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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-10605
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ODETICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-2588496
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1515 South Manchester Avenue, Anaheim, California 92802
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (714) 774-5000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.10 par value
Class B common stock, $.10 par value
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all 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 by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
Based on the closing sale price on Nasdaq National Market on June 21, 2001,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $21,733,846. For the purposes of this calculation, shares owned
by officers, directors and 10% stockholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Odetics has two classes of common stock outstanding, the Class A common
stock and the Class B common stock. The rights, preferences and privileges of
each class of common stock are identical in all respects, except for voting
rights. Each share of Class A common stock entitles its holder to one-tenth of
one vote per share and each share of Class B common stock entitles its holder
to one vote per share. As of June 21, 2001, there were 9,542,889 shares of
Class A common stock and 1,035,841 shares of Class B common stock outstanding.
Unless otherwise indicated, all references to common stock shall collectively
refer to the Class A common stock and the Class B common stock
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's
definitive proxy statement for the annual meeting of the stockholders scheduled
to be held on September 14, 2001.
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ODETICS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 16
ITEM 3. LEGAL PROCEEDINGS............................................. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 17
ITEM 6. SELECTED FINANCIAL DATA....................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 26
ITEM 11. EXECUTIVE COMPENSATION........................................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..................................................... 27
i
Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s),"
"believe(s)," "will," "may," "anticipate(s)," and similar expressions are
intended to identify forward-looking statement. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. You should not place undue reliance on these
forward-looking statements that speak only as of the date hereof. We undertake
no obligation to republish revised forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. We encourage you to carefully review and consider the
various disclosures made by us which describe certain factors which affect our
business, including the risk factors set forth at the end of Part I, Item 1 of
this report and in Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
General
Odetics, Inc. was founded in 1969 to supply digital recorders for use in the
United States space program. We pioneered new designs and standards for digital
magnetic tape recorders offering high reliability and enhanced performance in
the adverse environment attendant to space flight. In the 1970s, we broadened
our information automation product line to include time-lapse videocassette
recorders for commercial security and surveillance applications, and entered
the business of manufacturing telecom network synchronization products. Through
our Gyyr division, we became a leading supplier of time-lapse videotape
cassette recorders, digital image processing modules and related products used
in security and surveillance systems. We incorporated our Gyyr division in
1997, forming a wholly-owned subsidiary, Gyyr Incorporated. In October 1997, we
expanded Gyyr by acquiring Intelligent Controls Inc., a manufacturer of access
control products specializing in PC based, remote site and fiber optic
communications. In December 1999, we acquired the Security Products Division of
Digital Systems Processing, Inc., which expanded our product line to include
digital time-lapse recording based on hard disk drive technology.
Beginning in the late 1970s, we developed and manufactured telecom
synchronization products in our Communications division. We incorporated our
Communications division in fiscal 1999 as our wholly-owned subsidiary, Zyfer,
Inc., as part of our business expansion to develop products for secured
communications over the Internet.
Leveraging our expertise in video image processing, we entered into the
intelligent transportation system ("ITS") business with the introduction of a
video-based vehicle detection system in 1993. In June 1997, we acquired certain
assets comprising the Transportation Systems business from Rockwell
International, creating our ITS division, which expanded our offerings to
include advanced traffic management systems and advanced traveler information
systems. We incorporated our ITS division in 1998 as Odetics ITS, Inc. In
October 1998, we broadened our systems offerings by acquiring Meyer, Mohaddes
Associates, Inc. In January 2000, we reincorporated Odetics ITS in Delaware and
changed its name to Iteris, Inc. Meyer, Mohaddes Associates, Inc. currently
operates as a wholly-owned subsidiary of Iteris, Inc.
In the early 1980s, we developed the technical expertise to apply automation
to new commercial applications and established our Odetics Broadcast division.
We incorporated our Odetics Broadcast division in 1999 as Broadcast, Inc.
Broadcast develops and manufactures broadcast automation control systems. The
success of our video tape libraries led us to pursue new applications for
information automation technologies. In 1991, we introduced an automated tape
handling subsystem for integration into tape libraries designed for midrange
computers and client/server networks. In January 1993, we formed a separate
subsidiary, ATL Products, Inc., to pursue the market for automated tape
libraries. In March 1997, ATL completed an initial public offering of 1,650,000
shares of its Class A common stock. We distributed our remaining 82.9% interest
in ATL to our stockholders in a tax-free distribution in October 1997.
1
Today, Odetics serves as a developer of technology-oriented companies, each
with its own marketplace, customers and products. These operations share a
common corporate overhead for support for facilities, human resources, benefits
and certain accounting, finance and executive management services. We are
pursuing a business strategy to develop each of these business units with the
ultimate goal of monetizing them for the benefit of our stockholders. While our
strategy also embodies the tax-free spin-off of our developed companies to our
stockholders, we cannot assure that we will be able to spin-off any of these
companies in the near future, if at all.
We currently define our business segments as video products, telecom
products and ITS. Our video products segment includes our Broadcast subsidiary
and our Gyyr subsidiary. Our telecom products segment includes our Zyfer
subsidiary and our Mariner Networks subsidiary. Our ITS segment consists of our
Iteris subsidiary. For more information concerning our business segments,
please see Note 13 of Notes to Consolidated Financial Statements.
Video Products
Broadcast, Inc.
Broadcast develops systems to automate the storage and scheduling of
commercials, news stories and other television programming recorded on
videotape and video server storage systems. We believe that enhanced
operational efficiencies are a principal factor underlying the automation of
broadcast television stations and satellite uplink operations as the industry
transitions to digital television. During fiscal 2001, Broadcast began
transitioning its focus from a hardware-based business to a product offering
based on proprietary software solutions for broadband video content management
and delivery to serve broadcast and cable operations.
We offer software to form powerful integrated systems, including our
AIRO(TM) automation system. Multi-channel presentation systems, which integrate
the complete line of our hardware with commonly available broadcast quality
video disk recorders, are quickly becoming the core business of Broadcast.
Broadcast is focused on video asset management, including desktop video
browsing using a network PC architecture, which can be extended to wide area
network applications and Internet applications.
Sales, Marketing and Principal Customers. Broadcast sells directly to
broadcast television stations, satellite uplink operations, and other broadcast
television and cable television system operators. The sales and marketing
management for Broadcast is located at our principal facilities in Anaheim,
California. Broadcast maintains a dedicated field sales force of three persons
operating in three U.S. sales regions and Canada, and a sales manager for Latin
America, Europe and Asia. Broadcast also utilizes additional independent
representative organizations to promote its products in various other foreign
markets.
The customers of Broadcast include major television networks such as Fox,
the Canadian Broadcasting Corporation, CNBC, Euronews, Televisa, Measat
Broadcast Network Systems, NBC, the PBS Network, Group W Satellite
Communications, Asia Broadcast Centre, Univision and over 100 independent and
network-affiliated television stations. Broadcast currently has systems
installed in over 40 countries.
Manufacturing and Materials. Broadcast maintains a dedicated manufacturing
operation located within our Anaheim, California facilities. Our AIRO products
are serviced primarily in a facility located in Austin, Texas. At our Anaheim
facility, Broadcast maintains infrastructure to support production and
inventory control, purchasing, quality assurance, manufacturing and
engineering.
Broadcast purchases video servers from Grass Valley Group, Leitch and
Pinnacle Systems and video switching, conversion and monitoring equipment from
Grass Valley Group. Broadcast also purchases cabinets and other fabricated
parts and components from other third party suppliers.
2
Gyyr Incorporated
Gyyr produces analog and digital video products and access control systems
that meet the security and surveillance needs for a variety of markets
including banking, commercial/industrial and retail. Gyyr currently operates
two divisions, Gyyr GCTV Products and Gyyr Electronic Access Controls. Gyyr
GCTV Products develops and manufactures analog and digital video products and
focuses on developing innovative solutions for digital storage assistance based
video surveillance. Gyyr's time-lapse VCRs are installed in automated teller
machines and retail point of sale systems to record transaction information in
an effort to deter and address incidents of theft and other crimes. Gyyr
Electronic Access Controls develops and manufactures enterprise security
management systems and focuses on developing network-based access control
products. Gyyr's access control systems offer managed access and monitoring of
public, private and high security facilities. Customer demand for more
sophisticated capabilities and integration due to digital technology has also
contributed to the recent growth in the market for Gyyr's products. Gyyr's
strategy is to provide complete software-based system integration of digital
security devices over a variety of network topologies and the Internet. Recent
additions to Gyyr's product offerings include network and Internet-based video
and device control, and video multiplexing and digital recording. In December
1999, we expanded our product line to include the DVMS family of digital time-
lapse recorders based on hard disk drive architecture. This product line
expansion was the result of our acquisition of the Security Products Division
of Digital Systems Processing, Inc. We sell our products as individual devices
as well as components of fully-integrated network security control systems.
Sales, Marketing and Principal Customers. Gyyr markets and sells its
products through three established channels: OEMs, independent distributors and
system integrators. Gyyr personnel located at our principal facilities and
sales offices throughout the world oversee approximately 1,000 of these channel
partners. Gyyr has a business development and service organization located at
our Odetics Europe Limited subsidiary. Through January 2000, Odetics Europe
Limited assisted Gyyr with management in the development of European, Middle
East and African markets. Commencing in January 2000, Gyyr formed Gyyr Europe
Limited to succeed Odetics Europe Limited in its support services. Its Asian
sales and marketing activities are managed from our Anaheim, California
facilities. Gyyr's principal customers include major security equipment
companies such as Diebold, Inc., ADT Security Systems, Inc., Honeywell, Inc.,
Mosler, Inc., Hamilton Safe and ADI.
Manufacturing and Materials. Gyyr maintains a dedicated manufacturing area
located within our principal facilities in Anaheim, California. Gyyr primarily
uses continuous demand flow techniques in its assembly lines. Gyyr maintains
infrastructure to support production and inventory control, purchasing, quality
assurance and manufacturing engineering.
Gyyr purchases substantially all of its VCRs through Nissei Sangyo America,
the United States distribution affiliate of Hitachi, Ltd., into which we
incorporate certain value-added features. As a result of its reliance on
Hitachi, Ltd, Gyyr is vulnerable to Hitachi's actions, which might necessitate
changes in the design or manufacturing of Gyyr's products. While other
suppliers are available who can manufacture VCRs suitable for use in Gyyr's
products, we would be required to make changes in our product design or
manufacturing methods to accommodate other VCRs, and Gyyr could experience
delays or interruptions in supply while these changes are incorporated or a new
supplier is procured.
Telecom Products
Zyfer, Inc.
We incorporated our Communications division in 1999 as Zyfer, Inc. Zyfer
develops and manufactures telecom network synchronization products and provides
service support for space borne digital data recorders. Our telecom network
synchronization products synchronize communications for data security, timing
networks and wireless communications systems. These products are based on GPS
and oscillator technologies and are sold for new applications in wireless
networks and satellite communications for both commercial and government
customers. Significant customers of Zyfer include the U.S. government,
government subcontractors and LGIC of Korea.
3
Zyfer has developed a new class of encryption products for securing
enterprise wide communications. These products provide transparent security to
users and system administrators. Transparency results from the elimination of
traditional key exchange and key management requirements and from our ability
to encrypt and decrypt at high data rates.
The space borne digital recorders serviced by Zyfer are employed in
satellite programs for space research, earth resource and environmental
observation and weather monitoring, as well as global surveillance and
classified government programs.
Sales, Marketing and Principal Customers. Zyfer conducts its selling and
marketing activities directly from our principal facilities in Anaheim,
California. Zyfer also sells its telecom synchronization products primarily
through manufacturers' representatives.
Manufacturing and Materials. Zyfer's manufacturing processes are ISO
certified. Most of its manufacturing processes consist of final assembly and
test. Zyfer outsources board assembly and some preliminary fabrication
processes.
Mariner Networks, Inc.
Mariner Networks, Inc. has developed and manufactures a family of multi-
service access devices that enable branch offices to cost effectively combine
their separate voice, video and data networks onto a single wide area transport
network. The Dexter(R) product family provides wire speed transport of most
data traffic types. Mariner Networks' products include ATM, frame relay and
voice subsystems for handling intranet, data, voice and video traffic.
Sales, Marketing and Principal Customers. Mariner Networks sells its
products through its direct sales organization and resellers in North America
and in Europe. Mariner Networks maintains sales offices at our facilities in
Anaheim, California and maintains a European subsidiary, Mariner Networks
Europe Ltd., which occupies space within Odetics Europe Limited in the United
Kingdom.
Manufacturing and Materials. Mariner Networks' manufacturing processes are
ISO 9000 certified and consist primarily of final assembly and test. Mariner
Networks currently outsources circuit board assembly and some fabrication
processes.
ITS Products
Iteris, Inc.
Iteris, Inc. designs, develops, markets and implements software-based
solutions that improve the safety and efficiency of vehicle transportation.
Using its proprietary software and ITS industry expertise, Iteris provides
video sensor systems and transportation management and traveler information
systems for the ITS industry. The ITS industry is comprised of companies
applying a variety of technologies to enable the safe and efficient movement of
people and goods. Iteris uses its outdoor image recognition software expertise
to develop proprietary algorithms for video sensor systems that improve vehicle
safety and the flow of traffic. Our knowledge of the ITS industry enables
Iteris to design and implement transportation solutions that help public
agencies reduce traffic congestion and provide greater access to traveler
information.
Iteris' proprietary image recognition systems include AutoVue and Vantage.
AutoVue is a small windshield mounted sensor that utilizes proprietary software
to detect and warn drivers of unintended lane departures. Through new software
development, Iteris is expanding the AutoVue platform to incorporate additional
safety and convenience features. Vantage is a video vehicle sensing system that
detects the presence of vehicles at signalized intersections enabling a more
efficient allocation of green signal time.
Iteris, Inc. designs, develops and implements software-based systems that
integrate sensors, video surveillance, computers and advanced communications
equipment enabling public agencies to monitor, control
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and direct traffic flow, assist in the quick dispatch of emergency crews and
distribute real-time information about traffic conditions.
Sales, Marketing and Principal Customers. Iteris markets and sells its
transportation management systems and services directly to government agencies
pursuant to negotiated contracts which involve competitive bidding and specific
qualification requirements. Sales of Iteris' systems generally involve long
lead times and require extensive specification development, evaluation and
price negotiations.
Iteris sells its Vantage vehicle detection systems primarily through
indirect sales channels comprised of independent dealers in the United States
and Canada who sell integrated solutions and related products to the traffic
intersection market. The independent dealers for Iteris are primarily
responsible for sales, installation and support of Vantage systems. These
dealers maintain an inventory of demonstration traffic products including the
Vantage vehicle detection systems and sell directly to government agencies and
installation contractors. These dealers often have long-term arrangements with
the government agencies in their territory for the supply of various products
for the construction and renovation of traffic intersections. Iteris holds
technical training classes for its dealers and maintains a full-time staff of
customer support technicians to provide technical assistance when needed.
The marketing strategy for AutoVue is to establish it as the leading
platform for in vehicle video sensing for trucks and passenger cars. AutoVue is
sold directly by Iteris to vehicle manufacturers. Iteris currently has a direct
sales force of two product managers, and intends to expand its sales force in
the future to include engineers and product managers who will be responsible
for sales and customer service to specific vehicle manufacturers. Since its
target customer base is well known, Iteris currently does not plan to engage in
broad-scale marketing campaigns.
Manufacturing and Materials. Iteris designs, assembles and tests the
components of its Vantage systems in approximately 5,000 square feet of space
at our Anaheim facility. Production equipment consists of assembly lines and
test apparatus for final assembly and testing of the manufactured product.
Production volume is based upon quarterly forecasts that Iteris readjusts on a
monthly basis to control inventory. Iteris subcontracts the manufacture of its
AutoVue systems to two manufacturers. We anticipate these manufacturers will be
able to produce unit volume sufficient to support sales to heavy truck
manufacturers. Iteris intends to engage additional manufacturers with expertise
in high volume production to produce higher volumes for light and medium trucks
and passenger cars. Iteris does not manufacture any of the hardware used in the
transportation management and traveler information systems that it designs and
implements. The production facility for Iteris is ISO 9001 certified.
Customer Support and Services
Each of our business units is responsible for its own customer support and
service organizations. We provide warranty service for each of our product
lines, as well as follow-up service and support, for which we typically charge
separately. We also offer separate software maintenance agreements to our
customers. We view customer support services as a critical competitive factor
as well as a revenue source.
Backlog
Our backlog of unfulfilled firm orders was approximately $31.0 million as of
March 31, 2001 and approximately $27.3 million as of March 31, 2000.
Approximately 70% of our backlog at March 31, 2000 was recognized as revenues
in fiscal 2001, and approximately 68% of our backlog at March 31, 2001 is
expected to be recognized as revenues in fiscal 2002. Pursuant to the customary
terms of our agreements with government contractors and other customers,
customers can generally cancel or reschedule orders with little or no
penalties. Lead times for the release of purchase orders depend upon the
scheduling and forecasting practices of our individual customers, which also
can affect the timing of the conversion of our backlog into revenues. For these
reasons, among others, our backlog at a particular date may not be indicative
of our future revenues.
5
Product Development
Each of our business units directs and staffs its own product development
activities. Most of our development activities are conducted at our principal
facilities in Anaheim, California. Mariner Networks also maintains a
development team in La Gaude, France.
Our business units require substantial ongoing research and development
expenditures and other product development activities. Our company-sponsored
research and development costs and expenses were approximately $11.2 million in
fiscal 1999, $16.9 million in fiscal 2000 and $18.8 in fiscal 2001. We expect
to continue to pursue significant product development programs and incur
significant research and development expenditures in each of our business
units.
Competition
Our business units generally face significant competition in each of their
respective markets. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
Broadcast's primary competitors include Sony, Harris, Encoda and Probel.
Sony is a large, international supplier of extensive professional quality
products, including video tape libraries, for the broadcast television market.
Harris and Probel principally provide automation control for video libraries
and disk recorders. Broadcast's systems compete primarily in the arena of
facility management and enterprise wide automation. We believe that the
capability of our systems to integrate the broadcast station business systems
acquisition processes, storage devices and presentation devices under a
relational data base management system represents a unique and differentiable
capability.
As Gyyr expands its product base from time-lapse VCRs to providing
integrated security systems in CCTV and electronic access control, it will
compete with a broader set of companies. Major Japanese competitors in Gyyr's
legacy tape-based time-lapse VCR business include Panasonic, Toshiba, Sony,
Sanyo, Mitsubishi and JVC. Gyyr also competes with large systems suppliers
including Sensormatic, Honeywell, Pelco, Ultrak, Ademco and Vicon. In the sale
of access control systems, Gyyr principally competes with Casi-Rusco,
Checkpoint, Cardkey and Lenel. Gyyr generally competes based upon its strength
in the integration of its various component products into systems that provide
complete solutions through the use of advanced software and networking
technologies.
Zyfer's primary competition for network synchronization products is Datum,
Inc. and TrueTime Inc. Zyfer anticipates that its competition for encryption
products for secured communications systems will include Cylink Corporation,
Rainbow Technologies, Inc. and Redcreek Communications Inc. The competition for
integrated circuits addressing encryption applications include Broadcom
Corporation, Chrysalis and HiFN.
Mariner Networks' principal competition includes networking vendors Vina
Technologies, Accelerated Networks, Marconi and Nortel Networks.
While we believe that AutoVue is the only commercially-available lane
departure warning system, potential competitors including Delphi Automotive
Systems Corporation domestically, NEC Corporation and Hitachi Ltd. in Japan and
Robert Bosch Gmbh in Europe, which are currently developing video sensor
technologies for the vehicle industry that could be used for lane departure
warning systems. In the market for our Vantage vehicle detection systems, we
compete with both manufacturers of "above ground" video camera detection
systems, such as Econolite Control Products, Inc., Trafficon, N.V. and the Peek
Traffic Systems division of Thermo Electron Corporation, and other non-
intrusive detection devices including microwave, infrared, ultrasonic and
magnetic detectors, as well as manufacturers and installers of in-pavement
inductive loop products.
The transportation management and traveler information systems market is
highly fragmented and is subject to evolving national and regional quality and
safety standards. Iteris' competitors vary in number, scope
6
and breadth of the products and services they offer. Iteris' competitors in
advanced transportation management and traveler information systems include
corporations such as TRW, Inc., Transcore, Lockheed Martin Corporation, PB
Farradyne Inc., Kimley-Horn and Associates, Inc. and National Engineering
Technology, Inc. Iteris' competitors in transportation engineering, planning
and design include major firms such as Parsons Brinkerhoff, Inc. and Parsons
Transportation Group Inc., as well as many regional engineering firms.
In general, the markets for the products and services offered by our
businesses are highly competitive and are characterized by rapidly changing
technology and evolving standards. Many of our current and prospective
competitors have longer operating histories, greater name recognition, access
to larger customer bases and significantly greater financial, technical,
manufacturing, distribution and marketing resources than us. As a result, they
may be able to adapt more quickly to new or emerging standards or technologies
or to devote greater resources to the promotion and sale of their products. It
is also possible that new competitors or alliances among competitors could
emerge and rapidly acquire significant market share. We believe that our
ability to compete effectively in our target markets depends on a number of
factors, including the success and timing of our new product development, the
compatibility of our products with a broad range of computing systems, product
quality and performance, reliability, functionality, price, and service and
technical support. Our failure to provide services and develop and market
products that compete successfully with those of other suppliers and
consultants in our target markets would have a material adverse effect on our
business, financial condition and results of operations.
Intellectual Property and Proprietary Rights
Our ability to compete effectively depends in part on our ability to develop
and maintain the proprietary aspects of our technology. Our policy is to obtain
appropriate proprietary rights protection for any potentially significant new
technology acquired or developed each of our business units. We currently hold
a number of United States and foreign patents and trademarks, which will expire
at various dates commencing in 2004. We also have pending a number of United
States and foreign patent applications relating to certain of our products;
however, we cannot be certain that any patents will be granted pursuant to
these applications.
In addition to patent laws, we rely on copyright and trade secret laws to
protect our proprietary rights. We attempt to protect our trade secrets and
other proprietary information through agreements with customers and suppliers,
proprietary information agreements with our employees and consultants, and
other similar measures. We cannot be certain that we will be successful in
protecting our proprietary rights. While we believe our patents, patent
applications, software and other proprietary know-how have value, changing
technology makes our future success dependent principally upon our employees'
technical competence and creative skills for continuing innovation.
Litigation has been necessary in the past and may be necessary in the future
to enforce our proprietary rights, to determine the validity and scope of the
proprietary rights of others, or to defend us against claims of infringement or
invalidity by others. An adverse outcome in such litigation or similar
proceedings could subject us to significant liabilities to third parties,
require disputed rights to be licensed from others or require us to cease
marketing or using certain products, any of which 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, as well as from the diversion of management's
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.
Employees
We refer to our employees as associates. As of June 20, 2001, we employed
442 associates, including 72 associates in general management, administration
and finance; 65 associates in sales and marketing; 170 associates in product
development; 105 associates in operations, manufacturing and quality; and
30 associates in customer service. None of our associates are represented by a
labor union and we have not experienced a work stoppage.
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We provide centralized support for human resources management for each of
our business units and subsidiaries. These services include recruiting,
administration and outplacement.
Government Regulation
Our manufacturing operations are subject to various federal, state and local
laws, including those restricting the discharge of materials into the
environment. We are not involved in any pending or threatened proceedings which
would require curtailment of our operations because of such regulations. We
continue to expend funds in connection with our compliance with applicable
environmental regulations. These expenditures have not, however, been
significant in the past, and we do not expect any significant expenditures in
the near future.
From time to time, a portion of our work relating to network synchronization
systems may constitute classified United States government information or may
be used in classified programs of the United States Government. For this
purpose, we possess certain relevant security clearances. Our affected
facilities and operations are also subject to security regulations of the
United States Government. We believe we are currently in full compliance with
these regulations.
8
RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing the shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.
We Have Experienced Substantial Losses and Expect Future Losses. We
experienced significant operating losses of $49.8 million for the year ended
March 31, 2001, $38.7 million for the year ended March 31, 2000 and $18.3
million for the year ended March 31, 1999. In January 2001, we announced the
reorganization of our business in order to reduce our operating expenses and
negative cash flow, which included the downsizing of our operations in Gyyr and
Broadcast, and a 25% reduction in our total work force. We cannot assure you
that this reorganization will improve our financial performance, or that we
will be able to achieve profitability on a quarterly or annual basis in the
future. Most of our expenses are fixed in advance, and we generally are unable
to reduce our expenses significantly in the short-term to compensate for any
unexpected delay or decrease in anticipated revenues. As a result, we may
continue to experience losses, which could cause the market price of our common
stock to decline.
We Will Need to Raise Additional Capital in the Future and May Not Be Able
to Secure Adequate Funds on Terms Acceptable to Us, or at All. Our line of
credit facility expired on December 31, 2000. While we have received an
extension on this facility until July 31, 2001, we will need to obtain a new
line of credit from another lender in the near future. Substantially all of our
assets have been pledged to our existing lender to secure the outstanding
indebtedness under this facility ($13.5 million at March 31, 2001). We cannot
assure you that we will be able to obtain a new line of credit on a timely
basis, on acceptable terms, or at all. Even if we are able to secure a new line
of credit, we anticipate that we will need to raise additional capital in the
near future, either through additional bank borrowings, the monetization of
certain real property, the divestiture of business units or select assets, or
other debt or equity financings. These conditions, together with our recurring
losses, raise substantial doubt about our ability to continue as a going
concern.
Our capital requirements will depend on many factors, including:
. our ability to control costs;
. increased research and development funding, and required investments in
our business units;
. our ability to generate operating income;
. market acceptance of our products;
. technological advancements and our competitors' response to our
products;
. capital improvements to new and existing facilities;
. increased sales and marketing expenses;
. potential acquisitions of businesses and product lines; and
. additional working capital needs.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced and such securities may have
rights, preferences and privileges senior to our common stock. Additional
financing may not be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
develop or enhance our products, expand our sales and marketing programs, take
advantage of future opportunities or respond to competitive pressures.
9
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly revenues and operating results have fluctuated and are likely to
continue to vary from quarter to quarter due to a number of factors, many of
which are not within our control. Factors that could affect our revenues
include, among others, the following:
. our significant investment in research and development for our
subsidiaries and business units;
. our ability to control costs;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
. the size, timing, rescheduling or cancellation of significant customer
orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. changes in our pricing policies and the pricing policies by our
suppliers and competitors, pricing concessions on volume sales, as well
as increased price competition in general;
. the long lead times associated with government contracts or required by
vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. the effects of technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our business units;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the risks inherent in our acquisitions of technologies and businesses;
. risks and uncertainties associated with our international business;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and market conditions.
In addition, our sales in any quarter may consist of a relatively small
number of large customer orders. As a result, the timing of a small number of
orders may impact our quarter to quarter results. The loss of or a substantial
reduction in orders from any significant customer could seriously harm our
business, financial condition and results of operations.
Due to all of the factors listed above and other risks discussed in this
report, our future operating results could be below the expectations of
securities analysts or investors. If that happens, the trading price of our
common stock could decline. As a result of these quarterly variations, you
should not rely on quarter-to-quarter comparisons of our operating results as
an indication of our future performance.
Our Operating Strategy for Developing Companies is Expensive and May Not Be
Successful. Our business strategy entails intensive business development
activities, which are expensive and highly risky. The goal of this strategy is
to develop companies that can be spun-off to our stockholders. This strategy
has in the past required us to make significant investments in our business
units, both for research and development, and also to develop a separate
infrastructure for certain of our business units, sufficient to allow the unit
to function as an independent public company. We expect to continue to invest
in the development of certain of our business units with the goal of obtaining
additional capital to support further investment and eventually completing
additional public offerings. We may not recognize the benefits of this
investment for a significant
10
period of time, if at all. Our ability to complete private financings or an
initial public offering of any of our business units and/or spin-off our
interest to our stockholders will depend upon many factors, including:
. the overall performance and results of operations of the particular
business unit;
. the potential market for our business unit;
. our ability to assemble and retain a broad, qualified management team
for the business unit;
. our financial position and cash requirements;
. the business unit's customer base and product line;
. the current tax treatment of spin-off transactions and our ability to
obtain favorable determination letters from the Internal Revenue
Service; and
. general economic and market conditions, including the receptiveness of
the stock markets to initial public offerings.
We may not be able to complete a successful private or public offering or
spin-off of any of our business units in the near future, or at all. During
fiscal 2001, we attempted to complete the initial public offering of Iteris. We
withdrew the offering due to adverse market conditions. Even if we do complete
additional public offerings, we may decide not to spin-off a particular
business unit, or to delay the spin-off until a later date.
We Must Keep Pace with Rapid Technological Change to Remain Competitive. Our
target markets are in general characterized by the following factors:
. rapid technological advances;
. downward price pressure in the marketplace as technologies mature;
. changes in customer requirements;
. frequent new product introductions and enhancements; and
. evolving industry standards and changes in the regulatory environment.
Our future success will depend upon our ability to anticipate and adapt to
changes in technology and industry standards, and to effectively develop,
introduce, market and gain broad acceptance of new products and product
enhancements incorporating the latest technological advancements.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. We need to
continue to develop and introduce new products that incorporate the latest
technological advancements in hardware, storage media, operating system
software and applications software in response to evolving customer
requirements. Our business and results of operations could be adversely
affected if we do not anticipate or respond adequately to technological
developments or changing customer requirements. We cannot assure you that any
such investments in research and development will lead to any corresponding
increase in revenue.
Our Future Success Depends on the Successful Development and Market
Acceptance of New Products. We believe our revenue growth and future operating
results will depend on our ability to complete development of new products and
enhancements, introduce these products in a timely, cost-effective manner,
achieve broad market acceptance of these products and enhancements, and reduce
our product costs. We may not be able to introduce any new products or any
enhancements to our existing products on a timely basis, or at all. In
addition, the introduction of any new products could adversely affect the sales
of our certain of our existing products.
Our future success will also depend in part on the success of several
recently introduced products including DVMS, our family of digital time-lapse
recorders; AutoVue, our lane departure warning system; and Dexter, our multi-
service access device.
11
Market acceptance of our new products depends upon many factors, including
our ability to accurately predict market requirements and evolving industry
standards, our ability to resolve technical challenges in a timely and cost-
effective manner and achieve manufacturing efficiencies, the perceived
advantages of our new products over traditional products and the marketing
capabilities of our independent distributors and strategic partners. Our
business and results of operations could be seriously harmed by any significant
delays in our new product development. We have experienced delays in the past
in the introduction of new products, particularly with our Roswell system,
which we recently discontinued. Certain of our new products could contain
undetected design faults and software errors or "bugs" when first released by
us, despite our testing. We may not discover these faults or errors until after
a product has been installed and used by our customers. Any faults or errors in
our existing products or in any new products may cause delays in product
introduction and shipments, require design modifications or harm customer
relationships, any of which could adversely affect our business and competitive
position.
We currently outsource the manufacture of our AutoVue product line to a
single manufacturer. This manufacturer may not be able to produce sufficient
quantities of this product in a timely manner or at a reasonable cost, which
could materially and adversely affect our ability to launch or gain market
acceptance of AutoVue.
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets. International product sales
represented approximately 20% of our total net sales and contract revenues for
the fiscal year ended March 31, 2001, approximately 19% for the fiscal year
ended March 31, 2000 and approximately 27% for the fiscal year ended March 31,
1999. International business operations are subject to inherent risks,
including, among others:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers or restrictions;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. import and export license requirements and restrictions of the United
States and each other country in which we operate;
. exposure to different legal standards and reduced protection for
intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political, social and economic instability.
We believe that international sales will continue to represent a significant
portion of our revenues, and that continued growth and profitability may
require further expansion of our international operations. Many of our
international sales are currently denominated in U.S. dollars. As a result, an
increase in the relative value of the dollar could make our products more
expensive and potentially less price competitive in international markets. We
do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations.
Any of these factors may adversely effect our future international sales
and, consequently, on our business and operating results. Furthermore, as we
increase our international sales, our total revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the
world.
We Need to Manage Growth and the Integration of Our Acquisitions. Over the
past few years, we have expanded our operations and made several substantial
acquisitions of diverse businesses, including Intelligent
12
Controls, Inc., International Media Integration Services, Ltd., Meyer Mohaddes
Associates, Inc., Viggen Corporation, certain assets of the Transportation
Systems business of Rockwell International, and the Security Products Division
of Digital Systems Processing, Inc. A key element of our business strategy
involves expansion through the acquisition of complementary businesses,
products and technologies. Acquisitions may require significant capital
infusions and, in general, acquisitions also involve a number of special risks,
including:
. potential disruption of our ongoing business and the diversion of our
resources and management's attention;
. the failure to retain or integrate key acquired personnel;
. the challenge of assimilating diverse business cultures, and the
difficulties in integrating the operations, technologies and information
system of the acquired companies;
. increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
result of changes in management; and
. increased interest expense and amortization of acquired intangible
assets.
Acquisitions may also materially and adversely affect our operating results
due to large write-offs, contingent liabilities, substantial depreciation,
deferred compensation charges or goodwill amortization, or other adverse tax or
audit consequences.
Our competitors are also soliciting potential acquisition candidates, which
could both increase the price of any acquisition targets and decrease the
number of attractive companies available for acquisition. We cannot assure you
that we will be able to consummate any additional acquisitions, successfully
integrate any acquisitions or realize the benefits anticipated from any
acquisition.
Acquisitions, combined with the expansion of our business units and recent
growth has placed and is expected to continue to place a significant strain on
our resources. To accommodate this growth, we anticipate that we will be
required to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including the improvement of our accounting
and other internal management systems. All of these updates will require
substantial additional expense as well as management effort. Our failure to
manage growth and integrate our acquisitions successfully could adversely
affect our business, financial condition and results of operations.
We Depend on Government Contracts and Subcontracts and Face Additional Risks
Related to Fixed Price Contracts. A significant portion of the sales by Iteris
and a portion of our sales by Zyfer were derived from contracts with
governmental agencies, either as a general contractor, subcontractor or
supplier. Government contracts represented approximately 25% and 26% of our
total net sales and contract revenues for the years ended March 31, 2000 and
2001, respectively. We anticipate that revenue from government contracts will
continue to increase in the near future. Government business is, in general,
subject to special risks and challenges, including:
. long purchase cycles;
. competitive bidding and qualification requirements;
. performance bond requirements;
. delays in funding, budgetary constraints and cut-backs; and
. milestone requirements and liquidated damage provisions for failure to
meet contract milestones.
13
In addition, a large number of our government contracts are fixed price
contracts. As a result, we may not be able to recover for any cost overruns.
These fixed price contracts require us to estimate the total project cost based
on preliminary projections of the project's requirements. The financial
viability of any given project depends in large part on our ability to estimate
these costs accurately and complete the project on a timely basis. In the event
our costs on these projects exceed the fixed contractual amount, we will be
required to bear the excess costs. These additional costs adversely affect our
financial condition and results of operations. Moreover, certain of our
government contracts are subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in our net
sales in any given quarter. Our inability to address any of the foregoing
concerns or the loss or renegotiation of any material government contract could
seriously harm our business, financial condition and results of operations.
The Markets in Which We Operate Are Highly Competitive and Have Many More
Established Competitors. We compete with numerous other companies in our target
markets and we expect such competition to increase due to technological
advancements, industry consolidations and reduced barriers to entry. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our business, financial
condition and results of operations. Many of our competitors have far greater
name recognition and greater financial, technological, marketing and customer
service resources than we do. This may allow them to respond more quickly to
new or emerging technologies and changes in customer requirements. It may also
allow them to devote greater resources to the development, promotion, sale and
support of their products than we can. Recent consolidations of end users,
distributors and manufacturers in our target markets have exacerbated this
problem. As a result of the foregoing factors, we may not be able to compete
effectively in our target markets and competitive pressures could adversely
affect our business, financial condition and results of operations.
We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel and
We Do Not Have Employment Agreements with Any Key Personnel. Due to the
specialized nature of our business, we are highly dependent on the continued
service of our executive officers and other key management, engineering and
technical personnel, particularly Joel Slutzky, our Chief Executive Officer and
Chairman of the Board, and Gregory A. Miner, our Chief Operating Officer and
Chief Financial Officer. We do not have any employment contracts with any of
our officers or key employees. The loss of any of these persons would seriously
harm our development and marketing efforts, and would adversely affect our
business. Our success will also depend in large part upon our ability to
continue to attract, retain and motivate qualified engineering and other highly
skilled technical personnel. Competition for employees, particularly
development engineers, is intense. We may not be able to continue to attract
and retain sufficient numbers of such highly skilled employees. Our inability
to attract and retain additional key employees or the loss of one or more of
our current key employees could adversely affect upon our business, financial
condition and results of operations.
We May Not be Able to Adequately Protect or Enforce Our Intellectual
Property Rights. If we are not able to adequately protect or enforce the
proprietary aspects of our technology, competitors could be able to access our
proprietary technology and our business, financial condition and results of
operations will likely be seriously harmed. We currently attempt to protect our
technology through a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements and similar
means. Despite our efforts, other parties may attempt to disclose, obtain or
use our technologies or solutions. Our competitors may also be able to
independently develop products that are substantially equivalent or superior to
our products or design around our patents. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the United States. As a result, we may not be able to protect our
proprietary rights adequately in the United States or abroad.
From time to time, we have received notices that claim we have infringed
upon the intellectual property of others. Even if these claims are not valid,
they could subject us to significant costs. We have engaged in litigation in
the past, and litigation may be necessary in the future to enforce our
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. Litigation may also be necessary to defend
against claims of infringement or invalidity by others. An adverse outcome in
litigation or any similar
14
proceedings could subject us to significant liabilities to third parties,
require us to license disputed rights from others or require us to cease
marketing or using certain products or technologies. We may not be able to
obtain any licenses on terms acceptable to us, or at all. We also may have to
indemnify certain customers or strategic partners if it is determined that we
have infringed upon or misappropriated another party's intellectual property.
Any of these results could adversely affect on our business, financial
condition and results of operations. In addition, the cost of addressing any
intellectual property litigation claim, both in legal fees and expenses, and
the diversion of management resources, regardless of whether the claim is
valid, could be significant and could seriously harm our business, financial
condition and results of operations.
The Trading Price of Our Common Stock Is Volatile. The trading price of our
common stock has been subject to wide fluctuations in the past. Since January
2000, our Class A common stock has traded at prices as low as $1.88 per share
and as high as $29.44 per share. We may not be able to increase or sustain the
current market price of our common stock in the future. As such, you may not be
able to resell your shares of common stock at or above the price you paid for
them. The market price of our common stock could continue to fluctuate in the
future in response to various factors, including, but not limited to:
. quarterly variations in operating results;
. our ability to control costs and improve cash flow;
. shortages announced by suppliers;
. announcements of technological innovations or new products by our
competitors, customers or us;
. acquisitions or businesses, products or technologies;
. changes in pending litigation or new litigation;
. changes in investor perceptions;
. our ability to spin-off any business unit;
. applications or product enhancements by us or by our competitors; and
. changes in earnings estimates or investment recommendations by
securities analysts.
The stock market in general has recently experienced volatility, which has
particularly affected the market prices of equity securities of many high
technology companies. This volatility has often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock. In the past, companies that have
experienced volatilities in the market price of their securities have been the
subject of securities class action litigation. If we were to become the subject
of a class action lawsuit, it could result in substantial losses and divert
management's attention and resources from other matters.
We Are Controlled by Certain of Our Officers and Directors. As of June 21,
2001, our officers and directors beneficially owned approximately 28% of the
total combined voting power of the outstanding shares of our Class A common
stock and Class B common stock. As a result of their stock ownership, our
management will be able to significantly influence the election of our
directors and the outcome of corporate actions requiring stockholder approval,
such as mergers and acquisitions, regardless of how our other stockholders may
vote. This concentration of voting control may have a significant effect in
delaying, deferring or preventing a change in our management or change in
control and may adversely affect the voting or other rights of other holders of
common stock.
Our Stock Structure and Certain Anti-Takeover Provisions May Affect the
Price of Our Common Stock. Certain provisions of our certificate of
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to
our stockholders. These provisions could limit the price that investors might
be willing to pay in the future for shares of our common stock. Our Class A
common stock entitles the holder to one-tenth of one vote per share and our
15
Class B common stock entitles the holder to one vote per share. The disparity
in the voting rights between our common stock, as well as our insiders'
significant ownership of the Class B common stock, could discourage a proxy
contest or make it more difficult for a third party to effect a change in our
management and control. In addition, our Board of Directors is authorized to
issue, without stockholder approval, up to 2,000,000 shares of preferred stock
with voting, conversion and other rights and preferences superior to those of
our common stock, as well as additional shares of Class B common stock. Our
future issuance of preferred stock or Class B common stock could be used to
discourage an unsolicited acquisition proposal.
In March 1998, we adopted a stockholder rights plan and declared a dividend
of preferred stock purchase rights to our stockholders. In the event a third
party acquires more than 15% of the outstanding voting control of our company
or 15% of our outstanding common stock, the holders of these rights will be
able to purchase the junior participating preferred stock at a substantial
discount off of the then current market price. The exercise of these rights and
purchase of a significant amount of stock at below market prices could cause
substantial dilution to a particular acquiror and discourage the acquiror from
pursuing our company. The mere existence of a stockholder rights plan often
delays or makes a merger, tender offer or proxy contest more difficult.
We Do Not Pay Cash Dividends. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends on either class of
our common stock in the foreseeable future.
We May Be Subject to Additional Risks. The risks and uncertainties described
above are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may also adversely affect our business operations.
ITEM 2. PROPERTIES.
Our headquarters and principal operations are located in Anaheim,
California. In 1984, we purchased and renovated a three building complex
containing approximately 257,900 square feet situated on approximately 14 acres
adjacent to the Interstate 5 freeway, one block from Disneyland. Our facilities
house our corporate and administrative offices (approximately 43,600 dedicated
square feet), as well as the operations of Gyyr and Broadcast, (approximately
113,400 dedicated square feet), Zyfer (approximately 56,300 dedicated square
feet), Mariner Networks (approximately 20,600 dedicated square feet) and Iteris
(approximately 24,000 dedicated square feet).
Broadcast leases approximately 5,000 square feet in Austin, Texas primarily
for service and sales support. Odetics Europe Limited's offices are located in
leased space near London, England. Odetics Asia Pacific Pte. Ltd. offices are
located in leased space in Singapore. Iteris leases eleven office suites
representing an aggregate of approximately 35,000 square feet within the United
States for its support staff and development teams.
We currently operate a single shift in each of our manufacturing and
assembly facilities, and we believe that our facilities are adequate for our
current needs and for possible future growth. We may, however, elect to expand
or relocate its offices and facilities in the future.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A common stock and Class B common stock are traded on the Nasdaq
National Market under the symbols "ODETA" and "ODETB," respectively. The
following table sets forth for the fiscal periods indicated the high and low
sales prices for the Class A common stock and Class B common stock as reported
by the Nasdaq National Market:
Class A Class B
Common Stock Common Stock
------------- -------------
High Low High Low
------ ------ ------ ------
Fiscal Year Ended March 31, 2000
First Quarter.................................... $10.25 $ 7.63 $10.63 $ 8.25
Second Quarter................................... 13.00 9.13 12.13 9.13
Third Quarter.................................... 15.50 10.13 15.63 10.38
Fourth Quarter................................... 29.44 12.00 29.63 13.00
Fiscal Year Ended March 31, 2001
First Quarter.................................... 15.25 7.88 15.00 10.00
Second Quarter................................... 17.94 13.00 17.63 13.50
Third Quarter.................................... 17.00 5.53 17.00 5.63
Fourth Quarter................................... 8.00 2.94 8.25 3.00
Fiscal Year Ending March 31, 2002
First Quarter (through June 21, 2001)............ 4.60 1.88 4.64 2.95
As of June 21, 2001, we had 556 holders of record of Class A common stock
and 127 holders of record of Class B common stock according to information
furnished by our transfer agent.
Dividend Policy
Pursuant to the terms of our Loan and Security Agreement with our lender, we
are prohibited from paying any dividends on our common stock without our
lender's consent. We have never paid or declared cash dividends on either class
of our common stock, and have no current plans to pay such dividends in the
foreseeable future. We currently intend to retain any earnings for working
capital and general corporate purposes. The payment of any future dividends
will be at the discretion of our Board of Directors, and will depend upon a
number of factors, including, but not limited to, future earnings, the success
of our business, activities, our capital requirements, our general financial
condition and future prospects, general business conditions, the consent of our
lender and such other factors as the Board may deem relevant.
Recent Sales of Unregistered Securities
During the last fiscal year, we have sold and issued the following
unregistered securities:
In October 1998, Iteris acquired Meyer, Mohaddes Associates, Inc. Pursuant
to the terms of the merger agreement, and as a penalty for not completing the
initial public offering of Iteris, we issued an aggregate of an additional
38,995 shares of our Class A Common Stock in fiscal 2001 to the former
shareholders of Meyer, Mohaddes.
17
In September 2000, we issued an aggregate of 1,199,815 shares of our Class A
common stock to 24 accredited investors in a private placement at a purchase
price of $14.26 per share or an aggregate purchase price of $17.1 million. B.
Riley & Co. acted as a finder with respect to a portion of this offering.
The sale and issuance of securities set forth above were deemed to be exempt
from registration under the Securities Act by virtue of Section 4(2) thereof.
The recipients of the securities in each of the transactions set forth in above
represented their intention to acquire such securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments used
in such transactions. Except as indicated above, there were no underwriters,
brokers or finders employed in connection with any of the foregoing
transactions.
18
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data with respect to our
consolidated statement of operations for each of the five fiscal years in the
period ended March 31, 2001 and the consolidated balance sheet data at March
31, 1997, 1998, 1999, 2000 and 2001 are derived from our audited consolidated
financial statements. The consolidated financial statements for the fiscal
years ended March 31, 1997 and 1998 and our consolidated balance sheet at
March 31, 1997, 1998 and 1999 are not included in this report. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with our
consolidated financial statements and the related notes thereto included
elsewhere in this report.
Fiscal Year Ended March 31,
-----------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net sales.................... $71,748 $ 79,552 $ 70,042 $ 62,041 $ 57,030
Contract revenues............ 9,032 10,284 13,331 18,666 20,039
------- -------- -------- -------- --------
Total net sales and contract
revenues.................... 80,780 89,836 83,373 80,707 77,069
Cost of sales................ 48,507 55,227 49,816 50,883 46,244
Cost of contract revenues.... 4,907 6,530 9,007 13,431 13,781
Gross profit--net sales...... 23,241 24,325 20,226 11,158 10,786
Gross profit--contract
revenues.................... 4,125 3,754 4,324 5,235 6,258
------- -------- -------- -------- --------
Total gross profit........... 27,366 28,079 24,550 16,393 17,044
Selling, general and
administrative expense...... 19,831 26,010 31,670 38,173 41,780
Research and development
expense..................... 7,734 9,271 11,191 16,888 18,812
In process research and
development................. -- 2,106 -- -- --
Special charge............... -- 1,716 -- -- 6,285
------- -------- -------- -------- --------
Loss from operations......... (199) (10,924) (18,311) (38,668) (49,833)
Non-operating income
(expense)
Royalty income............. -- -- -- 38,437 19,055
Interest expense, net...... (183) (617) (1,807) (2,048) (1,762)
------- -------- -------- -------- --------
Loss before taxes............ (382) (11,541) (20,118) (2,279) (32,540)
Income taxes (benefit)....... (181) (2,858) -- -- --
------- -------- -------- -------- --------
Loss from continuing
operations.................. (201) (8,683) (20,118) (2,279) (32,540)
Income from discontinued
operations, net of income
taxes....................... 3,931 2,089 -- -- --
------- -------- -------- -------- --------
Net income (loss)............ $ 3,730 $ (6,594) $(20,118) $ (2,279) $(32,540)
======= ======== ======== ======== ========
Diluted earnings (loss) per
share:
Continuing operations........ $ (0.03) $ (1.26) $ (2.57) $ (0.25) $ (3.26)
Discontinued operations...... 0.62 0.31 -- -- --
------- -------- -------- -------- --------
Earnings (loss) per share.... $ 0.59 $ (0.95) $ (2.57) $ (0.25) $ (3.26)
======= ======== ======== ======== ========
Shares used in calculating
diluted earnings (loss) per
share....................... 6,299 6,912 7,820 9,089 9,977
======= ======== ======== ======== ========
Fiscal Year Ended March 31,
-----------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(in thousands)
Consolidated Balance Sheet
Data:
Working capital (deficit).... $21,903 $ 19,996 $ 15,216 $ 12,855 $ (8,845)
Total assets................. 85,805 88,790 81,355 81,850 68,061
Long-term debt (less current
portion).................... 11,860 21,000 19,962 11,666 4,800
Retained earnings (deficit).. 12,211 (3,795) (23,913) (26,192) (58,732)
Total stockholders' equity... 51,828 38,580 36,323 36,110 20,378
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
The following table sets forth certain income statement data as a percentage
of total net sales and contract revenues for the periods indicated and should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations.
As of March 31,
---------------------
1999 2000 2001
----- ----- -----
Net sales............................................... 84.0% 76.9% 74.0%
Contract revenues....................................... 16.0 23.1 26.0
----- ----- -----
Total net sales and contract revenues................... 100.0% 100.0% 100.0%
Gross profit--net sales................................. 28.9 18.0 18.9
Gross profit--contract revenues......................... 32.4 28.1 31.2
Selling, general and administrative expense............. 38.0 47.3 54.2
Research and development expense........................ 13.4 20.9 24.4
Special charge.......................................... -- -- 8.2
Loss from operations.................................... (22.0) (47.9) (64.7)
Non-operating income (expense):
Royalty income........................................ -- 47.6 24.7
Interest expense, net................................. (2.1) (2.5) (2.3)
Income taxes (benefit).................................. -- -- --
Net loss................................................ (24.1)% (2.8)% (42.2)%
===== ===== =====
General. We define our business segments as video products, telecom products
and ITS. The video products segment includes our wholly-owned subsidiaries,
Broadcast and Gyyr. The telecom products segment includes Zyfer, our wholly-
owned subsidiary (formerly known as our Communications division) and
Mariner Networks, our wholly-owned subsidiary. The ITS segment includes
Odetics' 93% owned subsidiary, Iteris. In April 2001, Gyyr separated its
operations into two divisions, Gyyr CCTV Products, which manufactures analog
and digital storage solutions, and Gyyr Electronic Access Control, which
manufactures enterprise security management systems. All references to our
subsidiaries in this report include the prior business and results of
operations of such subsidiaries as business units of Odetics prior to their
incorporation.
During the quarter ended December 31, 2000, we effected a restructuring to
reduce our overall expenses and to further focus our business development on
those areas that we believe provide the opportunity for the highest return on
stockholder capital. This restructuring included a reduction of approximately
25% of our total workforce and the discontinuation of certain product lines. As
a result of these actions, we incurred charges in the amount of $9.4 million in
the three months ended December 31, 2000. Of the total charges incurred,
approximately $6.3 million was classified as a non-recurring special charge,
representing severance payments and the write-down of certain assets.
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) revenue 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-borne recorders
used for geographical information systems. Total net sales and contract
revenues decreased 4.5% to $77.1 million for the fiscal year ended March 31,
2001 ("fiscal 2001") compared to $80.7 million for the fiscal year ended March
31, 2000 ("fiscal 2000"), and decreased 3.2% for the fiscal year ended March
31, 2000 compared to $83.4 million for the fiscal year ended March 31, 1999
("fiscal 1999").
20
Net Sales. Net sales decreased 8.1% to $57.0 million in fiscal 2001
compared to $62.0 million in fiscal 2000 as a result of declining sales in
Broadcast, Mariner Networks and Gyyr, offset in part by increased sales in
Iteris and Zyfer. Broadcast sales decreased 20.1% in fiscal 2001 compared
to fiscal 2000 as a result of declining sales of its automated tape
libraries. In the quarter ended December 31, 2000, Broadcast determined it
would not pursue continued sales opportunities for its Roswell facility
management system and shifted the focus of its business on sales of its
AIRO Automation systems. Mariner Networks sales decreased 56.5% in fiscal
2001 compared to fiscal 2000 as a result of the transition of its product
offering entirely to its emerging Dexter family of multi-service access
devices for the telecommunications market. Prior to this shift in product
strategy, Mariner Networks had sold a variety of network access products
that have been removed from its product line. Gyyr's sales decreased 10.8%
in fiscal 2001 compared to fiscal 2000 due principally to the decline in
sales of analog based time-lapse recorder product families. During the
quarter ended June 30, 2001, Gyyr divested its Vortex Dome and Quarterback
Controller product lines as part of a broader strategy to narrow its
product offering to digital and analog recording and access control
systems. Iteris' product sales increased 37% in fiscal 2001, primarily due
to increased unit sales of its Vantage video detection products.
Net sales decreased 11.4% to $62.0 million in fiscal 2000 compared to
$70.0 million in fiscal 1999 as a result of declining sales in Broadcast,
Mariner Networks and Gyyr. The decrease in Broadcast sales in fiscal 2000
reflects delays in the delivery of our Roswell facility management system.
The decline in Mariner Networks' sales reflects the loss in August 1999 of
IBM as a significant OEM customer of its Frame product family. Gyyr's
revenues declined 6.1% in fiscal 2000 compared to fiscal 1999 primarily as
a result of declining sales of its analog based time-lapse recorder product
families. Gyyr made substantial investments in expanding its product line
to include a broad family of integrated security solutions, including the
acquisition of a line of digital time-lapse recorders. This product line
expansion was the result of our acquisition of the Security Products
Division of Digital Systems Processing, Inc. in December 1999.
Contributions of revenue in fiscal 2000 from the expanded product offerings
were not significant enough to offset the declining revenues from analog-
based time-lapse recorders.
Contract Revenues. Contract revenues increased 7.4% to $20.0 million in
fiscal 2001 compared to $18.7 million in fiscal 2000 and increased 40.0% in
fiscal 2000 compared to $13.3 million in fiscal 1999. During fiscal 1999,
we acquired Meyer Mohaddes Associates, Inc. and the assets of Viggen
Corporation as part of a broader strategy to significantly grow our
contract systems business in the ITS market. The growth in contract
revenues in fiscal 2001 and fiscal 2000 reflects the successful execution
of that strategy.
Contract revenues derived from Iteris represented 83.5% of total
contract revenues in fiscal 2000 compared to 64.9% of total contract
revenues in fiscal 1999. The increase in Iteris' contract revenues in both
fiscal 2001 and fiscal 2000 was offset by continued declines in contract
revenues derived from the sale of space-borne recorders and related service
and equipment to agencies of the United States Government. We have focused
our recent contract procurement efforts on commercial markets and the
markets for Iteris' products and services.
Gross Profit. Total gross profit increased 4.0% to $17.0 million in fiscal
2001, compared to $16.4 million in fiscal 2000, and decreased 33.2% in fiscal
2000 compared to $24.6 million in fiscal 1999. Total gross profit as a percent
of net sales and contract revenues increased to 22.1% in fiscal 2001, compared
to 20.3% in fiscal 2000, and declined from 29.5% in fiscal 1999. Gross profit
as a percent of net sales increased to 18.9% in fiscal 2001 compared to 18.0%
in fiscal 2000. Gross profit in fiscal 2001 is net of charges totaling $3.1
million, or 4.0% of net sales and contract revenues, related to the write-off
of inventories associated with discontinued product lines in our Gyyr and
Broadcast businesses. The charges were incurred in the third quarter of fiscal
2001 and were part of an overall restructuring announced in January 2001.
The increase in gross profit as a percent of net sales in fiscal 2001
reflects increased gross profit on sales of Iteris Vantage products which
comprised 17.5% of net sales in fiscal 2001 compared to 11.7% of net sales in
fiscal 2000. In addition to improvements in Vantage gross profits, the gross
profit performance in fiscal 2000 was
21
negatively impacted by pricing concessions to certain customers in our
Broadcast business. During fiscal 2000, gross profit on net sales was also
impaired due to our adjustments to inventory reserves and capitalized software
related to certain discontinued products and product options in Mariner
Networks, Broadcast and Gyyr.
Gross profit as a percent of contract revenues increased to 31.2% in fiscal
2001 compared to 28.0% in fiscal 2000. The increase in gross profit on contract
revenues in fiscal 2001 reflects improved gross profit performance in both
Iteris and Zyfer. We recognize contract revenues and related gross profit using
percentage of completion contract accounting, and the related gross profit
recognized in any given year is primarily affected by the underlying mix of
contract activity.
Gross profit as a percent of contract revenues decreased to 28.0% in fiscal
2000 compared to 32.4% in fiscal 1999. Lower gross profit on contract revenues
in fiscal 2000 reflect a mix of lower margin contract activity.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 9.4% to $41.8 million (or 54.2% of total net
sales and contract revenues) compared to $38.2 million (or 47.2% of total net
sales and contract revenues) in fiscal 2000, and increased 20.5% in fiscal 2000
compared to $31.7 million (or 38.0% of total net sales and contract revenues)
in fiscal 1999. During fiscal 2001, we increased expenditures for sales and
marketing and general and administrative by approximately $4.2 million in
Mariner Networks principally to fund its international sales and marketing
organization to support the roll-out of its Dexter product offering. The
increased expenditures were primarily in the area of salaries and related
benefits, travel and living, trade shows, and advertising and promotion. The
increase in sales and marketing expense in Mariner Networks was partially
offset by decreased expenditures by Gyyr and Broadcast, which were part of our
overall cost reduction plan. Iteris also experienced increased general and
administrative expense in fiscal 2001 related to the build up of its
administrative infrastructure to support its planned spin-off from Odetics,
originally planned for the quarter ended June 30, 2000. As a result of the
aborted public offering and spin-off, general and administrative expense in
fiscal 2001 included a charge of approximately $360,000 related to the write-
off of deferred public offering costs.
During fiscal 2000, we increased expenditures for sales and marketing and
general and administrative in Mariner Networks, Iteris and Broadcast.
Concurrent with the completion of development of Mariner Networks' Dexter
product and its progression to beta testing, we began building additional sales
and marketing and administrative functions to support anticipated revenue
growth. In preparation for the initial public offering of Iteris, we increased
sales and marketing expense and general and administrative expense to enable
Iteris to execute on its expansion plans and to function as an independent
public company. In connection with this proposed public offering, we also
adjusted the amortization periods for goodwill that arose upon the acquisition
of the assets of the Transportation Systems business of Rockwell, and Meyer,
Mohaddes Associates, Inc. The effect of the adjustment was an incremental
charge to amortization expense of $887,000 during fiscal 2000. Iteris also
experienced increased sales and marketing, and general and administrative
expenses as a result of its acquisitions of Meyer Mohaddes Associates in
October 1998, and of certain assets of Viggen Corporation in January 1999. In
addition, the increase in selling, general and administrative expense in fiscal
2000 reflects charges of approximately $500,000 for adjustment to the allowance
for doubtful accounts in Broadcast.
Research and Development Expense. Research and development expense increased
11.4% to $18.8 million (or 24.4% of total net sales and contract revenues) in
fiscal 2001 compared $16.9 million (or 20.9% of total net sales and contract
revenues) in fiscal 2000, and increased 50.9% in fiscal 2000 compared to $11.2
million (or 13.4% of total net sales and contract revenues) in fiscal 1999. For
competitive reasons, we closely guard the confidentiality of specific
development projects. The increase in research and development expense in
fiscal 2001 reflects increased spending primarily by Mariner Networks and
Iteris, partially offset by reductions ins spending by Gyyr and Broadcast. The
increase in research and development expense by Mariner Networks reflects
continued development of Dexter 3000, which was released for general
availability to the market in June 2001. The increase in Iteris research and
development expense largely represents expenditures to support its development
initiatives for its Personalized Traveler Information Systems and, to a
22
lesser extent, continued development of its AutoVue product offering. As part
of cost reduction initiatives completed in the quarter ended December 31, 2000,
Iteris substantially reduced spending to support development of its
Personalized Traveler Information Systems. Consequently, Iteris' research and
development expense in the three months ended March 31, 2001 declined from the
comparable three month period ended March 31, 2000. The reductions in research
and development expense in Gyyr and Broadcast reflect the result of our overall
expense reduction efforts.
The increase in research and development expense in fiscal 2000 partly
reflects the capitalization of certain development costs in fiscal 1999. During
fiscal 1999, $2.8 million of development costs for Roswell and $2.1 million of
development costs for Dexter were capitalized as qualified software development
costs. The increase in research and development expense in fiscal 2000 also
reflects increased expenditures by Iteris, Broadcast and Mariner Networks.
Iteris increased its development activities 72.1% during fiscal 2000 to support
its AutoVue product development. Broadcast continued to aggressively develop
its Roswell facility management system and completed the development of its
MicroStation product offering. All software development activities for
Broadcast during fiscal 2000 were charged as research and development expense.
Mariner Networks capitalized $300,000 of software development costs in fiscal
2000, significantly expanded its product development team and increased
research and development expenses 223.9% during fiscal 2000 compared to fiscal
1999 to support the completion of its development schedule for Dexter in order
to meet a targeted beta release of the product in the first quarter of fiscal
2001. Gyyr reduced its expenses for product development 27.6% in fiscal 2000
compared to fiscal 1999 in response to its efforts to reduce overall operating
expenses and because it had completed several development initiatives as of the
end of fiscal 1999. The change in Zyfer's product development expenses in
fiscal 2000 compared to fiscal 1999 was not significant.
Nonrecurring Charge. In December 2000, we recorded a nonrecurring charge of
$6.3 million. Approximately $1.3 million of the charge reflects severance
payments for staffing reductions, and the remainder represents non-cash charges
for asset write-downs and reserves established in connection with the
discontinuation of certain product lines.
Royalty Income. In connection with the settlement of our action against
StorageTek, we received proceeds, net of expenses and fees, of approximately
$38.4 million in October 1999, and $17.8 million in June 2000 in full
settlement of the amounts due us.
Interest Expense, Net. Interest expense, net reflects the net of interest
expense and interest income as follows:
Year Ended March 31,
--------------------
1999 2000 2001
------ ------ ------
Interest expense........................................ $1,928 $2,313 $ 2012
Interest income......................................... 121 265 250
------ ------ ------
Interest expense, net................................... $1,807 $2,048 $1,762
====== ====== ======
Interest expense decreased 13% in fiscal 2001 compared to fiscal 2000 and
increased 20.0% in fiscal 2000 compared to fiscal 1999. Interest expense
primarily reflects interest charges on our line of credit borrowings and
mortgage interest. The fluctuations in interest expense in fiscal 2001 and
fiscal 2000 represents changes in the average outstanding borrowings on our
line of credit to fund negative operating cash flow. Interest income in fiscal
2001 and fiscal 2000 is primarily related to interest earned on invested cash
received from our settlement with StorageTek. Interest income in fiscal 1999
was derived primarily from a note receivable due from ATL Products, Inc., our
former subsidiary. ATL repaid in full the outstanding balance of its note
receivable in July 1998.
Income Taxes. We have not provided income tax benefit for the losses
incurred in fiscal 2001, 2000 and 1999 due to the uncertainty as to the
ultimate realization of the benefit.
23
Liquidity and Capital Resources
During fiscal 2001 and 2000, we reported operating losses of $49.8 million
and $38.7 million, respectively, and we had a working capital deficiency of
$8.8 million at March 31, 2001. We financed our operations in fiscal 2001 and
2000 largely through cash received from the settlement of certain litigation
with StorageTek, debt and equity financings and, to a lesser extent, through
the sale of assets of certain of our subsidiaries.
In October 1999, we settled litigation with StorageTek in exchange for
license fees payable to us in the aggregate amount of $100.0 million, $80.0
million of which was paid on the settlement date (resulting in net cash to us
of $38.4 million after payment of the related expenses). In June 2000, we
amended the settlement agreement with StorageTek to provide for the
acceleration of the payment of the $20.0 million still owed to us. Under the
terms of the amendment, StorageTek paid us $17.8 million in cash during fiscal
2001 to complete the settlement.
During fiscal 2001, we used $20.1 million of cash to fund operations, which
reflects our net loss of $32.5 million, offset by non-cash charges of $5.0
million for depreciation and amortization, $4.0 million for the write off of
capitalized software and goodwill, and a $4.6 million reduction in net
operating assets and liabilities. During fiscal 2001, we also sold certain
assets of Zyfer and of our solid state recording product line for $1.9 million
in cash. In connection with these sales, we recorded a non-operating gain of
$1.2 million.
In fiscal 2000, we sold an option to purchase our principal facilities in
Anaheim California to Manchester Capital LLC for an aggregate purchase price of
$5.0 million. We used $5.6 million in cash in fiscal 2001 to repurchase this
option, which included accrued interest.
At March 31, 2001, we had $13.5 million outstanding on a $17.0 million line
of credit with Transamerica Business Credit. While this line of credit expired
on December 31, 2000, we received an extension until July 31, 2001. In
addition, due to the breach of certain financial and other covenants under this
line of credit, we entered into a forbearance agreement in May 2001 with
Transamerica that expires July 31, 2001. Under the terms of this forbearance
agreement and the extension, we are prohibited from making further borrowings
under the line of credit.
In May 2001, we received $16.0 million pursuant to a promissory note secured
by a first trust deed on our principal facilities in Anaheim, California. This
promissory note is due in May 2002 and bears annual interest at the rate of
10%. In connection with this loan, we issued warrants to this lender to
purchase 426,667 shares of our Class A common stock at an exercise price of $4
per share. If we prepay this note prior to six months following its issuance,
the lender, at its option, may convert up to $1.6 million of the principal
amount on this note into our Class A common stock at a conversion price of $4
per share.
Of the $16.0 million proceeds received from the promissory note financing,
we used approximately $6 million to retire the pre-existing first trust deed on
our Anaheim real property and $5.9 million to reduce the borrowings due
Transamerica under the line of credit to $7.6 million in May 2001 in accordance
with the terms of the forbearance agreement. We used the balance of the
proceeds from this financing, after payment of expenses, for general working
capital purposes.
In January 2001, we announced that in response to tightening credit and
capital markets we were taking a number of actions to reduce our operating
expenses, improve our gross profit and operating profit performance, and narrow
our negative operating cash flow and operating losses. Concurrent with those
actions, we incurred charges in the three months ended December 31, 2000
totaling $9.4 million. Approximately $1.3 million of these charges incurred
were cash charges related to severance payments for staffing reductions and the
balance were non-cash charges related to asset write-downs and reserves
established in connection with the discontinuation of certain products.
We expect that our operations will continue to use net cash for the
foreseeable future. During fiscal 2002, we expect to have an ongoing need to
raise cash by securing additional debt or equity financing, or by divesting
certain assets to fund our operations until they return to profitability and
positive operating cash
24
flow. We are currently considering the sale and leaseback of our principal
operating facilities in Anaheim, California and are in negotiations with a
financial institution to provide a new line of credit. We cannot be certain
that our plan to sell and leaseback of our facilities will be successful, that
we will be able to secure a new line of credit on terms acceptable to us, or at
all, or that our existing lender will continue to extend our existing borrowing
relationship. Our future cash requirements will be highly dependent on our
ability to control expenses as well as the successful execution of the revenue
plans by each of our businesses. As a result, any projections of future cash
requirements and cash flows are subject to substantial uncertainty.
These conditions, together with our recurring operating losses, raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to interest rate risk primarily from our long-term debt
arrangements. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate changes.
The following table provides information about our debt obligations that are
sensitive to changes in interest rates.
Expected maturity date March 31,
------------------------------------------------
Fair
2002 2003 2004 2005 Total value
------ ------ ------ ------ ------- -------
(dollars in thousands)
Fixed rate debt.............. $6,990 $1,804 $1,653 $1,343 $11,790 $11,790
Average interest rate........ 8.87% 9.18% 9.36% 9.36% 9.02%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in thisForm 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. The information under the heading "Election
of Directors," appearing in our proxy statement, is incorporated herein by
reference.
(b) Identification of Executive Officers. The information under the heading
"Executive Compensation and Other Information," appearing in our proxy
statement, is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information under
the heading "Executive Compensation and Other Information," appearing in our
proxy statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation," appearing in our
proxy statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Principal Stockholders and Common Stock
Ownership of Certain Beneficial Owners and Management," appearing in our proxy
statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions," appearing in our
proxy statement, is incorporated herein by reference.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following financial statements of Odetics are
included in a separate section of this Annual Report on Form 10-K commencing on
the pages referenced below:
Page
----
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets as of March 31, 2000 and 2001............. F-3
Consolidated Statements of Operations for the years ended March 31,
1999, 2000 and 2001.................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1999, 2000 and 2001........................................ F-5
Consolidated Statements of Cash Flows for the years ended March 31,
1999, 2000 and 2001.................................................. F-6
Notes to Consolidated Financial Statements............................ F-7
2. Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts......................... S-1
All other schedules have been omitted because they are not required or the
required information is included in our consolidated financial statements and
notes thereto.
3. Exhibits.
3.1 Certificate of Incorporation of Odetics, as amended (incorporated by
reference to Exhibit 19.2 to Odetics' Quarterly Report on Form 10-Q for
the quarter ended September 30, 1987).
3.2 Bylaws of Odetics, as amended (incorporated by reference to Exhibit 4.2
to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as
filed with the SEC on July 6, 1993).
4.1 Specimen of Class A Common Stock and Class B Common Stock certificates
(incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Odetics'
Registration Statement on Form S-1
(Reg. No. 033-67932) as filed with the SEC on September 30, 1993).
4.2 Form of rights certificate for Odetics' preferred stock purchase rights
(incorporated by reference to Exhibit A of Exhibit 4 to Odetics' Current
Report on Form 8-K as filed with the SEC on May 1, 1998).
10.1 Profit Sharing Plan and Trust (incorporated by reference to Exhibit 10.3
to Odetics' Amendment No. 2 to the Registration Statement on Form S-8
(Reg. No. 002-98656) as filed with the SEC on May 5, 1988).
10.2 Form of Executive Deferral Plan between Odetics and certain employees of
Odetics (incorporated by reference to Exhibit 10.4 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1988).
10.3 Loan and Security Agreement dated December 28, 1998 among Transamerica
Business Credit Corporation, Odetics and the subsidiaries of Odetics, and
Schedule to Loan Agreement (incorporated by reference to the same exhibit
number in Odetics' Annual Report on Form 10-K for the year ended March
31, 1999).
10.4 Amendment to Loan Agreement dated December 28, 1998 among Transamerica
Business Credit Corporation, Odetics and the subsidiaries of Odetics, and
related Schedule to Loan Agreement dated December 28, 1998 (incorporated
by reference to the same exhibit number in Odetics' Annual Report on Form
10-K for the year ended March 31, 1999).
27
10.5 Revolving Credit Note dated December 28, 1998 payable to Transamerica
Business Credit Corporation in the original principal amount of
$17,000,000 (incorporated by reference to the same exhibit number in
Odetics' Annual Report on Form 10-K for the year ended March 31, 1999).
10.6 Letter of Credit Agreement dated December 28, 1998 among Transamerica
Business Credit Corporation, Odetics and the subsidiaries of Odetics
(incorporated by reference to the same exhibit number in Odetics' Annual
Report on Form 10-K for the year ended March 31, 1999).
10.7 Security Agreement in Copyrighted Works dated December 28, 1998 between
Transamerica Business Credit Corporation and Odetics (incorporated by
reference to the same exhibit number in Odetics' Annual Report on Form
10-K for the year ended March 31, 1999).
10.8 Patent and Trademark Security Agreement dated December 28, 1998 between
Transamerica Business Credit Corporation and Odetics (incorporated by
reference to the same exhibit number in Odetics' Annual Report on Form
10-K for the year ended March 31, 1999).
10.9 Cross-Corporate Continuing Guaranty dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the subsidiaries
of Odetics (incorporated by reference to the same exhibit number in
Odetics' Annual Report on Form 10-K for the year ended March 31, 1999).
10.10 Amendments to Loan Agreement dated December 22, 2000, February 28, 2001
and May 29, 2001 among Transamerica Business Credit Corporation and
Odetics and its subsidiaries.
10.11 Forbearance Agreement dated May 28, 2001 among Transamerica Business
Credit Corporation and Odetics and its subsidiaries.
10.12 Form of Indemnity Agreement entered into by Odetics and certain of its
officers and directors (incorporated by reference to Exhibit 19.4 to
Odetics' Quarterly Report on Form 10-Q for the quarter ended September
30, 1988).
10.13 Schedule of officers and directors covered by Indemnity Agreement
(incorporated by reference to Exhibit 10.9.2 to Amendment No. 1 to
Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as
filed with the SEC on July 6, 1993).
10.14 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust
(incorporated by reference to Exhibits 4.3.1 and 4.3.2, respectively, to
Amendment No. 3 to Odetics' Registration Statement on Form S-3 (Reg. No.
002-86220) as filed with the SEC on June 13, 1990).
10.15 1997 Stock Incentive Plan of Odetics (incorporated by reference to
Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000).
10.16 Form of Notice of Grant of Stock Option (incorporated by reference to
Exhibit 99.2 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000)
10.17 Form of Stock Option Agreement (incorporated by reference to Exhibit
99.3 to Odetics' Registration Statement on Form S-8 (File No. 333-30396)
as filed with the SEC on February 14, 2000).
10.18 Form of Addendum to Stock Option Agreement--Involuntary Termination
Following Corporate Transaction or Change in Control (incorporated by
reference to Exhibit 99.4 to Odetics' Registration Statement on Form S-8
(File No. 333-30396) as filed with the SEC on February 14, 2000).
10.19 Form of Addendum to Stock Option Agreement--Limited Stock Appreciation
Rights (incorporated by reference to Exhibit 99.5 to Odetics'
Registration Statement on Form S-8 (File No. 333-30396) as filed with
the SEC on February 14, 2000).
10.20 Form of Stock Issuance Agreement (incorporated by reference to Exhibit
99.6 to Odetics' Registration Statement on Form S-8 (File No. 333-30396)
as filed with the SEC on February 14, 2000)
10.21 Form of Addendum to Stock Issuance Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control (incorporated by
reference to Exhibit 99.7 to Odetics' Registration Statement on Form S-8
(File No. 333-30396) as filed with the SEC on February 14, 2000).
10.22 Form of Notice of Grant of Automatic Stock Option--Initial Grant filed
as Exhibit 99.8 filed as Exhibit (incorporated by reference to Exhibit
99.8 to Odetics' Registration Statement on Form S-8 (File No. 333-30396)
as filed with the SEC on February 14, 2000).
28
10.23 Form of Notice of Grant of Automatic Stock Option--Annual Grant
(incorporated by reference to Exhibit 99.9 to Odetics' Registration
Statement on Form S-8 (File No. 333-30396) as filed with the SEC on
February 14, 2000).
10.24 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the
(incorporated by reference to Exhibit 99.10 to Odetics' Registration
Statement on Form S-8 (File No. 333-30396) as filed with the SEC on
February 19, 2000).
10.25 Rights Agreement dated April 24, 1998 between Odetics and BankBoston,
N.A., which includes the form of Certificate of Designation for the
junior participating preferred stock as Exhibit A, the form of rights
certificate as Exhibit B and the summary of rights to purchase Series A
preferred shares as Exhibit C (incorporated by reference to Exhibit 4 to
Odetics' Current Report on Form 8-K as filed with the SEC on May 1,
1998).
10.26 1994 Long-Term Equity Plan of Odetics (incorporated by reference to
Exhibit 4.3 to Odetics' Registration Statement on Form S-8 (File No.
333-05735) as filed with the SEC on June 11, 1996).
10.27 Subordinated Convertible Note Purchase Agreement dated January 25, 2000
between Iteris, Inc. and DaimlerChrysler GmbH (incorporated by reference
to Exhibit 10.31 to Odetics' Annual Report on Form 10-K as filed with
the SEC on June 29, 2000).
10.28 Subordinated Convertible Note dated January 25, 2000 between Iteris,
Inc. and DaimlerChrysler GmbH (incorporated by reference to Exhibit
10.32 to Odetics' Annual Report on Form 10-K as filed with the SEC on
June 29, 2000).
10.29 Securities Purchase Agreement dated May 29, 2001, by and between Odetics
and Castle Creek Technology Partners LLC. Included from the Agreement
are Exhibit A (form of Senior Convertible Promissory Note), Exhibit B-1
(form of Stock Purchase Warrant), Exhibit B-2 (form of Stock Purchase
Warrant), Exhibit B-3 (form of Stock Purchase Warrant), and Exhibit D
(form of Deed of Trust) (incorporated by reference to Exhibit 99.1 to
Odetics' Current Report on Form 8-K as filed with the SEC on June 1,
2001).
10.30 Registration Rights Agreement dated May 29, 2001, by and between Odetics
and Castle Creek Technology Partners LLC (incorporated by reference to
Exhibit 99.2 to Odetics' Current Report on Form 8-K as filed with the
SEC on June 1, 2001).
10.31 Amendment to Rights Agreement, dated May 21, 2001, by and between
Odetics and Fleet National Bank (a.k.a. Bank Boston, N.A. (incorporated
by reference to Exhibit 99.4 to Odetics' Current Report on Form 8-K as
filed with the SEC on June 1, 2001).
21 Subsidiaries of Odetics (incorporated by reference to Exhibit 21 to
Odetics' Annual Report on Form 10-K as filed with the SEC on June 29,
2000).
23.1 Consent of Independent Auditors.
(b) Reports on Form 8-K
On August 16, 2000, we filed a Current Report on Form 8-K to announce that
Iteris, Inc., a subsidiary of Odetics, Inc., reached an agreement with Ford
Motor Company to become the exclusive supplier of the optical lane departure
warning systems to be installed on future Ford, Lincoln and Mercury badged
vehicles produced and sold in the United States. Under terms of the agreement,
Ford will receive warrants to purchase up to approximately 9.9% of Iteris
common stock if Ford meets predetermined Auto Vue purchase volumes over the six
year term of the agreement. The warrants will not be fully exercisable until
Ford purchases a number of units that results in sales of approximately $90
million dollars over the life of the agreement. However, Ford has no obligation
to purchase any Auto Vue products under the agreement. Ford will not play a
role in the management of Iteris.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Anaheim, State of California, on July 13, 2001.
ODETICS, INC.
By: _________________________________
Joel Slutzky
Chief Executive Officer, President
and Chairman of the Board
POWER OF ATTORNEY
We, the undersigned officers and directors of Odetics, Inc., do hereby
constitute and appoint Joel Slutzky and Gregory A. Miner, and each of them, our
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Joel Slutzky Chief Executive Officer, July 13, 2001
____________________________________ President and Chairman of
Joel Slutzky the Board (principal
executive officer)
/s/ Crandall Gudmundson Director July 13, 2001
____________________________________
Crandall Gudmundson
/s/ Jerry Muench Director July 13, 2001
____________________________________
Jerry Muench
/s/ Kevin C. Daly Director July 13, 2001
____________________________________
Kevin C. Daly
/s/ Gary Smith Vice President and July 13, 2001
____________________________________ Controller (principal
Gary Smith accounting officer)
/s/ Thomas L. Thomas Director July 13, 2001
____________________________________
Thomas L. Thomas
30
Signature Title Date
--------- ----- ----
/s/ John Seazholtz Director July 13, 2001
____________________________________
John Seazholtz
/s/ Paul E. Wright Director July 13, 2001
____________________________________
Paul E. Wright
/s/ Gregory A. Miner Vice President, Director and July 13, 2001
____________________________________ Chief Operating Officer and
Gregory A. Miner Chief Financial Officer
(principal financial
officer)
31
ODETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of March 31, 2000 and 2001................ F-3
Consolidated Statements of Operations for the years ended March 31, 1999,
2000 and 2001........................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1999, 2000 and 2001................................................. F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1999,
2000 and 2001........................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Odetics, Inc.
We have audited the accompanying consolidated balance sheets of Odetics,
Inc. as of March 31, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 2001. Our audits also included the financial
statement schedule listed in Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Odetics, Inc. at March 31, 2000 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company's recurring losses from
operations and working capital deficit raise substantial doubt about its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Orange County, California
May 15, 2001, except for Notes 1 and 16,
as to which the date is May 29, 2001
F-2
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31
------------------
2000 2001
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 4,880 $ 2,218
Trade accounts receivable, net of allowance for doubtful
accounts of $2,068 in 2000 and $1,644 in 2001........... 13,576 14,380
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 3,283 3,296
Inventories:
Finished goods........................................... 1,203 1,644
Work in process.......................................... 859 51
Materials and supplies................................... 16,150 11,371
Prepaid expenses and other............................... 1,978 1,078
-------- --------
Total current assets................................... 41,929 34,038
Property, plant and equipment:
Land..................................................... 2,060 2,060
Buildings and improvements............................... 18,868 18,982
Equipment................................................ 30,652 32,667
Furniture and fixtures................................... 2,676 2,692
Allowances for depreciation.............................. (33,520) (35,266)
-------- --------
20,736 21,135
Capitalized software costs, net............................ 6,482 2,090
Goodwill, net of accumulated amortization of $2,723 in 2000
and $1,924 in 2001........................................ 12,004 10,622
Other assets............................................... 699 176
-------- --------
Total assets............................................... $ 81,850 $ 68,061
======== ========
F-3
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS--(continued)
(In thousands, except share and per share amounts)
March 31
------------------
2000 2001
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable................................... $ 10,702 $ 10,644
Accrued payroll and related.............................. 4,892 4,559
Accrued expenses......................................... 2,313 2,354
Contract reserve......................................... 3,056 2,290
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 1,303 2,575
Revolving line of credit................................. 3,706 13,471
Current portion of long-term debt........................ 3,102 6,990
-------- --------
Total current liabilities.................................. 29,074 42,883
Long-term debt, less current portion....................... 11,666 4,800
Other liabilities.......................................... 5,000 --
Commitments (Note 12)
Stockholders' equity:
Preferred stock:
Authorized shares--2,000,000
Issued and outstanding--none........................... -- --
Common stock, $.10 par value:
Authorized shares--10,000,000 of Class A and 2,600,000
of Class B
Issued and outstanding shares--8,183,470 of Class A and
1,051,541 of Class B at March 31, 2000; 9,468,620 of
Class A and 1,035,841 of Class B at March 31, 2001.... 923 1,050
Paid-in capital.......................................... 61,200 78,548
Treasury stock, 4,564 and 93 shares in 2000 and 2001,
respectively............................................ (22) (1)
Notes receivable from employees ......................... (61) (51)
Accumulated other comprehensive income (loss)............ 262 (436)
Accumulated deficit...................................... (26,192) (58,732)
-------- --------
Total stockholders' equity................................. 36,110 20,378
-------- --------
Total liabilities and stockholders' equity................. $ 81,850 $ 68,061
======== ========
See accompanying notes.
F -4
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
Year ended March 31
----------------------------
1999 2000 2001
-------- -------- --------
Net sales and contract revenues:
Net sales..................................... $ 70,042 $ 62,041 $ 57,030
Contract revenues............................. 13,331 18,666 20,039
-------- -------- --------
83,373 80,707 77,069
Costs and expenses:
Cost of sales................................. 49,816 50,883 46,244
Cost of contract revenues..................... 9,007 13,431 13,781
Selling, general and administrative expense... 31,670 38,173 41,780
Research and development expense.............. 11,191 16,888 18,812
Special charge................................ -- -- 6,285
-------- -------- --------
101,684 119,375 126,902
-------- -------- --------
Loss from operations............................ (18,311) (38,668) (49,833)
Non-operating income (expense)
Royalty income................................ -- 38,437 17,825
Gain on sale of product lines................. -- -- 1,230
Interest expense, net......................... (1,807) (2,048) (1,762)
-------- -------- --------
Net loss........................................ $(20,118) $ (2,279) $(32,540)
======== ======== ========
Basic and diluted loss per share................ $ (2.57) $ (0.25) $ (3.26)
======== ======== ========
Shares used in computing basic and diluted loss
per share...................................... 7,820 9,089 9,977
======== ======== ========
See accompanying notes.
F-5
ODETICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common stock
---------------------
Shares
outstanding
-------------
Class Class Notes Accumulated
A B receivable other Compre-
common common Paid-in Treasury from comprehensive Accumulated hensive
stock stock Amount capital stock employees income (loss) deficit Total income
------ ------ ------ ------- -------- ---------- ------------- ----------- -------- --------
Balance at March 31,
1998................... 6,203 1,062 $ 726 $45,240 $(239) $(3,377) $ 25 $ (3,795) $ 38,580
Issuances of common
stock ............... 1,736 -- 175 14,339 -- -- -- -- 14,514
Conversion of Class B
common stock......... 2 (2) -- -- -- -- -- -- --
Purchase of treasury
stock................ -- -- -- -- (1) -- -- -- (1)
Payments on notes
receivable........... -- -- -- -- -- 3,281 -- -- 3,281
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 67 -- 67 $ 67
Net loss.............. -- -- -- -- -- -- -- (20,118) (20,118) (20,118)
----- ----- ------ ------- ----- ------- ----- -------- -------- --------
Balance at March 31,
1999................... 7,941 1,060 901 59,579 (240) (96) 92 (23,913) 36,323 $(20,051)
========
Issuances of common
stock ............... 234 -- 22 1,621 218 -- -- -- 1,861
Conversion of Class B
common stock......... 8 (8) -- -- -- -- -- -- --
Payments on notes
receivable........... -- -- -- -- -- 35 -- -- 35
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 170 -- 170 $ 170
Net loss.............. -- -- -- -- -- -- -- (2,279) (2,279) (2,279)
----- ----- ------ ------- ----- ------- ----- -------- -------- --------
Balance at March 31,
2000................... 8,183 1,052 923 61,200 (22) (61) 262 (26,192) 36,110 $ (2,109)
========
Issuances of common
stock ............... 1,270 -- 127 17,348 21 -- -- -- 17,496
Conversion of Class B
common stock......... 16 (16) -- -- -- -- -- -- --
Payments on notes
receivable........... -- -- -- -- -- 10 -- -- 10
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (698) -- (698) $ (698)
Net loss.............. -- -- -- -- -- -- -- (32,540) (32,540) (32,540)
----- ----- ------ ------- ----- ------- ----- -------- -------- --------
Balance at March 31,
2001................... 9,469 1,036 $1,050 $78,548 $ (1) $ (51) $(436) $(58,732) $ 20,378 $(33,238)
===== ===== ====== ======= ===== ======= ===== ======== ======== ========
See accompanying notes.
F-6
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended March 31
----------------------------
1999 2000 2001
-------- -------- --------
Operating activities
Net loss......................................... $(20,118) $ (2,279) $(32,540)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 5,205 7,185 4,967
Write-off of capitalized software.............. -- -- 4,014
Gain on sale of product lines.................. -- -- (1,230)
Provision for losses on accounts receivable.... 332 745 78
Provision for deferred income taxes............ 915 -- --
Changes in operating assets and liabilities
(Note 14)..................................... 1,560 1,179 4,621
-------- -------- --------
Net cash provided by (used in) operating
activities.................................. (12,106) 6,830 (20,090)
Investing activities
Purchases of property, plant and equipment, net.. (2,747) (2,169) (2,502)
Repurchase of real estate option................. -- -- (5,000)
Proceeds from sale of product lines.............. -- -- 1,877
Proceeds from option to sell real estate......... -- 5,000 --
Software development costs....................... (4,944) (330) --
Purchase of net assets of acquired business...... -- (1,500) (42)
Net cash received from ATL....................... 10,019 -- --
Other............................................ -- 213 (688)
-------- -------- --------
Net cash provided by (used in) investing
activities.................................. 2,328 1,214 (6,355)
Financing activities
Proceeds from line of credit and long-term
borrowings...................................... 44,527 23,966 26,644
Principal payments on line of credit and long-
term debt....................................... (45,089) (29,528) (19,857)
Proceeds from issuance of common stock........... 9,996 1,611 16,996
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 9,434 (3,951) 23,783
-------- -------- --------
Increase (decrease) in cash...................... (344) 4,093 (2,662)
Cash and cash equivalents at beginning of year... 1,131 787 4,880
-------- -------- --------
Cash and cash equivalents at end of year......... $ 787 $ 4,880 $ 2,218
======== ======== ========
See accompanying notes.
F-7
ODETICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
1. Formation and Operations
Odetics, Inc. (the Company) serves as a developer of technology oriented
companies, each with its own marketplace, customers and products, including the
Company's wholly-owned subsidiaries Gyyr, Inc., Broadcast, Inc., Mariner
Networks, Inc., Zyfer, Inc., Odetics Europe Limited, Odetics GYYR Limited,
Odetics Mariner Limited, Odetics Asia Pacific Pte. Ltd., and its 93% owned
subsidiary, Iteris, Inc.
In January 2001, the Company announced that in response to tightening credit
and capital markets it was taking a number of actions to reduce its operating
expenses, improve its gross profit and operating profit performance, and narrow
its negative operating cash flow and operating losses. Concurrent with those
actions, the Company incurred charges in the three months ended December 31,
2000 totaling $9.4 million (Note 4). Including these charges, during fiscal
2001 and 2000, the Company experienced operating losses of $49.8 million and
$38.7, respectively, and at March 31, 2001 had a working capital deficit of
$8.8 million.
Contributing to the working capital deficit at March 31, 2001, is $13.5
million of borrowings from Transamerica Business Credit under a $17.0 million
line of credit. This line of credit expired on December 31, 2000, however, the
Company received an extension until July 31, 2001. Due to the breach of certain
financial and other covenants under this line of credit, the Company entered
into a forbearance agreement with Transamerica in May 2001. Under the terms of
this forbearance agreement and the extension, the Company is prohibited from
making any further borrowings under the line of credit.
The Company financed its operations in fiscal 2000 and 2001 largely through
cash received from the settlement of certain litigation with StorageTek (Note
15), debt and equity financings and, to a lesser extent, through the sale of
assets of certain of its subsidiaries.
In May 2001, the Company received $16.0 million pursuant to a promissory
note secured by a first trust deed on its principal facilities in Anaheim,
California. This promissory note is due in May 2002 and bears annual interest
at the rate of 10%. Of the $16.0 million of proceeds received from the
promissory note financing, the Company used approximately $6.0 million to
retire the pre-existing first trust deed on its Anaheim real property and $5.9
million to reduce the borrowings due Transamerica under the line of credit to
$7.6 million in accordance with the terms of the forbearance agreement. The
balance of the proceeds from this financing, after payment of expenses, is
available to the Company for general working capital purposes.
The Company expects that its operations will continue to use net cash for
the foreseeable future. During fiscal 2002, the Company expects to have an
ongoing need to raise cash by securing additional debt or equity financing, or
by monetizing (divesting) certain assets to fund its operations until they
return to profitability and positive operating cash flow.
The Company is currently considering the sale and leaseback of its principal
operating facilities in Anaheim, California and is in negotiations with a
financial institution to provide a new line of credit. However, the Company
cannot be certain that its plan to sell and leaseback of its facilities will be
successful, that it will be able to secure a new line of credit on terms
acceptable to us, or at all, or that its existing lender will continue to
extend its existing borrowing relationship. The Company's future cash
requirements will be highly dependent on its ability to control expenses as
well as the successful execution of the revenue plans by each of our
businesses. As a result, any projections of future cash requirements and cash
flows are subject to substantial uncertainty.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments to reflect the possible future
F-8
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effects on the recoverability and classification of assets or liabilities that
may result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowances for doubtful accounts and deferred tax assets, inventory
reserves, certain accrued liabilities, costs to complete long-term contracts
and estimates of future cash flows used to determine the recoverability of long
lived assets.
Revenue Recognition
Product revenues and related cost of sales are recognized on the date of
shipment or, if required, upon acceptance by the customer, provided that the
Company believes collectibility of the net sales amount is probable.
Accordingly, at the date revenue is recognized, the significant uncertainties
concerning the sale have been resolved.
Contract revenues is derived primarily from long-term contracts with
governmental agencies. Contract revenue includes costs incurred plus a portion
of estimated fees or profits determined on the percentage of completion method
of accounting based on the relationship of costs incurred to total estimated
costs. Any anticipated losses on contracts are charged to earnings when
identified. Changes in job performance and estimated profitability, including
those arising from contract penalty provisions and final contract settlements
may result in revisions to cost and revenue and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenue
when their realization is reasonably assured.
Certain products sold by the Company include software which is integral to
the functionality of the product. When such products do not require significant
production, modification or customization of the software, revenue is
recognized upon delivery, assuming the fee is fixed and collectibility is
probable. If an arrangement requires significant production, modification or
customization of the software, the arrangement is accounted for on the
percentage of completion method of accounting as costs are incurred.
Revenues from follow-on service and support, for which the Company charges
separately, are recognized when earned. Revenues from computer software
maintenance agreements are recognized ratably over the term of the agreements.
When computer software maintenance is included in a software license agreement,
an appropriate portion of the license fee is deferred and recognized over the
maintenance period.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities of less than ninety days.
F-9
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and within amounts provided through
the allowances for doubtful accounts. At March 31, 2000 and 2001, accounts
receivable from governmental agencies and prime government contractors were
approximately $3,639,000 and $3,719,000, respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, and the current portion of long-
term debt approximate the carrying value because of the short period of time
to maturity. The fair value of long-term debt approximates carrying value
because the related rates of interest approximate current market rates and has
variable rates of interest.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Buildings are
depreciated using the straight-line method over their estimated useful lives
up to a period of forty years. Equipment, furniture and fixtures, including
assets recorded under capital lease obligations, are depreciated principally
by the declining balance method over their estimated useful lives ranging from
four to eight years.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company believes no impairment of the carrying value of its
long-lived assets, inclusive of goodwill, existed at March 31, 2001. The
Company's analysis was based on an estimate of future undiscounted cash flows
using forecasts contained in the Company strategic plan. It is at least
reasonably possible that the Company's estimate of future undiscounted cash
flows may change during fiscal 2002. If the Company's estimate of future
undiscounted cash flow should change or if the strategic plan is not achieved,
future analyses may indicate insufficient future undiscounted cash flows to
recover the carrying value of the Company's long-lived assets, in which case
such assets would be written down to estimated fair value.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value
of the net assets of acquired entities, is being amortized using the straight-
line method over the estimated useful lives ranging from three to fifteen
years.
Research and Development Expenditures
Software development costs incurred subsequent to determination of
technical feasibility are capitalized. Amortization of capitalized software
costs is provided on a product-by-product basis at the greater of the amount
computed using (a) the ratio of current gross revenues for the product to the
total of current and anticipated future gross revenues or (b) the straight-
line method over the remaining estimated economic life of the product.
Amortization begins when product is available for general release to
customers. Generally, an original estimated economic life of two to five years
is assigned to capitalized software development costs.
F-10
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, 2000 and 2001, software development costs were amortized
to cost of sales totaling $1,063,000, $1,515,000 and $940,000, respectively.
During fiscal 2001, the Company discontinued certain product lines, resulting
in the write-off of $3.5 million of previously capitalized software development
costs (Note 4).
All other research and development expenditures are charged to expense in
the period incurred.
Warranty
The Company provides a warranty of one to two years on all products and
records a related provision for estimated warranty costs at the date of the
sale. The estimated warranty liability at March 31, 2000 and 2001 was $596,000
and $389,000, respectively.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, establishes standards
for reporting and displaying comprehensive income (loss) and its components in
the consolidated financial statements. For the Company, the only component of
accumulated other comprehensive income (loss) is the cumulative foreign
currency translation adjustment recorded in stockholders' equity.
Income Taxes
Deferred income tax assets and liabilities are computed for differences
between financial statement and tax basis of assets and liabilities based on
enacted tax laws and rates applicable to the period in which differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more likely than
not to be realized. The provision for income taxes is the taxes payable or
refundable for the period plus or minus the change during the period in
deferred income tax assets and liabilities.
Loss Per Share
Basic and diluted loss per share is computed using the weighted average
number of shares of common stock outstanding during the year and excludes the
anti-dilutive effects of options.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation
("Statement 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, if the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the definition of employee for purposes of applying Accounting
Practice Board Opinion No. 25, Accounting for Stock Issued to Employees, the
criteria for determining whether a plan qualifies as a
F-11
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
44 did not have a material effect on the Company's financial position or
results of operations.
To calculate the pro forma information required by Statement 123, the
Company uses the Black-Scholes option pricing model. The Black-Scholes model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's option, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expense
totaled $2,622,000, $2,488,000 and $3,491,000 in the years ended March 31,
1999, 2000 and 2001, respectively.
Derivative Instruments and Hedging Activities
In June 1998 Statement of Financial Accounting Standard No. 133, Accounting
for Derivative Instruments and Hedging Activities ("Statement 133"), was
issued, which establishes new standards for recording derivatives in financial
statements. This statement requires recording all derivative instruments as
assets or liabilities, measured at fair value. Statement 133, as amended, is
effective for fiscal years beginning after June 15, 2000. Management does not
anticipate the adoption of this statement will have a significant impact on the
consolidated results of operations or financial position of the Company.
Reclassifications
Certain amounts in the 1999 and 2000 consolidated financial statements have
been reclassified to conform with the 2001 presentation.
3. Acquisitions and Dispositions
On September 12, 1998, the Company acquired International Media Integration
Services Limited, a United Kingdom corporation (IMIS), pursuant to the terms of
a Sale and Purchase of Shares Agreement whereby the Company purchased all of
the issued and outstanding shares of stock of IMIS for an aggregate purchase
price of $970,000 which was paid in 173,214 shares of the Company's Class A
common stock. The acquisition has been accounted for as a purchase, and the
purchase price has been allocated to the fair value of the net assets acquired,
primarily acquired technology, which is being amortized over its expected
useful life of 5 years.
On October 16, 1998, the Company, through its subsidiary, Iteris, Inc.,
acquired Meyer, Mohaddes Associates, Inc., a provider of transportation,
engineering and planning services (MMA). Pursuant to the terms of the merger
agreement, the Company purchased all of the issued and outstanding shares of
stock of MMA for $4.3 million, by issuing 55,245 shares of the Company's Class
A common stock valued at $250,000 and 810,153 shares of Iteris, Inc.'s common
stock after giving effect to the purchase price adjustment required by the
merger agreement and a 1.874916-to-1 split of Iteris common stock. The results
of operations of MMA are included in the Company's consolidated results of
operations from the date of acquisition.
F-12
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The merger agreement provided for MMA shareholders to receive additional
shares of the Company's Class A common stock with a then market value of
$250,000 at each of April 16, 1999, October 16, 1999, April 16, 2000, October
16, 2000 and April 16, 2001 in the event the Company did not consummate an
initial public offering of the common stock of Iteris, Inc. by each and any of
those dates. Pursuant to this provision, Odetics issued an additional 164,461
shares of its Class A common stock to the MMA shareholders through April 16,
2001, which was recorded by the Company as additional goodwill. In addition, if
Iteris does not complete its initial public offering by October 2001, then the
holders of the Iteris common stock issued in this transaction will have the
right to require Odetics to repurchase the Iteris common stock for a purchase
price of $10 per share of Iteris. At any time prior to the initial public
offering of Iteris, Odetics has the right to require these shareholders to sell
all of their shares of Iteris common stock at a purchase price of $10 per
share. Odetics has the option to pay the purchase price for theses shares in
cash or in Odetics' Class A common stock valued as of five business days prior
to the date of the event triggering the payment.
On January 19, 1999, the Company, through its subsidiary, Iteris, Inc.,
acquired certain assets and assumed certain liabilities of Viggen Corporation,
a provider of transportation, engineering and planning services, for an
aggregate purchase price of $275,000 evidenced by the issuance of 27,603 shares
of the Company's Class A common stock which were issued in April 1999. The
acquisition has been accounted for as a purchase and the purchase price,
including direct costs of the acquisition, has been allocated to the fair value
of the net assets acquired with the excess approximating $746,000 allocated to
goodwill. The results of operations of Viggen are included in the Company's
consolidated results of operations from the date of acquisition.
On December 1, 1999, the Company through its wholly owned subsidiary, Gyyr,
Inc., acquired the security products division of Digital Processing Systems,
Inc. (DPS), a manufacturer of digital security recorder products. Pursuant to
the terms of the Asset Purchase Agreement, the Company purchased certain assets
and assumed certain liabilities of DPS for an aggregate purchase price of
approximately $3.5 million. The Company paid $1.5 million on December 1, 1999
and $1 million on December 1, 2000. The final payment of $1 million is due on
December 1, 2001. This acquisition was accounted for as a purchase and
accordingly, the result of operations for DPS are included in the Company's
consolidated results of operations from the date of acquisition. The excess of
cost over the fair value of the net assets of approximately $3.4 million has
been recorded as goodwill.
During fiscal 2001, the Company sold certain assets of its sold state
recording product line and of its Zyfer subsidiary for cash proceeds of $1.9
million. In connection with these sales the Company recorded gains aggregating
$1.2 million.
Pro forma information related to these transactions is not material to the
Company's historical consolidated results of operations.
4. Special Charge
During fiscal 2001, the Company approved a number of actions to reduce
operating expenses and improve profitability and cash flows. These actions
included a reduction in workforce of 104 employees and the discontinuance of
certain product lines. As a result of these actions the company recorded the
following as special charge (in thousands):
Severance and related costs.......................................... $1,305
Write-off of capitalized software.................................... 3,452
Write-off of goodwill................................................ 562
Write-off deferred costs............................................. 966
------
$6,285
======
F-13
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Company reserved or wrote-off inventory in the amount of
$3.1 million, primarily related to discontinued products in its Broadcast and
Gyyr subsidiaries. This charge is included in cost of sales in the accompanying
consolidated statement of operations.
5. Related Party Transaction
In July 1999, the Company sold an option to an investment company controlled
by certain officers and shareholders of the Company, for an aggregate purchase
price of $5.0 million to purchase certain real property of Odetics. In August
2000 the Company repurchased the option for $5.6 million which represented the
original purchase price plus accrued interest.
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
March 31
---------------
2000 2001
------- -------
(In thousands)
Costs incurred on uncompleted contracts..................... $21,971 $14,054
Estimated earnings.......................................... 1,648 1,054
------- -------
23,619 15,108
Less billings to date....................................... 21,639 14,387
------- -------
$ 1,980 $ 721
======= =======
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 3,283 $ 3,296
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... 1,303 2,575
------- -------
$ 1,980 $ 721
======= =======
Costs and estimated earnings in excess of billings at March 31, 2000 and
2001 include $150,000 and $232,575, respectively, that were not billable as
certain milestone objectives specified in the contracts had not been attained.
Substantially all costs and estimated earnings in excess of billings at March
31, 2001 are expected to be billed and collected during the year ending March
31, 2002.
7. Revolving Line of Credit and Long-Term Debt
In December 1998, the Company entered into a $17.0 million revolving line of
credit, which provided for borrowings at the prime rate plus 2.0% (9.0% at
March 31, 2001). The revolving line of credit is collateralized by
substantially all of the Company's assets. Under the terms of the loan and
security agreement, the Company is required to comply with certain covenants,
maintain certain debt to net worth ratios, working capital current ratios and
minimum net worth requirements, and prohibits the payment of dividends without
the lender's consent. As amended, the line of credit expires on July 31, 2001
(Note 1).
On January 25, 2000, the Company through its subsidiary, Iteris, Inc.,
entered into a joint venture agreement, pursuant to which the Company obtained
a Subordinated Convertible Promissory Note in the amount of $3.75 million. The
note is convertible into Iteris' common stock either at the option of the joint
venture partner at any time prior to the maturity, or automatically upon an
initial public offering of Iteris' common stock or a change in control event,
as defined in the agreement. The number of shares issuable upon conversion is
subject to the fair value of the Iteris's common stock on the date of
conversion. The note matures on January 25, 2002 and bears interest at 8.0% per
annum. All accrued interest will be forgiven if the conversion feature is
triggered.
F-14
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consisted of the following:
March 31
--------------
2000 2001
------- ------
(In thousands)
Note payable, accruing interest at 9.36%, collateralized by
deed of trust on land and buildings with a net book value of
approximately $14.4 million, paid in May 2001 (Note 1)...... $ 7,027 $5,874
Notes payable, accruing interest at 8.00%, payable upon
maturity in January 2002.................................... 3,750 3,750
Note payable, in two equal annual installments in December
2001 and 2002............................................... 2,000 1,000
Notes payable, accruing interest at 7.55% to 17.08%,
collateralized by equipment, payable in monthly installments
through 2003................................................ 1,991 1,166
------- ------
14,768 11,790
Less current portion......................................... 3,102 6,990
------- ------
$11,666 $4,800
======= ======
The annual maturities of long-term debt through March 31, 2005 are as
follows:
(In thousands)
2002.......................................................... $ 6,990
2003.......................................................... 1,804
2004.......................................................... 1,653
2005.......................................................... 1,343
-------
$11,790
=======
8. Income Taxes
The reconciliation of the income tax benefit from continuing operations to
taxes computed at U.S. federal statutory rates is as follows:
Year ended March 31
-------------------------
1999 2000 2001
------- ------ --------
(In thousands)
Income tax benefit at statutory rates............ $(6,840) $ (775) $(11,064)
Increase (decrease) of valuation allowance ...... 5,373 (773) 8,353
Foreign losses recorded without benefit.......... 1,061 1,258 2,255
Nondeductible goodwill amortization.............. 31 191 153
Other............................................ 375 99 303
------- ------ --------
$ -- $ -- $ --
======= ====== ========
F-15
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
United States and foreign loss from continuing operations before income
taxes are as follows:
Year ended March 31
---------------------------
1999 2000 2001
-------- ------- --------
(In thousands)
Pretax (income) loss:
Domestic...................................... $(16,997) $ 1,317 $(25,918)
Foreign....................................... (3,121) (3,596) (6,622)
-------- ------- --------
$(20,118) $(2,279) $(32,540)
======== ======= ========
Significant components of the income taxes benefit from continuing
operations are as follows:
Year ended March
31
------------------
1999 2000 2001
----- ----- -----
(In thousands)
Current:
Federal................................................. $(915) $ -- $ --
State................................................... -- -- --
Foreign................................................. -- -- --
----- ----- -----
Total current......................................... (915) -- --
Deferred: -- -- --
Federal................................................. 915 -- --
State................................................... -- -- --
Foreign................................................. -- -- --
----- ----- -----
Total deferred........................................ 915 -- --
----- ----- -----
$ -- $ -- $ --
===== ===== =====
The components of deferred tax assets and liabilities are as follows:
2000 2001
------- --------
(In thousands)
Deferred tax assets:
Inventory reserves...................................... $ 730 $ 738
Deferred compensation and other payroll accruals........ 1,016 1,074
Net operating loss carryover............................ 4,417 14,578
Credit carryforwards.................................... 1,519 2,051
Bad debt and other reserves............................. 1,120 1,300
Other, net.............................................. 400 281
------- --------
Total deferred tax assets................................. 9,202 20,022
Valuation allowance for deferred tax assets............... (6,145) (17,378)
------- --------
Net deferred tax assets................................... 3,057 2,644
------- --------
Deferred tax liabilities:
Tax over book depreciation.............................. 1,973 1,990
Capitalized interest and taxes.......................... 451 434
Cash to accrual adjustment.............................. 347 174
Other, net.............................................. 286 46
------- --------
Total deferred tax liabilities............................ 3,057 2,644
------- --------
Net deferred taxes........................................ $ -- $ --
======= ========
F-16
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 2001, for federal income tax purposes, the Company had
approximately $1,238,000 in general business credit carryforwards and $534,000
of alternative minimum tax credit carryforwards. The Company also has
$37,096,000 of net operating loss carryforwards for federal income tax purposes
which begin to expire in 2019, and $640,000 of net operating loss carryfowards
which were acquired as part of the ICI acquisition. For financial reporting
purposes, a valuation allowance has been recorded to offset the deferred tax
asset related to these credits and net operating losses. Any future benefits
recognized from the reduction of the valuation allowance related to these
carryforwards will result in a reduction of income tax expense, other than the
ICI operating loss carryforwards realization of which will result in an
adjustment of assets acquired in this acquisition. The business credit
carryforwards expire at various dates beginning in 2002 and the acquired net
operating losses begin to expire in 2003.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryforwards may be
subject to an annual limitation against taxable income in future periods. As a
result of the annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax liabilities.
9. Associate Incentive Programs
Under the terms of a Profit Sharing Plan, the Company contributes to a trust
fund such amounts as are determined annually by the Board of Directors. No
contributions were made in 1999, 2000 or 2001.
In May 1990, the Company adopted a 401(k) Plan as an amendment and
replacement of the former Associate Stock Purchase Plan that was an additional
feature of the Profit Sharing Plan. Under the 401(k) Plan, eligible associates
voluntarily contribute to the plan up to 15% of their salary through payroll
deductions. The Company matches 50% of contributions up to a stated limit.
Under the provisions of the 401(k) Plan, associates have four investment
choices, one of which is the purchase of Odetics, Class A common stock at
market price. Company matching contributions were approximately $644,000,
$677,000 and $795,000 in 1999, 2000 and 2001, respectively.
Effective April 1, 1987, the Company established a noncontributory Associate
Stock Ownership Plan (ASOP) for all associates with more than six months of
eligible service. The ASOP provides that Company contributions, which are
determined annually by the Board of Directors, may be in the form of cash or
shares of Company stock. The Company contributions to the ASOP were
approximately $55,000, $69,000 and $17,000 in 1999, 2000 and 2001,
respectively. Shares distributed through the ASOP Plan were included in total
outstanding shares used in the earnings per share calculation.
10. Deferred Compensation Plans
During 1986, the Company adopted an Executive Deferral Plan under which
certain executives may defer a portion of their annual compensation. All
deferred amounts earn interest, generally with no guaranteed rate of return.
Compensation charged to operations and deferred under the plan totaled
$377,000, $110,000 and $128,000 for 1999, 2000 and 2001, respectively.
11. Stock Option Plans
The Company has adopted an Associate Stock Option Plan which provides that
options for shares of the Company's unissued Class A common stock may be
granted to directors and associates of the Company. Options granted enable the
option holder to purchase one share of Class A common stock at prices which are
equal to or greater than the fair market value of the shares at the date of
grant. Options expire ten years after
F-17
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date of grant or 90 days after termination of employment and vest ratably at
33% on each of the first three anniversaries of the grant date.
A summary of all Company stock option activity is as follows:
Year ended March 31
--------------------------------------------------
1999 2000 2001
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(In thousands, except per share data)
Options outstanding at
beginning of year......... 563 $4.67 628 $ 5.27 801 $ 7.68
Granted.................. 149 7.36 358 10.36 120 13.47
Exercised................ (59) 4.63 (152) 4.65 24 7.95
Canceled................. (25) 4.63 (33) 4.65 93 8.21
--- ---- ---
Options outstanding at end
of year................... 628 5.27 801 7.68 804 8.44
=== ==== ===
Exercisable at end of
year...................... 165 219 531
=== ==== ===
Available for grant at end
of year................... 37 114 487
=== ==== ===
Weighted average fair value
of options granted........ $3.81 $ 5.25 $ 7.03
===== ====== ======
The exercise price for options outstanding as of March 31, 2001, ranged from
$4.50 to $15.625. The weighted-average remaining contractual life of those
options is 8.0 years.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans
In calculating pro forma information regarding net income and earning per
share, as required by Statement No. 123, the fair value was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumption:
Years ended March 31
----------------------
1999 2000 2001
------ ------ ------
Dividend rate........................................... 0.0 0.0 0.0
Expected life--years.................................... 7.0 7.0 7.0
Risk-free interest rate................................. 6.0 6.0 6.0
Volatility of common stock.............................. 0.4 0.4 0.4
F-18
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the year ended March 31, 1999, 2000 and 2001 follows
(in thousands, except per share data):
1999 2000 2001
-------- ------- ---------
Pro forma:
Net loss.................................... $(20,555) $(2,969) $(33,512)
Basic and diluted loss per share............ $ (2.63) $ (0.33) $ (3.36)
Iteris, Inc.'s Stock Options
In September 1997, Iteris granted options to purchase up to 899,960 shares
of its common stock to certain members of its senior management at an exercise
price of $1.07 per share. The options granted vested ratably at 25% on each of
the first four anniversaries of the grant date.
Subsequently, Iteris' Board of Directors adopted and approved the 1998 Stock
Incentive Plan (the "Plan"), as amended in February 2000, authorized 3,000,000
shares of Iteris' common stock for issuance under the Plan. Options to purchase
1,731,485 shares of common stock, at exercise prices ranging from $1.60 to
$9.07 per share, were outstanding at March 31, 2001. Options expire ten years
after date of grant or 90 days after termination of employment. The options
granted vested ratably at 25% on each of the first four anniversaries of the
grant date.
Mariner Networks, Inc.'s Stock Options
In March 2000, Mariner's Board of Directors adopted a Special Executive
Stock Option Plan which provides for the granting of stock options for shares
of Mariner's unissued common stock to certain officers, key employees, non-
employee members of the Board of Directors, consultants and independent
contractors. A total of 1,500,000 shares of Mariner's common stock are reserved
for issuance under this plan.
In March 2000, Mariner's Board of Directors also adopted the 1999 Employee
Stock Option Plan which provides options for shares of Mariner's common stock
to associates, non-employee members of the Board of Directors of Mariner,
Odetics or other Odetics' subsidiaries and independent consultants. A total of
1,000,000 shares of Mariner's common stock are reserved for issuance under this
plan.
Options expire ten years after date of grant or 90 days after termination of
employment and vest upon the optionee's completion of five years of service
measured from the vesting commencement date as specified on the stock option
agreements. The vesting of these options will accelerate upon initial public
offering of Mariner's common stock. Options to purchase 1,727,250 shares of
Mariner's common stock were outstanding at March 31, 2001 under these plans.
Zyfer, Inc.'s Stock Option Plans
In April 2000, Zyfer's Board of Directors adopted a Special Executive Stock
Option Plan which provides for the granting of stock options for shares of
Zyfer's unissued common stock to certain officers, key employees, non-employee
members of the Board of Directors, consultants and independent contractors. A
total of 1,176,500 shares of Zyfer's common stock are reserved for issuance
under this plan.
In April 2000, Zyfer's Board of Directors also adopted the 1999 Employee
Stock Option Plan which provides options for shares of Zyfer's common stock to
associates, non-employee members of the Board of Directors of Zyfer, Odetics or
other Odetics' subsidiaries and independent consultants. A total of 588,500
shares of Zyfer's common stock are reserved for issuance under this plan.
19
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options expire ten years after date of grant or 90 days after termination of
employment and vest upon the optionee's completion of five years of service
measured from the vesting commencement date as specified on the stock option
agreements. The vesting of these options will accelerate upon initial public
offering of Zyfer's common stock. Options to purchase 885,000 shares of Zyfer's
common stock were outstanding at March 31, 2001.
12. Commitments
The Company has lease commitments for facilities in various locations
throughout the United States. The annual commitment under these noncancelable
operating leases at March 31, 2001 is as follows:
Fiscal Year
-----------
(in thousands)
2002....................................................... $307
2003....................................................... 121
2004....................................................... 35
----
$463
====
Rent expense under operating leases totaled $725,000, $973,000 and
$1,040,000, respectively for the years ended March 31, 1999, 2000 and 2001.
13. Business Segment and Geographic Information
The Company operates in three reportable segments: intelligent
transportation systems, video products which includes products for the
television broadcast and video security markets, and telecommunications. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that certain expenses,
such as interest, amortization of certain intangibles and certain corporate
expenses are not allocated to the segments. In addition, certain assets
including cash and cash equivalents, deferred taxes and certain long-lived and
intangible assets are not allocated to the segments. Intersegment sales are
recorded at the selling segment's cost plus profit.
The reportable segments are each managed separately because they manufacture
and distribute distinct products or provide services with different processes.
F-20
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected financial information for the Company's reportable segments as of
and for the years ended March 31, 1999, 2000 and 2001 follows:
Intelligence Video Telecom
Transportation Products Product Total
-------------- -------- -------- --------
(In thousands)
Year ended March 31, 1999
Revenue from external customers.. $14,580 $ 46,755 $ 13,974 $ 75,309
Intersegment revenues............ -- 5,351 94 5,445
Depreciation and amortization.... 765 2,282 1,199 4,246
Segment income (loss)............ (3,865) (5,381) (2,617) (11,863)
Segment assets................... 17,943 38,831 8,954 65,728
Expenditure for long-lived
assets.......................... 4,924 3,457 3,084 11,465
Year ended March 31, 2000
Revenue from external customers.. $23,411 $ 38,958 $ 9,664 $ 72,033
Intersegment revenues............ -- 6,001 84 6,085
Depreciation and amortization.... 1,962 2,637 1,182 5,781
Segment income (loss)............ (4,407) (16,350) (7,824) (28,581)
Segment assets................... 19,240 38,831 8,954 67,025
Expenditure for long-lived
assets.......................... 470 760 1,108 2,338
Year ended March 31, 2001
Revenue from external customers.. $28,057 $ 39,726 $ 7,883 $ 75,666
Intersegment revenues............ -- 1,183 57 1,240
Depreciation and amortization.... 1,502 2,513 447 4,462
Segment income (loss)............ (3,942) (15,767) (14,042) (33,751)
Segment assets................... 18,709 22,706 11,965 53,380
Expenditure for long-lived
assets, net..................... 1,392 631 506 2,529
F-21
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following reconciles segment income to consolidated income before income
taxes and segment assets and deprecation and amortization to consolidated
assets and consolidated depreciation and amortization:
1999 2000 2001
-------- -------- --------
(In thousands)
Revenue
Total revenues for reportable segments........... $ 80,754 $ 78,118 $ 76,906
Non reportable segment revenues.................. 8,064 8,673 1,403
Elimination of Intersegment sales................ (5,445) (6,084) (1,240)
-------- -------- --------
Total consolidated revenues.................. $ 83,373 $ 80,707 $ 77,069
======== ======== ========
Segment Profit or Loss
Total profit or loss for reportable segments..... $(11,863) $(28,581) $(33,751)
Other profit or loss............................. (1,201) (3,618) (2,893)
Unallocated amounts:
Corporate and other expenses................... (5,247) (6,469) (5,674)
Royalty income................................. -- 38,437 17,825
Special charge................................. -- -- (6,285)
Interest expense............................... (1,807) (2,048) (1,762)
-------- -------- --------
Loss from continuing operations before income
taxes....................................... $(20,118) $ (2,279) $(32,540)
======== ======== ========
Assets
Total assets for reportable segments............. $ 65,728 $ 67,025 $ 53,380
Assets held at Corporate......................... 15,627 14,825 14,681
-------- -------- --------
Total assets................................. $ 81,355 $ 81,850 $ 68,061
======== ======== ========
Depreciation and Amortization
Depreciation and amortization for reportable
segments........................................ $ 4,246 $ 5,781 $ 4,462
Other............................................ 959 1,404 505
-------- -------- --------
Total depreciation and amortization.......... $ 5,205 $ 7,185 $ 4,967
======== ======== ========
Selected financial information for the Company's operations by geographic
segment is as follows:
1999 2000 2001
------- ------- -------
(In thousands)
Geographic Area Revenue
United States.......................................... $61,171 $65,285 $61,506
Europe................................................. 7,582 8,509 7,340
Asia Pacific Rim....................................... 6,287 2,821 2,703
Other.................................................. 8,333 4,092 5,520
------- ------- -------
Total net revenue.................................... $83,373 $80,707 $77,069
======= ======= =======
Geographic Area Long-Lived Assets
United States.......................................... $39,424 $38,805 $33,586
Europe................................................. 1,612 1,101 414
Asia Pacific Rim....................................... 33 15 23
------- ------- -------
Total long-lived assets.............................. $41,069 $39,921 $34,023
======= ======= =======
F-22
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Supplemental Cash Flow Information
Year ended March 31
-------------------------
1999 2000 2001
------- ------- -------
(In thousands)
Net cash used in changes in operating assets and
liabilities, net of acquisitions:
(Increase) decrease in accounts receivable....... $(2,706) $ 4,568 $ (882)
(Increase) decrease in net costs and estimated
earnings in excess of billings.................. 276 (833) 1,259
(Increase) decrease in inventories............... 4,825 (2,227) 4,499
Increase in prepaids and other assets............ 111 428 861
Increase (decrease) in accounts payable and
accrued expenses................................ (946) (757) (1,116)
------- ------- -------
Net cash used in changes in operating assets and
liabilities....................................... $ 1,560 $ 1,179 $ 4,621
======= ======= =======
Cash paid during the year:
Interest......................................... $ 1,997 $ 1,995 $ 1,768
Income taxes paid (refunded)..................... (463) (1,144) 86
Noncash transactions during the year:
Purchase of subsidiary for stock................. $ 5,845 $ -- $ --
Acquisition of business for note payable......... -- 2,000 --
Stock issuance to former MMA shareholders........ -- 251 500
15. Legal Proceedings
On October 11, 1999, the Company settled a patent infringement case it had
brought against Storage Technology Corporation (StorageTek). Through an
agreement, StorageTek agreed to pay the Company a license fee totaling $100.0
million for use of the Company's United States Patent No. 4,779,151. Under the
agreement, the license fee was payable in three installments: $80.0 million
upon signing of the agreement, and two annual installments of $10.0 million
payable in each of October 2000 and 2001. In connection with the initial
payment, the Company received $38.4 million, net of legal fees and other direct
expenses, which is reflected in the accompanying consolidated statement of
operations as royalty income.
On June 12, 2000, the Company and StorageTek amended the agreement, whereby
StorageTek agreed to pay a final discounted payment of $17.8 million
immediately in full settlement of the $20.0 million otherwise due to complete
the settlement, which is reflected in the accompanying consolidated financial
statements as royalty income.
16. Subsequent Event
In connection with entering into the $16.0 million promissory in May 2001
(Note 1), the Company granted the lender a warrant to purchase 426,667 shares
of the Company's Class A common stock at an exercise price of $4.00 per share.
The warrant expires in May 2006. During the term of the promissory note,
assuming certain prepayment milestones are not met, the lender will receive
warrants to purchase up to an additional 426,667 shares of the Company's Class
A common stock at an exercise price equal to 110% of the then current market
price. If the Company prepays the note prior to six months following its
issuance, up to $1.6 million of the principal amount is convertible, at the
lender's option, into the Company's Class A common stock at a conversion price
of $4.00 per share.
F-23
Schedule II
Odentics, Inc.
Valuation and Qualifying Accounts
Balance at Charged to Charged Balance at
Beginning Costs and to Deductions End of
Description of Period Expenses Accounts Describe Period
----------- ---------- ---------- -------- ---------- ----------
Year ended March 31,
1999:
Deducted from asset
accounts:
Allowance for doubtful
accounts.............. $ 432,000 $ 332,000 $125,000 $ (50,000) $ 839,000
Reserve for inventory
obsolescence.......... 2,881,000 1,590,000 0 (1,300,000) 3,171,000
Year ended March 31, 2000
Deducted from asset
accounts:
Allowance for doubtful
accounts............... $ 839,000 $1,293,000 $ 0 $ (64,000) $2,068,000
Reserve for inventory
obsolescence.......... 3,171,000 1,438,000 0 (1,123,000) 3,486,000
Year ended March 31, 2001
Deducted from asset
accounts:
Allowance for doubtful
accounts............... $2.068,000 $ 78,000 $ 0 $ (502,000) $1,644,000
Reserve for inventory
obsolescence.......... 3,486,000 4,925,000 0 (4,443,000) 3,968,000
S-1