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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2002
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)
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
__________________
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 [X]
Based on the closing sale price on Nasdaq SmallCap Market on June 27, 2002,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $20,574,481. 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 27, 2002, there were 11,580,914 shares of Class A
common stock and 1,035,841 shares of Class B common stock outstanding. Unless
otherwise indicated, all references to common stock collectively refer to the
Class A common stock and the Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
registrant's proxy statement for the Annual Meeting of Stockholders to be held
September 13, 2002.
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ODETICS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
----
ITEM 1. BUSINESS ............................................................ 1
ITEM 2. PROPERTIES .......................................................... 14
ITEM 3. LEGAL PROCEEDINGS ................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ................................................. 16
ITEM 6. SELECTED FINANCIAL DATA ............................................. 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ........... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ............................................ 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................. 27
ITEM 11. EXECUTIVE COMPENSATION .............................................. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT .......................................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................... 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K ............................................................ 27
In this report, "Odetics," the "Company," the "Registrant," "we," "us" and
"our" collectively refers to Odetics, Inc. and its wholly-owned subsidiaries.
Note: This report contains forward-looking statements which are based on
our current expectations, estimates and projections about our business and our
industry, and reflect management's beliefs and certain assumptions made by us
based upon information available to us as of the date of this report. 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 statements. These forward-looking statements include but are not
limited to statements regarding our anticipated revenue, expenses, capital
needs, backlog and manufacturing capabilities and the status of our facilities.
These statements are not guarantees of future performance and 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 could 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. provides products, systems, and services that control and
manage the use of public roadways, secure access to public and private
facilities, and secure the delivery of digital communications. Our company was
founded in 1969 to supply digital recorders for use in the United States space
program. We pioneered new designs and standards for digital magnetic tape
recorders offering high reliability and enhanced performance in the adverse
environment attendant to space flight. In the 1970s, we broadened our
information automation product line to include time-lapse videocassette
recorders for commercial security and surveillance applications, and entered the
business of manufacturing telecom network synchronization products. Through our
Gyyr Incorporated subsidiary, we became a leading supplier of time-lapse
videotape cassette recorders, and we pioneered new products incorporating
digital video technologies and related CCTV products used in security and
surveillance systems. In April 2001, we sold Gyyr's Vortex Dome and Quarterback
Controller product lines. Then in September 2001, we sold the assets of our CCTV
product line, and changed the name of our Gyyr subsidiary to MAXxess Systems
Inc. to continue to pursue the security market with electronic access control
products and systems.
Beginning in the late 1970s, we developed and manufactured telecom
synchronization products in our Communications division. We incorporated our
Communications division in fiscal 1999 as our wholly-owned subsidiary, Zyfer,
Inc., as part of our business expansion to develop products focused on the
security aspects of data traffic over ground and satellite links, and network
communications.
Leveraging our expertise in video image processing, we entered into the
intelligent transportation system ("ITS") business with the introduction of a
video-based vehicle detection system in 1993. In June 1997, we acquired certain
assets comprising the Transportation Systems business from Rockwell
International, creating our ITS division, which expanded our offerings to
include advanced traffic management systems and advanced traveler information
systems. We incorporated our ITS division in 1998 as Odetics ITS, Inc. In
October 1998, we broadened our systems offerings by acquiring Meyer, Mohaddes
Associates, Inc. In January 2000, we reincorporated Odetics ITS in Delaware and
changed its name to Iteris, Inc. Odetics currently owns 78.2% of the outstanding
common stock of Iteris or 62.7% as calculated for the preferred stock conversion
equivalent. Meyer, Mohaddes Associates, Inc. currently operates as a
wholly-owned subsidiary of Iteris, Inc.
In the early 1980s, we developed the technical expertise to apply
automation to new commercial applications and established our Odetics Broadcast
division. We incorporated our Odetics Broadcast division in 1999 as Broadcast,
Inc. Broadcast is a supplier of content management and delivery solutions for
the television, cable and satellite industries. The success of our video tape
libraries led us to pursue new applications for information automation
technologies. In 1991, we introduced an automated tape handling subsystem for
integration into tape libraries designed for midrange computers and
client/server networks. In January 1993, we formed a separate subsidiary, ATL
Products, Inc., to pursue the market for automated tape libraries. In March
1997, ATL completed an initial public offering of 1,650,000 shares of its Class
A common stock. We distributed our remaining 82.9% interest in ATL to our
stockholders in a tax-free distribution in October 1997.
1
Odetics has a unique mix of competencies in outdoor image processing,
high-speed security processing, precision timing and synchronization, and data
management. We have a unique identity within each of our vertical markets that
we address, and our business is organizationally structured so that our
management teams and technical competencies are in alignment with each area of
market focus. Our business units share a common overhead structure for
facilities, human resources, benefits and certain accounting, finance and
management services.
We currently define our business segments as video products, telecom
products and ITS. Our video products segment includes our Broadcast subsidiary
and our MAXxess subsidiary. Our telecom products segment consists of our Zyfer
subsidiary. Our ITS segment consists of our Iteris subsidiary. For more
information concerning our business segments, please see Note [14] of Notes to
Consolidated Financial Statements.
Video Products
Broadcast, Inc.
Broadcast is a supplier of content management and delivery solutions for
the television, cable and satellite industries. Broadcast's systems automate the
storage and scheduling of commercials, news stories and other television
programming recorded on video server storage systems and videotape. 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. The Broadcast product offering
is based on proprietary software solutions for broadband video content
management and delivery to serve broadcast and cable operations. The AIRO(TM)
suite of products is Broadcast's content management and delivery solution that
is designed to automate the on-air operations of television and cable
broadcasters.
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 four persons
operating in four sales regions in North America, and two sales managers for
Latin America and Europe. Broadcast also utilizes additional independent
representative organizations to promote its products in various other foreign
markets. During the year ended March 31, 2002, Broadcast implemented indirect
sales channels consisting of system integrators, value added resellers and
system distributors.
The customers of Broadcast include major television networks such as Fox,
Nickelodeon, CNBC, Televisa, Measat Broadcast Network Systems, NBC, the PBS
Network, Group W Satellite Communications, Asia Broadcast Centre, Univision and
over 250 independent and network-affiliated television stations. Broadcast
currently has systems installed in over 40 countries.
Manufacturing and Materials. Within our Anaheim facilities, Broadcast
maintains a dedicated manufacturing operation as well as infrastructure to
support production and inventory control, purchasing, quality assurance and
manufacturing. Our AIRO products are serviced primarily in a facility located in
Austin, Texas.
Broadcast purchases video servers from Grass Valley Group, Leitch and
Pinnacle Systems and purchases video switching, conversion and monitoring
equipment from Grass Valley Group and Leitch. Broadcast also purchases cabinets
and other fabricated parts and components from other third party suppliers.
MAXxess Systems Inc.
MAXxess Systems produces enterprise security management systems and
electronic access control systems that meet the facility security needs of
institutional, commercial, industrial and retail users. MAXxess sells a full
line of electronic access control products consisting of software, hardware and
digital video badging technologies. During the year ended March 31, 2002,
MAXxess introduced its Environmental Security Systems that integrate its base
AXxess 202 system with new detection technologies for toxic chemicals, gases and
narcotics, in addition to video-based detection of smoke and unauthorized
vehicles. MAXxess believes that its Environmental Security Systems provide
enhanced levels of monitoring, control and detection that will be required in
public facilities including buildings, airports, ports and for other high value
assets.
2
Sales, Marketing and Principal Customers. MAXxess markets and sells its
products globally through a network of system integrators. In the United States,
MAXxess has three regional sales managers who oversee three geographical regions
and manage the integrators. MAXxess operates a full service branch office in
Windsor U.K. which serves the sales needs of the EMEA region. The Windsor office
also provides local product availability and technical support for the region.
Manufacturing and Materials. MAXxess maintains a dedicated manufacturing
area located within our principal facilities in Anaheim, California. MAXxess
maintains infrastructure to support production and inventory control,
purchasing, quality assurance and manufacturing engineering at our Anaheim
facilities.
Telecom Products - Zyfer, Inc.
Zyfer designs, develops and manufactures precision time and synchronization
systems and products for network communications, computer networks and military
command and control applications. Zyfer is under subcontract to provide NASA
service support for space-borne digital data recorders. The space-borne digital
recorders serviced by Zyfer used in on-board recording of flight systems for the
U.S. Space Shuttle program.
Zyfer's synchronization systems are based on GPS and oscillator
technologies and are sold for applications in wireless networks and satellite
communications for both commercial and government consumers. Significant
customers of Zyfer include the U.S. government, government subcontractors and
OEM suppliers to wireless carriers.
Zyfer has developed a Gigabit network security processor called the
SKP-100S. This product, anticipated to be the first of a family of products, is
built around a proprietary network security processor technology called
StealthKey. Typical applications are for network security, specifically storage
area networks. Zyfer believes that the StealthKey technology has key performance
advantages including automatic and transparent key generation, ease of
implementation, and the ability to operate at wire speed.
Sales, Marketing and Principal Customers. Zyfer conducts its selling and
marketing activities directly from our principal facilities in Anaheim,
California, and sells its synchronization products primarily through
manufacturers' representatives.
Manufacturing and Materials. Zyfer's manufacturing processes are ISO 9001
certified. Most of its manufacturing processes consist of final assembly and
test, which are conducted at our Anaheim, California facilities. Zyfer
outsources board assembly and some preliminary fabrication processes.
ITS Products - Iteris, Inc.
Iteris, Inc. designs, develops, markets and implements sensors and systems
for surface transportation. Using its proprietary software and ITS industry
expertise, Iteris provides video sensor systems and transportation management
and traveler information systems for the ITS industry. The ITS industry is
comprised of companies applying a variety of technologies to enable the safe and
efficient movement of people and goods. Iteris uses its outdoor image
recognition software expertise to develop proprietary algorithms for video
sensor systems that improve vehicle safety and the flow of traffic. Our
knowledge of the ITS industry enables Iteris to design and implement
transportation solutions that help public agencies reduce traffic congestion and
provide greater access to traveler information.
Iteris' proprietary image recognition systems include AutoVue and Vantage.
AutoVue is a small windshield mounted sensor that utilizes proprietary software
to detect and warn drivers of unintended lane departures. Iteris believes that
AutoVue is a broad sensor platform that, through additional software
development, may be expanded 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' transportation management systems services business 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.
3
Sales, Marketing and Principal Customers. Iteris markets and sells its
transportation management systems and services directly to government agencies
pursuant to negotiated contracts that involve competitive bidding and specific
qualification requirements. Sales of Iteris' systems contracts generally involve
long lead times and require extensive specification development, evaluation and
price negotiations.
Iteris sells its Vantage vehicle detection systems primarily through
indirect sales channels comprised of independent dealers in the United States
and Canada who sell integrated solutions and related products to the traffic
intersection market. The independent dealers for Iteris are primarily
responsible for sales, installation and support of Vantage systems. These
dealers maintain an inventory of demonstration traffic products including the
Vantage vehicle detection systems and sell directly to government agencies and
installation contractors. These dealers often have long-term arrangements with
the government agencies in their territory for the supply of various products
for the construction and renovation of traffic intersections. Iteris holds
technical training classes for its dealers and maintains a full-time staff of
customer support technicians to provide technical assistance when needed.
The marketing strategy for AutoVue is to establish it as the leading
platform for in vehicle video sensing for trucks and passenger cars. AutoVue is
sold directly by Iteris to vehicle manufacturers and major automotive suppliers.
Iteris currently has a direct sales force for AutoVue consisting of two product
managers. Product managers are supported by project and applications engineers
who are responsible for applications and customer support.
Manufacturing and Materials. Iteris designs, assembles and tests the
components of its Vantage systems in approximately 6,000 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 one manufacturer. 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 $42.7 million as
of March 31, 2002 and was approximately $31.0 million as of March 31, 2001.
Approximately 68% of our backlog at March 31, 2001 was recognized as revenues in
the fiscal year ended March 31, 2002, and approximately 67% of our backlog at
March 31, 2002 is expected to be recognized as revenues in the fiscal year ended
March 31, 2003. 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. Most of our development activities are conducted at our principal
facilities in Anaheim, California. Our business units have historically required
substantial ongoing research and development expenditures and other product
development activities. Our company-sponsored research and development costs and
expenses were approximately $13.0 million in fiscal 2000, $13.8 million in
fiscal 2001 and $8.1 million in fiscal 2002. We expect to continue to pursue
significant product development programs and incur significant research and
development expenditures in each of our business units.
4
Competition
Our business units generally face significant competition in each of their
respective markets. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
Broadcast's primary competitors include Sony, Harris, Encoda and Probel.
Sony is a large, international supplier of extensive professional quality
products. Harris and Probel principally provide automation control for video
libraries and disk recorders. Broadcast's systems compete primarily in the arena
of facility management and enterprise wide automation. We believe that the
capability of our systems to integrate the broadcast station business systems
acquisition processes, storage devices and presentation devices under a
relational database management system represents a unique and differentiable
capability.
MAXxess principally competes with Casi-Rusco, Checkpoint, Cardkey, Lenel
and Northern Computers in the sale of access control systems. MAXxess generally
competes on the basis of its distributed processing system architecture, an open
system that readily integrates other security subsystems and new detection
capabilities, and a superior operator interface.
Zyfer's primary competition for network synchronization products is Datum,
Inc. and TrueTime Inc.
While we believe that AutoVue is the only commercially-available lane
departure warning system, potential competitors of Iteris include Delphi
Automotive Systems Corporation domestically, NEC Corporation and Hitachi Ltd. in
Japan and Robert Bosch Gmbh in Europe, which are currently developing video
sensor technologies for the vehicle industry that could be used for lane
departure warning systems. In the market for our Vantage vehicle detection
systems, Iteris competes with manufacturers of both "above ground" video camera
detection systems, such as Econolite Control Products, Inc., Trafficon, N.V. and
the Peek Traffic Systems, 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
Transcore, Lockheed Martin Corporation, PB Farradyne Inc., Kimley-Horn and
Associates, Inc. and National Engineering Technology, Inc. Iteris' competitors
in transportation engineering, planning and design include major firms such as
Parsons Brinkerhoff, Inc. and Parsons Transportation Group Inc., as well as many
regional engineering firms.
In general, the markets for the products and services offered by our
businesses are highly competitive and are characterized by rapidly changing
technology and evolving standards. Many of our current and prospective
competitors have longer operating histories, greater name recognition, access to
larger customer bases and significantly greater financial, technical,
manufacturing, distribution and marketing resources than us. As a result, they
may be able to adapt more quickly to new or emerging standards or technologies
or to devote greater resources to the promotion and sale of their products. It
is also possible that new competitors or alliances among competitors could
emerge and rapidly acquire significant market share. We believe that our ability
to compete effectively in our target markets depends on a number of factors,
including the success and timing of our new product development, the
compatibility of our products with a broad range of computing systems, product
quality and performance, reliability, functionality, price, and service and
technical support. Our failure to provide services and develop and market
products that compete successfully with those of other suppliers and consultants
in our target markets would have a material adverse effect on our business,
financial condition and results of operations.
Intellectual Property and Proprietary Rights
Our ability to compete effectively depends in part on our ability to
develop and maintain the proprietary aspects of our technology. Our policy is to
obtain appropriate proprietary rights protection for any potentially significant
new technology acquired or developed each of our business units. We currently
hold a number of United States and foreign patents and trademarks, which will
expire at various dates commencing in 2004. We also have pending a number of
United States and foreign patent applications relating to certain of our
products; however, we cannot be certain that any patents will be granted
pursuant to these applications.
5
In addition to patent laws, we rely on copyright and trade secret laws to
protect our proprietary rights. We attempt to protect our trade secrets and
other proprietary information through agreements with customers and suppliers,
proprietary information agreements with our employees and consultants, and other
similar measures. We cannot be certain that we will be successful in protecting
our proprietary rights. While we believe our patents, patent applications,
software and other proprietary know-how have value, changing technology makes
our future success dependent principally upon our employees' technical
competence and creative skills for continuing innovation.
Litigation has been necessary in the past and may be necessary in the
future to enforce our proprietary rights, to determine the validity and scope of
the proprietary rights of others, or to defend us against claims of infringement
or invalidity by others. An adverse outcome in such litigation or similar
proceedings could subject us to significant liabilities to third parties,
require disputed rights to be licensed from others or require us to cease
marketing or using certain products, any of which could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the cost of addressing any intellectual property litigation claim,
both in legal fees and expenses, as well as from the diversion of management's
resources, regardless of whether the claim is valid, could be significant and
could have a material adverse effect on our business, financial condition and
results of operations.
Employees
We refer to our employees as associates. As of June 17, 2002, Odetics and
its subsidiaries employed an aggregate of 315 associates, including 77
associates in general management, administration and finance; 36 associates in
sales and marketing; 132 associates in product development; 58 associates in
operations, manufacturing and quality; and 12 associates in customer service.
None of our associates are represented by a labor union, and we have never
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 network
synchronization systems may constitute classified United States government
information or may be used in classified programs of the United States
Government. For this purpose, we possess certain relevant security clearances.
Our affected facilities and operations are also subject to security regulations
of the United States Government. We believe we are currently in full compliance
with these regulations.
6
RISK FACTORS
Before deciding to invest in Odetics or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this report and in our other filings with
the SEC, including our reports on Forms 10-Q and 8-K. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business operations. If any of these risks actually occur,
our business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose all or part of your investment.
We Have Experienced Substantial Losses and Expect Future Losses. We
experienced operating losses of $10.8 million the year ended March 31, 2002,
$37.9 million for the year ended March 31, 2001 and $32.9 million for the year
ended March 31, 2000. In the quarter ended September 30, 2001, we downsized our
business in connection with our sale of the Gyyr CCTV Products division and the
discontinuation of the business of our Mariner Networks subsidiary and the
reorganization of our European operations. We cannot assure you that our efforts
to downsize our operations will improve our financial performance, or that we
will be able to achieve profitability on a quarterly or annual basis in the
future. Most of our expenses are fixed in advance, and we generally are unable
to reduce our expenses significantly in the short-term to compensate for any
unexpected delay or decrease in anticipated revenues. As a result, we may
continue to experience losses, which would make it difficult to fund our
operations and achieve our business plan, and could cause the market price of
our common stock to decline.
We Will Need to Raise Additional Capital in the Future and May Not Be Able
to Secure Adequate Funds on Terms Acceptable to Us, or at All. We have generated
significant net losses in recent periods, and have experienced negative cash
flows from operations in the amount of $18.2 million for the year ended March
31, 2002 and $20.1 million for the year ended March 31, 2001. Although we
completed the sale of our Anaheim, California property in May 2002, the majority
of the proceeds of such sale were used to repay outstanding short-term
indebtedness. We anticipate that we will need to raise additional capital in the
future. Our Iteris subsidiary currently maintains a line of credit with a
maximum availability of $5.0 million, which expires in August 2004.
Substantially all of the assets of Iteris have been pledged to the lender to
secure the outstanding indebtedness under this facility (although there were no
amounts outstanding under the line of credit at June 21, 2002). Even though we
retired the Odetics line of credit in the quarter ended December 31, 2001, we
also incurred cash obligations in the amount of $3.0 million payable over the
next seven months related to the discontinuation of Mariner Networks and the
reorganization of our European operations. We plan to raise additional capital
in the near future, either through bank borrowings, other debt or equity
financings, or the divestiture of business units or select assets. We cannot
assure you that any additional capital will be available on a timely basis, on
acceptable terms, or at all. These conditions, together with our recurring
losses and cash requirements, raise substantial doubt about our ability to
continue as a going concern.
Our capital requirements will depend on many factors, including:
. our ability to control costs;
. market acceptance of our products and the overall level of sales of our
products;
. our ability to generate operating income;
. increased research and development funding, and required investments in
our business units;
. increased sales and marketing expenses;
. technological advancements and our competitors' response to our
products;
. capital improvements to new and existing facilities;
. potential acquisitions of businesses and product lines;
. our relationships with customers and suppliers; and
7
. general economic conditions including the effects of the current
economic slowdown and international conflicts.
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 or convertible debt 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 continue our operations as planned, develop or enhance our
products, expand our sales and marketing programs, take advantage of future
opportunities or respond to competitive pressures.
The Trading Price of Our Common Stock Is Volatile. The trading price of our
common stock has been subject to wide fluctuations in the past. Since January
2000, our common stock has traded at prices as low as $1.27 per share and as
high as $29.44 per share. In April 2002, because we failed to meet the minimum
stockholder's equity requirement for continued listing on the Nasdaq National
Market, both our Class A common stock and Class B common stock were delisted
from the Nasdaq National Market and subsequently approved for listing on the
Nasdaq SmallCap Market. If our stock price continues to decline or declines
below $1.00 per share for a period of time, our common stock could be subject to
delisting from the Nasdaq SmallCap Market and there may not be a market for our
stock. We may not be able to increase or sustain the current market price of our
common stock in the future. As such, you may not be able to resell your shares
of common stock at or above the price you paid for them. The market price of our
common stock could continue to fluctuate in the future in response to various
factors, including, but not limited to:
. quarterly variations in operating results;
. our ability to control costs and improve cash flow;
. shortages announced by suppliers;
. announcements of technological innovations or new products by our
competitors, customers or us;
. acquisitions or businesses, products or technologies;
. changes in pending litigation or new litigation;
. changes in investor perceptions;
. our ability to spin-off any business unit;
. applications or product enhancements by us or by our competitors; and
. changes in earnings estimates or investment recommendations by
securities analysts.
The stock market in general has recently experienced volatility, which has
particularly affected the market prices of equity securities of many high
technology companies. This volatility has often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock. In the past, companies that have
experienced volatility in the market price of their securities have been the
subject of securities class action litigation. If we were to become the subject
of a class action lawsuit, it could result in substantial losses and divert
management's attention and resources from other matters.
We Depend on Government Contracts and Subcontracts and Face Additional
Risks Related to Fixed Price Contracts. A significant portion of the sales by
Iteris and a portion of our sales by Zyfer were derived from contracts with
governmental agencies, either as a general contractor, subcontractor or
supplier. Government contracts represented approximately 24%, 26% and 38% of our
total net sales and contract revenues for the years ended March 31, 2000, 2001
and 2002, respectively. We anticipate that revenue from government contracts
will continue to increase in the near future. Government business is, in
general, subject to special risks and challenges, including:
8
. long purchase cycles or approval processes;
. competitive bidding and qualification requirements;
. performance bond requirements;
. changes in government policies and political agendas;
. delays in funding, budgetary constraints and cut-backs; and
. milestone requirements and liquidated damage provisions for failure to
meet contract milestones.
In addition, a large number of our government contracts are fixed price
contracts. 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.
We are Exposed to the Risks Associated with the Recent Worldwide Economic
Slowdown and Related Uncertainties. Concerns about inflation, decreased consumer
confidence, reduced corporate profits and capital spending, and recent
international conflicts and terrorist and military actions have resulted in a
downturn in worldwide economic conditions, particularly in the United States. As
a result of these unfavorable economic conditions, we have experienced a
slowdown in customer orders, cancellations and rescheduling of backlog and
higher overhead costs. In addition, recent political and social turmoil related
to international conflicts and terrorist acts can be expected to put further
pressure on economic conditions in the U.S. and worldwide. These political,
social and economic conditions make it extremely difficult for our customers,
our suppliers and us to accurately forecast and plan future business activities.
If such conditions continue or worsen, our business, financial condition and
results of operations will likely be materially and adversely affected.
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly revenues and operating results have fluctuated and are likely to
continue to vary from quarter to quarter due to a number of factors, many of
which are not within our control. Factors that could affect our revenues
include, among others, the following:
. our ability to raise additional capital;
. our significant investment in research and development for our
subsidiaries and business units;
. our ability to control costs;
. international conflicts and acts of terrorism;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
. the size, timing, rescheduling or cancellation of significant customer
orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. changes in our pricing policies and the pricing policies by our
suppliers and competitors, pricing concessions on volume sales, as well
as increased price competition in general;
9
. the long lead times associated with government contracts or required by
vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. the effects of technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our business units;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the risks inherent in our acquisitions of technologies and businesses;
. risks and uncertainties associated with our international business;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and political conditions.
In addition, our sales in any quarter may consist of a relatively small
number of large customer orders. As a result, the timing of a small number of
orders may impact our quarter-to-quarter results. The loss of or a substantial
reduction in orders from any significant customer could seriously harm our
business, financial condition and results of operations.
Due to all of the factors listed above and other risks discussed in this
report, our future operating results could be below the expectations of
securities analysts or investors. If that happens, the trading price of our
common stock could decline. As a result of these quarterly variations, you
should not rely on quarter-to-quarter comparisons of our operating results as an
indication of our future performance.
Our Operating Strategy for Developing Companies is Expensive and May Not Be
Successful. Our business strategy historically has required us to make
significant investments in our business units. These investments are expensive
and require the commitment of significant time and resources. We expect to
continue to invest in the development of certain of our business units with the
goal of achieving profitability in each of our business units, and to a lesser
extent, to monetize those business units for the benefit of our stockholders
through an initial public offering, spin-off or sale to a strategic buyer. We
may not recognize the benefits of this investment for a significant period of
time, if at all. Our ability to achieve profitability in any business unit, to
complete any private or public offerings of securities by any of our business
units, and/or to spin-off our interest in the business unit to our stockholders
will depend upon many factors, including:
. the overall performance and results of operations of the particular
business unit;
. the potential market for our business unit;
. our ability to assemble and retain a 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 and sale transactions, and our
ability to obtain favorable determination letters from the Internal
Revenue Service; and
. general economic and market conditions, including the receptiveness of
the stock markets to initial public offerings and private placements.
We may not be able to achieve profitability in our business units, to
complete a successful private or public offering or to spin-off of any of our
business units in the near future, or at all. During fiscal 2001, we attempted
to complete the initial public offering of Iteris, but withdrew the offering due
to adverse market conditions. Even if we
10
are able to achieve profitability and the market is receptive to public
offerings, we may decide not to complete any further offerings, spin-off a
particular business unit, or delay the spin-off until a later date.
We Must Keep Pace with Rapid Technological Change to Remain Competitive.
Our target markets are in general characterized by the following factors:
. rapid technological advances;
. downward price pressure in the marketplace as technologies mature;
. changes in customer requirements;
. frequent new product introductions and enhancements; and
. evolving industry standards and changes in the regulatory environment.
Our future success will depend upon our ability to anticipate and adapt to
changes in technology and industry standards, and to effectively develop,
introduce, market and gain broad acceptance of new products and product
enhancements incorporating the latest technological advancements.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. We need to
continue to develop and introduce new products that incorporate the latest
technological advancements in hardware, storage media, operating system software
and applications software in response to evolving customer requirements. Our
business and results of operations could be adversely affected if we do not
anticipate or respond adequately to technological developments or changing
customer requirements. We cannot assure you that any such investments in
research and development will lead to any corresponding increase in revenue.
Our Future Success Depends on the Successful Development and Market
Acceptance of New Products. We believe our revenue growth and future operating
results will depend on our ability to complete development of new products and
enhancements, introduce these products in a timely, cost-effective manner,
achieve broad market acceptance of these products and enhancements, and reduce
our product costs. We may not be able to introduce any new products or any
enhancements to our existing products on a timely basis, or at all. In addition,
the introduction of any new products could adversely affect the sales of our
certain of our existing products.
Our future success will also depend in part on the success of several
recently introduced products including CommSync II, a Zyfer solution for secure,
high speed, point-to-point communications; AutoVue, our lane departure warning
system; and AIRO 9.0, our broadcast automation solution. Market acceptance of
our new products depends upon many factors, including our ability to accurately
predict market requirements and evolving industry standards, our ability to
resolve technical challenges in a timely and cost-effective manner and achieve
manufacturing efficiencies, the perceived advantages of our new products over
traditional products and the marketing capabilities of our independent
distributors and strategic partners. Our business and results of operations
could be seriously harmed by any significant delays in our new product
development. Certain of our new products could contain undetected design faults
and software errors or "bugs" when first released by us, despite our testing. We
may not discover these faults or errors until after a product has been installed
and used by our customers. Any faults or errors in our existing products or in
any new products may cause delays in product introduction and shipments, require
design modifications or harm customer relationships, any of which could
adversely affect our business and competitive position.
Iteris currently outsources the manufacture of its AutoVue product line to
a single manufacturer. This manufacturer may not be able to produce sufficient
quantities of this product in a timely manner or at a reasonable cost, which
could materially and adversely affect our ability to launch or gain market
acceptance of AutoVue.
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets. International sales represented 10% of
our net sales and contract revenues for the fiscal year ended March 31, 2002,
20% for the fiscal year ended March 31, 2001, and 20% for the fiscal year ended
March 31, 2000. During the fiscal year ended March 31, 2002, we reorganized our
European operations, which included the discontinuation of our Odetics Europe
Ltd., MAXxess Europe Ltd., Mariner France and Mariner Europe Ltd.
11
operations, and the transition of our Broadcast and MAXxess international
operations to branch office operations with the intent of lowering our
international costs. This reorganization may result in significantly lower
international sales in future periods and unanticipated liabilities related to
the closures and we may not achieve the anticipated cost savings. We may also
face challenges in managing and transitioning our international operations due
to our limited experience operating through branch offices. In addition, the
recent terrorist attacks in the United States and heightened security may
adversely impact our international sales and could make our international
operations more expensive.
International business operations are also subject to other inherent risks,
including, among others:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers or restrictions;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. import and export license requirements and restrictions of the United
States and each other country in which we operate;
. exposure to different legal standards and reduced protection for
intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political, social and economic instability.
We believe that international sales will continue to represent a
significant portion of our revenues, and that continued growth and profitability
may require further expansion of our international operations. Nearly all of our
international sales from this point on are denominated in U.S. dollars. As a
result, an increase in the relative value of the dollar could make our products
more expensive and potentially less price competitive in international markets.
We do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations.
Any of the factors mentioned above may adversely effect our future
international sales and, consequently, effect our business, financial condition
and operating results. Furthermore, as we increase our international sales, our
total revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
We Need to Manage Operations and the Integration of Our Acquisitions. Over
the past few years, we have expanded our operations and made several substantial
acquisitions of diverse businesses, including Intelligent Controls, Inc.,
International Media Integration Services, Ltd., Meyer Mohaddes Associates, Inc.,
Viggen Corporation, and certain assets of the Transportation Systems business of
Rockwell International. We may engage in acquisitions of complementary
businesses, products and technologies. Acquisitions may require significant
capital infusions and, in general, acquisitions also involve a number of special
risks, including:
. potential disruption of our ongoing business and the diversion of our
resources and management's attention;
. the failure to retain or integrate key acquired personnel;
. the challenge of assimilating diverse business cultures, and the
difficulties in integrating the operations, technologies and
information system of the acquired companies;
. increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
12
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
result of changes in management; and
. increased interest expense and amortization of acquired intangible
assets.
Acquisitions may also materially and adversely affect our operating results
due to large write-offs, contingent liabilities, substantial depreciation,
deferred compensation charges or goodwill amortization, or other adverse tax or
audit consequences. Our failure to manage growth and integrate our acquisitions
successfully could adversely affect our business, financial condition and
results of operations.
Our competitors are also soliciting potential acquisition candidates, which
could both increase the price of any acquisition targets and decrease the number
of attractive companies available for acquisition. We cannot assure you that we
will be able to consummate any additional acquisitions, successfully integrate
any acquisitions or realize the benefits anticipated from any acquisition.
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 Chairman of the Board, who
recently retired as our Chief Executive Officer, and Gregory A. Miner, our Chief
Executive Officer and Chief Financial Officer. The leadership transition between
Mr. Slutzky and Mr. Miner could adversely affect our business. We do not have
any employment contracts with any of our officers or key employees. The loss of
any of these individuals could adversely affect our business, financial
condition or results of operations.
Our success will also depend in large part upon our ability to continue to
attract, retain and motivate qualified engineering and other highly skilled
technical personnel. Competition for employees, particularly development
engineers, is intense. We may not be able to continue to attract and retain
sufficient numbers of such highly skilled employees. Our inability to attract
and retain additional key employees or the loss of one or more of our current
key employees could adversely affect upon our business, financial condition and
results of operations.
We May Not be Able to Adequately Protect or Enforce Our Intellectual
Property Rights. If we are not able to adequately protect or enforce the
proprietary aspects of our technology, competitors could be able to access our
proprietary technology and our business, financial condition and results of
operations will likely be seriously harmed. We currently attempt to protect our
technology through a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements and similar
means. Despite our efforts, other parties may attempt to disclose, obtain or use
our technologies or solutions. Our competitors may also be able to independently
develop products that are substantially equivalent or superior to our products
or design around our patents. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of the United States.
As a result, we may not be able to protect our proprietary rights adequately in
the United States or abroad.
From time to time, we have received notices that claim we have infringed
upon the intellectual property of others. Even if these claims are not valid,
they could subject us to significant costs. We have engaged in litigation in the
past, and litigation may be necessary in the future to enforce our intellectual
property rights or to determine
13
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. We also may have to indemnify certain customers or strategic
partners if it is determined that we have infringed upon or misappropriated
another party's intellectual property. Any of these results could adversely
affect on our business, financial condition and results of operations. In
addition, the cost of addressing any intellectual property litigation claim,
both in legal fees and expenses, and the diversion of management resources,
regardless of whether the claim is valid, could be significant and could
seriously harm our business, financial condition and results of operations.
We Are Controlled by Certain of Our Officers and Directors. As of June 21,
2002, our officers and directors beneficially owned approximately 24% of the
total combined voting power of the outstanding shares of our Class A common
stock and Class B common stock. As a result of their stock ownership, our
management will be able to significantly influence the election of our directors
and the outcome of corporate actions requiring stockholder approval, such as
mergers and acquisitions, regardless of how our other stockholders may vote.
This concentration of voting control may have a significant effect in delaying,
deferring or preventing a change in our management or change in control and may
adversely affect the voting or other rights of other holders of common stock.
Our Stock Structure and Certain Anti-Takeover Provisions May Affect the
Price of Our Common Stock. Certain provisions of our certificate of
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to our
stockholders. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. Our Class A common
stock entitles the holder to one-tenth of one vote per share and our Class B
common stock entitles the holder to one vote per share. The disparity in the
voting rights between our common stock, as well as our insiders' significant
ownership of the Class B common stock, could discourage a proxy contest or make
it more difficult for a third party to effect a change in our management and
control. In addition, our Board of Directors is authorized to issue, without
stockholder approval, up to 2,000,000 shares of preferred stock with voting,
conversion and other rights and preferences superior to those of our common
stock, as well as additional shares of Class B common stock. Our future issuance
of preferred stock or Class B common stock could be used to discourage an
unsolicited acquisition proposal.
In March 1998, we adopted a stockholder rights plan and declared a dividend
of preferred stock purchase rights to our stockholders. In the event a third
party acquires more than 15% of the outstanding voting control of our company or
15% of our outstanding common stock, the holders of these rights will be able to
purchase the junior participating preferred stock at a substantial discount off
of the then current market price. The exercise of these rights and purchase of a
significant amount of stock at below market prices could cause substantial
dilution to a particular acquiror and discourage the acquiror from pursuing our
company. The mere existence of a stockholder rights plan often delays or makes a
merger, tender offer or proxy contest more difficult.
We Do Not Pay Cash Dividends. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends on either class of
our common stock in the foreseeable future.
We May Be Subject to Additional Risks. The risks and uncertainties
described above are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business operations.
ITEM 2. PROPERTIES.
Our headquarters and principal operations are located in Southern
California. In 1984, we purchased and renovated a two building complex
containing approximately 257,900 square feet situated on approximately 14 acres
located at 1515 and 1585 South Manchester Boulevard in Anaheim, California. Our
facilities house our corporate and administrative offices (approximately 43,600
dedicated square feet), as well as the operations of MAXxess and Broadcast,
(approximately 35,000 dedicated square feet), Zyfer (approximately 56,300
dedicated square feet), and Iteris (approximately 30,000 dedicated square feet).
14
In May 2002, we completed the sale and leaseback of our Anaheim Facilities
for an aggregate sales price of $22.6 million. We entered into a 30-month lease
for 1585 South Manchester for a monthly rental payment of $57,553, and a ten
year lease for 1515 South Manchester for a monthly rental payment of $152,150.
We intend to consolidate our operations to within approximately 140,000 square
feet and sublease the remaining space in Anaheim to other tenants.
Broadcast leases approximately 7,400 square feet in Austin, Texas primarily
for service, sales support, and engineering. Iteris leases 8 office suites
representing an aggregate of approximately 20,000 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
needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
three months ended March 31, 2002.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since April 22, 2002, our Class A common stock and Class B common stock has
been listed on the Nasdaq SmallCap Market under the symbols "ODETA" and "ODETB,"
respectively. Prior to that, our Class A common stock and Class B common stock
were listed on the Nasdaq National Market. 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 SmallCap Market:
Class A Class B
Common Stock Common Stock
------------ ------------
High Low High Low
---- --- ---- ---
Fiscal Year Ended March 31, 2001
First Quarter ......................................... $15.25 $ 7.88 $15.00 $10.00
Second Quarter ........................................ 17.94 13.00 17.63 13.50
Third Quarter ......................................... 17.00 5.53 17.00 5.63
Fourth Quarter ........................................ 8.00 2.94 8.25 3.00
Fiscal Year Ended March 31, 2002
First Quarter ......................................... 4.50 2.19 4.59 3.13
Second Quarter ........................................ 2.49 1.38 3.80 1.76
Third Quarter ......................................... 1.97 1.13 2.59 1.41
Fourth Quarter ........................................ 1.92 1.44 3.29 1.82
Fiscal Year Ending March 31, 2002
First Quarter (through June 27, 2002) ................. 1.67 1.32 2.30 1.85
As of June 27, 2002, we had 508 holders of record of Class A common stock
and 113 holders of record of Class B common stock according to information
furnished by our transfer agent.
Dividend Policy
We have never paid or declared cash dividends on either class of our common
stock, and have no current plans to pay such dividends in the foreseeable
future. We currently intend to retain any earnings for working capital and
general corporate purposes. The payment of any future dividends will be at the
discretion of our Board of Directors, and will depend upon a number of factors,
including, but not limited to, future earnings, the success of our business,
activities, our capital requirements, our general financial condition and future
prospects, general business conditions, the consent of our lender and such other
factors as the Board may deem relevant.
Recent Sales of Unregistered Securities
During the quarter ended March 31, 2002, we did not sell or issue any
unregistered securities.
16
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, 2002 and the consolidated balance sheet data at March 31,
1998, 1999, 2000, 2001 and 2002 are derived from our audited consolidated
financial statements. The consolidated statements of operation data for the
fiscal years ended March 31, 1998 and 1999 and the consolidated balance sheet
data at March 31, 1998, 1999 and 2000 are not included in the consolidated
financial statements included elsewhere 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,
--------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales .................................................... $ 77,373 $ 64,805 $ 59,949 $ 56,119 $ 36,642
Contract revenues ............................................ 10,284 13,331 18,666 20,039 22,846
-------- -------- -------- -------- --------
Total net sales and contract revenues ........................ 87,657 78,136 78,615 76,158 59,488
Cost of sales ................................................ 53,663 46,939 49,147 44,869 22,245
Cost of contract revenues .................................... 6,430 9,007 13,431 13,781 13,132
Gross profit--net sales ...................................... 23,710 17,866 10,802 11,250 14,397
Gross profit--contract revenues .............................. 3,854 4,324 5,235 6,258 9,714
Total gross profit ........................................... 27,564 22,190 16,037 17,508 24,111
Selling, general and administrative expenses ................. 25,052 29,872 35,938 35,398 24,570
Research and development expenses ............................ 8,631 9,980 12,978 13,753 8,115
In process research and development .......................... 2,106 -- -- -- --
Special charge ............................................... 1,716 -- -- 6,285 2,189
-------- -------- -------- -------- --------
Loss from operations ......................................... (9,941) (17,662) (32,879) (37,928) (10,763)
Non-operating income (expense):
Royalty/other income ..................................... -- -- 38,437 19,055 2,864
Interest expense, net ..................................... (617) (1,807) (2,048) (1,762) (4,190)
-------- -------- -------- -------- --------
Income (loss) before taxes ................................... (10,558) (19,469) 3,510 (20,635) (12,089)
Income taxes (benefit) ....................................... (2,858) -- -- -- (785)
Minority interest in earnings of subsidiary .................. -- -- -- -- 1,910
-------- -------- -------- -------- --------
Income (loss) from continuing operations ..................... (7,700) (19,469) 3,510 (20,635) (13,214)
Income (loss) from discontinued operations, net of
income tax ................................................ 1,106 (649) (5,789) (11,905) (12,924)
Extraordinary loss from early extinguishment
of debt, net .............................................. -- -- -- -- (450)
-------- -------- -------- -------- --------
Net loss .................................................... . $ (6,594) $(20,118) $ (2,279) $(32,540) $(26,588)
======== ======== ======== ======== ========
Diluted earnings (loss) per share:
Continuing operations ..................................... $ (1.11) $ (2.49) $ 0.37 $ (2.07) $ (1.17)
Discontinued operations ................................... 0.16 (0.08) (0.61) (1.19) (1.15)
Extraordinary loss from the extinguishment of debt ........ -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Loss per share ............................................ $ (0.95) $ (2.57) $ (0.24) $ (3.26) $ (2.36)
======== ======== ======== ======== ========
Shares used in calculating diluted earnings (loss) per share . 6,912 7,820 9,444 9,977 11,267
======== ======== ======== ======== ========
At March 31,
--------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Working capital (deficit) ................................... $ 22,076 $ 18,045 $ 15,763 $ (5,785) $ (9,327)
Total assets ................................................ 88,760 81,355 81,850 68,061 52,238
Long-term debt (less current portion) ....................... 21,000 19,962 11,666 4,800 2,042
Accumulated deficit ......................................... (3,795) (23,913) (26,192) (58,732) (85,320)
Total stockholders' equity .................................. 38,580 36,323 36,110 20,378 5,255
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
We define our business segments as ITS, video products and telecom
products. The ITS segment consists of our majority-owned subsidiary, Iteris,
Inc. The video products segment includes our wholly-owned subsidiaries,
Broadcast, Inc. and MAXxess Systems, Inc. (previously known as Gyyr
Incorporated). The telecom products segment consists of Zyfer, Inc., our
wholly-owned subsidiary (formerly known as our Communications division). In
April 2001, Gyyr separated its operations into two divisions, the Gyyr CCTV
Products division, which manufactures analog and digital storage solutions, and
the Gyyr Electronic Access Control division, which manufactures enterprise
security management systems. In September 2001, we sold substantially all of the
assets and certain liabilities of the Gyyr CCTV Products division. In connection
with the sale, we changed the name of Gyyr to MAXxess Systems, Inc. to reflect
the focus of the business on electronic access control systems.
All references to our subsidiaries in this report include the prior
business and results of operations of such subsidiaries as our business units
prior to their incorporation.
During the quarter ended December 31, 2000, we began a restructuring to
reduce our overall expenses and to focus our business on those areas that we
believe would provide the highest return for stockholder capital. This
restructuring resulted in a 25% reduction in our workforce in the fiscal year
ended March 31, 2001 and the discontinuation of certain product lines. The
restructuring efforts in fiscal 2001 also resulted in restructuring charges of
approximately $6.3 million for severance costs and the write down of certain
assets. In September 2001, in connection with continued cost control efforts and
the slowdown in the telecommunications industry, our Board of Directors approved
the immediate discontinuation of Mariner Networks, Inc., our wholly owned
subsidiary. Mariner had previously been included within our telecom products
segment. The aggregate losses recognized to exit the Mariner operations were
approximately $8.4 million and are included in the loss from discontinued
operations in the consolidated statements of operations in the fiscal year ended
March 31, 2002.
As a result of the sale of the Gyyr CCTV Products division and the
discontinuation of Mariner Networks, we reorganized our European operations and
reduced our corporate staff. The reorganization of the European operations
included the discontinuation of our Odetics Europe Ltd., Gyyr Europe Ltd.,
Mariner France and Mariner Europe Ltd. operations, and the transition of our
Broadcast and MAXxess international operations to branch office operations with
the intent of lowering our international costs. Related to the actions in
Europe, we incurred severance and other costs totaling $1.4 million in the
fiscal year ended March 31, 2002.
Critical Accounting Policies And Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements included herein,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and related disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis, we
evaluate these estimates and assumptions, including those related to the
collectibility of accounts receivables, the valuation of inventories, the
recoverability of long-lived assets, including goodwill, and reserves for
restructuring and related activities. We base these estimates on historical
experience and on various other factors which we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. These estimates and assumptions by their nature
involve risks and uncertainties, and may prove to be inaccurate. In the event
that any of our estimates or assumptions are inaccurate in any material respect,
it could have a material adverse effect on our reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
18
The following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition. We record product revenues and related cost of sales
on the date of shipment or, if required, upon acceptance by the customer,
provided that we believe collectibility of the net sales amount is probable.
Accordingly, at the date revenue is recognized, the significant uncertainties
concerning the sale have been resolved. Unless otherwise stated in our product
literature, we provide a one to two year warranty on all product material and
workmanship, and establish reserves for potential warranty returns as products
are shipped. Defective products will be either repaired or replaced, at our
option, upon meeting certain criteria.
Contract revenue 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. We record a charge to earnings for any anticipated losses on contracts in
the period in which such losses are 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.
We include in revenue profit incentives in the period in which their realization
is reasonably assured.
We sell certain products that 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, we recognize revenue
is upon delivery, assuming the fee is fixed and collectibility is probable. If
an arrangement requires significant production, modification or customization of
the software, we account for the arrangement on the percentage of completion
method of accounting as costs are incurred.
We record revenues from follow-on service and support, for which we charge
separately, in the period in which such services are performed. We record
revenues from computer software maintenance agreements ratably over the term of
the agreements. When computer software maintenance is included in a software
license agreement, we defer an appropriate portion of the license fee and
recognize it over the maintenance period.
Accounts Receivable. We estimate the collectibility of customer receivables
on an ongoing basis by periodically reviewing balances outstanding over a
certain period of time. We have recorded reserves for receivables deemed to be
at risk for collection as well as a general reserve based on our historical
experience. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables, including the current
credit-worthiness of each customer. If the financial condition of our customers
deteriorates, resulting in an impairment of their ability to make required
payments, additional allowances may be required which could adversely affect our
operating results.
Inventory. We state our inventories at the lower of cost or market and
provide reserves for potentially excess and obsolete inventory. In assessing the
ultimate realization of inventories, we make judgments as to future demand
requirements and compare that with the current or committed inventory levels.
Reserves are established for inventory levels that exceed future demand. It is
possible that reserves over and above those already established may be required
in the future if market conditions for our products should deteriorate.
Impairment of Assets and Restructuring. We assess the impairment of
goodwill and other identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The
determination of related estimated useful lives and whether or not these assets
are impaired involves significant judgments, related primarily to the future
profitability and/or future value of the assets. Changes in our strategic plan
and/or market conditions could significantly impact these judgments and require
adjustments to recorded asset balances.
In 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible
Assets ("Statement 142"), which we adopted on April 1, 2002. Under Statement
142, goodwill will be subject to annual impairment tests based upon a comparison
of the fair value of each of our reporting units, as defined, and the carrying
value of the reporting units' net assets, including goodwill. Pursuant to
Statement 142, we are currently testing our goodwill for impairment, and are
unable at this time to estimate the amount of the impairment charge, if any,
that may be required.
19
During fiscal 2002, we recorded reserves in connection with the
discontinuance of out Mariner Networks subsidiary, the sale of the assets of our
Gyyr CCTV Products division and the restructuring of our European operations.
These reserves include estimates pertaining to employee separation costs and
facility closure costs. Although we do not anticipate significant changes, the
actual costs to settle such liabilities may differ from the amounts estimated.
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,
---------------
2000 2001 2002
---- ---- ----
Net sales ............................................................... 76.3% 73.7% 61.6%
Contract revenues ....................................................... 23.7 26.3 38.4
------ ------ -------
Total net sales and contract revenues ................................... 100.0% 100.0% 100.0%
Gross profit--net sales ................................................. 18.0 20.0 39.3
Gross profit--contract revenues ......................................... 28.0 31.2 42.5
Selling, general and administrative expense ............................. 45.7 46.5 41.3
Research and development expense ........................................ 16.5 18.1 13.6
Special charge .......................................................... -- 8.3 3.7
------ ------ -------
Loss from operations .................................................... (41.8) (49.8) (18.1)
Non-operating income (expense):
Royalty/other income ............................................... 48.9 25.0 4.8
Interest expense, net .............................................. (2.6) (2.3) (7.0)
Income taxes (benefit) .................................................. -- -- (1.3)
Minority interest in earnings of subsidiary ............................. -- -- 3.2
Income and (loss) from discontinued operations, net of income taxes ..... (7.4) (15.6) (21.7)
Extraordinary loss from early extinguishment of debt .................... -- -- (0.8)
------ ------ -------
Net loss ................................................................ (2.9)% (42.7)% (44.7)%
====== ====== =======
Net Sales and Contract Revenues. Net sales and contract revenues consist of
(i) sales of products and services to commercial and municipal agencies ("net
sales") and (ii) revenues derived from contracts with state, county and
municipal agencies for ITS projects ("contract revenues"). Contract revenues
also include revenue from contracts with agencies of the United States
government and foreign entities for space-borne recorders. Total net sales and
contract revenues decreased 21.9% to $59.5 million for the fiscal year ended
March 31, 2002 ("fiscal 2002") compared to $76.2 million for the fiscal year
ended March 31, 2001 ("fiscal 2001"), and decreased 3.1% for the fiscal year
ended March 31, 2001 compared to $78.6 million for the fiscal year ended March
31, 2000 ("fiscal 2000").
Net Sales. Net sales decreased 34.7% to $36.6 million in fiscal 2002
compared to $56.1 million in fiscal 2001. The majority of the decrease in net
sales in fiscal 2002 compared to fiscal 2001 was attributable to our sale of the
Gyyr CCTV Products division ("CCTV") late in the second quarter of fiscal 2002.
CCTV product sales in fiscal 2002 include sales only through the date of the
divestiture. CCTV product sales comprised $26.4 million and $8.3 million of net
sales in fiscal 2001 and fiscal 2002, respectively. The Company also experienced
decreased sales in Broadcast, Zyfer and MAXxess, which were offset by increased
sales of Iteris products in fiscal 2002 compared to fiscal 2001. Iteris sales
growth reflects increased unit sales of Vantage video detection systems and
AutoVue lane departure warning systems. In the third quarter of fiscal 2001,
Broadcast determined it would not pursue continued sales opportunities for its
Roswell facility management system and shifted the focus of its business to
sales of its AIRO Automation systems. The average selling price of an AIRO
system is lower than that of Broadcast's tape library products that comprised a
significant portion of its net sales in the prior fiscal year. The decrease in
Broadcast net sales largely reflects sales of a more focused, software centric
product line in fiscal 2002 compared to fiscal 2001. The decrease in Zyfer sales
in fiscal 2002 primarily reflects its transition to selling its new line of
CommSynch II products that address specialized communications applications, and
the decline in revenue derived from LGIC, a significant Korean-based customer.
The decrease in MAXxess net sales primarily reflects the decrease in sales to a
major telecommunications customer in fiscal 2002 compared to fiscal 2001.
20
Net sales decreased 6.4% to $56.1 million in fiscal 2001 compared to $59.9
million in fiscal 2000 as a result of declining sales in Broadcast and MAXxess,
offset in part by increased sales in Iteris and Zyfer. Broadcast sales decreased
20.1% in fiscal 2001 compared to fiscal 2000 as a result of declining unit sales
of its automated tape libraries. In the third quarter of fiscal 2001, Broadcast
determined it would not pursue continued sales opportunities for its Roswell
facility management system and shifted the focus of its business on sales of its
AIRO Automation Systems. MAXxess' sales decreased 10.8% in fiscal 2001 compared
to fiscal 2000 due principally to the decline in sales of analog based
time-lapse recorder product families. During the first quarter of fiscal 2001,
MAXxess' divested its Vortex Dome and Quarterback Controller product lines as
part of a broader strategy to narrow its product offering to digital and analog
recording and access control systems. Iteris' product sales increased 37% in
fiscal 2001, primarily due to increased unit sales of its Vantage video
detection products.
Contract Revenues. Contract revenues increased 14.0% to $22.8 million in
fiscal 2002 compared to $20.0 million in fiscal 2001, and increased 7.4%
compared to $18.7 million in fiscal 2000. The increase in contract revenues in
both fiscal 2002 and fiscal 2001 reflects an increase in Iteris' contract
revenues for ITS projects.
Contract revenues derived from Iteris represented 88.4% of total contract
revenues in fiscal 2002 compared to 87.0% of total contract revenues in fiscal
2001, and 83.5% of total contract revenues in fiscal 2000. The increase in
Iteris' contract revenues in both fiscal 2002 and fiscal 2001 was offset in part
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.
Gross Profit. Total gross profit increased 37.7% to $24.1 million in fiscal
2002 compared to $17.5 million in fiscal 2001, and increased 9.2% in fiscal 2001
compared to $16.0 million in fiscal 2000. Total gross profit as a percent of net
sales and contract revenues increased to 40.1% in fiscal 2002 compared to 23.0%
in fiscal 2001 and 20.4% in fiscal 2000. Gross profit as a percentage of net
sales increased to 39.3% in fiscal 2002 compared to 20.0% in fiscal 2001 and
18.0% in fiscal 2000. Gross profit in fiscal 2001 was net of charges of $3.1
million for the write-off of inventories associated with discontinued product
lines. Before the effect of these write-offs, gross profit as percent net sales
in fiscal 2001 was 25.6%.
The increase in gross profit in fiscal 2002 compared to fiscal 2001
primarily reflects increased gross margin on net sales in Iteris and Broadcast.
Broadcast experienced an improved gross margin as a result of its focus on the
sale of higher margin AIRO Automation Systems, and fewer sales of automated tape
libraries, which historically had low gross profits relative to sales. Iteris'
gross profits improved in fiscal 2002 primarily as a result of a 53.5% increase
in Vantage sales and related improved manufacturing efficiencies. The increase
in gross profit in fiscal 2002 also reflects the benefit of the divestiture of
the Gyyr CCTV Product line, which had historically low gross margins relative to
net sales in fiscal 2001.
The increase in gross profit as a percent of net sales in fiscal 2001
reflects increased gross profit on sales of Iteris Vantage products, which
comprised 17.5% of net sales in fiscal 2001 compared to 11.7% of net sales in
fiscal 2000. The improvement in Vantage gross profits was offset in part by
pricing concessions given to certain customers in our Broadcast business, which
negatively impacted the gross profit performance in fiscal 2000. During fiscal
2000, gross profit on net sales was also impaired due to our adjustments to
inventory reserves and capitalized software related to certain discontinued
products and product options in Broadcast and MAXxess.
Gross profit as a percent of contract revenues increased to 57.5% in fiscal
2002 compared to 31.2% in fiscal 2001, and compared to 28.0% in fiscal 2000. The
increase in gross profit on contract revenues in fiscal 2002 principally
reflects adjustments to loss reserves on certain long term contracts in Iteris
resulting from changes in the scope of work defined by a major customer. The
increase in gross profit on contract revenues in fiscal 2001 primarily reflects
improved gross profit performance in both Iteris and Zyfer. We recognize
contract revenues and related gross profit using percentage of completion
contract accounting, and the underlying mix of contract activity primarily
affects the related gross profit recognized in any given year.
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased 30.6% to $24.6 million (or 41.3% of total net
sales and contract revenues) in fiscal 2002 compared to $35.4 million (or 46.5%
of total net sales and contract revenues) in fiscal 2001, and decreased 1.5% in
fiscal 2001 compared to $35.9 million (or 45.7% of total net sales and contract
revenues) in fiscal 2000. The restructuring activities, which commenced during
the third quarter of fiscal 2001, resulted in substantial decreases in selling,
general and administrative
21
expense in Broadcast, MAXxess and Iteris in fiscal 2002. The expense reductions
in the current fiscal year that are associated with the restructuring were
augmented by further cost reductions associated with the divestiture of the Gyyr
CCTV Product line in September 2001.
The decrease in selling, general and administrative expenses in fiscal 2001
reflects increased expenses in Iteris, offset by decreased expenses in MAXxess
and Broadcast. During fiscal 2001, Iteris experienced increased general and
administrative expense related to the build-up of its administrative
infrastructure to support its planned initial public offering and spin-off from
Odetics, originally planned for the first quarter of fiscal 2001. As a result of
the aborted public offering and spin-off, general and administrative expense in
fiscal 2001 included a charge of approximately $360,000 related to the write-off
of deferred public offering costs. The increase in Iteris was offset by
decreased expenditures in MAXxess and Broadcast, realized as part of cost
reductions included in our restructuring activities.
Research and Development Expense. Research and development expense
decreased 41.0% to $8.1 million (or 13.6% of total net sales and contract
revenues) in fiscal 2002 compared $13.8 million (or 18.1% of total net sales and
contract revenues) in fiscal 2001, and increased 6.0% in fiscal 2001 compared to
$13.0 million (or 16.5% of total net sales and contract revenues) in fiscal
2000. For competitive reasons, we closely guard the confidentiality of specific
development projects. The decrease in research and development expense in fiscal
2002 reflects the full fiscal year cost benefit of the restructuring, which was
begun in the fourth quarter of fiscal 2001. The restructuring resulted in
substantial decreases in research and development expenditures, primarily in the
areas of payroll and related benefits, prototype material cost and consulting
fees. Reductions in research and development expenses in fiscal 2002 were also
associated with the divestiture of the Gyyr CCTV Product line at the end of the
second quarter of fiscal 2002.
The increase in research and development expense in fiscal 2001 reflects
increased spending primarily by Iteris, partially offset by reductions in
spending by Gyyr and Broadcast. The increase in Iteris research and development
expense largely represents expenditures to support its development initiatives
for its Personalized Traveler Information Systems and, to a lesser extent,
continued development of its AutoVue product offering. As part of cost reduction
initiatives completed in the third quarter of fiscal 2001, Iteris substantially
reduced spending to support development of its Personalized Traveler Information
Systems. The reductions in research and development expense in MAXxess and
Broadcast reflect the result of our overall expense reduction efforts.
Special Charge. The special charge of $2.2 million in fiscal 2002 reflects
approximately $700,000 in severance charges incurred upon the retirement of the
former Chief Executive Officer of Odetics, and charges of $1.5 million related
to the reorganization of our European operations. The reorganization of European
operations included the discontinuation of our Odetics Europe Ltd., Gyyr Europe
Ltd., Mariner France and Mariner Europe Ltd. operations, and the transition of
our Broadcast and MAXxess international operations to branch office operations
with the intent of lowering our international costs.
In fiscal 2001, we incurred restructuring charges of $6.3 million.
Approximately $1.3 million of the charges related to severance payments for
staffing reductions, and the remainder represents non-cash charges for asset
write-downs and reserves established in connection with the discontinuation of
certain product lines.
Royalty Income. During fiscal 2000 and 2001, in connection with the
settlement of patent litigation filed that Odetics filed against StorageTek, we
received proceeds, net of expenses and fees, of approximately $38.4 million and
$17.8 million respectively in full settlement of the amounts due us.
Interest Expense, Net. Interest expense, net reflects the net of interest
expense and interest income as follows:
Year Ended March 31,
-----------------------------------
2000 2001 2002
--------- --------- ---------
Interest expense ................. $2,313 $2,012 $4,190
Interest income .................. 265 250 --
------ ------ ------
Interest expense, net ............ $2,048 $1,762 $4,190
Interest expense increased 108.3% in fiscal 2002 compared to fiscal 2001
and decreased 13.0% in fiscal 2001 compared to fiscal 2000. The increase in
interest expense in fiscal 2002 reflects an increase in our average outstanding
borrowings, an increase in our cost of borrowing and $1.2 million of
amortization of debt discount associated with a warrant issued in connection
with certain of our financing transactions. Interest income in fiscal 2000 and
fiscal 2001 and
22
the decline in interest expense from 2000 to fiscal 2001 is primarily related to
interest earned on invested cash received from our settlement with StorageTek.
Extraordinary Item. The extraordinary loss incurred in fiscal 2002 relates
to a prepayment penalty on the retirement of our mortgage note payable resulting
from the refinancing of our Anaheim real property.
Income Taxes. During fiscal 2002, we recognized an income tax benefit of
$785,000 for the recovery of net operating loss carrybacks made available under
the Job Creation and Workers Association Act of 2002. We have not provided
income tax benefit for the losses incurred in fiscal 2000 and fiscal 2001 due to
the uncertainty as to the ultimate realization of the related benefit.
Liquidity and Capital Resources
As of March 31, 2002, we had cash and cash equivalents of $408,000. During
fiscal 2002, we used $18.2 million of cash to fund our operations, which
reflects our net loss of $26.6 million reduced by non-cash charges of $8.4
million related to asset impairment write-downs and reserves for costs to exit
Mariner Networks, $3.8 million for depreciation and amortization, and $1.6
million of losses incurred from the sale of common stock of our majority owned
subsidiary, Iteris, Inc. Significant financing and investing activities during
fiscal 2002 are discussed below.
In April 2001, we concluded the sale of our Vortex Dome and Quarterback
Controller product lines for approximately $1.1 million in net cash proceeds
resulting in a $0.1 million gain. The proceeds were used to reduce outstanding
borrowings due on our bank line of credit.
In May 2001, we received $16.0 million pursuant to a promissory note
secured by a first trust deed on our principal facilities in Anaheim, California
which bore interest at 10% per annum. This promissory note was paid in full at
its scheduled maturity date on May 29, 2002. In connection with this note, we
issued warrants to the lender to purchase 426,667 shares of our Class A common
stock at an exercise price of $4.00 per share. In connection with a forbearance
agreement negotiated in November 2001, we repriced the exercise price of these
warrants to $3.00 per share. We allocated approximately $1.3 million of the loan
proceeds to the warrant, and will accrete that amount to interest expense over
the term of the loan.
Of the $16.0 million proceeds received from this note, we used
approximately $6.0 million to retire the pre-existing first trust deed on our
Anaheim real property, which included a prepayment penalty of $450,000. This
prepayment penalty is reflected as an extraordinary item in the accompanying
consolidated statement of operations. We also used approximately $5.9 million of
the proceeds to repay all outstanding borrowings under our bank line of credit,
which was then terminated. We used the balance of the proceeds from this
financing, after payment of the related expenses, for general working capital
purposes.
In August 2001, Iteris issued 1,781,268 shares of its Series A preferred
stock to one institutional investor for a purchase price of $5.0 million in
cash. In addition, Iteris issued 1,343,645 shares of its Series A preferred
stock and 547,893 shares of its common stock in exchange for $500,000 in cash
and the retirement of its $3.75 million subordinated convertible promissory
note, which Iteris entered into in January 2000, plus related accrued interest
of $400,000. In August and December 2001, Odetics sold 1,539,241 shares of
Iteris common stock that Odetics owned for proceeds of 3.8 million to a group of
investors, which included certain members of management of Odetics and Iteris.
As a result of this transaction, we realized a loss of $0.6 million. At December
31, 2001, Odetics owned 78.2% of the outstanding common stock of Iteris or 62.7%
as calculated for the preferred stock conversion equivalent.
In August 2001, Iteris entered into a loan and security agreement which
provided for a line of credit with maximum borrowings of $5.0 million. The line
of credit bears interest at prime plus 2% (6.75% at March 31, 2002) and matures
in August 2004. At March 31, 2002, $0.8 million was outstanding under the line
of credit and $3.3 million was available for future borrowing.
In September 2001, we completed the sale of substantially all of the assets
of our Gyyr CCTV Products division for $8.8 million in cash, plus the assumption
of $1.0 million in debt. In connection with this transaction, we recorded a
non-operating gain of $2.5 million in the three months ended September 30, 2001.
We used the proceeds from the transaction to retire the remaining obligations
due under our previous bank
23
line of credit, which has now expired, and to fund severance obligations and for
other general working capital requirements.
In September 2001, we discontinued the operations of our wholly-owned
subsidiary, Mariner Networks Inc. The aggregate losses recognized to exit the
Mariner operations were approximately $8.4 million, and are included in the loss
from discontinued operations in our consolidated statements of operations for
fiscal 2002.
In February 2002, we entered into a $1.25 million line of credit with a
partnership controlled by the Chairman of our Board of Directors. The line of
credit bears interest at prime plus 4% (8.75% at March 31, 2002) and matures in
July 2003. At March 31, 2002, $1.25 million was outstanding under this line of
credit.
In May 2002, we completed the sale and leaseback of our Anaheim, California
facilities for an aggregate sale price of $22.6 million. Approximately $16.4
million of the proceeds from this sale were used to repay the outstanding
indebtedness under the 2001 promissory note which was secured by a first deed of
trust on our Anaheim facilities. The balance of the proceeds from this sale will
be used for general working capital purposes.
The Company's contractual obligations are as follows at March 31, 2002
Payments Due by Period (in thousands)
-------------------------------------------------------------------
1 year After
Total or less 2-3 years 4-5 years 5 years
----- ------- --------- --------- -------
Note payable ..................... 16,000 16,000 - - -
Lines of credit .................. 2,017 - 2,017 - -
Capital lease obligations ........ 402 377 25 - -
Operating leases.................. 545 327 218 - -
------ ------ ----- ----- ----
Total ...................... 18,964 16,704 2,260 - -
====== ====== ===== ===== ====
The $16.0 million note payable was paid in full in May 2002, upon the
completion of the sale and leaseback of our Anaheim facility. Under the terms of
the lease, we committed to lease one of the two buildings on the property for a
period of ten years, and to lease the other building for a period of 30 months.
Minimum lease payments under the terms of these leases over the next five years,
and thereafter are as follows: 2003: $2.1 million; 2004: $2.5 million; 2005:
$2.3 million; 2006: $1.8 million; 2007: $1.8 million; and thereafter: $9.4
million.
We expect that our operations will continue to use net cash at least
through the first half of fiscal 2003. We also expect to have an ongoing need to
raise cash by securing additional debt or equity financing, or by divesting
certain assets to fund our operations until we return to profitability and
positive operating cash flows. However we cannot be certain that we will be able
to secure additional debt or equity financing or divest of certain assets on
terms acceptable to us, or at all. Our future cash requirements will be highly
dependent upon our ability to control expenses, as well as the successful
execution of the revenue plans by each of our business units. As a result, any
projections of future cash requirements and cash flows are subject to
substantial uncertainty.
These conditions, together with our recurring operating losses, raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). The Statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, however it retains the
fundamental provisions of that statement related to the recognition and
measurement of the impairment of long-lived assets to be "held and used." SFAS
144 also supersedes the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of Operation's--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions (APB 30), for the disposal of
a segment of a business. Under SFAS
24
144 a component of a business that is held for sale is reported in discontinued
operations if (i) the operations and cash flows will be, or have been,
eliminated from the on-going operations of the company and, (ii) the company
will not have any significant continuing involvement in such operations. In the
quarter ended September 30, 2001, we adopted the provisions of SFAS 144
effective April 1, 2001.
In 2001, the FASB issued Statement No. 141, Business Combinations ("SFAS
141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which we
adopted on April 1, 2002. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but, instead, will
be subject to annual impairment tests. Other intangible assets will continue to
be amortized over their useful lives. We will apply the new rules on accounting
for goodwill and other intangible assets beginning in the first quarter of
fiscal 2003. At March 31, 2002, we had goodwill of approximately $9.8 million.
Pursuant to Statement 142, we are currently testing our goodwill for impairment
and are unable at this time to estimate the amount of the impairment charge, if
any, that may be required.
On a pro forma basis, application of the non-amortization provision of SFAS
141 would have reduced our net loss in the years ended March 31, 2000, 2001 and
2002 as follows:
Year ended March 31
(in thousands) 2000 2001 2002
---------------------------------------
Pro forma net loss $(592) $(30,616) $(25,072)
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Our exposure to interest rate risk is limited to our lines of credit.
Iteris' and Odetics' lines of credit bear interest at the prevailing prime rate,
plus 2% and 4%, respectively. Our $16.0 million note payable, prior to its
repaymentin May 2002, carried a fixed rate of interest. We estimate that, based
on amounts outstanding at March 31, 2002, a 10% increase in the prime rate would
result in an increase in interest expense, on an annualized basis, of less than
$0.1 million.
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.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
(a) Indemnification of Directors. The information under the caption
"Election of Directors" appearing in our proxy statement, is incorporated herein
by reference.
(b) Identification of Executive Officers. The information under the caption
"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 caption "Executive Compensation and Other Information" appearing in
our proxy statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information" appearing in our proxy statement, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of March 31, 2002, Odetics had only one plan, the 1997 Stock Incentive
Plan, pursuant to which equity securities of Odetics are authorized for
issuance. The following table sets forth certain information regarding this
plan:
(a) (b) (c)
Number of Securities
Number of Securities Remaining Available
to be Issued Weighted Average under Equity Compensation
Upon Exercise of Exercise Price of Plans (excluding some
Equity Compensation Plans Outstanding Options, Outstanding Options, securities reflected
Approved by Security Holders Warrants and Rights Warrants and Rights in column (a))
- ---------------------------- -------------------- -------------------- -------------------------
1997 Stock Incentive Plan.... 328,655 8.37 1,322,195
Equity Compensation Plans Not
Approved by Security Holders
- ----------------------------
None......................... - - -
Total..........................
The information under the caption "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 TRANSACTIONS
The information under the caption "Certain Transactions," appearing in our
proxy statement, is incorporated herein by reference.
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, 2001 and 2002 ............................................ F-3
Consolidated Statements of Operations for the years ended March 31, 2000, 2001 and 2002 .............. F-4
Consolidated Statements of Stockholders' Equity for the years ended March 31, 2000, 2001
and 2002 ........................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002 .............. F-6
Notes to Consolidated Financial Statements ........................................................... F-7
2. Financial Statement Schedules.
Schedule II-- Valuation and Qualifying Accounts ...................................................... S-1
27
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. (a) 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 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).
10.4 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).
10.5 1997 Stock Incentive Plan of Odetics (incorporated by reference to
Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000).
10.6 Form of Notice of Grant of Stock Option (incorporated by reference to
Exhibit 99.2 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000)
10.7 Form of Stock Option Agreement (incorporated by reference to Exhibit
99.3 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000).
10.8 Form of Addendum to Stock Option Agreement--Involuntary Termination
Following Corporate Transaction or Change in Control (incorporated by
reference to Exhibit 99.4 to Odetics' Registration Statement on Form
S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000).
10.9 Form of Addendum to Stock Option Agreement--Limited Stock Appreciation
Rights (incorporated by reference to Exhibit 99.5 to Odetics'
Registration Statement on Form S-8 (File No. 333-30396) as filed with
the SEC on February 14, 2000).
10.10 Form of Stock Issuance Agreement (incorporated by reference to Exhibit
99.6 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000)
28
10.11 Form of Addendum to Stock Issuance Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control (incorporated by
reference to Exhibit 99.7 to Odetics' Registration Statement on Form
S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000).
10.12 Form of Notice of Grant of Automatic Stock Option--Initial Grant filed
as Exhibit 99.8 filed as Exhibit (incorporated by reference to Exhibit
99.8 to Odetics' Registration Statement on Form S-8 (File No.
333-30396) as filed with the SEC on February 14, 2000).
10.13 Form of Notice of Grant of Automatic Stock Option--Annual Grant
(incorporated by reference to Exhibit 99.9 to Odetics' Registration
Statement on Form S-8 (File No. 333-30396) as filed with the SEC on
February 14, 2000).
10.14 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the
(incorporated by reference to Exhibit 99.10 to Odetics' Registration
Statement on Form S-8 (File No. 333-30396) as filed with the SEC on
February 19, 2000).
10.15 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).
10.16 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).
10.17 Subordinated Convertible Note Purchase Agreement dated January 25,
2000 between Iteris, Inc. and DaimlerChrysler GmbH (incorporated by
reference to Exhibit 10.31 to Odetics' Annual Report on Form 10-K as
filed with the SEC on June 29, 2000).
10.18 Subordinated Convertible Note dated January 25, 2000 between Iteris,
Inc. and DaimlerChrysler GmbH (incorporated by reference to Exhibit
10.32 to Odetics' Annual Report on Form 10-K as filed with the SEC on
June 29, 2000).
10.19 Amendment to Rights Agreement, dated May 21, 2001, by and between
Odetics and Fleet National Bank (a.k.a. Bank Boston, N.A.)
(incorporated by reference to Exhibit 99.4 to Odetics' Current Report
on Form 8-K as filed with the SEC on June 1, 2001).
10.20 Amended and Restated Agreement of Purchase and Sale and Escrow
Instructions, dated February 19, 2002, by and between Odetics, Inc.
and 1515 South Manchester, LLC (incorporated by reference to Exhibit
2.1 to Odetics' Current Report on Form 8-K as filed with the SEC on
June 12, 2002).
21 Subsidiaries of Odetics.
23.1 Consent of Independent Auditors.
(b) Reports on Form 8-K
On June 12, 2002, we filed a Current Report on Form 8-K to announce the
sale and lease back of our headquarters and principal operating facilities in
Anaheim, California.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on June 28, 2002.
ODETICS, INC.
By: /s/ GREGORY A. MINER
--------------------------------
Gregory A. Miner,
Chief Executive Officer
and Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Odetics, Inc., do hereby
constitute and appoint Gary Smith 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/ GREGORY A. MINER Director, Chief Executive Officer June 28, 2002
--------------------
Gregory A. Miner and Chief Financial Officer
(principal executive officer and
principal financial officer)
/s/ JOEL SLUTZKY Chairman of the Board June 28, 2002
-----------------
Joel Slutzky
/s/ KEVIN C. DALY Director June 28, 2002
------------------
Kevin C. Daly, Ph.D
/s/ CRANDALL GUDMUNDSON Director June 28, 2002
-----------------------
Crandall Gudmundson
/s/ JERRY MUENCH Director June 28, 2002
----------------
Jerry Muench
30
Signature Title Date
--------- ----- ----
/s/ JOHN SEAZHOLTZ Director June 28, 2002
-------------------
John Seazholtz
/s/ GARY SMITH Vice President and Controller June 28, 2002
---------------
Gary Smith (principal accounting officer)
/s/ THOMAS L. THOMAS Director June 28, 2002
--------------------
Thomas L. Thomas
/s/ PAUL E. WRIGHT Director June 28, 2002
-------------------
Paul E. Wright
31
Odetics, Inc.
Index to Consolidated Financial Statements
Page
Report of Independent Auditors ..................................................................... F-2
Consolidated Balance Sheets as of March 31, 2001 and 2002 .......................................... F-3
Consolidated Statements of Operations for the years ended
March 31, 2000, 2001 and 2002 .................................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000, 2001 and 2002 .................................................................. F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 2001 and 2002 .................................................................. 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, 2001 and 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 2002. 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, 2001 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2002, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans as to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Orange County, California
May 22, 2002, except for Note 1,
as to which the date is May 29, 2002
F-2
Odetics, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
March 31
2001 2002
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,218 $ 408
Trade accounts receivable, net of allowance for doubtful accounts of
$1,644 in 2001 and $381 in 2002 14,300 10,301
Costs and estimated earnings in excess of billings on uncompleted
contracts 3,296 3,565
Inventories:
Finished goods 1,611 1,034
Work in process 51 103
Materials and supplies 8,991 7,275
Prepaid expenses and other 992 1,830
Assets of discontinued operations 5,639 205
--------------------------
Total current assets 37,098 24,721
Property, plant and equipment:
Land 2,060 2,060
Buildings and improvements 18,982 19,014
Equipment 30,897 26,993
Furniture and fixtures 2,643 1,094
Allowances for depreciation (34,405) (31,441)
--------------------------
20,177 17,720
Goodwill, net of accumulated amortization of $4,217 in 2001 and $4,553 in
2002 10,622 9,769
Other assets 164 28
--------------------------
Total assets $ 68,061 $ 52,238
==========================
F-3
Odetics, Inc.
Consolidated Balance Sheets (continued)
(In thousands, except share and per share amounts)
March 31
2001 2002
------------------------
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 8,954 $ 6,611
Accrued payroll and related 4,255 5,295
Accrued expenses 2,352 1,373
Contract reserve 2,290 600
Billings in excess of costs and estimated earnings on uncompleted
contracts 2,575 2,236
Revolving line of credit 13,471 -
Line of credit with related party - -
Liabilities of discontinued operations 1,996 1,800
Current portion of long-term debt 6,990 16,133
------------------------
Total current liabilities 42,883 34,048
Revolving line of credit - 2,017
Long-term debt, less current portion 4,800 25
Minority interest - 10,893
Commitments (Note 13)
Stockholders' equity:
Preferred stock:
Authorized shares - 2,000,000
Issued and outstanding - none - -
Common stock, $.10 par value:
Authorized shares - 50,000,000 of Class A and 2,600,000 of
Class B
Issued and outstanding shares - 9,468,620 of Class A and
1,035,841 of Class B at March 31, 2001; 11,490,530 of Class
A and 1,035,841 of Class B at March 31, 2002 1,050 1,252
Paid-in capital 78,548 89,134
Treasury stock, 93 and 93 shares in 2001 and 2002, respectively (1) (1)
Notes receivable from employees (51) (51)
Accumulated other comprehensive income (436) 241
Accumulated deficit (58,732) (85,320)
------------------------
Total stockholders' equity 20,378 5,255
------------------------
Total liabilities and stockholders' equity $ 68,061 $ 52,238
========================
See accompanying notes.
F-4
Odetics, Inc.
Consolidated Statements of Operations
(In thousands, except per share information)
Year ended March 31
2000 2001 2002
-------------------------------------------
Net sales and contract revenues:
Net sales $ 59,949 $ 56,119 $ 36,642
Contract revenues 18,666 20,039 22,846
-------------------------------------------
78,615 76,158 59,488
Costs and expenses:
Cost of sales 49,147 44,869 22,245
Cost of contract revenues 13,431 13,781 13,132
Selling, general and administrative expenses 35,938 35,398 24,570
Research and development expenses 12,978 13,753 8,115
Special charge - 6,285 2,189
-------------------------------------------
114,494 114,086 70,251
-------------------------------------------
Loss from operations (32,879) (37,928) (10,763)
Non-operating income (expense)
Royalty income 38,437 17,825 -
Other income (loss), net - 1,230 2,864
Interest expense, net (2,048) (1,762) (4,190)
-------------------------------------------
Income (loss) before income tax 3,510 (20,635) (12,089)
Income tax benefit - - 785
-------------------------------------------
Income (loss) from continuing operations before 3,510 (20,635) (11,304)
minority interest
Minority interest in earnings of subsidiary - - (1,910)
-------------------------------------------
Income (loss) from continuing operation 3,510 (20,635) (13,214)
Loss from discontinued operations, including loss
on disposal of $8,361 in 2002, net of taxes of $0 (5,789) (11,905) (12,924)
Extraordinary loss from early extinguishment of
debt, net of tax of $0 - - (450)
-------------------------------------------
Net loss $ (2,279) $ (32,540) $ (26,588)
===========================================
Basic earnings (loss) per share
Continuing operations $ 0.39 $ (2.07) $ (1.17)
Discontinued operations (0.64) (1.19) (1.15)
Extraordinary items - - (0.04)
-------------------------------------------
Net loss $ (0.25) $ (3.26) $ (2.36)
===========================================
Diluted earnings (loss) per share
Continuing operations $ 0.37 $ (2.07) $ (1.17)
Discontinued operations (0.61) (1.19) (1.15)
Extraordinary items - - (0.04)
-------------------------------------------
Net loss $ (0.24) $ (3.26) $ (2.36)
===========================================
Shares used in computing basic earnings
(loss) per share 9,089 9,977 11,267
===========================================
Shares used in computing diluted earnings
(loss) per share 9,444 9,977 11,267
===========================================
See accompanying notes.
F-5
Odetics, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
Common stock
---------------------------------
Shares outstanding
---------------------- Notes Accumulative
Class A Class B receivable other
common common Paid-in Treasury from comprehensive
stock stock Amount capital stock employees income
------------------------------------------------------------------------------------
Balance at March 31, 1999 7,941 1,060 $ 901 $ 59,579 $(240) $ (96) $ 92
Issuances of common stock 234 - 22 1,621 218 - -
Conversion of Class B common stock 8 (8) - - - - -
Payments on notes receivable - - - - - 35 -
Foreign currency
translation adjustments - - - - - - 170
Net loss - - - - - - -
------------------------------------------------------------------------------------
Balance at March 31, 2000 8,183 1,052 923 61,200 (22) (61) 262
Issuances of common stock 1,270 - 127 17,348 21 - -
Conversion of Class B common stock 16 (16) - - - - -
Payments on notes receivable - - - - - 10 -
Foreign currency translation
adjustments - - - - - - (698)
Net loss - - - - - - -
------------------------------------------------------------------------------------
Balance at March 31, 2001 9,469 1,036 1,050 78,548 (1) (51) (436)
Issuances of Odetics common stock 2,022 - 202 3,716 - - -
Issuance of Iteris common stock - - - 5,513 - - -
Issuance of warrant - - - 1,357 - - -
Foreign currency translation
adjustments - - - - - - 677
Net loss - - - - - - -
------------------------------------------------------------------------------------
Balance at March 31, 2002 11,491 1,036 $ 1,252 $ 89,134 $ (1) $ (51) $ 241
====================================================================================
Accumulated Comprehensive
deficit Total income
---------------------------------------
Balance at March 31, 1999 $ (23,913) $ 36,323
Issuances of common stock - 1,861
Conversion of Class B common stock - -
Payments on notes receivable - 35
Foreign currency
translation adjustments - 170 $ 170
Net loss (2,279) (2,279) (2,279)
---------------------------------------
Balance at March 31, 2000 (26,192) 36,110 $ (2,109)
==============
Issuances of common stock - 17,496
Conversion of Class B common stock - -
Payments on notes receivable - 10
Foreign currency translation
adjustments - (698) $ (698)
Net loss (32,540) (32,540) (32,540)
---------------------------------------
Balance at March 31, 2001 (58,732) 20,378 $ (33,238)
==============
Issuances of Odetics common stock - 3,918
Issuance of Iteris common stock - 5,513
Issuance of warrant - 1,357
Foreign currency translation
adjustments - 677 $ 677
Net loss (26,588) (26,588) (26,588)
---------------------------------------
Balance at March 31, 2002 $ (85,320) $ 5,255 $ (25,911)
=======================================
See accompanying notes.
F-6
Odetics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31
2000 2001 2002
-------------------------------------------
Operating activities
Net loss $ (2,279) $ (32,540) $ (26,588)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,185 4,967 3,776
Amortization of warrants - - 1,230
Write-off of discontinued subsidiary - - 8,361
Minority interest in earnings of subsidiary - - 1,910
Loss on sale of Iteris common stock - - 1,597
Loss on disposal of assets - - 48
Write-off of capitalized software - 4,014 -
Gain on sale of product lines - (1,230) (3,385)
Provision for losses on accounts receivable 745 78 102
Changes in operating assets and liabilities (Note 15) 1,179 4,621 (5,284)
-------------------------------------------
Net cash provided by (used in) operating activities 6,830 (20,090) (18,233)
Investing activities
Purchases of property, plant and equipment, net (2,169) (2,502) (426)
Repurchase of real estate option - (5,000) -
Proceeds from sale of product lines - 1,877 9,884
Proceeds from option to sell real estate 5,000 - -
Software development costs (330) - -
Purchase of net assets of acquired business (1,500) (42) (200)
Other 213 (688) 677
-------------------------------------------
Net cash provided by (used in) investing activities 1,214 (6,355) 9,935
Financing activities
Proceeds from line of credit and long-term borrowings 23,966 26,644 28,720
Principal payments on line of credit, long-term debt, and
capital lease obligations (29,528) (19,857) (30,929)
Proceeds from sale of Iteris common and preferred stock - - 8,697
Proceeds from issuance of common stock 1,611 16,996 -
-------------------------------------------
Net cash provided by (used in) financing activities (3,951) 23,783 6,488
-------------------------------------------
Increase (decrease) in cash 4,093 (2,662) (1,810)
Cash and cash equivalents at beginning of year 787 4,880 2,218
-------------------------------------------
Cash and cash equivalents at end of year $ 4,880 $ 2,218 $ 408
===========================================
See accompanying notes.
F-7
Odetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
March 31,2002
1. Formation and Operations
Odetics, Inc. (the Company) serves as a developer of technology oriented
companies, each with its own marketplace, customers and products, including the
Company's wholly-owned subsidiaries MAXxess Systems Inc., formerly known as Gyyr
Incorporated (MAXxess), Broadcast, Inc. (Broadcast), Mariner Networks, Inc.
(Mariner), Zyfer, Inc. (Zyfer), Odetics Europe Limited, Odetics GYYR Limited,
Odetics Mariner Limited, Odetics Asia Pacific Pte. Ltd) and its majority-owned
subsidiary, Iteris, Inc. (Iteris).
During fiscal 2002 and 2001, the Company experienced operating losses of $10.8
million and $37.9 million, respectively, and at March 31, 2002 has a working
capital deficiency of $9.3 million. The Company financed its operations in
fiscal 2001 and 2002 largely through cash received from the settlement of
certain litigation with StorageTek (Note 16), debt and equity financings and
through the sale of assets of certain of its subsidiaries.
On May 28, 2002, the Company completed the sale and leaseback of its Anaheim,
California facility for an aggregate sale price of $22.6 million. Under the
terms of the sale and leaseback agreement, the Company will continue to lease
one of the two buildings located on the property for an initial ten-year period
at a rate of $152,150 per month and the other building for a period of 30 months
at a rate of approximately $57,553 per month. Approximately $16.4 million of the
proceeds from the sale was used to repay the outstanding indebtedness, and
accrued interest under a promissory note that was secured by a first deed of
trust on the Anaheim facility (Note 7). The balance of the proceeds is available
for general working capital purposes. The gain on the sale of the facility of
approximately $8.2 million will be deferred and amortized against rent expenses
over the term of the leases.
Notwithstanding the sale and leaseback transaction, the Company expects
that its operations will continue to use net cash at least through the first
half of fiscal 2003. The Company also expects to have an ongoing need to raise
cash by securing additional debt or equity financing, or by divesting certain
assets to fund its operations until they return to profitability and positive
operating cash flow. However, the Company cannot be certain that it will be able
to secure an additional debt or equity financing, or divest of certain assets on
terms acceptable to us, or at all. The Company's future cash requirements will
be highly dependent on its ability to control expenses as well as the successful
execution of the revenue plans by each of its businesses. As a result, any
projections of future cash requirements and cash flows are subject to
substantial uncertainty.
F-8
Odetics, Inc.
Notes to Consolidated Financial Statements
1. Formation and Operations (continued)
These conditions, together with the Company's recurring operating losses, raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or liabilities that may result from the outcome of this
uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Significant estimates made in
preparing the consolidated financial statements include the allowances for
doubtful accounts and deferred tax assets, inventory reserves, certain accrued
liabilities, costs to complete long-term contracts and estimates of future cash
flows used to determine the recoverability of long lived assets.
Revenue Recognition
Product revenues and related cost of sales are recognized on the date of
shipment or, if required, upon acceptance by the customer, provided that the
Company believes collectibility of the net sales amount is probable.
Accordingly, at the date revenue is recognized, the significant uncertainties
concerning the sale have been resolved.
Contract revenues is derived primarily from long-term contracts with
governmental agencies. Contract revenue includes costs incurred plus a portion
of estimated fees or profits determined on the percentage of completion method
of accounting based on the relationship of costs incurred to total estimated
costs. Any anticipated losses on contracts are charged to earnings when
identified. Changes in job performance and estimated profitability, including
those arising from contract penalty provisions and final contract settlements
may result in revisions to cost and revenue and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenue
when their realization is reasonably assured.
F-9
Odetics, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant 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, 2001 and 2002, accounts
receivable from governmental agencies and prime government contractors were
approximately $3,719,000 and $4,774,000, 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.
Notes to Consolidated Financial Statements
2. 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 are depreciated principally by
the declining balance method over their estimated useful lives ranging from four
to eight years. Depreciation expense for the years ended March 31, 2000, 2001
and 2002 was $3.7 million, $1.9 million and $2.3 million, respectively.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company believes no impairment of the carrying value of its long-lived assets,
inclusive of goodwill, existed at March 31, 2002. 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
2003. 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 an estimated useful lives of ten years.
F-11
Odetics, Inc.
Notes to Consolidated Financial Statements
2. Summary of Accounting Policies (continued)
Goodwill (continued)
In 2001, the FASB issued Statements No. 141, Business Combinations (SFAS 141),
and Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
the Company adopted on April 1, 2002. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized,
but, instead, will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. The Company will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2003. Pursuant to Statement 142, the
Company is currently testing its goodwill for impairment and is unable at this
time to estimate the amount of the impairment charge, if any, that may be
required.
On a pro forma basis, application of the non-amortization provision of SFAS 141
would have resulted in a net loss in the years ended March 31, 2000, 2001 and
2002 as follows:
Year ended March 31
(in thousands) 2000 2001 2002
---------------------------------------
Pro forma net loss $(592) $(30,616) $(25,072)
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 2000, 2001 and 2002, software development costs were amortized to
cost of sales totaling $1,515,000, $940,000 and $237,000, respectively. During
fiscal 2002, the Company discontinued certain product lines, resulting in the
write-off of $1.9 million of previously capitalized software development costs.
All other research and development expenditures are charged to expense in the
period incurred.
F-12
Odetics, Inc.
Notes to Consolidated Financial Statements
2. Summary of Accounting Policies (continued)
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.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign based subsidiaries 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.
Comprehensive Income
The only component of accumulated other comprehensive income is the cumulative
foreign currency translation adjustment recorded in stockholders' equity.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between
financial statement and tax basis of assets and liabilities based on enacted tax
laws and rates applicable to the period in which differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized. The provision for income taxes is the taxes payable or refundable for
the period plus or minus the change during the period in deferred income tax
assets and liabilities.
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.
F-13
Odetics, Inc.
Notes to Consolidated Financial Statements
2. 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 Statement of Financial Accounting Standard No.
123, Accounting for Stock-Based Compensation ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
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.
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. The adoption of FIN 44 did not have a material effect on the
Company's financial position or results of operations.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expense totaled
$2,488,000, $3,491,000 and $1,264,000 in the years ended March 31, 2000, 2001
and 2002, respectively.
F-14
Odetics, Inc.
Notes to Consolidated Financial Statements
2. Summary of Accounting Policies (continued)
Derivative Instruments and Hedging Activities
In June 1998 Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("Statement 133"), was issued,
which establishes new standards for recording derivatives in financial
statements. This statement requires recording all derivative instruments as
assets or liabilities, measured at fair value. The Company adopted Statement
133, as amended, on April 1, 2001. The adoption of Statement 133 did not have a
significant impact on the consolidated results of operations, financial position
or cash flows of the Company.
Discontinued Operations
In August of 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). The Statement supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, however, it retains the fundamental
provisions of that statement related to the recognition and measurement of the
impairment of long-lived assets to be "held and used." SFAS 144 also supersedes
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operation's - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB 30), for the disposal of a segment of a
business. Under SFAS 144, a component of a business that is held for sale is
reported in discontinued operations if (i) the operations and cash flows will
be, or have been, eliminated from the ongoing operations of the company and,
(ii) the company will not have any significant continuing involvement in such
operations. In the quarter ended September 30, 2001, the Company adopted the
provisions of SFAS 144 effective April 1, 2001.
In September of 2001, the Company's Board of Directors approved a plan to
discontinue the operations of Mariner which was part of the Company's telecom
products segment. The aggregate losses recognized to write down the assets of
Mariner to their fair value less cost to sell were approximately $6.7 million.
In addition, the Company accrued $1.7 million for severance and other direct
costs to exit the operation.
F-15
Odetics, Inc.
Notes to Consolidated Financial Statements
2. Summary of Accounting Policies (continued)
Discontinued Operations (continued)
The write-downs and costs are included in the loss from discontinued operations
in the year ending March 31, 2002. Mariner's results of operations for all prior
periods presented have been reclassified and presented as discontinued
operations in the accompanying consolidated statement of operations. Interest
expense was not allocated to discontinued operations because the discontinuance
did not eliminate any of the Company's debt.
The assets and liabilities of the discontinued operations consisted of the
following:
2001 2002
-----------------------
Accounts receivable, net $ 80 $ -
Inventories 2,413 -
Prepaid expenses and other assets 98 2
Property, plant and equipment, net 958 203
Capitalized software costs, net 2,090 -
-----------------------
Total assets of discontinued operations $ 5,639 $ 205
=======================
Accounts payable $ 1,690 $ 1,258
Accrued expenses 306 542
-----------------------
Total liabilities of discontinued operations $ 1,996 $ 1,800
=======================
Reclassifications
Certain amounts in the 2000 and 2001 consolidated financial statements have been
reclassified to conform with the 2002 presentation.
3. Acquisitions and Dispositions
In October 1998, the Company, through Iteris, 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.
F-16
Odetics, Inc.
Index to Consolidated Financial Statements
3. Acquisitions and Dispositions (continued)
The merger agreement provided for MMA shareholders to receive additional shares
of the Company's Class A common stock with a then market value of $250,000 at
each of April 16, 1999, October 16, 1999, April 16, 2000, October 16, 2000 and
April 16, 2001 in the event the Company did not consummate an initial public
offering of the common stock of Iteris, Inc. by each and any of those dates.
Pursuant to this provision, Odetics issued an additional 219,706 shares of its
Class A common stock to the MMA shareholders, which was recorded by the Company
as additional goodwill. In addition, as a result of Iteris' failure to complete
an initial public offering by October 2001, the MMA shareholder exercised their
rights under the agreement and required Odetics to exchange 1,107,301 shares of
Odetics' Class A common stock for 155,149 shares of Iteris common stock. This
transaction resulted in additional goodwill of $2.5 million.
During fiscal 2001, the Company sold certain assets of its solid state recording
product line of its Zyfer subsidiary for cash proceeds of $1.9 million. In
connection with these sales the Company recorded gains aggregating $1.2 million.
In April 2001, the Company sold its Vortex Dome and Quarterback Controller
product lines for approximately $1.1 million in net cash proceeds. In connection
with this transaction, the Company realized a gain of $0.1 million.
In September 2001, the Company sold substantially all of the assets of its Gyyr
CCTV Products divisions for $8.8 million in cash, plus the assumption of $1.0
million in debt. In connection with this transaction, the Company wrote-off
goodwill with a net book value of $2.3 million and, net of this write-off,
realized a gain of $4.3 million.
F-17
Odetics, Inc.
Index to Consolidated Financial Statements
4. Special Charge
During fiscal 2001 and 2002, the Company approved a number of actions to reduce
operating expenses and improve profitability and cash flows. These actions
included a reduction in workforce of 222 and 130 employees in 2001 and 2002,
respectively, and the discontinuance of certain product lines. As a result of
these actions the company recorded the following as special charge (in
thousands):
Severance Write-off of Write-off Write-off
and related capitalized of of deferred
costs software goodwill costs Total
-------------------------------------------------------------------
Special provision $ 1,305 $ 3,452 $ 562 $ 966 $ 6,285
Cash expenditures
Non-cash activities (1,305) (3,452) (562) (966) (6,285)
-------------------------------------------------------------------
Balance at March 31, 2001 - - - - -
Special provision 2,189 - - - 2,189
Cash expenditures (858) - - - (858)
-------------------------------------------------------------------
Balance at March 31, 2002 $ 1,331 $ - $ - $ - $ 1,331
===================================================================
In addition during fiscal 2001, the Company reserved or wrote-off inventory in
the amount of $3.1 million, primarily related to discontinued products in its
Broadcast and Gyyr subsidiaries. The charge is included in cost of sales in the
accompanying consolidated statement of operations.
5. Real Estate Option
In July 1999, the Company sold an option to an investment company controlled by
certain officers and shareholders of the Company, for an aggregate purchase
price of $5.0 million to purchase certain real property of Odetics. In August
2000 the Company repurchased the option for $5.6 million which represented the
original purchase price plus accrued interest.
F-18
Odetics, Inc.
Index to Consolidated Financial Statements
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
March 31
2001 2002
------------------------------------
(In thousands)
Costs incurred on uncompleted contracts $ 14,054 $ 17,998
Estimated earnings 1,054 1,355
------------------------------------
15,108 19,353
Less billings to date 14,387 18,024
------------------------------------
$ 721 $ 1,329
====================================
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 3,296 $ 3,565
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,575 2,236
------------------------------------
$ 721 $ 1,329
====================================
Costs and estimated earnings in excess of billings at March 31, 2001 and 2002
include $232,575 and $136,114 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, 2002 are expected to be billed and collected during the year ending March
31, 2003.
7. Revolving Lines of Credit and Long-Term Debt
In February 2002, the Company entered into a $1.25 million line of credit with a
partnership controlled by the Company's Chairman of the Board. The line of
credit is collateralized by substantially all of the Company's assets other than
real property. Borrowings on the line of credit bear interest at the prime rate
plus 4% (8.75% at March 31, 2002) and matures in July 2003.
F-19
Odetics, Inc
Notes to Consolidated Financial Statements
7. Revolving Lines of Credit and Long-Term Debt (continued)
In August 2001, the Company through Iteris, entered into a loan and security
agreement with a maximum available credit line of $5 million. At March 31, 2002,
$767,000 was outstanding under this line of credit and amounts available for
future borrowing totalled $3,309,000. Under the terms of the agreement, the
Company may borrow against its eligible accounts receivable and the value of its
eligible inventory, as defined. Interest on borrowed amounts is payable monthly
at the prime rate plus 2% (6.75% at March 31, 2002). Additionally, Iteris is
obligated to pay an unused line fee of 0.5% per annum applied to the amount by
which the maximum credit amount exceeds the average daily principal balance
during the preceding month, and a monthly collateral management fee of $2,000.
The agreement is secured by substantially all of Iteris' assets and expires in
August 2004. Either party can terminate the agreement with thirty days written
notice. Should Iteris elect to terminate the agreement, a one-time termination
fee of 3%, 2% and 1% of the maximum credit limit would apply in years 1 through
3, respectively.
In January 2000, the Company through Iteris, entered into a joint venture
agreement, pursuant to which Iteris obtained a Subordinated Convertible
Promissory Note in the amount of $3.75 million. In July 2001, the note holder
converted the note and related accrued interest into common and preferred stock
of Iteris (Note 11).
In May 2001, the Company entered into a $16 million promissory note secured by a
first trust deed on its principle facilities in Anaheim, California which bore
interest at 10% per annum. The promissory note was paid in full at its scheduled
maturity date in May 2002 (Note 1). In connection with the note the Company
issued warrants to the lender to purchase 426,667 shares of Class A common stock
at an exercise price of $4.00 per share. The Company repriced the warrants to
$3.00 per share, in connection with a forbearance agreement negotiated in
November of 2001. The issuance of the warrant represented a discount on the note
totaling $1,357,000, which is being amortized over the life of the note. At
March 31, 2002, $244,000 of the discount had not been amortized and is reflected
as a reduction of the outstanding note balance.
Approximately $6.0 million of the proceeds of the promissory note was used to
retire the pre-existing note payable on the Anaheim facility, which included a
prepayment penalty of $450,000. This prepayment penalty is reflected as an
extraordinary item in the accompanying consolidated statement of operations.
F-20
Odetics, Inc
Notes to Consolidated Financial Statements
7. Revolving Lines of Credit and Long-Term Debt (continued)
Long-term debt consisted of the following:
March 31
2001 2002
-------------------------
(In thousands)
Note payable, net of discount of $244,000 at March 31, 2002, paid
in May 2002 $ - $ 15,756
Note payable, paid in May 2001 5,874 -
Note payable, converted to common and preferred stock of Iteris in
July 2001 3,750 -
Note payable, assumed in September 2001 by the purchaser of the Gyyr
CCTV Products division (Note 3) 1,000 -
Notes payable, accruing interest at 7.55% to 17.08%,
collateralized by equipment, payable in monthly installments
through 2003 1,166 402
-------------------------
11,790 16,158
Less current portion 6,990 16,133
-------------------------
$ 4,800 $ 25
=========================
The annual maturities of long-term debt at March 31, 2002 are as follows:
(In thousands)
2003 $ 16,133
2004 25
--------------
$ 16,158
==============
F-21
Odetics, Inc
Notes to Consolidated Financial Statements
8. Income Taxes
During fiscal 2002, the Company recognized an income tax benefit of
$785,000 related to the recovery of net operating loss carrybacks made available
under the Job Creation and Workers Association Act of 2002.
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
2000 2001 2002
------------------------------------------------------
(In thousands)
Income tax expense (benefit) at statutory
rates $ 1,193 $ (7,015) $ (4,111)
Recognition of net operating losses - - (785)
Increase (decrease) of valuation allowance
associated with federal deferred tax assets (2,741) 4,304 2,169
Foreign losses recorded without benefit 1,258 2,255 1,489
Nondeductible goodwill amortization 191 153 176
Other 99 303 277
------------------------------------------------------
$ - $ - $ (785)
======================================================
United States and foreign loss from continuing operations before income taxes
are as follows:
Year ended March 31
2000 2001 2002
------------------------------------------------------
(In thousands)
Pretax income (loss):
Domestic $ 4,488 $ (16,110) $ (7,709)
Foreign (978) (4,525) (4,380)
------------------------------------------------------
$ 3,510 $ (20,635) $ (12,089)
======================================================
F-22
Odetics, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
The components of deferred tax assets and liabilities are as follows:
2001 2002
----------------------
(In thousands)
Deferred tax assets:
Inventory reserves $ 738 $ 716
Deferred compensation and other payroll accruals 1,074 1,192
Net operating loss carryforward 14,578 21,269
Credit carryforwards 2,051 1,503
Bad debt reserve and other reserves 1,300 357
Other, net 281 402
---------------------
Total deferred tax assets 20,022 25,439
Valuation allowance for deferred tax assets (17,378) (23,557)
---------------------
Net deferred tax assets 2,644 1,882
---------------------
Deferred tax liabilities:
Tax over book depreciation 1,990 1,416
Capitalized interest and taxes 434 420
Cash to accrual adjustment 174 -
Other, net 46 46
---------------------
Total deferred tax liabilities 2,644 1,882
---------------------
Net deferred taxes $ - $ -
=====================
At March 31, 2002, for federal income tax purposes, the Company had
approximately $1,430,000 in general business credit carryforwards, which expire
at various dates beginning in 2003. The Company also has $49,746,000 of net
operating loss carryforwards for federal income tax purposes that begin to
expire in 2019. 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.
In December 2001, the Company's ownership interest in Iteris fell below the
threshold required for the Company to file a consolidated tax return. As a
result, Iteris will no longer be included in the Odetics consolidated group for
income tax purposes, and instead will be required to file a separate tax return.
At March 31, 2002, for federal income tax purposes, Iteris had approximately
$3,200,000 of net operating loss carryforwards that begin to expire in 2021.
F-23
Odetics, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
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 2000, 2001 or 2002.
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 $746,000, $812,000 and $722,000 in 2000, 2001
and 2002, respectively.
F-24
Odetics, Inc.
Notes to Consolidated Financial Statements
9. Associate Incentive Programs (continued)
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 $69,000, $17,000 and $0 in 2000, 2001 and 2002, 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 $110,000, $128,000 and
$66,000 for 2000, 2001 and 2002, respectively.
11. Iteris Preferred and Common Stock
In July 2001, Iteris issued 1,781,268 shares of its Series A Preferred Stock
(Iteris Preferred Stock) to an institutional investor in exchange for $5.0
million in cash. In addition, Iteris issued 1,343,645 shares of its Series A
Preferred Stock and 547,893 shares of its common stock in exchange for $500,000
in cash and the retirement of its $3.75 million Subordinated Convertible
Promissory Note plus related accrued interest of $0.4 million.
Shares of Iteris Preferred Stock are convertable into shares of Iteris common
stock at the conversion rate in effect at the time, as defined. Each share of
Iteris Preferred Stock will automatically convert into shares of Iteris common
stock immediately upon the closing of a firmly underwritten public offering
pursuant to an effective registration statement under the Securities Act of 1933
with aggregate gross proceeds to the Company of not less than $30 million and
price per share of not less than two times the original Series A Preferred Stock
issue price of $2.80 per share.
F-25
Odetics, Inc.
Notes to Consolidated Financial Statements
11. Iteris Preferred and Common Stock (continued)
In the event that the Company fails to consummate an initial public offering of
Iteris common stock or complete a sale of Iteris to a third party with aggregate
proceeds of $25 million by January 1, 2004 and/or the holders of Series A
Preferred Stock elect not to exercise their rights to convert into Common Stock,
the Company will be obligated to redeem the Series A shares at a sum equal to
two times the original Series A Preferred Stock issue price.
At March 31, 2002, the liquidation preference on Iteris Preferred Stock totals
$17.5 million. The difference between the initial issue price, net of related
issuance costs, and the liquidation preference is being amortized over the
redemption period and is reflected in minority interest in earnings of
subsidiary in the accompanying consolidated statement of operations.
In August and December 2001, Odetics sold 1,539,241 shares of Iteris common
stock that it held at an aggregate purchase price of $3.8 million to a group of
investors, which included certain members of management of Odetics and Iteris.
In connection with this transaction, Odetics realized a loss of $1.6 million
which is reflected in other income (loss) in the accompanying consolidated
statement of operations. At March 31, 2001, Odetics owned 78.2% of the
outstanding common stock of Iteris.
12. 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-26
Odetics, Inc.
Notes to Consolidated Financial Statements
12. Stock Option Plans (continued)
A summary of all Company stock option activity is as follows:
Year ended March 31
2000 2001 2002
---------------------------------------------------------------------
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 628 $ 5.27 801 $ 7.68 804 $8.44
Granted 358 10.36 120 13.47 30 2.28
Exercised (152) 4.65 (24) 7.95 - -
Canceled (33) 4.65 (93) 8.21 (505) 8.06
--------- --------- ---------
Options outstanding at end of
year 801 $ 7.68 804 $ 8.44 329 $8.37
=====================================================================
Exercisable at end of year 219 531 237
=====================================================================
Available for grant at end of
year 114 487 1,322
========= ========= =========
Weighted average fair value of
options granted $ 5.25 $ 7.03 $1.20
========== ========== ==========
The exercise price for options outstanding as of March 31, 2002, ranged from
$2.28 to $15.625. The weighted-average remaining contractual life of those
options is 8.3 years.
F-27
Odetics, Inc.
Notes to Consolidated Financial Statements
12. 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
2000 2001 2002
-------------------------------
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 4.5
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, 2000, 2001 and 2002 follows (in
thousands, except per share data):
2000 2001 2002
-----------------------------------
Pro forma:
Net loss $ (2,969) $ (33,512) $ (26,789)
Basic and diluted loss per share $ (0.33) $ (3.36) $ (2.38)
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. As of March 31, 2002, options to purchase 759,345
shares of common stock were outstanding.
Subsequently, Iteris' Board of Directors adopted and approved the 1998 Stock
Incentive Plan (the Plan), as amended in February 2000, authorized 3,000,000
shares of Iteris' common stock for issuance under the Plan. Options to purchase
2,228,492 shares of common stock, at exercise prices ranging from $1.60 to $9.07
per share, were outstanding at March 31, 2002. Under the Plan, 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.
F-28
Odetics, Inc.
Notes to Consolidated Financial Statements
12. Stock Option Plans (continued)
Zyfer, Inc.'s Stock Option Plans
In April 2000, Zyfer's Board of Directors adopted a Special Executive Stock
Option Plan which provides for the granting of stock options for shares of
Zyfer's unissued common stock to certain officers, key employees, non-employee
members of the Board of Directors, consultants and independent contractors. A
total of 1,176,500 shares of Zyfer's common stock are reserved for issuance
under this plan.
In April 2000, Zyfer's Board of Directors also adopted the 1999 Employee Stock
Option Plan which provides options for shares of Zyfer's common stock to
associates, non-employee members of the Board of Directors of Zyfer, Odetics or
other Odetics subsidiaries and independent consultants. A total of 588,500
shares of Zyfer's common stock are reserved for issuance under this plan.
Options expire ten years after the date of grant or 90 days after termination of
employment and vest upon the optionee's completion of five years of service
measured from the vesting commencement date as specified on the stock option
agreements. The vesting of these options will accelerate upon initial public
offering of Zyfer's common stock. Options to purchase 1,266,500 shares of
Zyfer's common stock under these plans were outstanding at March 31, 2002.
13. Commitments
The Company has lease commitments for facilities in various locations throughout
the United States. The annual commitment under these noncancelable operating
leases at March 31, 2002 is as follows:
Fiscal Year (in thousands)
-----------
2003 $ 327
2004 162
2005 56
--------------------
$ 545
====================
Rent expense under operating leases totaled $973,000, $1,040,000 and $1,139,000,
respectively for the years ended March 31, 2000, 2001 and 2002.
F-29
Odetics, Inc.
Notes to Consolidated Financial Statements
13. Commitments (continued)
Common stock reserved for future issuance at March 31, 2002:
Issuable under stock options plans 1,651,000
Issuable upon the exercise of warrants 426,667
14. Business Segment and Geographic Information
The Company operates in three reportable segments: intelligent transportation
systems, video products which includes products for the television broadcast and
video security markets, and telecommunications. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies except that certain expenses, such as interest,
amortization of certain intangibles and certain corporate expenses are not
allocated to the segments. In addition, certain assets including cash and cash
equivalents, deferred taxes and certain long-lived and intangible assets are not
allocated to the segments. Intersegment sales are recorded at the selling
segment's cost plus profit.
The reportable segments are each managed separately because they manufacture and
distribute distinct products or provide services with different processes.
Selected financial information for the Company's reportable segments as of and
for the years ended March 31, 2000, 2001 and 2002 follows:
Intelligence
(In thousands) Transportation Video Products Telecom Product Total
- --------------------------------------------------------------------------------------------------------------
Year ended March 31, 2000
Revenue from external customers $ 23,411 $ 38,958 $ 7,572 $ 69,941
Intersegment revenues - 6,001 84 6,085
Depreciation and amortization 1,962 2,637 732 5,331
Segment income (loss) (4,407) (16,350) (2,035) (22,792)
Segment assets 19,240 38,831 5,473 63,544
Expenditure for long-lived assets 470 760 308 1,538
F-30
Odetics, Inc.
Notes to Consolidated Financial Statements
14. Business Segment and Geographic Information (continued)
Intelligence Video Telecom
(In thousands) Transportation Products Product Total
- ------------------------------------------------------------------------------------------------------------
Year ended March 31, 2001
Revenue from external customers $ 28,057 $ 39,726 $ 6,972 $ 74,755
Intersegment revenues - 1,183 57 1,240
Depreciation and amortization 1,502 1,849 183 3,534
Segment income (loss) (3,942) (15,767) (2,137) (21,846)
Segment assets 18,709 22,706 6,326 47,741
Expenditure for long-lived assets, net 1,392 631 206 2,150
Year ended March 31, 2002
Revenue from external customers $ 37,308 $ 16,715 $ 5,465 $ 59,488
Intersegment revenues - - - -
Depreciation and amortization 1,759 547 313 2,619
Segment income (loss) 2,979 (3,306) (3,787) (4,114)
Segment assets 25,736 5,805 5,016 36,557
Expenditure for long-lived assets, net 272 22 63 357
F-31
Odetics, Inc.
Notes to Consolidated Financial Statements
14. 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) 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------
Revenue
Total revenues for reportable segments $ 76,026 $ 75,995 $ 59,488
Non reportable segment revenues 8,674 1,403 -
Elimination of Intersegment sales (6,085) (1,240) -
-------------------------------------------
Total consolidated revenues $ 78,615 $ 76,158 $ 59,488
===========================================
Segment Income (Loss)
Total income (loss) for reportable segments $ (22,792) $ (21,846) $ (4,114)
Other income (loss) (3,618) (2,893) 2,726
Unallocated amounts:
Corporate and other expenses (6,469) (5,674) (4,322)
Royalty income 38,437 17,825 -
Special charge - (6,285) (2,189)
Interest expense (2,048) (1,762) (4,190)
-------------------------------------------
Income (Loss) from continuing operations before
income taxes $ 3,510 $ (20,635) $ (12,089)
===========================================
Assets
Total assets for reportable segments $ 63,544 $ 47,741 $ 36,557
Assets held at Corporate 18,306 20,320 15,681
-------------------------------------------
Total assets $ 81,850 $ 68,061 $ 52,238
===========================================
Depreciation and Amortization
Depreciation and amortization for reportable segments $ 5,331 $ 3,534 $ 2,619
Other 1,854 1,433 1,157
-------------------------------------------
Total depreciation and amortization $ 7,185 $ 4,967 $ 3,776
===========================================
F-32
Odetics, Inc.
Notes to Consolidated Financial Statements
14. Business Segment and Geographic Information (continued)
Selected financial information for the Company's operations by geographic
segment is as follows:
(In thousands) 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------
Geographic Area Revenue
United States $ 63,193 $ 60,595 $ 53,461
Europe 8,509 7,340 3,466
Asia Pacific Rim 2,821 2,703 1,762
Other 4,092 5,520 799
-----------------------------------------
Total net revenue $ 78,615 $ 76,158 $ 59,488
=========================================
Geographic Area Long-Lived Assets
United States $ 35,897 $ 30,526 $ 27,496
Europe 1,101 414 -
Asia Pacific Rim 15 23 21
-----------------------------------------
Total long-lived assets $ 37,013 $ 30,963 $ 27,517
=========================================
15. Supplemental Cash Flow Information
Year ended March 31
2000 2001 2002
------------------------------------------
(In thousands)
Net cash used in changes in operating assets and
liabilities, net of acquisitions:
(Increase) decrease in accounts receivable $ 4,568 $ (882) $ 3,897
(Increase) decrease in net costs and estimated
earnings in excess of billings (833) 1,259 (608)
(Increase) decrease in inventories (2,227) 4,499 (1,542)
Increase in prepaids and other assets 428 861 (735)
Increase (decrease) in accounts payable and accrued
expenses (757) (1,116) (3,170)
Change in net operating assets of discontinued
operations - - (3,126)
------------------------------------------
Net cash used in changes in operating assets and
liabilities $ 1,179 $ 4,621 $ (5,284)
==========================================
Cash paid (received) during the year:
Interest $ 1,995 $ 1,768 $ 2,514
Income taxes paid (refunded) (1,144) 86 -
Noncash transactions during the year:
Exchange of note payable and accrued interest for
Iteris stock $ - $ - $ 4,203
Acquisition of business for note payable 2,000 -
Stock issuance to former MMA shareholders 251 500 2,737
Contribution of common stock to 401(k) Plan - - 791
Issuance of common stock in settlement of accounts
payable - - 390
F-33
Odetics, Inc.
Notes to Consolidated Financial Statements
16. Legal Proceedings
On October 11, 1999, the Company settled a patent infringement case it had
brought against Storage Technology Corporation (StorageTek). Through an
agreement, StorageTek agreed to pay the Company a license fee totaling $100.0
million for use of the Company's United States Patent No. 4,779,151. Under the
agreement, the license fee was payable in three installments: $80.0 million upon
signing of the agreement, and two annual installments of $10.0 million payable
in each of October 2000 and 2001. In connection with the initial payment, the
Company received $38.4 million, net of legal fees and other direct expenses,
which is reflected in the accompanying consolidated statement of operations as
royalty income.
On June 12, 2000, the Company and StorageTek amended the agreement, whereby
StorageTek agreed to pay a final discounted payment of $17.8 million immediately
in full settlement of the $20.0 million otherwise due to complete the
settlement, which is reflected in the accompanying consolidated financial
statements as royalty income.
17. Supplementary Quarterly Consolidated Financial Data (Unaudited)
All quarters presented in the following schedule have been restated for the
discontinuance of Mariner in September 2001.
Income
Income per Share
(Loss) from Net from
Net Gross Continuing Income Continuing
Sales Profit Operations (Loss) Operations
-----------------------------------------------------
June 30, 2000(1) 19,317 4,550 9,169 7,430 .95
September 30, 2000 18,844 4,605 (9,358) (12,266) (.97)
December 31, 2000(2) 18,533 1,976 (16,748) (19,951) (1.60)
March 31, 2001 19,464 6,377 (3,698) (7,753) (.35)
June 30, 2001 16,384 5,387 (4,355) (7,775) (.41)
September 30, 2001(3) 15,977 6,149 (4,291) (15,164) (.41)
December 31, 2001 13,618 5,753 (2,332) (2,332) (.20)
March 31, 2002 13,509 6,822 (2,236) (1,317) (.18)
(1) On June 12, 2000 the Company amended the settlement of a patent
infringement case whereby the Company accepted a final discounted payment of
$17.8 million to complete the settlement. The settlement is reflected in
the operating results for the quarter ended June 30, 2000.
(2) During the quarter ended December 31, 2000, the Company effected a
restructuring that included a reduction of approximately 25% of its total
workforce and discontinuation of certain product lines. As a result of
these actions, the Company incurred charges in the amount of $9.4 million,
which is reflected in the operating results for the quarter ended December
31, 2000.
(3) During the quarter ended September 30, 2001, the Company discontinued the
operations of its Mariner subsidiary and restructured its European
operations. In connection with these actions the Company recorded severance
and other reserves and wrote down assets totaling $9.9 million.
F-34
Schedule II
Odetics, Inc.
Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning of Costs and Charged to Deductions End of
Description Period Expenses Accounts Describe Period
- ----------------------------------------------- -------------- ------------ ------------ ------------- -----------
Year ended March 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts ........... $ 839,000 $1,293,000 $ (64,000) $ -- $2,068,000
Reserve for inventory obsolescence ...... 3,171,000 1,438,000 (1,123,000) -- 3,486,000
Year ended March 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts ........... $2,068,000 $ 78,000 $ (502,000) $ -- $1,644,000
Reserve for inventory obsolescence ...... 3,486,000 4,925,000 (4,443,000) -- 3,968,000
Year ended March 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts ........... $1,644,000 $ 102,000 $(1,365,000) $ -- $ 381,000
Reserve for inventory obsolescence ...... 3,968,000 363,000 (2,264,000) -- 2,067,000