1% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Selling, general and
administrative expense for the six month period ended September 30, 1998
increased 26.9% to $15.7 million (or 37.5% of total net sales and contract
revenues) compared to $12.4 million (or 28.4% of total net sales and contract
revenues) for the same period of the prior fiscal year. 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 six month periods ended
September 30, 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. 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 20.9% to $2.8 million (or 12.5% of total net sales and contract
revenues) in the three month period ended September 30, 1998 compared to $2.3
million (or 10.3% of total net sales and contract revenues) in corresponding
period of the prior fiscal year. Research and development expense for the six
month period ended September 30, 1998 increased 24.6% to $5.4 million (or 12.8%
of total net sales and contract revenues) compared to $4.3 million (or 9.9% of
total net sales and contract revenues) in the corresponding period of the prior
fiscal year. The increase in research and development in the three and six month
periods in the current fiscal year principally reflects spending in Gyyr and
Communications. Gyyr announced a new line of dome products for facility
monitoring, and the Company's Communications division has recently introduced
Dexter, a broadband communications interface product. For competitive reasons,
the Company closely guards the confidentiality of its specific development
projects. The increase in new product development expense relates primarily to
development labor and related benefits, prototype material cost and consulting
fees.
11
The acquisitions of ICI and the Transportation Systems business of
Rockwell International did not materially impact the increases in current year
research and development expenses.
Interest Expense, Net. Interest Expense, Net reflects interest income and
interest expense as follows:
Three Months Six Months
Ended Sept. 30 Ended Sept. 30
--------------- --------------
1997 1998 1997 1998
----- ---- ---- ----
(in thousands)
Interest Expense $371 $476 $651 $1029
Interest Income 259 0 535 195
----- ---- ---- -----
Interest Expense, Net $112 $476 $116 $ 834
===== ==== ==== =====
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 six month periods ended September 30, 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 six month
periods ended September 30, 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 six month periods
ended September 30, 1998.
Income Taxes. No income tax benefit was provided on the net loss of the
Company for the three month and six month periods ended September 30, 1998 since
management has determined that the Company cannot meet the criteria for
recognition of the resulting deferred tax asset. In the three month and six
month periods ended September 30, 1997, pre-tax income from the Company's
discontinued operations, ATL, 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 for income taxes of $879,000 in
income from discontinued operations and a provision for income tax (benefit) of
$736,000 for continuing operations. For the six month period ended September
30, 1998 the Company recorded a provision for income taxes of $1,537,000 in
income from discontinued operations and a provision for income tax (benefit) of
$983,000 for continuing operations.
12
Liquidity and Capital Resources
The Company has incurred negative cash flow from operating activities of
$4.9 million for the six months ended September 30, 1998 principally as a result
of net losses incurred during the period. The impact of the $9.4 million net
loss in the six months ended September 30, 1998 to operating cash flows has been
mitigated by inventory and accounts receivable liquidations aggregating
approximately $5.6 million. During the three months ended September 30, 1998,
the Company received approximately $9.0 million from ATL representing principal
plus accrued interest on its note receivable due from ATL. The proceeds of this
payment were applied to reduce outstanding borrowings on the Company's line of
credit. During the six months ended September 30, 1998 the Company's cash flow
requirements have been met primarily with advances on its line of credit with
its principal banks. At November 10, 1998, $9.4 million was outstanding under
the Company's line of credit. The Company's $15.0 million bank line of credit
with Imperial Bank and Comerica Bank-California provides for borrowings
generally at the bank's prime rate (8.0% at November 10, 1998) plus .75%. The
Company has entered into a proposal for 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%. There can be no assurance that the Company will
enter into this new line of credit on a timely basis, if at all. The Company
believes that the structure of the line of credit facility with Transamerica
Business Credit will be better suited to the Company's business requirements.
The Company's borrowings under its existing and proposed lines of credit are
secured by substantially all of the Company's assets.
The Company anticipates that net cash flow generated by operating
activities, together with funds available under the Company's line of credit,
will be adequate and enable the Company to execute its current operating plans
and meet its obligations on a timely basis for at least the next twelve months.
13
RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. You should carefully consider the risks described below before
purchasing shares of our Class A Common Stock or Class B Common Stock
(collectively, the "Common Stock"). The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. If any of the following risks actually occur, our
business, financial condition, or results of operations could be materially
adversely affected. In such case, the trading price of our Class A Common Stock
could decline and you may lose all or part of your investment.
This Report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in, or incorporated by reference into, this Report. In evaluating an investment
in the shares, you should consider carefully the following risk factors in
addition to the other information presented in this Report or incorporated by
reference into this Report.
Fluctuations in Quarterly and Annual Operating Results. In the past, we
have experienced recent losses and wide fluctuations in our quarterly and annual
operating results. We may continue to experience losses and fluctuations in our
business due to a number of factors, not all of which are in our control. These
factors include, without limitation, the following:
. 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 significant investment in research and development for our subsidiaries
and divisions;
. Our ability to develop, introduce, market and gain market acceptance of new
products (particularly the Roswell, Dexter, Vortex, Digi Scan Pro, Vantage
One and Lane Tracker), applications and product enhancements in a timely
manner;
. Our ability to control costs;
. Changes in our pricing policies and the pricing policies by 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;
. Referrals 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 have a
material adverse effect on our business, financial condition and results of
operations. Our revenue growth in prior periods may not be sustainable and may
not be indicative of future operating results. We may not be able to continue
to achieve profitability on a quarterly or annual basis in the future. Due to
all of the foregoing factors and other risks discussed below, it is possible
that in some future period our operating results may
14
be below the expectations of analysts and investors. In that event, the market
price of our securities would probably be materially and adversely affected.
Uncertainty of Incubator Strategy. We have initiated a strategy to nurture
our business divisions with the goal of conducting additional initial public
offerings. This strategy has and will continue to require us to make significant
investments. We may not recognize the benefits of this strategy for a long
time, if at all. Our ability to complete an initial public offering of any of
our divisions or subsidiaries will depend upon numerous factors. Such factors
include, without limitation, the overall performance and results of operations
of our division or subsidiary, its potential market, its ability to assemble and
retain a broad, qualified management team; and its customer base and product
line. General economic and market conditions can also impact a successful
offering. We may not be able to complete a successful initial public offering of
any of our divisions in the near future, or at all.
Rapid Technological Change; Effect of New Product Introduction and
Uncertain Market Acceptance. 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
. Revolving industry standards and changes in the regulatory environment.
We believe that we must continue to make substantial investments to support
ongoing research and development. Our future success will depend in part on our
ability to enhance our current products and reduce our product costs. In
addition, we will 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. 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. Our business and results of
operations could be materially adversely affected if we do not anticipate or
respond adequately to technological developments or changing customer
requirements. Our business and results of operations could also be materially
adversely affected by any significant delays in our new product development or
by the failure of any new products to gain market acceptance. We have
experienced delays in the past in connection with the introduction of new
products, particularly with our Roswell system. We may not be able to introduce
any new products or enhancements to our existing products on a timely basis, or
at all. We also cannot predict the effect any new introductions will have on
sales of our existing products. In addition, our recent shift towards providing
more software solutions may create additional challenges for us, particularly in
our Broadcast Division. 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. Although we have not experienced
any material adverse effect resulting from any of these faults or errors to
date, any faults or errors in our existing products or in our new products may
cause delays in product introduction and shipments or require design
modifications. Any of these factors could adversely affect our competitive
position and results of operations. Our success is also dependent in large part
upon achieving broad market acceptance of certain of our new products including
our Roswell, Vortex, Digi Scan Pro, Vantage One and Lane Tracker products. These
products or enhancements to these products may not achieve broad market
acceptance. 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. In addition, we 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.
15
Risks Associated with International Sales; Effect of Asian Economical
Crisis. 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. 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 in recent periods.
It is possible that these sales could be further impacted by the currency
devaluations and restrictions, and related economic problems in this region and
abroad in general. 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.
Additional risks inherent in international business activities generally include
the following:
. Unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. Longer accounts receivable payment cycles;
. Difficulties in managing and staffing international operations;
. Potentially adverse tax consequences including restrictions on the
repatriation of earnings;
. The burdens of compliance with a wide variety of foreign laws; and
. Currency fluctuations and political and economical instability.
We do not engage in any transactions as a hedge against risks of loss due
to foreign currency fluctuations. Any of these factors may have a material
adverse effect on 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.
Management of Growth; Risks Related to Possible Acquisitions. Over the past
year, we have significantly expanded our operations. This expansion has
included the acquisition of several companies including ICI, International Media
Integration Services, Limited ("IMIS") and Meyer Mohaddes & Associates, Inc.
("MMA"). We also acquired certain assets of the Transportation Systems business
of Rockwell International. We intend to continue to pursue an acquisition
strategy. This period of rapid growth and expansion will continue to place a
significant strain on our resources. To accommodate this growth, we anticipate
that we will be required to implement a variety of new and upgraded operational
and financial systems, procedures and controls, including the improvement of our
accounting and other internal management systems. All of these updates will
require substantial management effort. We may not be able to accomplish these
efforts successfully. In addition, we may not be able to identify, acquire,
profitably manage or successfully integrate any new business without incurring
substantial delays or other operational or financial problems. Moreover, 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 may require
significant capital infusions and, in general, acquisitions also involve a
number of special risks, including the diversion of management's attention, the
failure to retain or successfully integrate key acquired personnel, the
challenge of operating diverse business divisions, increased costs to improve
managerial, operational, financial and administrative systems, legal liabilities
and increased interest expense and amortization of acquired intangible assets.
Any of these risks could materially adversely affect our business and results of
operations.
Reliance on Government Contracts and Subcontractors; Risks Related to Fixed
Price Contracts. Substantially all of the net sales by ITS, and a portion of the
net sales by our Communications division for the year ended March 31, 1998 and
the six months ended September 30, 1998 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. These risks and challenges include 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
16
failure to meet contract milestones. In addition, a large number of our
government contracts are fixed price contracts, pursuant to which we benefit
from cost savings, but 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 could have a material
adverse effect on 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 have a material adverse effect on our business, financial
condition and results of operations.
Competition. We compete with numerous other companies in our target
markets. Many of our competitors have far greater name recognition and
financial, technological, marketing and customer service resources. Some of our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or devote greater resources to the
development, promotion, sale and support of their products than we can. The
recent consolidation 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.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
affect upon our business, operating results and financial condition.
Dependence on Key Personnel. Our future performance depends to a
significant extent on our senior management and other key employees, in
particular, our Chief Executive Officer and Chairman of the Board, Joel Slutzky,
and our Chief Operating Officer and Chief Financial Officer, Gregory A. Miner.
The loss of the services of either of Messrs. Slutzky or Miner, or certain other
key employees would have a material adverse effect on our development and
marketing efforts. Our future success will also depend in large part upon our
ability to attract, retain and motivate highly skilled employees. 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 have a material adverse
effect upon our business, financial condition and results of operations.
Dependence on Proprietary Technology; Risks of Infringement. Our ability
to compete effectively depends in part on our ability to develop and maintain
the proprietary aspects of our technology. 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. These efforts may not provide meaningful protection for our technology.
Our competitors may 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. Moreover, litigation has been necessary in the past and 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 have a material adverse effect 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 have a material adverse effect on our business, financial
condition and results of operations.
17
Volatility of Stock Price. 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. The trading price of our Common Stock could
continue to fluctuate in the future in response to quarterly variations in
operating results, shortages announced by suppliers, announcements of
technological innovations or new products, changes in pending litigation,
applications or product enhancements by us or by our competitors, changes in
financial estimates by securities analysts and other events or factors. The
stock market in general has recently has 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 such companies. These broad market fluctuations may adversely
affect the market price of our Common Stock.
Concentration of Ownership. As of September 30, 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.
Anti-Takeover Effects of Charter Provisions, Bylaws, Stock Structure and
Stockholder Rights Plan. We currently have two classes of Common Stock
outstanding which are substantially identical other than with respect to voting
power. Our Class A Common Stock entitles the holder to 1/10th vote per share and
our Class B Common Stock entitles the holder to one vote per share. Our
officers, directors and their affiliates currently hold the majority of the
Class B Common Stock. In addition, our Board of Directors is elected annually
on a split vote basis. The holders of our Class A Common Stock are currently
entitled to elect three of the directors and the holders of the our Class B
Common Stock are currently entitled to elect the remaining six directors. These
provisions could discourage a proxy contest or make it more difficult for a
third party acquiring a substantial block of our Common Stock 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.
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. Although we do not have any current plans to
issue any shares of Preferred Stock or additional shares of Class B 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, pursuant to which we 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. While the rights generally are only
exercisable if a person or group acquires 15% or more of our stock, the exercise
of the rights could cause substantial dilution to a particular acquiror.
Although the purpose of the Stockholder Rights Plan is to provide an incentive
to potential acquirors to deal directly with our Board of Directors, the
existence of the Stockholder Rights Plan could be considered to delay or make a
merger, tender offer or proxy contest more difficult.
Year 2000 Compliance. Many of our currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the hardware and software industry concerning the
potential effects associated with such compliance. 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
18
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 do not yet have any contingency plans to address our inability to remedy
these issues. Despite our efforts to address the Year 2000 impact, we have not
fully identified such 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. The failure to address these
issues on a timely basis or at all could have a material adverse effect on our
business, financial condition and results of operations.
19
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
September 30, 1998, the Company issued 55,245 shares of Class A Common Stock to
the former shareholders of MMA in connection with the merger of the MMA
Acquisition Corp, a subsidiary of Odetics ITS, Inc. with and into MMA. In this
transaction, all of the outstanding shares of Common Stock of MMA were converted
into an aggregate of 55,245 shares of the Company's Class A Common Stock and an
aggregate of 211.57407 shares of Common Stock of Odetics ITS, Inc. 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
In connection with the Annual Meeting of the Stockholders of Odetics, Inc.
held on September 11, 1998, the following proxies were tabulated representing
563,567 shares of Class A Common Stock or 90% of the eligible voting shares, and
907,813 of Class B Common Stock or 85% of the total outstanding shares voted in
the following manner:
20
Proposal I: Election of the Board of Directors
- ------------------------------------------------
Total Vote for Total Vote Withheld
Class A Common Stock Each Director From Each Director
-------------------- ------------- -------------------
Crandall Gudmundson 562,555 1,032
Jerry F. Muench 562,555 1,032
Leo Wexler 562,765 822
Total Vote for Total Vote Withheld
Class B Common Stock: Each Director From Each Director
--------------------- ------------- -------------------
Joel Slutzky 907,152 660
Kevin C. Daly 907,152 660
Ralph R. Mickelson 907,152 660
Gregory A. Miner 907,152 660
John W. Seazholtz 907,152 660
Paul E. Wright 907,152 660
Proposal II: To Ratify the Appointment of Ernst & Young LLP as the Company's
- ------------------------------------------------------------------------------
independent auditors for the fiscal year ending March 31, 1999.
---------------------------------------------------------------
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- -------------------
For 561,040 906,843
Against 374 120
Abstain 2,173 849
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 Company's acquisition of 90% of the
outstanding share capital of IMIS in September 28, 1998, the Company filed
a Form 8-K to report the issuance of 173,214 shares of its Class A Common
Stock, par value $.10 per share, pursuant to Regulation S under the
Securities Act of 1933, as amended,
21
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: November 13, 1998
-----------------
22
5
1,000
6-MOS
MAR-31-1999
APR-01-1998
SEP-30-1998
618
0
13,228
0
16,915
37,883
51,477
(28,352)
72,851
25,672
0
0
0
723
28,950
72,851
41,902
41,902
29,418
29,418
24,605
0
834
(9,428)
0
(9,428)
0
0
0
(9,428)
(1.30)
(1.30)
