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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 000-10605
ODETICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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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)
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 26, 2000,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $91,597,073. 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 26, 2000, there were 8,204,351 shares of Class A
common stock and 1,051,541 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 8, 2000.
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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...................................................... 20
ITEM 3. LEGAL PROCEEDINGS............................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS......................................................... 21
ITEM 6. SELECTED FINANCIAL DATA......................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....... 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 32
ITEM 11. EXECUTIVE COMPENSATION.......................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................ 33
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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 and industrial 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,
Inc. 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.
We manufactured telecom synchronization products in our Communications
division beginning in the late 1970s. 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., which currently operates as a subsidiary of Odetics ITS. In
January 2000, we reincorporated Odetics ITS in Delaware and changed its name to
Iteris, Inc.
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In the early 1980s, we set out to develop 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
and pioneered the use of video tape libraries in broadcast television stations
and satellite uplink operations. 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.
Today, Odetics serves as an incubator of high technology 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 our incubator business strategy to nurture and develop each of these
operations with the ultimate goal of achieving a tax-free spin-off of each
entity to our stockholders. In October 1999, we received a determination letter
from the Internal Revenue Service to confirm the tax-free status of our proposed
spin-off of Gyyr, Broadcast and Iteris. To date, we have not spun-off any of
the entities for which we have received determination letters. Subject to
favorable market conditions, it is still our intention to move forward with the
proposed spin-offs.
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. Broadcast is developing proprietary software solutions
for broadband video content management and delivery to serve broadcast and cable
operations as well as broadband Internet.
The earliest commercial success for Broadcast came from the manufacture of
video tape libraries. The video tape library market has experienced a trend
toward smaller libraries, coupled with digital hard disk recording devices. To
address this market, we introduced the TCS45 tape library, which incorporates
highly integrated caching systems. The TCS45 can be coupled with hard drive
recorders available from several recognized suppliers to the broadcast
community. As
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a result of the industry's transition to digital television and high definition
content origination, we continue to see strong demand for tape libraries. We
offer software to form powerful integrated systems, including our AIRO(TM) and
Microstation(TM) automation products. Our Roswell(TM) facility management system
is designed for enterprise automation of operations at television broadcast
facilities. 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 five persons
operating in five U.S. sales regions and Canada, and a sales manager for Latin
America. The European sales and marketing activities for Broadcast are
conducted and managed by Odetics Europe Limited, a wholly-owned United Kingdom
subsidiary of Odetics. Odetics Asia Pacific Pte. Ltd., Odetics' wholly-owned
subsidiary located in Singapore, conducts Asian sales and marketing activities
for Broadcast. 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 (for the Arts & Entertainment Network and the Discovery Channel),
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 and Leitch for installation in our automated video management
systems. Broadcast also purchases cabinets and other fabricated parts and
components from other third party suppliers.
Gyyr, Inc.
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'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's access control systems offer managed access and monitoring
of public, private and high security facilities. Customer demand for more
sophisticated capabilities and
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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 the Internet.
Recent additions to Gyyr's product offerings include network and Internet-based
video and device control, intelligent dome cameras, 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. Through
September 1999, Gyyr utilized Odetics Asia Pacific Pte. Ltd. to assist in
sales to the Asian markets. Commencing in October 1999, Gyyr consolidated its
Asian sales and marketing activities into its 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 VCRs modified to our specifications exclusively 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
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wireless networks and satellite communications for both commercial and
government customers. Significant customers of Zyfer include LGIC of Korea, and
the U.S. government. See "Risk Factors--Our Operating Results Have Been
Adversely Affected by the Asian Economic Crisis."
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.
Zyfer also provides service support for space borne digital data recorders
that are used in manned and unmanned space vehicles to store data gathered by
onboard sensors prior to transmission of the data to ground receiving stations.
These recorders 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 worldwide directly from our principal facilities in
Anaheim, California. Zyfer sells its telecom synchronization products primarily
through manufacturers' representatives.
Manufacturing and Materials. Zyfer manufactures its telecom
synchronization products to best commercial practices and is ISO certified.
Most of the manufacturing processes consist of final assembly and test. We
outsource board assembly and some preliminary fabrication processes.
Mariner Networks, Inc.
Mariner Networks, Inc. has developed and will manufacture a family of
broadband integrated 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
subsystems, Frame Relay-to-ATM networking components and systems, and ATM wide
area network access concentrators for handling intranet, data, voice and video
traffic.
Sales, Marketing and Principal Customers. Mariner Networks sells its
products through OEMs and resellers in North America and in Europe. Mariner
Networks maintains sales offices at our facilities in the United States in
Anaheim, California and at 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
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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 and direct traffic flow,
assist in the quick dispatch of emergency crews and distribute real-time
information about traffic conditions and alternative routes.
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 our 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 three 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 large
scale marketing campaigns.
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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 $27.3 million as
of March 31, 2000 and approximately $22.0 million as of March 31, 1999.
Approximately 82% of our backlog at March 31, 1999 was recognized as revenues in
fiscal 2000, and approximately 68% of our backlog at March 31, 2000 is expected
to be recognized as revenues in fiscal 2001. 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.
Product Development
Each of our business units directs and staffs its own product development
activities. Our businesses require substantial ongoing research and development
expenditures and other product development activities. Our company-sponsored
research and development costs and expenses were approximately $9.3 million in
fiscal 1998, $11.2 million in fiscal 1999 and $16.9 in fiscal 2000. 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.
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Broadcast's primary competitors include Sony, Panasonic, Louth and Pro-bel.
Sony and Panasonic are large, international suppliers of extensive professional
quality products, including video tape libraries, for the broadcast television
market. Louth 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 will include Zyling Corporation, Rainbow
Technologies, Inc. and Redcreek Communications Inc.
For its integrated access devices, Mariner Networks' principal competition
includes networking vendors Vina Technologies, Sonoma Systems and Accelerated
Networks.
While we believe that AutoVue is the only commercially-available lane
departure warning system, potential competitors including Delphi Automotive
Systems Corporation domestically and NEC Corporation and Hitachi Ltd. in Japan
and Robert Bosch Gmbh in Europe are currently developing video sensor technology
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. 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 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.
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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. 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. 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. 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.
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Employees
We refer to our employees as associates. As of June 23, 2000, we employed
569 associates, including 113 associates in general management, administration
and finance; 82 associates in sales and marketing; 196 associates in product
development; 124 associates in operations, manufacturing and quality; and 54
associates in customer service. None of our associates are represented by a
labor union and we have not experienced a work stoppage.
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 digital data recorders
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.
RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing the shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly operating results have fluctuated and are likely to continue to
fluctuate due to a number of factors, many of which are not within our control.
Factors that could affect our revenues include the following:
. our significant investment in research and development for our
subsidiaries and divisions;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
10
. the size and timing of significant customer orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. our ability to control costs;
. changes in our pricing policies and the pricing policies by our
suppliers and competitors, as well as increased price competition in
general;
. the long lead times associated with government contracts or required by
vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our divisions;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the Asian economic crisis and instability;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and market conditions.
In addition, our sales in any quarter 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.
Because of the factors listed above and other risks discussed in this
report, our future operating results could be below the expectations of
securities analysts and/or investors. If that happens, the trading price of our
common stock could be adversely affected.
We Have Experienced Substantial Losses and Expect Future Losses. We have
experienced substantial operating losses of $38.7 million for the year ended
March 31, 2000 and $18.3 million for the year ended March 31, 1999. We may not
be able to achieve profitability on a quarterly or annual basis in the future.
Most of our expenses are fixed in advance, and we generally are unable to reduce
our expenses significantly in the short-term to compensate for any unexpected
delay or decrease in anticipated revenues. In addition, in order to implement
our incubator strategy successfully, we expect to continue to make significant
investments in each of
11
our business units. As a result, we may continue to experience losses which
could cause the market price of our common stock to decline.
Our Incubator Strategy is Expensive and May Not Be Successful. We have
initiated a business strategy called our incubator strategy which is expensive
and highly risky. The goal of this strategy is to nurture and develop companies
that can be spun-off to our stockholders. This strategy has in the past
required us to make significant investments in our business units, both for
research and development, and also to develop a separate infrastructure for each
of our divisions, sufficient to allow the division to function as an independent
public company. We expect to continue to invest heavily in the development of
our divisions with the goal of conducting additional public offerings. We may
not recognize the benefits of this investment for a significant period of time,
if at all. Our ability to complete an initial public offering of any of our
divisions and/or spin-off our interest to our stockholders will depend upon many
factors, including:
. the overall performance and results of operations of the particular
businesa 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 receptivity of the
stock markets to initial public offerings.
We may not be able to complete a successful initial public offering or
spin-off of any of our divisions in the near future, or at all. During fiscal
2000, we attempted to complete the initial public offering of Iteris. We
aborted 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
12
. evolving industry standards and changes in the regulatory environment.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. In particular,
we will need to modify certain of our products to accommodate the anticipated
deployment of digital television and the corresponding phase-out of analog
transmissions. We will also have to continue to develop and introduce new
products that incorporate the latest technological advancements in hardware,
storage media, operating system software and applications software in response
to evolving customer requirements. Our recent shift towards providing more
software solutions may create additional challenges for us, particularly in
Broadcast. Our business and results of operations could be adversely affected
if we do not anticipate or respond adequately to technological developments or
changing customer requirements.
Our Future Success Depends on the Successful Development and Market
Acceptance of New Products. We believe our revenue growth and future operating
results will depend on our ability to complete development of new products and
enhancements, achieve broad market acceptance of these products and
enhancements, and reduce our product costs. We may not be able to introduce any
new products or any enhancements to our existing products on a timely basis, or
at all. In addition, the introduction of any new products could adversely
affect the sales of our certain of our existing products.
Our future success will also depend in part on the success of several
recently introduced products including:
. Roswell, our automated facility management system for broadcast
television stations;
. Bowser, our visual asset manager;
. MicroStation, our integrated disk recorder and automation system;
. Vortex, our high performance dome product;
. Digi Scan Pro, our advanced digital multiplexer;
. DVMS, our family of digital time-lapse recorders;
. Vantage One and Vantage Edge, our single camera traffic detection
systems;
. AutoVue, our lane departure warning system; and
. Dexter, our networking access device.
Market acceptance of our new products depends upon many factors, including
our ability to resolve technical challenges in a timely and cost-effective
manner, the perceived advantages of our new products over traditional products
and the marketing capabilities of our independent distributors and strategic
partners. Our business and results of operations could be seriously harmed by
any significant delays in our new product development. We have experienced
delays in the past in the introduction of new products, particularly with our
Roswell system. Certain of
13
our new products could contain undetected design faults and software errors or
"bugs" when first released by us, despite our testing. We may not discover these
faults or errors until after a product has been installed and used by our
customers. Any faults or errors in our existing products or in our new products
may cause delays in product introduction and shipments, require design
modifications or harm customer relationships, any of which could adversely
affect our business and competitive position.
We currently anticipate that we will outsource the manufacture of 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 May Need Additional Capital in the Future and May Not Be Able to Secure
Adequate Funds on Terms Acceptable to Us. We raised approximately $7.3 million
in a private placement of Odetics Class A common stock in December 1998 and
approximately $2.0 million in March 1999. We raised $5.0 million through the
sale of an option on our principal Anaheim facility in July 1999. In addition,
we raised $3.75 million through the issuance of debt to Daimler Chrysler
Ventures, which is convertible into 2.5% of the equity securities of Iteris. We
may need to raise additional capital in the near future, either through
additional bank borrowings or other debt or equity financings. Our capital
requirements will depend on many factors, including:
. market acceptance of our products;
. increased research and development funding, and required investments in
our divisions;
. increased sales and marketing expenses;
. potential acquisitions of businesses and product lines; and additional
working capital needs.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced and such securities may have
rights, preferences and privileges senior to our common stock. Additional
financing may not be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
develop or enhance our products, expand our sales and marketing programs, take
advantage of future opportunities or respond to competitive pressures.
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets. International product sales
represented approximately 19% of our total net sales and contract revenues for
the fiscal year ended March 31, 2000, approximately 27% for the fiscal year
ended March 31, 1999 and approximately 34% for the fiscal year ended March 31,
1998. International business operations are subject to inherent risks,
including, among others:
14
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. reduced protection for intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political and economic instability.
We believe that international sales will continue to represent a
significant portion of our revenues, and that continued growth and profitability
may require further expansion of our international operations. Our
international sales are currently denominated primarily in U.S. dollars. As a
result, an increase in the relative value of the dollar could make our products
more expensive and potentially less price competitive in international markets.
We do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations.
Any of these factors may adversely 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.
Our Operating Results Have Been Adversely Affected by the Asian Economic
Crisis. Our telecommunications products are sold principally to LGIC of Korea.
As a result of economic instability in Asia, particularly in Korea, our sales in
this region declined over 60% in fiscal year 1999 as compared to fiscal 1998.
While sales to LGIC in fiscal 2000 increased, the aggregate sales to LGIC in
fiscal 2000 were still significantly below fiscal 1998 sales. It is possible
that these sales could be further impacted by the currency devaluations and
related economic problems in this region, and sales in this region could
continue to decline.
We Need to Manage Growth and the Integration of Our Acquisitions. Over the
past three years, we have significantly expanded our operations and made several
substantial acquisitions of diverse businesses, including Intelligent Controls,
Inc., International Media Integration Services, Ltd., Meyer Mohaddes Associates,
Inc., Viggen Corporation, certain assets of the Transportation Systems business
of Rockwell International, and the Security Products Division of Digital Systems
Processing, Inc. A key element of our business strategy involves expansion
through the acquisition of complementary businesses, products and technologies.
Acquisitions may require significant capital infusions and, in general,
acquisitions also involve a number of special risks, including:
15
. potential disruption of our ongoing business and the diversion of our
resources and management's attention;
. the failure to retain or integrate key acquired personnel;
. the challenge of assimilating diverse business cultures;
. increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
result of changes in management; and
. increased interest expense and amortization of acquired intangible
assets.
Our competitors are also soliciting potential acquisition candidates, which
could both increase the price of any acquisition targets and decrease the number
of attractive companies available for acquisition.
Acquisitions, combined with the expansion of our business divisions and
recent growth has placed and is expected to continue to place a significant
strain on our resources. To accommodate this growth, we anticipate that we will
be required to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including the improvement of our accounting
and other internal management systems. All of these updates will require
substantial management effort. Our failure to manage growth and integrate our
acquisitions successfully could adversely affect our business, financial
condition and results of operations.
We Depend on Government Contracts and Subcontracts and Face Additional
Risks Related to Fixed Price Contracts. A significant portion of the sales by
Iteris, a portion of our sales by Zyfer were derived from contracts with
governmental agencies, either as a general contractor, subcontractor or
supplier. Government contracts represented approximately 23% of our total net
sales and contract revenues for the year ended March 31, 2000. We expect
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;
. milestone requirements, and liquidated damage provisions for failure to
meet contract milestones.
16
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
17
attempt to protect our technology through a combination of patent, copyright,
trademark and trade secret laws, employee and third party nondisclosure
agreements and similar means. Despite our efforts, other parties may attempt to
disclose, obtain or use our technologies or solutions. Our competitors may also
be able to independently develop products that are substantially equivalent or
superior to our products or design around our patents. In addition, the laws of
some foreign countries do not protect our proprietary rights as fully as do the
laws of the United States. As a result, we may not be able to protect our
proprietary rights adequately in the United States or abroad.
We have engaged in litigation in the past and litigation may be necessary
in the future to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation may also be
necessary to defend against claims of infringement or invalidity by others. An
adverse outcome in litigation or any similar proceedings could subject us to
significant liabilities to third parties, require us to license disputed rights
from others or require us to cease marketing or using certain products or
technologies. We may not be able to obtain any licenses on terms acceptable to
us, or at all. Any of these results could adversely affect on our business,
financial condition and results of operations. In addition, the cost of
addressing any intellectual property litigation claim, both in legal fees and
expenses, and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could seriously harm our business,
financial condition and results of operations.
The Trading Price of Our Common Stock Is Volatile. The trading price of
our common stock has been subject to wide fluctuations in the past. We may not
be able to increase or sustain the current market price of our common stock in
the future. The market price of our common stock could continue to fluctuate in
the future in response to various factors, including, but not limited to:
. quarterly variations in operating results;
. shortages announced by suppliers;
. announcements of technological innovations or new products;
. acquisitions or businesses, products or technologies;
. changes in pending litigation;
. our ability to spin-off any division;
. applications or product enhancements by us or by our competitors; and
. changes in financial estimates by securities analysts.
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.
18
We Are Controlled by Certain of Our Officers and Directors. As of March
31, 2000, our officers and directors beneficially owned approximately 29% 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 Effect the
Price of Our Common Stock. Certain provisions of our certificate of
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to our
stockholders. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. Our Class A common
stock entitles the holder to one-tenth of one vote per share and our Class B
common stock entitles the holder to one vote per share. In addition, holders of
the Class B common stock are presently entitled to elect six of our nine
directors. The disparity in the voting rights between our common stock, as well
as our insiders' significant ownership of the Class B common stock, could
discourage a proxy contest or make it more difficult for a third party to effect
a change in our management and control. In addition, our Board of Directors is
authorized to issue, without stockholder approval, up to 2,000,000 shares of
preferred stock with voting, conversion and other rights and preferences
superior to those of our common stock, as well as additional shares of Class B
common stock. Our future issuance of preferred stock or Class B common stock
could be used to discourage an unsolicited acquisition proposal.
In March 1998, we adopted a stockholder rights plan and declared a dividend
of preferred stock purchase rights to our stockholders. In the event a third
party acquires more than 15% of the outstanding voting control of our company or
15% of our outstanding common stock, the holders of these rights will be able to
purchase the junior participating preferred stock at a substantial discount off
of the then current market price. The exercise of these rights and purchase of
a significant amount of stock at below market prices could cause substantial
dilution to a particular acquiror and discourage the acquiror from pursuing our
company. The mere existence of the stockholder rights plan often delays or
makes a merger, tender offer or proxy contest more difficult.
We Do Not Pay Cash Dividends. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends on either class of
our common stock in the foreseeable future.
We May Be Subject to Additional Risks. The risks and uncertainties
described above are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business operations.
19
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).
Zyfer leases approximately 4,500 square feet of space in a manufacturing
facility located in El Paso, Texas. 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 seven office suites representing an aggregate of approximately 25,000
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.
We brought an action against Storage Technology Corporation, commonly known
as StorageTek, in the Eastern District Court of Virginia alleging that
StorageTek had infringed our patent covering robotics tape cassette handling
systems (United States Patent No. 4,779,151). StorageTek counterclaimed
alleging that we infringed several of StorageTek's patents. Prior to trial, the
court dismissed two of the infringement claims against us and the third claim
was dismissed upon resolution between the parties. In October 1999, we entered
into a settlement agreement with StorageTek pursuant to which we granted them a
non-exclusive license of this patent and released StorageTek from past
infringement and all claims to civil actions. In exchange for settlement, we
received total consideration of $100 million, of which $80 million was paid
during the fiscal year ended March 31, 2000, and $10 million was to be paid in
each of fiscal years ending March 31, 2001 and 2002. The initial cash payment
of $80 million resulted in cash proceeds to us, net of expenses and fees, of
approximately $38.4 million. In June 2000, we amended the settlement agreement
with StorageTek to provide for the acceleration of the $10 million payments.
Under the terms of the amendment, StorageTek paid us $17.8 million immediately
in full settlement of the $20 million otherwise due to us to complete the
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
20
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, 1999
First Quarter............................. $ 17 1/8 $ 8 3/8 $ 17 $ 9
Second Quarter............................ 13 5/8 4 5/8 14 1/4 5
Third Quarter............................. 8 3/4 4 1/16 9 5/8 4
Fourth Quarter............................ 10 5/8 7 1/16 10 3/4 7 3/8
Fiscal Year Ended March 31, 2000
First Quarter............................. 10 1/4 7 5/8 10 5/8 8 1/4
Second Quarter............................ 13 9 1/8 12 1/8 9 1/8
Third Quarter............................. 15 1/2 10 1/8 15 5/8 10 3/8
Fourth Quarter............................ 29 7/16 12 29 5/8 13
Fiscal Year Ending March 31, 2001
First Quarter (through June 26, 2000)..... 15 8 7/8 14 1/2 10
As of June 26, 2000, we had 627 holders of record of Class A common stock
and 141 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.
21
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. in
exchange for 55,245 shares of our Class A common stock. Pursuant to the terms
of the merger agreement, we issued an aggregate of 46,726 additional shares of
our Class A Common Stock in fiscal 1999 and an additional 20,181 shares of our
Class A Common Stock in April 2000 to the four former shareholders of Meyer,
Mohaddes as a penalty for not completing the initial public offering of Iteris.
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.
22
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, 2000 and the consolidated balance sheet data at March 31,
1996, 1997, 1998, 1999 and 2000 are derived from our audited consolidated
financial statements. The consolidated financial statements for the fiscal
years ended March 31, 1996 and 1997 and our consolidated balance sheet at March
31, 1996, 1997 and 1998 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,
--------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net sales...................... $65,056 $71,748 $ 79,552 $ 70,042 $ 62,041
Contract revenues.............. 10,161 9,032 10,284 13,331 18,666
------- ------- -------- -------- --------
Total net sales and contract
revenues...................... 75,217 80,780 89,836 83,373 80,707
Cost of sales.................. 44,535 48,507 55,227 49,816 50,883
Cost of contract revenues...... 4,374 4,907 6,430 9,007 13,431
Selling, general and
administrative expense........ 15,620 19,831 26,010 31,670 38,173
Research and development
expenses...................... 5,242 7,734 9,271 11,191 16,888
In process research and
development................... -- -- 2,106 -- --
Restructuring charge........... -- -- 1,716 -- --
------- ------- -------- -------- --------
Income (loss) from operations.. 5,446 (199) (10,924) (18,311) (38,668)
Non-operating income (expense)
Royalty income................ -- -- -- -- 38,437
Interest expense, net......... (386) (183) (617) (1,807) (2,048)
------- ------- -------- -------- --------
Income (loss) before taxes..... 5,060 (382) (11,541) (20,118) (2,279)
Income taxes (benefit)......... 1,418 (181) (2,858) -- --
------- ------- -------- -------- --------
Income (loss) from
continuing operations......... 3,642 (201) (8,683) (20,118) (2,279)
Income (loss) from
discontinued operations, net
of income taxes............... (1,189) 3,931 2,089 -- --
------- ------- -------- -------- --------
Net income (loss).............. $ 2,453 $ 3,730 $ (6,594) $(20,118) $ (2,279)
======= ======= ======== ======== ========
Diluted earnings (loss) per
share(1):
Continuing operations.......... $ 0.59 $ (0.03) $ (1.26) $ (2.57) $ (0.25)
Discontinued operations........ (0.19) 0.62 0.31 -- --
------- ------- -------- -------- --------
Earnings (loss) per share...... $ 0.40 $ 0.59 $ (0.95) $ (2.57) $ (0.25)
======= ======= ======== ======== ========
Shares used in calculating
diluted earnings (loss) per
share......................... 6,179 6,299 6,912 7,820 9,089
_____________________________
(1) The earnings (loss) per share amounts prior to fiscal 1998 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128 Earnings per Share.
23
Fiscal Year Ended March 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
Consolidated Balance Sheet Data: (in thousands)
Working capital........................ $20,610 $21,903 $19,996 $ 15,216 $ 12,855
Total assets........................... 73,013 85,805 88,790 81,355 81,850
Long-term debt (less current portion).. 22,019 11,860 21,000 19,962 11,666
Retained earnings (deficit)............ 8,481 12,211 (3,795) (23,913) (26,192)
Total stockholders' equity............. 30,985 51,828 38,580 36,323 36,110
24
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,
--------------------------
1998 1999 2000
----- ----- -----
Net sales....................................... 88.6% 84.0% 76.9%
Contract revenues............................... 11.4 16.0 23.1
----- ----- -----
Total net sales and contract revenues........... 100.0% 100.0% 100.0%
Cost of sales................................... 61.4 59.7 63.0
Cost of contract revenues....................... 7.2 10.8 16.6
Selling, general and administrative expenses.... 29.0 38.0 47.3
Research and development expenses............... 10.3 13.4 20.9
In process research and development............. 2.3 -- --
Restructuring charge............................ 1.9 -- --
----- ----- -----
Loss from operations............................ (12.2) (22.0) (47.9)
Non-operating income (expense)
Royalty income................................. -- -- 47.6
Interest expense, net.......................... (0.7) (2.1) (2.5)
----- ----- -----
Loss before taxes............................... (12.9) (24.1) (2.8)
Income taxes (benefit).......................... (3.2) -- --
----- ----- -----
Loss from continuing operations................. (9.7) (24.1) (2.8)
Income from discontinued operations, net of
income taxes.................................... 2.4 -- --
----- ----- -----
Net loss........................................ (7.3)% (24.1)% (2.8)%
----- ----- -----
General. We define our business segments as video products, telecom
products and ITS. The video products segment includes our wholly-owned
subsidiaries, Broadcast, Inc. and Gyyr, Inc. The telecom products segment
includes Zyfer, Inc., our wholly-owned subsidiary (formerly known as our
Communications division) that manufactures timing and synchronization products,
and Mariner Networks, Inc., our wholly-owned subsidiary. The ITS segment
includes Odetics' 93% owned subsidiary, Iteris, Inc. On October 31, 1997, we
completed the spin-off of our 82.9% interest in ATL Products, Inc. by
distributing our 8,005,000 shares of Class A common stock to our stockholders of
record on October 31, 1997. In connection with the spin-off, we restated our
financial statements to reflect continuing and discontinued operations.
Discontinued operations reflect our interest in the operations of ATL for all
periods presented. 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.
Net Sales and Contract Revenues. Net sales and contract revenues consist of
(i) sales of products and services to commercial and municipal customers ("net
sales") and (ii) revenues derived from contracts with state, county and
municipal agencies for intelligent transportation systems projects ("contract
revenues"). Contract revenues also include revenue from contracts with agencies
of the United States Government and foreign entities for space-borne recorders
25
used for geographical information systems. Total net sales and contract revenues
decreased 3.2% to $80.7 million for the fiscal year ended March 31, 2000
("fiscal 2000") compared to $83.4 million for the fiscal year ended March 31,
1999 ("fiscal 1999"), and decreased 7.2% in fiscal 1999 from $89.8 million for
the fiscal year ended March 31, 1998 ("fiscal 1998").
Net Sales. 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.
We believe that the Roswell system represents key enabling software that
facilitates the sale of Broadcast systems. The decline in Mariner Networks'
sales reflects the loss in August 1999 of IBM as a significant OEM customer of
its Fraim 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 has 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. 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.
Net sales decreased 12.0% to $70.0 million in fiscal 1999 compared to $79.6
million in fiscal 1998 as a result of a 10.2% decrease in Gyyr's sales and a
58.6% decrease in Zypher's sales. The decrease in Gyyr's sales reflects reduced
purchases by certain of its OEM customers who sell to the banking industry
segment of the electronic security market. This market segment has undergone
substantial consolidation in the current fiscal year that has negatively
impacted demand for certain of our products including video multiplexers and
time-lapse video tape decks. The decrease in sales in our telecom products
segment reflects a decrease in sales by Zyfer of timing and synchronization
products to LGIC of Korea, a significant customer. The decline in sales to this
customer largely reflects adverse economic conditions in Asia. Sales by Iteris
increased 360.0% in fiscal 1999 compared to fiscal 1998 partially offsetting the
decline in sales of Gyyr and Zyfer. The increase in Iteris' sales was primarily
the result of increasing market acceptance of our Vantage line of video-based
traffic intersection control systems. We also experienced a 140% increase in
Mariner Networks' sales in fiscal 1999 compared to fiscal 1998 primarily due to
increased sales of network interface products. Sales of Mariner Networks
products represented 2.0% of our total net sales and contract revenues in fiscal
1998 compared to 6.0% in fiscal 1999. During fiscal 1999, Broadcast sales were
relatively flat compared to fiscal 1998.
Contract Revenues. Contract revenues increased 40.0% to $18.7 million in
fiscal 2000 compared to $13.3 million in fiscal 1999, and increased 29.6% in
fiscal 1999 from $10.3 million in fiscal 1998. The growth in contract revenues
in fiscal 2000 compared to fiscal 1999 primarily reflects increased contract
volume in our Iteris subsidiary. During fiscal 1999, Iteris completed the
acquisition of Meyer Mohaddes Associates, Inc. and the assets of Viggen
Corporation. In fiscal 2000 compared to fiscal 1999, Iteris experienced a 59%
growth in contract revenues in Meyer Mohaddes Associates Inc., a 34% growth in
contact revenues related to its acquisition of Viggen's assets, and a 37% growth
in its base business of contracts.
26
Approximately one-half of the increase in contract revenues in fiscal 1999
compared to fiscal 1998 resulted from the acquisition of Meyer Mohaddes. The
balance of the increase in contract revenues in fiscal 1999 represents overall
increased contract volume in Iteris. The increases in Iteris' contract revenues
in both fiscal 2000 and fiscal 1999 were 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 as a percent of net sales and contract
revenues decreased to 20.3% in fiscal 2000, compared to 29.4% in fiscal 1999,
and 31.4% in fiscal 1998. Gross profit as a percent of net sales decreased to
18.0% in fiscal 2000 compared to 28.9% in fiscal 1999. The decrease in gross
profit as a percent of net sales reflects lower sales levels and higher
unabsorbed manufacturing costs in Video Products and Telecom Products. Gross
profit performance in fiscal 2000 was negatively impacted by pricing concessions
to certain customers in our Broadcast business. During fiscal 2000 gross profit
was impaired due to our adjustments to inventory reserves and capitalized
software related to certain discontinued products and product options in our
Mariner Networks, Broadcast and Gyyr businesses. As a result of increasing
sales volume, we experienced improved gross profit performance during fiscal
2000 on sales of Vantage Product by our Iteris subsidiary.
Gross profit as a percent of contract revenues decreased to 28.0% in fiscal
2000 compared to 32.4% in fiscal 1999. Contract revenue derived from our Iteris
subsidiary comprised 83.5% of total contract revenue in fiscal 2000 compared to
64.9% of total contract revenue in fiscal 1999. Gross profit earned on Iteris'
contracts activity is generally lower than gross profit historically earned by
Odetics on other government contract activities.
The decrease in gross profit in fiscal 1999 compared to fiscal 1998
reflects decreased gross profit performance in Broadcast and Zyfer. The
decrease in gross profit in Broadcast resulted from an unfavorable sales mix of
low margin product sales in the fourth quarter of fiscal 1999, in addition to an
increase in charges for warranty liabilities that are included in cost of sales.
Gross profit in Zyfer decreased from 46.5% of sales in fiscal 1998 to 36.7% of
sales in fiscal 1999, as a result of the decline in sales to LGIC of Korea.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 20.5% to $38.2 million (or 47.2% of total net
sales and contract revenues) in fiscal 2000 compared to $31.7 million (or 38.0%
of total net sales and contract revenues) in fiscal 1999, and increased 21.8% in
fiscal 1999 compared to $26.0 million (or 29.0% of total net sales and contract
revenues) in fiscal 1998. During fiscal 2000, we increased expenditures for
sales and marketing and general and administrative expenses 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. During fiscal 2000, we attempted to execute a
public offering of Iteris. As a result of the volatility of the public equity
markets, we aborted the planned initial public offering and in May 2000,
withdrew the Registration Statement on Form S-1. In preparation for the initial
public offering of Iteris, we
27
increased expenditures for sales and marketing and general and administrative
expenses to enable Iteris to execute on its aggressive growth plans and to
function as an independent public company. As part of the process of filing a
Registration Statement on Form S-1 for Iteris with the Securities and Exchange
Commission, we 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 19, 1999. The increase in selling, general and administrative expense in
fiscal 2000 also reflects charges of approximately $500,000 for adjustment to
the allowance for doubtful accounts in Broadcast.
During fiscal 1999, we increased sales and marketing expenditures $3.9
million or 20.7% over fiscal 1998 levels. Sales and marketing expense increased
in our Iteris, Gyyr, Broadcast and Mariner Networks businesses in fiscal 1999.
Approximately $514,000 of the increase in fiscal 1999 was attributable to Meyer
Mohaddes, which was acquired by Iteris in October 1998. The other increases in
spending were incurred to support planned growth in sales and market share and
were incurred principally in the areas of labor and benefits, sales commissions,
advertising and promotions, and charges related to support increased presence in
international markets, particularly Europe. These increases were partially
offset by decreased spending in Zyfer, which enforced general spending cutbacks
in response to the sharp reduction in sales in fiscal 1999 accompanying the
Asian economic crisis. General and administrative expense increased $1.2
million in fiscal 1999 compared to fiscal 1998 primarily as a result of the
write off of deferred costs associated with our delay in the initial public
offering of Iteris, an increase in goodwill amortization as a result of the
acquisitions of Meyer Mohaddes Associates and International Media Integration
Services, and the administrative infrastructure that accompanied the acquisition
of Meyer Mohaddes Associates.
Research and Development Expense. Research and development expense
increased 50.9% to $16.9 million (or 20.9% of total net sales and contract
revenues) in fiscal 2000 compared to $11.2 million (or 13.4% of total net sales
and contract revenues) in fiscal 1999, and increased 20.7% in fiscal 1999
compared to $9.3 million (or 10.3% of total net sales and contract revenues) in
fiscal 1998. For competitive reasons, we closely guard the confidentiality of
specific development projects. 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
28
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.
The increase in research and development expense in fiscal 1999 compared to
fiscal 1998 principally reflects increased product development activity in Gyyr,
Mariner Networks and Zyfer. Most of these increases represent engineering labor
and related benefits, prototype material and consulting fees. Gyyr completed an
aggressive product development schedule during fiscal 1999 intended to broaden
its product family beyond time-lapse video recorders. During fiscal 1999, Gyyr
introduced its Vortex family of domes for facility monitoring, expanded its
video multiplexer product line, and launched a new Internet based security
product called Tango. Mariner Networks added substantial investment in the
development of Dexter, a broadband wide area access concentrator. Mariner
Networks also invested development resources in FRAIM, an extension to its
family of products offering Frame Relay to ATM communications. Zyfer also
experienced increased development costs related to its high performance G.P.S.
based synchronization product.
Restructuring Charge. In March 1998, we recorded a nonrecurring charge of
$1.7 million. This charge reflects severance costs related to retirement of
certain of our founders and officers, and to a lesser extent, costs incurred to
terminate a joint venture relationship in China.
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. Under our revised settlement agreement with
StorageTek, we received an additional $17.8 million in June 2000 in full
settlement of the amounts due to us. See Item 3. Legal Proceedings.
Interest Expense, Net. Interest expense, net reflects the net of interest
expense and interest income as follows:
Year Ended March 31,
----------------------------------
1998 1999 2000
------- ------- -------
Interest expense......... $1,609 $1,928 $2,313
Interest income.......... 992 121 265
------- ------- -------
Interest expense, net.... $ 617 $1,807 $2,048
======= ======= =======
Interest expense increased 20.0% in fiscal 2000 compared to fiscal 1999,
and decreased 19.8% in fiscal 1999 compared to fiscal 1998. Interest expense
primarily reflects interest charges on Odetics line of credit borrowings and
mortgage interest. The increase in fiscal 2000 represents increased average
outstanding borrowings on our line of credit to fund negative operating cash
flow. Interest income in fiscal 2000 primarily related to interest earned on
invested cash received from our settlement with StorageTek. Interest income in
fiscal 1999 and
29
fiscal 1998 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.
In-Process Research and Development. In the fourth quarter of fiscal 1998,
we completed the purchase price allocation related to our acquisition of
Intelligent Controls and determined that $2.1 million of the purchase price was
attributable to the value of research and development activities in process at
the date of acquisition, constituting the development of an integrated building
access and security system that Gyyr began selling in the latter part of fiscal
1999 as the Access 202 product family. In accordance with the provisions of
FASB Statement No. 2, "Accounting for Research and Development Costs," we
recorded a charge in fiscal 1998 for this in-process research and development.
Subsequent to this acquisition, we incurred an additional $94,000 and $469,000
of research and development expense in fiscal 1998 and 1999, respectively,
related to this product development effort.
Income Taxes. We have not provided income tax benefit for the losses
incurred in fiscal 2000 and 1999 due to the uncertainty as to the ultimate
realization of the benefit. We provided for a tax benefit from continuing
operations at an effective rate of (24.8)% in fiscal 1998. The tax benefit
recorded in 1998 was less than the statutory rate because no benefit was
recorded in connection with $2.1 million write-off of purchased research and
development expenses associated with the acquisition of Intelligent Controls, a
reduction in the benefit of general business credits on total expense, and
foreign losses recorded in Singapore for which no tax benefit was recognized.
Loss from Continuing Operations. In connection with the spin-off of our
82.9% ownership interest in ATL on October 31, 1997, we restated our financial
statements to present the results of operations of ATL as discontinued
operations for all periods presented. Loss from continuing operations reflects
our continuing operations including Gyyr, Broadcast, Zyfer, Mariner Networks and
Iteris.
Liquidity and Capital Resources
Odetics serves as an incubator of high technology companies, each with its
own marketplace, customers and products. The process of incubating companies
implies a potentially high investment of cash as each entity moves through its
development stage in preparation for an initial public offering or a strategic
sale. We generally fund the cash flow requirements of each entity by seeking
investors who have both strategic and financial interests directly in the
subsidiaries of Odetics. We also fund our operations through the sale of
Odetics common stock and more traditional debt financing.
During fiscal 2000, net cash provided by operating activities was $7.0
million. Cash used to fund purchases of property plant and equipment was $2.2
million, reflecting a decrease of 21.0% from fiscal 1999. Net cash provided by
operating activities in fiscal 2000 included the receipt of $38.4 million from
our settlement of litigation with Storage Technology Corporation ("StorageTek").
In October 1999, we settled litigation with StorageTek in exchange for
license fees payable to us of $100 million, $80 million of which was paid on the
settlement date. The initial
30
payment of $80 million resulted in cash proceeds to us, net of expenses and
fees, of approximately $38.4 million. We used a portion of the proceeds to
retire outstanding borrowings on our line of credit with Transamerica Business
Credit, and to reduce trade accounts payable. We retained the balance of these
funds to support our general working capital requirements. Under the terms of
the original settlement agreement, we were to receive two additional payments of
$10 million each in September 2000 and 2001.
In June 2000, we amended the settlement agreement with StorageTek to
provide for the acceleration of the two $10 million payments. Under the terms
of the amendment, StorageTek paid us $17.8 million immediately in full
settlement of the $20 million otherwise payable to us to complete the
settlement. We recognized non-operating income in the amount of $17.8 million
in the quarter ended June 30, 2000, and used the cash proceeds to pay down
borrowings on our line of credit and retained the balance of the cash to fund
our general working capital requirements.
We currently have a $17.0 million line of credit with Transamerica Business
Credit providing for borrowings at their prime rate plus 2.0% (11.0% at March
31, 2000). At March 31, 2000, approximately $3.7 million of borrowings were
outstanding under this line of credit. We anticipate that the cash flow
available from our line of credit, proceeds from equity offerings of our
common stock and the stock of our subsidiaries, and amounts received from the
litigation settlement, and, if necessary, the sale of certain assets, will be
sufficient for us to execute our current operating plans and meet our
obligations on a timely basis for at least the next twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to changes in interest rates 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,
-----------------------------------------------------------------------
2001 2002 2003 2004 2005 Total Fair value
------ ------ ------ ------ ------ ------- ----------
(dollars in thousands)
Long-term debt:
Fixed rate............ $3,102 $6,988 $1,813 $1,666 $1,199 $14,768 $14,768
Average interest rate. 8.67% 8.87% 9.18% 9.36% 9.36% 9.02%
Variable rate......... $3,706 -- -- -- -- $ 3,706 $ 3,706
Average interest rate. 11.00% 11.00%
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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.
32
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 1999........... F-3
Consolidated Statements of Operations for the years ended March 31,
2000, 1999 and 1998............................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998..................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31,
2000, 1999 and 1998............................................... 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).
33
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).
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 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).
10.11 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).
10.12 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).
10.13 Separation and Distribution Agreement dated March 1, 1997 between
Odetics and ATL (incorporated by reference to Exhibit 10.13 to
Odetics' Annual Report on Form 10-K for the year ended March 31,
1997)
10.14 Tax Allocation Agreement dated March 1, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.14 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1997).
10.15 Services Agreement dated March 21, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.15 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1997).
10.16 Promissory Note dated April 1, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.16 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1997).
10.17 1997 Stock Incentive Plan of Odetics (incorporated by reference to
Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File
No. 333-44907) as filed with the SEC on January 26, 1998).
10.18 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. 333-44907) as filed with the SEC on January 26, 1998)
10.19 Form of Stock Option Agreement (incorporated by reference to Exhibit
99.3 to Odetics' Registration Statement on Form S-8 (File No. 333-
44907) as filed with the SEC on January 26, 1998).
10.20 Form of Addendum to Stock Option Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control (incorporated by
reference to Exhibit 99.4 to Odetics' Registration Statement on Form
S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998).
34
10.21 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. 333-44907) as
filed with the SEC on January 26, 1998).
10.23 Form of Stock Issuance Agreement (incorporated by reference to
Exhibit 99.6 to Odetics' Registration Statement on Form S-8 (File
No. 333-44907) as filed with the SEC on January 26, 1998)
10.24 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. 333-44907) as filed with the SEC on
January 26, 1998).
10.25 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. 333-44907) as filed with the SEC on January 26, 1998).
10.26 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. 333-44907) as filed with the SEC on
January 26, 1998).
10.27 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. 333-44907) as filed
with the SEC on January 26, 1998).
10.28 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).
10.29 Promissory Note in the original principal amount of $15,000,000
payable to The Northwestern Mutual Life Insurance Company dated
October 31, 1989 and related Deed of Trust, Security Agreement and
Financing Statement between Odetics, Inc. and Northwestern Mutual
dated October 31, 1989 (incorporated by reference to Exhibit 10.12
to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932)
as filed with the SEC July 6, 1993).
10.30 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).
10.31 Subordinated Convertible Note Purchase Agreement between Iteris,
Inc. and DaimlerChrysler GmbH, dated January 25, 2000.
10.32 Subordinated Convertible Note between Iteris, Inc. and
DaimlerChrysler GmbH, dated January 25, 2000.
21 Subsidiaries of Odetics.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
35
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 June 29, 2000.
ODETICS, INC.
By: /s/ JOEL SLUTZKY
----------------------------------
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, President and June 29, 2000
- --------------------------------------- Chairman of the Board (principal
Joel Slutzky executive officer)
/s/ CRANDALL GUDMUNDSON Director June 29, 2000
- ---------------------------------------
Crandall Gudmundson
/s/ JERRY MUENCH Director June 29, 2000
- ---------------------------------------
Jerry Muench
KEVIN C. DALY Director June 29, 2000
- ---------------------------------------
Kevin C. Daly
36
Signature Title Date
--------- ----- ----
/s/ GARY SMITH Vice President and Controller June 29, 2000
- --------------------------------------- (principal accounting officer)
Gary Smith
/s/ THOMAS L. THOMAS Director June 29, 2000
- ---------------------------------------
Thomas L. Thomas
/s/ JOHN SEAZHOLTZ Director June 29, 2000
- ---------------------------------------
John Seazholtz
/s/ PAUL E. WRIGHT Director June 29, 2000
- ---------------------------------------
Paul E. Wright
/s/ GREGORY A. MINER Vice President, Director and Chief June 29, 2000
- --------------------------------------- Operating Officer and Chief Financial
Gregory A. Miner Officer (principal financial officer)
37
Odetics, Inc.
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000............. F-3
Consolidated Statements of Operations for the years ended
March 31, 1998, 1999 and 2000........................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1998, 1999 and 2000........................................ F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1999 and 2000........................................ 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, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 2000. 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 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, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2000, 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.
/s/ ERNST & YOUNG LLP
Orange County, California
May 15, 2000,
except for the last paragraph of Note 15,
as to which the date is June 12, 2000
F-2
Odetics, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
March 31
1999 2000
-------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 787 $ 4,880
Trade accounts receivable, net of allowance for
doubtful accounts of $839 in 1999 and $2,068 in 2000 18,889 13,576
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,423 3,283
Inventories:
Finished goods 1,101 1,203
Work in process 749 859
Materials and supplies 14,135 16,150
Prepaid expenses and other 2,202 1,978
-------------------------------------
Total current assets 40,286 41,929
Property, plant and equipment:
Land 2,060 2,060
Buildings and improvements 18,674 18,868
Equipment 28,618 30,652
Furniture and fixtures 2,685 2,676
Allowances for depreciation (29,561) (33,520)
-------------------------------------
22,476 20,736
Capitalized software costs, net 7,667 6,482
Goodwill, net of accumulated amortization of $1,046 in
1999 and $2,723 in 2000 10,023 12,004
Other assets 903 699
-------------------------------------
Total assets $ 81,355 $ 81,850
=====================================
F-3
Odetics, Inc.
Consolidated Balance Sheets (continued)
(In thousands, except share and per share amounts)
March 31
1999 2000
------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 10,454 $ 10,702
Accrued payroll and related 5,441 4,892
Accrued expenses 1,933 2,313
Contract reserve 3,892 3,056
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,276 1,303
Revolving line of credit - 3,706
Current portion of long-term debt 2,074 3,102
------------------------------------
Total current liabilities 25,070 29,074
Revolving line of credit 10,997 -
Long-term debt, less current portion 8,965 11,666
Other liabilities - 5,000
Commitments and contingencies
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 - 7,941,271 of Class A
and 1,060,041 of Class B at March 31, 1999; 8,183,470
of Class A and 1,051,541 of Class B at March 31, 2000 901 923
Paid-in capital 59,579 61,200
Treasury stock, 50,093 and 4,564 shares in 1999 and
2000, respectively (240) (22)
Notes receivable from employees (96) (61)
Accumulated other comprehensive income 92 262
Accumulated deficit (23,913) (26,192)
------------------------------------
Total stockholders' equity 36,323 36,110
------------------------------------
Total liabilities and stockholders' equity $ 81,355 $ 81,850
====================================
See accompanying notes.
F-4
Odetics, Inc.
Consolidated Statements of Operations
(In thousands, except per share information)
Year ended March 31
1998 1999 2000
----------------------------------------
Net sales and contract revenues:
Net sales $ 79,552 $ 70,042 $ 62,041
Contract revenues 10,284 13,331 18,666
----------------------------------------
89,836 83,373 80,707
Costs and expenses:
Cost of sales 55,227 49,816 50,883
Cost of contract revenues 6,430 9,007 13,431
Selling, general and administrative
expenses 26,010 31,670 38,173
Research and development expenses 9,271 11,191 16,888
In process research and development 2,106 - -
Restructuring charge 1,716 - -
----------------------------------------
100,760 101,684 119,375
----------------------------------------
Loss from operations (10,924) (18,311) (38,668)
Non-operating income (expense)
Royalty income - - 38,437
Interest expense, net (617) (1,807) (2,048)
----------------------------------------
Loss before taxes (11,541) (20,118) (2,279)
Income tax benefit (2,858) - -
----------------------------------------
Loss from continuing operations (8,683) (20,118) (2,279)
Income from discontinued operations, net
of income taxes 2,089 - -
----------------------------------------
Net loss $ (6,594) $(20,118) $ (2,279)
========================================
Basic and diluted loss per share:
Continuing operations $(1.26) $(2.57) $(0.25)
Discontinued operations .31 - -
----------------------------------------
Loss per share $ (.95) $(2.57) $(0.25)
========================================
See accompanying notes.
F-5
Odetics, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
Common stock
----------------------------------
Shares outstanding
------------------------ Notes Accumulative
Class A Class B Additional receivable other Compre
common common Paid-in Treasury from Comprehensive Accumulated -hensive
stock stock Amount capital stock employees income deficit Total income
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1997 5,316 1,064 $638 $38,927 $ - $ - $ 52 $12,211 $ 51,828 $ 3,792
Issuances of common stock 885 - 88 7,968 - (3,377) - - 4,679
Conversion of Class B common
stock 2 (2) - - - - - - -
Spin-off of ATL Products,
Inc. common stock - - - (1,655) - - - (9,412) (11,067)
Purchase of treasury stock - - (239) - - - (239)
Foreign currency translation
adjustments - - - - - - (27) - (27) (27)
Net loss - - - - - - - (6,594) (6,594) (6,594)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1998 6,203 1,062 726 45,240 (239) (3,377) 25 (3,795) 38,580 $ (6,621)
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 170 - 170 170
adjustments - - - - - - - - - -
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)
=====================================================================================================
See accompanying notes.
F-6
Odetics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31
1998 1999 2000
-----------------------------------------------------
Operating activities
Net loss $ (6,594) $(20,118) $ (2,279)
Adjustments to reconcile net loss to net cash used in
operating activities:
Income from discontinued operations (2,089) - -
Depreciation and amortization 2,912 5,205 7,185
Write-off of in process research and development 2,106 - -
Contribution to ASOP 511 - -
Provision for losses on accounts receivable 155 332 745
Provision (benefit) for deferred income taxes (902) 915 -
Other (11) - 213
Changes in operating assets and liabilities (Note 14) (1,462) 1,560 1,179
-----------------------------------------------------
Net cash provided by (used in) operating activities (5,374) (12,106) 7,043
Investing activities
Purchases of property, plant and equipment (3,829) (2,747) (2,169)
Proceeds from option to sell real estate - - 5,000
Software development costs (2,527) (4,944) (330)
Purchase of net assets of acquired business (2,171) - (1,500)
Net cash received from ATL 2,978 10,019 -
-----------------------------------------------------
Net cash provided by (used in) investing activities (5,549) 2,328 1,001
Financing activities
Proceeds from line of credit and long-term borrowings 49,176 44,527 23,966
Principal payments on line of credit, long-term debt,
and capital lease obligations (40,159) (45,089) (29,528)
Proceeds from issuance of common stock 1,172 9,996 1,611
-----------------------------------------------------
Net cash provided by (used in) financing activities 10,189 9,434 (3,951)
-----------------------------------------------------
Increase (decrease) in cash (734) (344) 4,093
Cash and cash equivalents at beginning of year 1,865 1,131 787
-----------------------------------------------------
Cash and cash equivalents at end of year $ 1,131 $ 787 $ 4,880
=====================================================
See accompanying notes.
F-7
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2000
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Odetics, Inc. (the Company) include the
accounts of the Company and its wholly-owned subsidiaries (Gyyr, Inc.,
Broadcast, Inc., Mariner Networks, Inc., Zyfer, Inc., Odetics Europe Limited,
Odetics Asia Pacific Pte. Ltd.) and its 93% owned subsidiary, Iteris, Inc.
During fiscal 1990, the Company incorporated Odetics Europe Limited to develop
European commercial sales. During fiscal 1995, the Company incorporated Odetics
Asia Pacific Pte. Ltd. to develop commercial sales for the Asian Market. All
significant intercompany accounts and transactions are eliminated in
consolidation.
On October 31, 1997, the Company completed the spin-off of its 82.9% interest in
ATL Products, Inc. (ATL) by distributing the Company's 8,005,000 shares of Class
A Common Stock to the Company's stockholders of record on October 31, 1997. As a
result of the spin-off, the Company's financial statements have been restated to
reflect the operations of ATL as discontinued operations.
Operations
The Company has initiated a business strategy known as its incubator strategy
whereby its goal is to nurture and develop companies that can be spun-off to the
Company's stockholders. In pursuing this strategy, the Company has incurred
losses from continuing operations of $20.1 million and $2.3 million in fiscal
1999 and 2000, respectively, due in part to making investments in its business
for research and development as well as developing a separate infrastructure for
certain business units sufficient for these business units to function
ultimately as independent public companies.
The Company has obtained funds to pursue this strategy in fiscal 1999 and 2000
from repayments of a note receivable, equity offerings, amounts received from
litigation settlement and equipment financing. In fiscal 2001, it will be
necessary either to obtain sufficient additional funding to continue this
strategy or the Company will be required to curtail the incubator strategy in
order to reduce operating losses. Management believes cash available from its
revolving line of credit, possible proceeds from additional equity offerings of
common stock of the Company or its subsidiaries, amounts received from
F-8
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Operations (continued)
litigation settlement and, if necessary, and the sale of certain assets, should
be sufficient to allow the Company to execute its current operating plans and
meet its obligations on a timely basis for at least the next twelve months.
Additionally, management believes it is possible to obtain additional funds, if
required, through the sale or placing of additional financing on its facilities
in Anaheim, California.
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, deferred tax assets, inventory reserves, certain accrued
liabilities and costs to complete long-term contracts and estimates of future
cash flows used to determine whether asset impairments exist.
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.
F-9
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies (continued)
Revenue Recognition (continued)
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.
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, 1999 and 2000, accounts
receivable from governmental agencies and prime government contractors were
approximately $3,616,000 and $3,639,000, 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.
F-10
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies (continued)
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
recoverability test is performed at the lowest level based on undiscounted net
cash flows. Based on its analysis, the Company believes that no impairment of
the carrying value of its long-lived assets, inclusive of goodwill, existed at
March 31, 2000. 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 2001. 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 ten to fifteen years.
F-11
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies (continued)
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.
During fiscal 1998, 1999 and 2000, software development costs were amortized to
cost of sales totaling $585,000, $1,063,000 and $1,515,000, respectively.
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, 1999 and 2000 was $411,000 and
$596,000, respectively.
Foreign Currency Translation
The balance sheet accounts of Odetics Europe Limited and Odetics Asia Pacific
Pte. Ltd. are translated at the current year-end exchange rate and income
statement items are translated at the average exchange rate for the year.
Resulting translation adjustments are made directly to a separate component of
stockholders' equity. Gains and losses resulting from transactions of the
Company and its subsidiaries which are made in currencies different from their
own are immaterial and are included in income as they occur.
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
F-12
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies (continued)
Income Taxes (continued)
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.
Earnings (Loss) Per Share
Basic and diluted earnings (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.
The following table sets forth the computation of net income (loss) per share:
Years ended March 31
1998 1999 2000
----------------------------------------------------
(in thousands, except share and
per share information)
Numerator:
Loss from continuing operation $ (8,683) $ (20,118) $ (2,279)
Income from discontinued operations 2,089 - -
----------------------------------------------------
Net income (loss) $ (6,594) $ (20,118) $ (2,279)
====================================================
Denominator:
Weighted-average shares outstanding 6,912,000 7,820,000 9,089,000
====================================================
Basic and diluted earnings (loss) per
share:
Continuing operations $ (1.26) $ (2.57) $ (0.25)
Discontinued operations .31 - -
----------------------------------------------------
Earnings (loss) per share $ (.95) $ (2.57) $ (0.25)
====================================================
F-13
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies (continued)
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 FASB Statement No. 123, Accounting for Stock-Based
Compensation, 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.
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
$2,226,000, $2,622,000 and $2,488,000 in the years ended March 31, 1998, 1999
and 2000, respectively.
Recent Accounting Pronouncement
In June 1998, FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, 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 No. 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.
F-14
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies (continued)
Recent Accounting Pronouncement (continued)
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 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 Company believes that FIN 44 will not have a material effect on its
financial position or results of operations.
Reclassifications
Certain amounts in the 1998 and 1999 consolidated financial statements have been
reclassified to conform with the 2000 presentation.
2. Acquisitions
On June 20, 1997, the Company acquired certain assets and assumed certain
contracts from Rockwell Collins, Inc. (Rockwell). Revenues and costs related to
contracts assumed from Rockwell are included in the accompanying statement of
operations since the date of assumption. The total payment to Rockwell
associated with the assumption of contracts was approximately $2.2 million in
cash. In the transaction, a total of $1.3 million of assets were acquired and a
$5.0 million provision for anticipated losses on a contract with the Michigan
Department of Transportation (MDOT) were assumed, which resulted in the
recognition of approximately $6.0 million of goodwill. Also, Rockwell agreed to
reimburse the Company for loses incurred on certain phases of the MDOT contract.
At March 31, 2000, the remaining provision for contract losses totaled $3.1
million, which the Company expects to incur over the next two years.
On October 29, 1997, the Company acquired the net assets of Intelligent Controls
Inc. (ICI). The total cost of the acquisition was approximately $2.7 million
which was paid in the Company's Class A common stock. A total of $1.0 million of
assets were acquired, primarily consisting of accounts receivable, inventories
and property and equipment that were recorded by the Company at this historical
carrying values, and $0.4 million of
F-15
2. Acquisitions (continued)
liabilities were assumed. In connection with the purchase, $2.1 million of in
process research and development was written off, primarily related to software
and hardware under development for an integrated building access and security
system that Gyyr began selling the latter part of fiscal 1999 as the Access 202
product family. Subsequent to this acquisition, the Company incurred an
additional $94,000, $469,000 and $307,000 of research and development expense in
fiscal 1998, 1999 and 2000, respectively, related to this product development
effort.
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
acquire technology, which is being amortized over its 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.
The merger agreement provides 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 does not consummate an initial public
offering of the common stock of Iteris, Inc. by each and any of those dates. In
April and October 1999 and April 2000, Odetics issued an additional 25,740,
20,986 and 20,181, respectively, shares of its Class A common stock to the MMA
shareholders pursuant to this provision, 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
F-16
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
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 in cash during fiscal
2000 and is obligated to pay $1 million at December 1, 2000 and 2001,
respectively, in accordance with the terms of the agreement. 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 preliminarily has been recorded as goodwill while the
Company completes its identification and valuation of intangible assets
acquired.
Pro forma information related to these acquisitions is not material to the
Company's historical consolidated results of operations.
3. Sale of Stock of ATL Products, Inc.
On March 13, 1997, ATL Products, Inc. (ATL), which at that time was a wholly-
owned subsidiary of the Company, completed an initial public offering of
1,650,000 shares of its Class A common stock, at an offering price of $11 per
share (the Offering). Following the Offering, the Company's beneficial ownership
interest in the ATL totaled 82.9%.
F-17
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
3. Sale of Stock of ATL Products, Inc. (continued)
On October 31, 1997, the Company completed a tax-free spin-off of its remaining
82.9% interest in ATL to the Company's stockholders, pursuant to which each
holder of the Company's Class A and Class B Common as of October 31, 1997,
received approximately 1.1 shares of Class A Common Stock of ATL for each share
of the Company's Common Stock then held.
4. Related Party Transaction
In July 1999, the Company sold an option to an investment company incorporated
in Delaware, for an aggregate purchase price of $5.0 million to purchase certain
real property of Odetics. The option exercise price is equal to the lesser of
(i) the appraised fair value of the property as determined as of November 1,
1999, or (ii) at the option of the investment company, at the appraised fair
value of the property as of November 1, 2000 or 2001. This investment company
was formed by an officer of Odetics and certain individuals. If the investment
company does not exercise the option, then the Company shall retain the option
payment. If the option is exercised, the option payment will be applied as a
credit against the option exercise price. Pursuant to the terms of the Option
Agreement, the Company may exercise a repurchase option at a repurchase price
specified in the agreement at any time prior to August 1, 2002 if the investment
company has not previously exercised the option.
5. Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
March 31
1999 2000
-------------------
(In thousands)
Costs incurred on uncompleted contracts $19,204 $21,971
Estimated earnings 1,557 1,648
-------------------
20,761 23,619
Less billings to date 19,614 21,639
-------------------
$ 1,147 $ 1,980
===================
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 2,423 $ 3,283
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,276 1,303
-------------------
$ 1,147 $ 1,980
===================
F-18
Odetics, Inc.
Notes to Consolidated Financial Statements
5. Costs and Estimated Earnings on Uncompleted Contracts (continued)
Costs and estimated earnings in excess of billings at March 31, 1999 and 2000
include $320,000 and $150,000, 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, 2000 are expected to be billed and collected during the year ending March
31, 2001.
6. Revolving Line of Credit and Long-Term Debt
The Company has a $17.0 million revolving line of credit which provides for
borrowings at the prime rate plus 2.0% (11.0% at March 31, 2000). Borrowings are
available for general working capital purposes, and at March 31, 2000,
approximately $13.3 million was available for borrowing under the line. The line
expires December 31, 2000.
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. The Company was in compliance with the financial covenants at March 31,
2000.
Included within the borrowing limits of the loan and security agreement, the
Company has available approximately $2,000,000 in letters of credit at March 31,
2000.
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% per
annum. All accrued interest will be forgiven if the conversion feature is
triggered.
F-19
Odetics, Inc.
Notes to Consolidated Financial Statements
6. Revolving Line of Credit and Long-Term Debt (continued)
Long-term debt consisted of the following:
March 31
1999 2000
---------------------
(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 $11,000,000, payable in monthly
installments through December 2004. $ 8,173 $ 7,027
Notes payable, accruing interest at 8.00%, payable upon
maturity in January 2002 - 3,750
Note payable, in two equal annual installments in December
2001 and 2002 - 2,000
Notes payable, accruing interest at 7.55% to 8.89%,
collateralized by equipment, payable in monthly
installments through 2003. 2,866 1,991
---------------------
11,039 14,768
Less current portion 2,074 3,102
---------------------
$ 8,965 $11,666
=====================
The annual maturities of long-term debt through March 31, 2005 are as follows:
(In thousands)
2001 $ 3,102
2002 6,988
2003 1,813
2004 1,666
2005 1,199
-----------
$14,768
===========
F-20
Odetics, Inc.
Notes to Consolidated Financial Statements
7. Restructuring Charge
In the fourth quarter of fiscal 1998, the Board of Directors approved an early
retirement plan for certain founders, senior officers and employees of the
Company. The Company recorded a charge of approximately $1.5 million related to
this plan that is expected to be paid out over a four year period. In addition,
the Company recorded a charge of approximately $200,000 to write down its
investment in connection with the termination of its joint venture in China.
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
1998 1999 2000
-----------------------------------------------------
(In thousands)
Income tax benefit at statutory rates $(3,915) $(6,840) $ (775)
Acquired in process research and
development 715 - -
State income taxes, net of federal tax
benefit 189 - -
Increase (decrease) of valuation
allowance associated with federal
deferred tax assets (175) 5,373 (773)
Foreign losses recorded without benefit 118 1,061 1,258
Foreign income at lower tax rate 15
Nondeductible goodwill amortization 11 31 191
Other 184 375 99
-----------------------------------------------------
$(2,858) $ - $ -
=====================================================
United States and foreign loss from continuing operations before income taxes
are as follows:
Year ended March 31
1998 1999 2000
-----------------------------------------------------
(In thousands)
Pretax (income) loss:
Domestic $ (9,726) $(16,997) $ 1,317
Foreign (1,815) (3,121) (3,596)
-----------------------------------------------------
$(11,541) $(20,118) $(2,279)
=====================================================
F-21
Odetics, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
Significant components of the income taxes benefit from continuing operations
are as follows:
Year ended March 31
1998 1999 2000
---------------------------------------------
(In thousands)
Current:
Federal $(1,143) $(915) $ -
State (328) - -
Tax benefit from stock option exercises (300) - -
Foreign (485) - -
---------------------------------------------
Total current (2,256) (915) -
Deferred:
Federal (1,516) 915 -
State 614 - -
---------------------------------------------
Total deferred (902) 915 -
Charge in lieu:
Credit to additional paid-in capital
attributable to stock option exercises 300 - -
---------------------------------------------
$(2,858) $ - $ -
=============================================
The components of deferred tax assets and liabilities are as follows:
1999 2000
-------------------------------------
(In thousands)
Deferred tax assets:
Inventory reserves $ 780 $ 730
Deferred compensation and other payroll accruals 1,133 1,016
Acquired net operating loss carryforwards 217 217
Net operating loss carryover 6,120 4,200
General business tax credit carryforwards 958 975
Alternative minimum tax credit carryforwards 404 463
State tax credits 81
Bad debt reserve 307 865
Other reserves 178 255
Other, net 314 400
-------------------------------------
Total deferred tax assets 10,411 9,202
Valuation allowance for deferred tax assets (6,575) (6,145)
-------------------------------------
Net deferred tax assets 3,836 3,057
-------------------------------------
F-22
Odetics, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
1999 2000
------------------------------------
(In thousands)
Deferred tax liabilities:
Tax over book depreciation 2,777 1,973
Capitalized interest and taxes 468 451
Cash to accrual adjustment 556 347
Other, net 35 286
Total deferred tax liabilities 3,836 3,057
------------------------------------
Net deferred taxes $ - $ -
====================================
At March 31, 2000, for federal income tax purposes, the Company had
approximately $975,000 in general business credit carryforwards and $463,000 of
alternative minimum tax credit carryforwards. The Company also has $9,900,000 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 whose realization will result in an adjustment of assets acquired
in this acquisition. The credit carryforwards expire at various dates beginning
in 2001 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 1998, 1999 or 2000.
F-23
Odetics, Inc.
Notes to Consolidated Financial Statements
9. Associate Incentive Programs (continued)
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 $548,000, $644,000 and $677,000 in 1998, 1999
and 2000, 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 $511,000, $55,000 and $69,000 in 1998, 1999 and 2000,
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 $302,000, $377,000 and
$110,000 for 1998, 1999 and 2000, 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 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.
F-24
Odetics, Inc.
Notes to Consolidated Financial Statements
11. Stock Option Plans (continued)
A summary of all Company stock option activity is as follows:
Year ended March 31
1998 1999 2000
----------------------------------------------------------------------------------------
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 640 $6.41 563 $4.67 628 5.27
Granted 502 4.63 149 7.36 358 10.36
Exercised (578) 4.79 (59) 4.63 (152) 4.65
Canceled (1) 5.99 (25) 4.63 (33) 4.65
----------------------------------------------------------------------------------------
Options outstanding at end
of year 563 $4.67 628 $5.27 801 7.68
========================================================================================
Exercisable at end of year 165 219
========================================================================================
Available for grant at end
of year 157 37 114
========================================================================================
Weighted average fair
value of options granted $2.43 $3.81 $ 5.25
========================================================================================
The exercise price for options outstanding as of March 31, 2000, $4.50 to
$11.00. The weighted-average renewing contractual life of those options is 8.0
years.
In connection with the completed spin-off of the Company's interest in ATL, the
Company made secured loans to option holders in amounts up to the exercise price
of their options, which totaled $3.4 million. These notes are full recourse, are
secured by the shares of stock of the Company and ATL are interest bearing with
a rate of 5.7% and are due five years from the exercise date. Loans must be
repaid upon sale of the underlying shares of stock or upon termination of
employment.
F-25
Odetics, Inc.
Notes to Consolidated Financial Statements
11. Stock Option Plans (continued)
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
1998 1999 2000
----------------------------------------------------
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
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, 1998, 1999 and 2000 follows (in
thousands, except per share data):
1998 1999 2000
-------------------------------------------------------
Pro forma:
Net loss $(7,084) $(20,555) $(2,969)
Basic and diluted loss per share $ (1.03) $ (2.63) $ (0.33)
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.
F-26
Odetics, Inc.
Notes to Consolidated Financial Statements
11. Stock Option Plans (continued)
Iteris, Inc.'s Stock Options (continued)
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, and granted
thereunder options to purchase 1,731,485 shares of common stock at exercise
prices ranging from $1.60 to $9.07 per share, the fair value of the underlying
common stock as of the date of grant as determined by the Board of Directors.
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 1,176,500 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 800,500 shares of
Mariner's common stock were outstanding at March 31, 2000.
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 588,500
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 328,000 shares of
Mariner's common stock were outstanding at March 31, 2000.
F-27
Odetics, Inc.
Notes to Consolidated Financial Statements
12. Commitments and Contingencies
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, 2000 is as follows:
Fiscal Year (in thousands)
-----------
2001 $ 626
2002 508
2003 17
--------------------
$1,151
====================
Rent expense under operating leases totaled $258,000, $725,000 and $973,000,
respectively for the years ended March 31, 1998, 1999 and 2000.
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
F-28
Odetics, Inc.
Notes to Consolidated Financial Statements
13. Business Segment and Geographic Information (continued)
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.
Selected financial information for the Company's reportable segments as of and
for the years ended March 31, 1998, 1999 and 2000 follows:
Intelligence Video Products Telecom Product
(In thousands) Transportation Total
- ------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998
Revenue from external customers $ 5,841 $ 54,161 $23,613 $ 83,615
Intersegment revenues - 4,163 53 4,216
Depreciation and amortization 514 1,362 589 2,465
Segment income (loss) (5,445) (2,240) 3,527 (4,158)
Segment assets 11,614 37,913 7,943 57,470
Expenditure for long-lived assets 7,384 4,003 1,001 12,388
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
F-29
Odetics, Inc.
Notes to Consolidated Financial Statements
13. Business Segment and Geographic Information (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:
(In thousands) 1998 1999 2000
- -------------------------------------------------------------------------------------------------------
Revenue
Total revenues for reportable segments $ 87,832 $ 80,754 $ 78,118
Non reportable segment revenues 6,220 8,064 8,673
Elimination of Intersegment sales (4,216) (5,445) (6,084)
-----------------------------------------------
Total consolidated revenues $ 89,836 $ 83,373 $ 80,707
===============================================
Segment Profit or Loss
Total profit or loss for reportable segments $ (4,158) $(11,863) $(28,581)
Other profit or loss (273) (1,201) (3,618)
Unallocated amounts:
Corporate and other expenses (4,777) (5,247) (6,469)
Special income or charge (1,716) 38,437
Interest expense (617) (1,807) (2,048)
-----------------------------------------------
Loss from continuing operations before income taxes $(11,541) $(20,118) $ (2,279)
===============================================
Assets
Total assets for reportable segments $ 57,470 $ 65,728 $ 67,025
Assets held at Corporate 31,320 15,627 14,825
-----------------------------------------------
Total assets $ 88,790 $ 81,355 $ 81,850
===============================================
Depreciation and Amortization
Depreciation and amortization for reportable segments $ 2,465 $ 4,246 $ 5,781
Other 447 959 1,404
-----------------------------------------------
Total depreciation and amortization $ 2,912 $ 5,205 $ 7,185
===============================================
F-30
Odetics, Inc.
Notes to Consolidated Financial Statements
13. Business Segment and Geographic Information (continued)
Selected financial information for the Company's operations by geographic
segment is as follows:
(In thousands) 1998 1999 2000
- -----------------------------------------------------------------------------------------------------
Geographic Area Revenue
United States $60,502 $61,171 $65,285
Europe 5,538 7,582 8,509
Asia Pacific Rim 17,842 6,287 2,821
Other 5,954 8,333 4,092
---------------------------------------------
Total net revenue $89,836 $83,373 $80,707
=============================================
Geographic Area Long-Lived Assets
United States $32,929 $39,424 $38,805
Europe 504 1,612 1,101
Asia Pacific Rim 24 33 15
---------------------------------------------
Total long-lived assets $33,457 $41,069 $39,921
=============================================
14. Supplemental Cash Flow Information
Year ended March 31
1998 1999 2000
----------------------------------
(In thousands)
Net cash used in changes in operating assets and liabilities, net
of acquisitions:
(Increase) decrease in accounts receivable $ 1,136 $(2,706) $ 4,568
(Increase) decrease in net costs and estimated earnings in
excess of billings (1,771) 276 (833)
(Increase) decrease in inventories (4,604) 4,825 (2,227)
Increase in prepaids and other assets (951) 111 428
Increase (decrease) in accounts payable and accrued expenses 4,728 (946) (757)
----------------------------------
Net cash used in changes in operating assets and liabilities $(1,462) $ 1,560 $ 1,179
==================================
Cash paid during the year:
Interest $ 1,526 $ 1,997 $ 1,995
Income taxes paid (refunded) 365 (463) (1,144)
Noncash transactions during the year:
Purchase of subsidiary for stock $ 2,734 $ 5,845 $ -
Acquisition of business for note payable - - 2,000
MMA purchase price adjustment - - 251
F-31
Odetics, Inc.
Notes to Consolidated Financial Statements
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. Accordingly, the Company will recognize non-operating income in that
amount in its quarter ended June 30, 2000.
F-32
ODETICS, INC.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------------
Balance at Charged Balance
Beginning of to Costs Charged to Deductions at End
Description Period and Expenses Accounts Describe of Period
- --------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts........ $ 350,000 $ 155,000 $ 0 $ (73,000) $ 432,000
Reserve for inventory obsolescence..... 2,437,000 1,240,000 0 $ (796,000) 2,881,000
--------------------------------------------------------------------------
Total............................... $2,787,000 $1,395,000 $ 0 $ (869,000) $3,313,000
========== ========== ======== =========== ==========
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
--------------------------------------------------------------------------
Total............................... $3,313,000 $1,922,000 $125,000 $(1,350,000) $4,010,000
========== ========== ======== =========== ==========
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
--------------------------------------------------------------------------
Total............................... $4,010,000 $2,731,000 $ 0 $(1,187,000) $5,554,000
========== ========== ======== =========== ==========
S-1