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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 000-10605
ODETICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 95-2588496
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1515 South Manchester Avenue, Anaheim, California 92802
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (714) 774-5000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.10 par value
Class B common stock, $.10 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
Based on the closing sale price on Nasdaq National Market on June 26, 2000,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $91,597,073. For the purposes of this calculation, shares owned
by officers, directors and 10% stockholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Odetics has two classes of common stock outstanding, the Class A common
stock and the Class B common stock. The rights, preferences and privileges of
each class of common stock are identical in all respects, except for voting
rights. Each share of Class A common stock entitles its holder to one-tenth of
one vote per share and each share of Class B common stock entitles its holder to
one vote per share. As of June 26, 2000, there were 8,204,351 shares of Class A
common stock and 1,051,541 shares of Class B common stock outstanding. Unless
otherwise indicated, all references to common stock shall collectively refer to
the Class A common stock and the Class B common stock
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
registrant's definitive proxy statement for the annual meeting of the
stockholders scheduled to be held on September 8, 2000.
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ODETICS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS........................................................ 1
ITEM 2. PROPERTIES...................................................... 20
ITEM 3. LEGAL PROCEEDINGS............................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS......................................................... 21
ITEM 6. SELECTED FINANCIAL DATA......................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....... 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 32
ITEM 11. EXECUTIVE COMPENSATION.......................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................ 33
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Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s),"
"believe(s)," "will," "may," "anticipate(s)," and similar expressions are
intended to identify forward-looking statement. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. You should not place undue reliance on these
forward-looking statements that speak only as of the date hereof. We undertake
no obligation to republish revised forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. We encourage you to carefully review and consider the
various disclosures made by us which describe certain factors which affect our
business, including the risk factors set forth at the end of Part I, Item 1 of
this report and in Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
General
Odetics, Inc. was founded in 1969 to supply digital recorders for use in
the United States space program. We pioneered new designs and standards for
digital magnetic tape recorders offering high reliability and enhanced
performance in the adverse environment attendant to space flight. In the 1970s,
we broadened our information automation product line to include time-lapse
videocassette recorders for commercial and industrial security and surveillance
applications, and entered the business of manufacturing telecom network
synchronization products. Through our Gyyr division, we became a leading
supplier of time-lapse videotape cassette recorders, digital image processing
modules and related products used in security and surveillance systems. We
incorporated our Gyyr division in 1997, forming a wholly-owned subsidiary, Gyyr,
Inc. In October 1997, we expanded Gyyr by acquiring Intelligent Controls Inc.,
a manufacturer of access control products specializing in PC based, remote site
and fiber optic communications. In December 1999, we acquired the Security
Products Division of Digital Systems Processing, Inc., which expanded our
product line to include digital time-lapse recording based on hard disk drive
technology.
We manufactured telecom synchronization products in our Communications
division beginning in the late 1970s. We incorporated our Communications
division in fiscal 1999 as our wholly-owned subsidiary, Zyfer, Inc., as part of
our business expansion to develop products for secured communications over the
Internet.
Leveraging our expertise in video image processing, we entered into the
intelligent transportation system ("ITS") business with the introduction of a
video-based vehicle detection system in 1993. In June 1997, we acquired certain
assets comprising the Transportation Systems business from Rockwell
International, creating our ITS division, which expanded our offerings to
include advanced traffic management systems and advanced traveler information
systems. We incorporated our ITS division in 1998 as Odetics ITS, Inc. In
October 1998, we broadened our systems offerings by acquiring Meyer, Mohaddes
Associates, Inc., which currently operates as a subsidiary of Odetics ITS. In
January 2000, we reincorporated Odetics ITS in Delaware and changed its name to
Iteris, Inc.
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In the early 1980s, we set out to develop the technical expertise to apply
automation to new commercial applications and established our Odetics Broadcast
division. We incorporated our Odetics Broadcast division in 1999 as Broadcast,
Inc. Broadcast develops and manufactures broadcast automation control systems
and pioneered the use of video tape libraries in broadcast television stations
and satellite uplink operations. The success of our video tape libraries led us
to pursue new applications for information automation technologies. In 1991, we
introduced an automated tape handling subsystem for integration into tape
libraries designed for midrange computers and client/server networks. In
January 1993, we formed a separate subsidiary, ATL Products, Inc., to pursue the
market for automated tape libraries. In March 1997, ATL completed an initial
public offering of 1,650,000 shares of its Class A common stock. We distributed
our remaining 82.9% interest in ATL to our stockholders in a tax-free
distribution in October 1997.
Today, Odetics serves as an incubator of high technology companies, each
with its own marketplace, customers and products. These operations share a
common corporate overhead for support for facilities, human resources, benefits
and certain accounting, finance and executive management services. We are
pursuing our incubator business strategy to nurture and develop each of these
operations with the ultimate goal of achieving a tax-free spin-off of each
entity to our stockholders. In October 1999, we received a determination letter
from the Internal Revenue Service to confirm the tax-free status of our proposed
spin-off of Gyyr, Broadcast and Iteris. To date, we have not spun-off any of
the entities for which we have received determination letters. Subject to
favorable market conditions, it is still our intention to move forward with the
proposed spin-offs.
We currently define our business segments as video products, telecom
products and ITS. Our video products segment includes our Broadcast subsidiary
and our Gyyr subsidiary. Our telecom products segment includes our Zyfer
subsidiary and our Mariner Networks subsidiary. Our ITS segment consists of our
Iteris subsidiary. For more information concerning our business segments,
please see Note 13 of Notes to Consolidated Financial Statements.
Video Products
Broadcast, Inc.
Broadcast develops systems to automate the storage and scheduling of
commercials, news stories and other television programming recorded on videotape
and video server storage systems. We believe that enhanced operational
efficiencies are a principal factor underlying the automation of broadcast
television stations and satellite uplink operations as the industry transitions
to digital television. Broadcast is developing proprietary software solutions
for broadband video content management and delivery to serve broadcast and cable
operations as well as broadband Internet.
The earliest commercial success for Broadcast came from the manufacture of
video tape libraries. The video tape library market has experienced a trend
toward smaller libraries, coupled with digital hard disk recording devices. To
address this market, we introduced the TCS45 tape library, which incorporates
highly integrated caching systems. The TCS45 can be coupled with hard drive
recorders available from several recognized suppliers to the broadcast
community. As
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a result of the industry's transition to digital television and high definition
content origination, we continue to see strong demand for tape libraries. We
offer software to form powerful integrated systems, including our AIRO(TM) and
Microstation(TM) automation products. Our Roswell(TM) facility management system
is designed for enterprise automation of operations at television broadcast
facilities. Multi-channel presentation systems, which integrate the complete
line of our hardware with commonly available broadcast quality video disk
recorders, are quickly becoming the core business of Broadcast. Broadcast is
focused on video asset management including desktop video browsing using a
network PC architecture, which can be extended to wide area network applications
and Internet applications.
Sales, Marketing and Principal Customers. Broadcast sells directly to
broadcast television stations, satellite uplink operations, and other broadcast
television and cable television system operators. The sales and marketing
management for Broadcast is located at our principal facilities in Anaheim,
California. Broadcast maintains a dedicated field sales force of five persons
operating in five U.S. sales regions and Canada, and a sales manager for Latin
America. The European sales and marketing activities for Broadcast are
conducted and managed by Odetics Europe Limited, a wholly-owned United Kingdom
subsidiary of Odetics. Odetics Asia Pacific Pte. Ltd., Odetics' wholly-owned
subsidiary located in Singapore, conducts Asian sales and marketing activities
for Broadcast. Broadcast also utilizes additional independent representative
organizations to promote its products in various other foreign markets.
The customers of Broadcast include major television networks such as Fox,
the Canadian Broadcasting Corporation, CNBC, Euronews, Televisa, Measat
Broadcast Network Systems, NBC, the PBS Network, Group W Satellite
Communications (for the Arts & Entertainment Network and the Discovery Channel),
Asia Broadcast Centre, Univision and over 100 independent and network-affiliated
television stations. Broadcast currently has systems installed in over 40
countries.
Manufacturing and Materials. Broadcast maintains a dedicated manufacturing
operation located within our Anaheim, California facilities. Our AIRO products
are serviced primarily in a facility located in Austin, Texas. At our Anaheim
facility, Broadcast maintains infrastructure to support production and inventory
control, purchasing, quality assurance, manufacturing and engineering.
Broadcast purchases video servers from Grass Valley Group, Leitch and
Pinnacle Systems and video switching, conversion and monitoring equipment from
Grass Valley Group and Leitch for installation in our automated video management
systems. Broadcast also purchases cabinets and other fabricated parts and
components from other third party suppliers.
Gyyr, Inc.
Gyyr produces analog and digital video products and access control systems
that meet the security and surveillance needs for a variety of markets including
banking, commercial/industrial and retail. Gyyr's time-lapse VCRs are installed
in automated teller machines and retail point of sale systems to record
transaction information in an effort to deter and address incidents of theft and
other crimes. Gyyr's access control systems offer managed access and monitoring
of public, private and high security facilities. Customer demand for more
sophisticated capabilities and
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integration due to digital technology has also contributed to the recent growth
in the market for Gyyr's products. Gyyr's strategy is to provide complete
software-based system integration of digital security devices over the Internet.
Recent additions to Gyyr's product offerings include network and Internet-based
video and device control, intelligent dome cameras, video multiplexing and
digital recording. In December 1999, we expanded our product line to include the
DVMS family of digital time-lapse recorders based on hard disk drive
architecture. This product line expansion was the result of our acquisition of
the Security Products Division of Digital Systems Processing, Inc. We sell our
products as individual devices as well as components of fully-integrated network
security control systems.
Sales, Marketing and Principal Customers. Gyyr markets and sells its
products through three established channels: OEMs, independent distributors and
system integrators. Gyyr personnel located at our principal facilities and
sales offices throughout the world oversee approximately 1,000 of these channel
partners. Gyyr has a business development and service organization located at
our Odetics Europe Limited subsidiary. Through January 2000, Odetics Europe
Limited assisted Gyyr with management in the development of European, Middle
East and African markets. Commencing in January 2000, Gyyr formed Gyyr Europe
Limited to succeed Odetics Europe Limited in its support services. Through
September 1999, Gyyr utilized Odetics Asia Pacific Pte. Ltd. to assist in
sales to the Asian markets. Commencing in October 1999, Gyyr consolidated its
Asian sales and marketing activities into its Anaheim, California facilities.
Gyyr's principal customers include major security equipment companies such as
Diebold, Inc., ADT Security Systems, Inc., Honeywell, Inc., Mosler, Inc.,
Hamilton Safe and ADI.
Manufacturing and Materials. Gyyr maintains a dedicated manufacturing area
located within our principal facilities in Anaheim, California. Gyyr primarily
uses continuous demand flow techniques in its assembly lines. Gyyr maintains
infrastructure to support production and inventory control, purchasing, quality
assurance and manufacturing engineering.
Gyyr purchases VCRs modified to our specifications exclusively through
Nissei Sangyo America, the United States distribution affiliate of Hitachi,
Ltd., into which we incorporate certain value-added features. As a result of
its reliance on Hitachi, Ltd, Gyyr is vulnerable to Hitachi's actions, which
might necessitate changes in the design or manufacturing of Gyyr's products.
While other suppliers are available who can manufacture VCRs suitable for use in
Gyyr's products, we would be required to make changes in our product design or
manufacturing methods to accommodate other VCRs, and Gyyr could experience
delays or interruptions in supply while these changes are incorporated or a new
supplier is procured.
Telecom Products
Zyfer, Inc.
We incorporated our Communications division in 1999 as Zyfer, Inc. Zyfer
develops and manufactures telecom network synchronization products and provides
service support for space borne digital data recorders. Our telecom network
synchronization products synchronize communications for data security, timing
networks and wireless communications systems. These products are based on GPS
and oscillator technologies and are sold for new applications in
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wireless networks and satellite communications for both commercial and
government customers. Significant customers of Zyfer include LGIC of Korea, and
the U.S. government. See "Risk Factors--Our Operating Results Have Been
Adversely Affected by the Asian Economic Crisis."
Zyfer has developed a new class of encryption products for securing
enterprise wide communications. These products provide transparent security to
users and system administrators. Transparency results from the elimination of
traditional key exchange and key management requirements and from our ability to
encrypt and decrypt at high data rates.
Zyfer also provides service support for space borne digital data recorders
that are used in manned and unmanned space vehicles to store data gathered by
onboard sensors prior to transmission of the data to ground receiving stations.
These recorders are employed in satellite programs for space research, earth
resource and environmental observation and weather monitoring, as well as global
surveillance and classified government programs.
Sales, Marketing and Principal Customers. Zyfer conducts its selling and
marketing activities worldwide directly from our principal facilities in
Anaheim, California. Zyfer sells its telecom synchronization products primarily
through manufacturers' representatives.
Manufacturing and Materials. Zyfer manufactures its telecom
synchronization products to best commercial practices and is ISO certified.
Most of the manufacturing processes consist of final assembly and test. We
outsource board assembly and some preliminary fabrication processes.
Mariner Networks, Inc.
Mariner Networks, Inc. has developed and will manufacture a family of
broadband integrated access devices that enable branch offices to cost
effectively combine their separate voice, video and data networks onto a single
wide area transport network. The Dexter(R) product family provides wire speed
transport of most data traffic types. Mariner Networks' products include ATM
subsystems, Frame Relay-to-ATM networking components and systems, and ATM wide
area network access concentrators for handling intranet, data, voice and video
traffic.
Sales, Marketing and Principal Customers. Mariner Networks sells its
products through OEMs and resellers in North America and in Europe. Mariner
Networks maintains sales offices at our facilities in the United States in
Anaheim, California and at Odetics Europe Limited in the United Kingdom.
Manufacturing and Materials. Mariner Networks' manufacturing processes are
ISO 9000 certified and consist primarily of final assembly and test. Mariner
Networks currently outsources circuit board assembly and some fabrication
processes.
ITS Products
Iteris, Inc.
Iteris, Inc. designs, develops, markets and implements software based
solutions that improve the safety and efficiency of vehicle transportation.
Using its proprietary software and
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ITS industry expertise, Iteris provides video sensor systems and transportation
management and traveler information systems for the ITS industry. The ITS
industry is comprised of companies applying a variety of technologies to enable
the safe and efficient movement of people and goods. Iteris uses its outdoor
image recognition software expertise to develop proprietary algorithms for video
sensor systems that improve vehicle safety and the flow of traffic. Our
knowledge of the ITS industry enables Iteris to design and implement
transportation solutions that help public agencies reduce traffic congestion and
provide greater access to traveler information.
Iteris' proprietary image recognition systems include AutoVue and Vantage.
AutoVue is a small windshield mounted sensor that utilizes proprietary software
to detect and warn drivers of unintended lane departures. Through new software
development, Iteris is expanding the AutoVue platform to incorporate additional
safety and convenience features. Vantage is a video vehicle sensing system that
detects the presence of vehicles at signalized intersections enabling a more
efficient allocation of green signal time.
Iteris, Inc. designs, develops and implements software based systems that
integrate sensors, video surveillance, computers and advanced communications
equipment enabling public agencies to monitor, control and direct traffic flow,
assist in the quick dispatch of emergency crews and distribute real-time
information about traffic conditions and alternative routes.
Sales, Marketing and Principal Customers. Iteris markets and sells its
transportation management systems and services directly to government agencies
pursuant to negotiated contracts which involve competitive bidding and specific
qualification requirements. Sales of Iteris' systems generally involve long
lead times and require extensive specification development, evaluation and price
negotiations.
Iteris sells its Vantage vehicle detection systems primarily through
indirect sales channels comprised of independent dealers in the United States
and Canada who sell integrated solutions and related products to the traffic
intersection market. The independent dealers for Iteris are primarily
responsible for sales, installation and support of Vantage systems. These
dealers maintain an inventory of demonstration traffic products including the
Vantage vehicle detection systems and sell directly to government agencies and
installation contractors. These dealers often have long-term arrangements with
the government agencies in their territory for the supply of various products
for the construction and renovation of traffic intersections. Iteris holds
technical training classes for our dealers and maintains a full-time staff of
customer support technicians to provide technical assistance when needed.
The marketing strategy for AutoVue is to establish it as the leading
platform for in vehicle video sensing for trucks and passenger cars. AutoVue is
sold directly by Iteris to vehicle manufacturers. Iteris currently has a direct
sales force of three product managers, and intends to expand its sales force in
the future to include engineers and product managers who will be responsible for
sales and customer service to specific vehicle manufacturers. Since its target
customer base is well known, Iteris currently does not plan to engage in large
scale marketing campaigns.
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Manufacturing and Materials. Iteris designs, assembles and tests the
components of its Vantage systems in approximately 5,000 square feet of space at
our Anaheim facility. Production equipment consists of assembly lines and test
apparatus for final assembly and testing of the manufactured product.
Production volume is based upon quarterly forecasts that Iteris readjusts on a
monthly basis to control inventory. Iteris subcontracts the manufacture of its
AutoVue systems to two manufacturers. We anticipate these manufacturers will be
able to produce unit volume sufficient to support sales to heavy truck
manufacturers. Iteris intends to engage additional manufacturers with expertise
in high volume production to produce higher volumes for light and medium trucks
and passenger cars. Iteris does not manufacture any of the hardware used in the
transportation management and traveler information systems that it designs and
implements. The production facility for Iteris is ISO 9001 certified.
Customer Support and Services
Each of our business units is responsible for its own customer support and
service organizations. We provide warranty service for each of our product
lines, as well as follow-up service and support, for which we typically charge
separately. We also offer separate software maintenance agreements to our
customers. We view customer support services as a critical competitive factor
as well as a revenue source.
Backlog
Our backlog of unfulfilled firm orders was approximately $27.3 million as
of March 31, 2000 and approximately $22.0 million as of March 31, 1999.
Approximately 82% of our backlog at March 31, 1999 was recognized as revenues in
fiscal 2000, and approximately 68% of our backlog at March 31, 2000 is expected
to be recognized as revenues in fiscal 2001. Pursuant to the customary terms of
our agreements with government contractors and other customers, customers can
generally cancel or reschedule orders with little or no penalties. Lead times
for the release of purchase orders depend upon the scheduling and forecasting
practices of our individual customers, which also can affect the timing of the
conversion of our backlog into revenues. For these reasons, among others, our
backlog at a particular date may not be indicative of our future revenues.
Product Development
Each of our business units directs and staffs its own product development
activities. Our businesses require substantial ongoing research and development
expenditures and other product development activities. Our company-sponsored
research and development costs and expenses were approximately $9.3 million in
fiscal 1998, $11.2 million in fiscal 1999 and $16.9 in fiscal 2000. We expect
to continue to pursue significant product development programs and incur
significant research and development expenditures in each of our business units.
Competition
Our business units generally face significant competition in each of their
respective markets. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
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Broadcast's primary competitors include Sony, Panasonic, Louth and Pro-bel.
Sony and Panasonic are large, international suppliers of extensive professional
quality products, including video tape libraries, for the broadcast television
market. Louth and Probel principally provide automation control for video
libraries and disk recorders. Broadcast's systems compete primarily in the
arena of facility management and enterprise wide automation. We believe that
the capability of our systems to integrate the broadcast station business
systems acquisition processes, storage devices and presentation devices under a
relational data base management system represents a unique and differentiable
capability.
As Gyyr expands its product base from time-lapse VCRs to providing
integrated security systems in CCTV and electronic access control, it will
compete with a broader set of companies. Major Japanese competitors in Gyyr's
legacy tape-based time-lapse VCR business include Panasonic, Toshiba, Sony,
Sanyo, Mitsubishi and JVC. Gyyr also competes with large systems suppliers
including Sensormatic, Honeywell, Pelco, Ultrak, Ademco and Vicon. In the sale
of access control systems, Gyyr principally competes with Casi-Rusco,
Checkpoint, Cardkey and Lenel. Gyyr generally competes based upon its strength
in the integration of its various component products into systems that provide
complete solutions through the use of advanced software and networking
technologies.
Zyfer's primary competition for network synchronization products is Datum,
Inc. and TrueTime Inc. Zyfer anticipates that its competition for encryption
products for secured communications will include Zyling Corporation, Rainbow
Technologies, Inc. and Redcreek Communications Inc.
For its integrated access devices, Mariner Networks' principal competition
includes networking vendors Vina Technologies, Sonoma Systems and Accelerated
Networks.
While we believe that AutoVue is the only commercially-available lane
departure warning system, potential competitors including Delphi Automotive
Systems Corporation domestically and NEC Corporation and Hitachi Ltd. in Japan
and Robert Bosch Gmbh in Europe are currently developing video sensor technology
for the vehicle industry that could be used for lane departure warning systems.
In the market for our Vantage vehicle detection systems, we compete with both
manufacturers of "above ground" video camera detection systems, such as
Econolite Control Products, Inc. and the Peek Traffic Systems division of Thermo
Electron Corporation, and other non-intrusive detection devices including
microwave, infrared, ultrasonic and magnetic detectors, as well as manufacturers
and installers of in-pavement inductive loop products.
The transportation management and traveler information systems market is
highly fragmented and is subject to evolving national and regional quality and
safety standards. Iteris' competitors vary in number, scope and breadth of the
products and services they offer. Iteris' competitors in advanced
transportation management and traveler information systems include corporations
such as TRW, Inc., Transcore, Lockheed Martin Corporation, PB Farradyne Inc.,
Kimley-Horn and Associates, Inc. and National Engineering Technology, Inc.
Iteris' competitors in transportation engineering, planning and design include
major firms such as Parsons Brinkerhoff, Inc. and Parsons Transportation Group
Inc., as well as many regional engineering firms.
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In general, the markets for the products and services offered by our
businesses are highly competitive and are characterized by rapidly changing
technology and evolving standards. We believe that our ability to compete
effectively in our target markets depends on a number of factors, including the
success and timing of our new product development, the compatibility of our
products with a broad range of computing systems, product quality and
performance, reliability, functionality, price, and service and technical
support. Many of our current and prospective competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, technical, manufacturing, distribution and
marketing resources than us. As a result, they may be able to adapt more
quickly to new or emerging standards or technologies or to devote greater
resources to the promotion and sale of their products. It is also possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. Our failure to provide services and develop and
market products that compete successfully with those of other suppliers and
consultants in our target markets would have a material adverse effect on our
business, financial condition and results of operations.
Intellectual Property and Proprietary Rights
Our ability to compete effectively depends in part on our ability to
develop and maintain the proprietary aspects of our technology. Our policy is
to obtain appropriate proprietary rights protection for any potentially
significant new technology acquired or developed each of our business units. We
currently hold a number of United States and foreign patents and trademarks,
which will expire at various dates commencing in 2004. We also have pending a
number of United States and foreign patent applications relating to certain of
our products; however, we cannot be certain that any patents will be granted
pursuant to these applications.
In addition to patent laws, we rely on copyright and trade secret laws to
protect our proprietary rights. We attempt to protect our trade secrets and
other proprietary information through agreements with customers and suppliers,
proprietary information agreements with our employees and consultants, and other
similar measures. We cannot be certain that we will be successful in protecting
our proprietary rights. While we believe our patents, patent applications,
software and other proprietary know-how have value, changing technology makes
our future success dependent principally upon our employees' technical
competence and creative skills for continuing innovation.
Litigation has been necessary in the past and may be necessary in the
future to enforce our proprietary rights, to determine the validity and scope of
the proprietary rights of others, or to defend us against claims of infringement
or invalidity by others. An adverse outcome in such litigation or similar
proceedings could subject us to significant liabilities to third parties,
require disputed rights to be licensed from others or require us to cease
marketing or using certain products, any of which could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the cost of addressing any intellectual property litigation claim,
both in legal fees and expenses, as well as from the diversion of management's
resources, regardless of whether the claim is valid, could be significant and
could have a material adverse effect on our business, financial condition and
results of operations.
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Employees
We refer to our employees as associates. As of June 23, 2000, we employed
569 associates, including 113 associates in general management, administration
and finance; 82 associates in sales and marketing; 196 associates in product
development; 124 associates in operations, manufacturing and quality; and 54
associates in customer service. None of our associates are represented by a
labor union and we have not experienced a work stoppage.
We provide centralized support for human resources management for each of
our business units and subsidiaries. These services include recruiting,
administration and outplacement.
Government Regulation
Our manufacturing operations are subject to various federal, state and
local laws, including those restricting the discharge of materials into the
environment. We are not involved in any pending or threatened proceedings which
would require curtailment of our operations because of such regulations. We
continue to expend funds in connection with our compliance with applicable
environmental regulations. These expenditures have not, however, been
significant in the past, and we do not expect any significant expenditures in
the near future.
From time to time, a portion of our work relating to digital data recorders
may constitute classified United States government information or may be used in
classified programs of the United States Government. For this purpose, we
possess certain relevant security clearances. Our affected facilities and
operations are also subject to security regulations of the United States
Government. We believe we are currently in full compliance with these
regulations.
RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing the shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly operating results have fluctuated and are likely to continue to
fluctuate due to a number of factors, many of which are not within our control.
Factors that could affect our revenues include the following:
. our significant investment in research and development for our
subsidiaries and divisions;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
10
. the size and timing of significant customer orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. our ability to control costs;
. changes in our pricing policies and the pricing policies by our
suppliers and competitors, as well as increased price competition in
general;
. the long lead times associated with government contracts or required by
vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our divisions;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the Asian economic crisis and instability;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and market conditions.
In addition, our sales in any quarter may consist of a relatively small
number of large customer orders. As a result, the timing of a small number of
orders may impact our quarter to quarter results. The loss of or a substantial
reduction in orders from any significant customer could seriously harm our
business, financial condition and results of operations.
Because of the factors listed above and other risks discussed in this
report, our future operating results could be below the expectations of
securities analysts and/or investors. If that happens, the trading price of our
common stock could be adversely affected.
We Have Experienced Substantial Losses and Expect Future Losses. We have
experienced substantial operating losses of $38.7 million for the year ended
March 31, 2000 and $18.3 million for the year ended March 31, 1999. We may not
be able to achieve profitability on a quarterly or annual basis in the future.
Most of our expenses are fixed in advance, and we generally are unable to reduce
our expenses significantly in the short-term to compensate for any unexpected
delay or decrease in anticipated revenues. In addition, in order to implement
our incubator strategy successfully, we expect to continue to make significant
investments in each of
11
our business units. As a result, we may continue to experience losses which
could cause the market price of our common stock to decline.
Our Incubator Strategy is Expensive and May Not Be Successful. We have
initiated a business strategy called our incubator strategy which is expensive
and highly risky. The goal of this strategy is to nurture and develop companies
that can be spun-off to our stockholders. This strategy has in the past
required us to make significant investments in our business units, both for
research and development, and also to develop a separate infrastructure for each
of our divisions, sufficient to allow the division to function as an independent
public company. We expect to continue to invest heavily in the development of
our divisions with the goal of conducting additional public offerings. We may
not recognize the benefits of this investment for a significant period of time,
if at all. Our ability to complete an initial public offering of any of our
divisions and/or spin-off our interest to our stockholders will depend upon many
factors, including:
. the overall performance and results of operations of the particular
businesa unit;
. the potential market for our business unit;
. our ability to assemble and retain a broad, qualified management team
for the business unit;
. our financial position and cash requirements;
. the business unit's customer base and product line;
. the current tax treatment of spin-off transactions and our ability to
obtain favorable determination letters from the Internal Revenue
Service; and
. general economic and market conditions, including the receptivity of the
stock markets to initial public offerings.
We may not be able to complete a successful initial public offering or
spin-off of any of our divisions in the near future, or at all. During fiscal
2000, we attempted to complete the initial public offering of Iteris. We
aborted the offering due to adverse market conditions. Even if we do complete
additional public offerings, we may decide not to spin-off a particular business
unit, or to delay the spin-off until a later date.
We Must Keep Pace with Rapid Technological Change to Remain Competitive.
Our target markets are in general characterized by the following factors:
. rapid technological advances;
. downward price pressure in the marketplace as technologies mature;
. changes in customer requirements;
. frequent new product introductions and enhancements; and
12
. evolving industry standards and changes in the regulatory environment.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. In particular,
we will need to modify certain of our products to accommodate the anticipated
deployment of digital television and the corresponding phase-out of analog
transmissions. We will also have to continue to develop and introduce new
products that incorporate the latest technological advancements in hardware,
storage media, operating system software and applications software in response
to evolving customer requirements. Our recent shift towards providing more
software solutions may create additional challenges for us, particularly in
Broadcast. Our business and results of operations could be adversely affected
if we do not anticipate or respond adequately to technological developments or
changing customer requirements.
Our Future Success Depends on the Successful Development and Market
Acceptance of New Products. We believe our revenue growth and future operating
results will depend on our ability to complete development of new products and
enhancements, achieve broad market acceptance of these products and
enhancements, and reduce our product costs. We may not be able to introduce any
new products or any enhancements to our existing products on a timely basis, or
at all. In addition, the introduction of any new products could adversely
affect the sales of our certain of our existing products.
Our future success will also depend in part on the success of several
recently introduced products including:
. Roswell, our automated facility management system for broadcast
television stations;
. Bowser, our visual asset manager;
. MicroStation, our integrated disk recorder and automation system;
. Vortex, our high performance dome product;
. Digi Scan Pro, our advanced digital multiplexer;
. DVMS, our family of digital time-lapse recorders;
. Vantage One and Vantage Edge, our single camera traffic detection
systems;
. AutoVue, our lane departure warning system; and
. Dexter, our networking access device.
Market acceptance of our new products depends upon many factors, including
our ability to resolve technical challenges in a timely and cost-effective
manner, the perceived advantages of our new products over traditional products
and the marketing capabilities of our independent distributors and strategic
partners. Our business and results of operations could be seriously harmed by
any significant delays in our new product development. We have experienced
delays in the past in the introduction of new products, particularly with our
Roswell system. Certain of
13
our new products could contain undetected design faults and software errors or
"bugs" when first released by us, despite our testing. We may not discover these
faults or errors until after a product has been installed and used by our
customers. Any faults or errors in our existing products or in our new products
may cause delays in product introduction and shipments, require design
modifications or harm customer relationships, any of which could adversely
affect our business and competitive position.
We currently anticipate that we will outsource the manufacture of our
AutoVue product line to a single manufacturer. This manufacturer may not be
able to produce sufficient quantities of this product in a timely manner or at a
reasonable cost, which could materially and adversely affect our ability to
launch or gain market acceptance of AutoVue.
We May Need Additional Capital in the Future and May Not Be Able to Secure
Adequate Funds on Terms Acceptable to Us. We raised approximately $7.3 million
in a private placement of Odetics Class A common stock in December 1998 and
approximately $2.0 million in March 1999. We raised $5.0 million through the
sale of an option on our principal Anaheim facility in July 1999. In addition,
we raised $3.75 million through the issuance of debt to Daimler Chrysler
Ventures, which is convertible into 2.5% of the equity securities of Iteris. We
may need to raise additional capital in the near future, either through
additional bank borrowings or other debt or equity financings. Our capital
requirements will depend on many factors, including:
. market acceptance of our products;
. increased research and development funding, and required investments in
our divisions;
. increased sales and marketing expenses;
. potential acquisitions of businesses and product lines; and additional
working capital needs.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced and such securities may have
rights, preferences and privileges senior to our common stock. Additional
financing may not be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
develop or enhance our products, expand our sales and marketing programs, take
advantage of future opportunities or respond to competitive pressures.
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets. International product sales
represented approximately 19% of our total net sales and contract revenues for
the fiscal year ended March 31, 2000, approximately 27% for the fiscal year
ended March 31, 1999 and approximately 34% for the fiscal year ended March 31,
1998. International business operations are subject to inherent risks,
including, among others:
14
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. reduced protection for intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political and economic instability.
We believe that international sales will continue to represent a
significant portion of our revenues, and that continued growth and profitability
may require further expansion of our international operations. Our
international sales are currently denominated primarily in U.S. dollars. As a
result, an increase in the relative value of the dollar could make our products
more expensive and potentially less price competitive in international markets.
We do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations.
Any of these factors may adversely effect our future international sales
and, consequently, on our business and operating results. Furthermore, as we
increase our international sales, our total revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.
Our Operating Results Have Been Adversely Affected by the Asian Economic
Crisis. Our telecommunications products are sold principally to LGIC of Korea.
As a result of economic instability in Asia, particularly in Korea, our sales in
this region declined over 60% in fiscal year 1999 as compared to fiscal 1998.
While sales to LGIC in fiscal 2000 increased, the aggregate sales to LGIC in
fiscal 2000 were still significantly below fiscal 1998 sales. It is possible
that these sales could be further impacted by the currency devaluations and
related economic problems in this region, and sales in this region could
continue to decline.
We Need to Manage Growth and the Integration of Our Acquisitions. Over the
past three years, we have significantly expanded our operations and made several
substantial acquisitions of diverse businesses, including Intelligent Controls,
Inc., International Media Integration Services, Ltd., Meyer Mohaddes Associates,
Inc., Viggen Corporation, certain assets of the Transportation Systems business
of Rockwell International, and the Security Products Division of Digital Systems
Processing, Inc. A key element of our business strategy involves expansion
through the acquisition of complementary businesses, products and technologies.
Acquisitions may require significant capital infusions and, in general,
acquisitions also involve a number of special risks, including:
15
. potential disruption of our ongoing business and the diversion of our
resources and management's attention;
. the failure to retain or integrate key acquired personnel;
. the challenge of assimilating diverse business cultures;
. increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
result of changes in management; and
. increased interest expense and amortization of acquired intangible
assets.
Our competitors are also soliciting potential acquisition candidates, which
could both increase the price of any acquisition targets and decrease the number
of attractive companies available for acquisition.
Acquisitions, combined with the expansion of our business divisions and
recent growth has placed and is expected to continue to place a significant
strain on our resources. To accommodate this growth, we anticipate that we will
be required to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including the improvement of our accounting
and other internal management systems. All of these updates will require
substantial management effort. Our failure to manage growth and integrate our
acquisitions successfully could adversely affect our business, financial
condition and results of operations.
We Depend on Government Contracts and Subcontracts and Face Additional
Risks Related to Fixed Price Contracts. A significant portion of the sales by
Iteris, a portion of our sales by Zyfer were derived from contracts with
governmental agencies, either as a general contractor, subcontractor or
supplier. Government contracts represented approximately 23% of our total net
sales and contract revenues for the year ended March 31, 2000. We expect
revenue from government contracts will continue to increase in the near future.
Government business is, in general, subject to special risks and challenges,
including:
. long purchase cycles;
. competitive bidding and qualification requirements;
. performance bond requirements;
. delays in funding, budgetary constraints and cut-backs;
. milestone requirements, and liquidated damage provisions for failure to
meet contract milestones.
16
In addition, a large number of our government contracts are fixed price
contracts. As a result, we may not be able to recover for any cost overruns.
These fixed price contracts require us to estimate the total project cost based
on preliminary projections of the project's requirements. The financial
viability of any given project depends in large part on our ability to estimate
these costs accurately and complete the project on a timely basis. In the event
our costs on these projects exceed the fixed contractual amount, we will be
required to bear the excess costs. These additional costs adversely affect our
financial condition and results of operations. Moreover, certain of our
government contracts are subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in our net
sales in any given quarter. Our inability to address any of the foregoing
concerns or the loss or renegotiation of any material government contract could
seriously harm our business, financial condition and results of operations.
The Markets in Which We Operate Are Highly Competitive and Have Many More
Established Competitors. We compete with numerous other companies in our target
markets and we expect such competition to increase due to technological
advancements, industry consolidations and reduced barriers to entry. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our business, financial
condition and results of operations. Many of our competitors have far greater
name recognition and greater financial, technological, marketing and customer
service resources than we do. This may allow them to respond more quickly to
new or emerging technologies and changes in customer requirements. It may also
allow them to devote greater resources to the development, promotion, sale and
support of their products than we can. Recent consolidations of end users,
distributors and manufacturers in our target markets have exacerbated this
problem. As a result of the foregoing factors, we may not be able to compete
effectively in our target markets and competitive pressures could adversely
affect our business, financial condition and results of operations.
We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel and
We Do Not Have Employment Agreements with Any Key Personnel. Due to the
specialized nature of our business, we are highly dependent on the continued
service of our executive officers and other key management, engineering and
technical personnel, particularly Joel Slutzky, our Chief Executive Officer and
Chairman of the Board, and Gregory A. Miner, our Chief Operating Officer and
Chief Financial Officer. We do not have any employment contracts with any of
our officers or key employees. The loss of any of these persons would seriously
harm our development and marketing efforts, and would adversely affect our
business. Our success will also depend in large part upon our ability to
continue to attract, retain and motivate qualified engineering and other highly
skilled technical personnel. Competition for employees, particularly
development engineers, is intense. We may not be able to continue to attract
and retain sufficient numbers of such highly skilled employees. Our inability
to attract and retain additional key employees or the loss of one or more of our
current key employees could adversely affect upon our business, financial
condition and results of operations.
We May Not be Able to Adequately Protect or Enforce Our Intellectual
Property Rights. If we are not able to adequately protect or enforce the
proprietary aspects of our technology, competitors could be able to access our
proprietary technology and our business, financial condition and results of
operations will likely be seriously harmed. We currently
17
attempt to protect our technology through a combination of patent, copyright,
trademark and trade secret laws, employee and third party nondisclosure
agreements and similar means. Despite our efforts, other parties may attempt to
disclose, obtain or use our technologies or solutions. Our competitors may also
be able to independently develop products that are substantially equivalent or
superior to our products or design around our patents. In addition, the laws of
some foreign countries do not protect our proprietary rights as fully as do the
laws of the United States. As a result, we may not be able to protect our
proprietary rights adequately in the United States or abroad.
We have engaged in litigation in the past and litigation may be necessary
in the future to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation may also be
necessary to defend against claims of infringement or invalidity by others. An
adverse outcome in litigation or any similar proceedings could subject us to
significant liabilities to third parties, require us to license disputed rights
from others or require us to cease marketing or using certain products or
technologies. We may not be able to obtain any licenses on terms acceptable to
us, or at all. Any of these results could adversely affect on our business,
financial condition and results of operations. In addition, the cost of
addressing any intellectual property litigation claim, both in legal fees and
expenses, and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could seriously harm our business,
financial condition and results of operations.
The Trading Price of Our Common Stock Is Volatile. The trading price of
our common stock has been subject to wide fluctuations in the past. We may not
be able to increase or sustain the current market price of our common stock in
the future. The market price of our common stock could continue to fluctuate in
the future in response to various factors, including, but not limited to:
. quarterly variations in operating results;
. shortages announced by suppliers;
. announcements of technological innovations or new products;
. acquisitions or businesses, products or technologies;
. changes in pending litigation;
. our ability to spin-off any division;
. applications or product enhancements by us or by our competitors; and
. changes in financial estimates by securities analysts.
The stock market in general has recently experienced volatility which has
particularly affected the market prices of equity securities of many high
technology companies. This volatility has often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock.
18
We Are Controlled by Certain of Our Officers and Directors. As of March
31, 2000, our officers and directors beneficially owned approximately 29% of the
total combined voting power of the outstanding shares of our Class A common
stock and Class B common stock. As a result of their stock ownership, our
management will be able to significantly influence the election of our directors
and the outcome of corporate actions requiring stockholder approval, such as
mergers and acquisitions, regardless of how our other stockholders may vote.
This concentration of voting control may have a significant effect in delaying,
deferring or preventing a change in our management or change in control and may
adversely affect the voting or other rights of other holders of common stock.
Our Stock Structure and Certain Anti-Takeover Provisions May Effect the
Price of Our Common Stock. Certain provisions of our certificate of
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to our
stockholders. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. Our Class A common
stock entitles the holder to one-tenth of one vote per share and our Class B
common stock entitles the holder to one vote per share. In addition, holders of
the Class B common stock are presently entitled to elect six of our nine
directors. The disparity in the voting rights between our common stock, as well
as our insiders' significant ownership of the Class B common stock, could
discourage a proxy contest or make it more difficult for a third party to effect
a change in our management and control. In addition, our Board of Directors is
authorized to issue, without stockholder approval, up to 2,000,000 shares of
preferred stock with voting, conversion and other rights and preferences
superior to those of our common stock, as well as additional shares of Class B
common stock. Our future issuance of preferred stock or Class B common stock
could be used to discourage an unsolicited acquisition proposal.
In March 1998, we adopted a stockholder rights plan and declared a dividend
of preferred stock purchase rights to our stockholders. In the event a third
party acquires more than 15% of the outstanding voting control of our company or
15% of our outstanding common stock, the holders of these rights will be able to
purchase the junior participating preferred stock at a substantial discount off
of the then current market price. The exercise of these rights and purchase of
a significant amount of stock at below market prices could cause substantial
dilution to a particular acquiror and discourage the acquiror from pursuing our
company. The mere existence of the stockholder rights plan often delays or
makes a merger, tender offer or proxy contest more difficult.
We Do Not Pay Cash Dividends. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends on either class of
our common stock in the foreseeable future.
We May Be Subject to Additional Risks. The risks and uncertainties
described above are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business operations.
19
ITEM 2. PROPERTIES.
Our headquarters and principal operations are located in Anaheim,
California. In 1984, we purchased and renovated a three building complex
containing approximately 257,900 square feet situated on approximately 14 acres
adjacent to the Interstate 5 freeway, one block from Disneyland. Our facilities
house our corporate and administrative offices (approximately 43,600 dedicated
square feet), as well as the operations of Gyyr and Broadcast, (approximately
113,400 dedicated square feet), Zyfer (approximately 56,300 dedicated square
feet), Mariner Networks (approximately 20,600 dedicated square feet) and Iteris
(approximately 24,000 dedicated square feet).
Zyfer leases approximately 4,500 square feet of space in a manufacturing
facility located in El Paso, Texas. Broadcast leases approximately 5,000 square
feet in Austin, Texas primarily for service and sales support. Odetics Europe
Limited's offices are located in leased space near London, England. Odetics
Asia Pacific Pte. Ltd. offices are located in leased space in Singapore. Iteris
leases seven office suites representing an aggregate of approximately 25,000
square feet within the United States for its support staff and development
teams.
We currently operate a single shift in each of our manufacturing and
assembly facilities, and we believe that our facilities are adequate for our
current needs and for possible future growth. We may, however, elect to expand
or relocate its offices and facilities in the future.
ITEM 3. LEGAL PROCEEDINGS.
We brought an action against Storage Technology Corporation, commonly known
as StorageTek, in the Eastern District Court of Virginia alleging that
StorageTek had infringed our patent covering robotics tape cassette handling
systems (United States Patent No. 4,779,151). StorageTek counterclaimed
alleging that we infringed several of StorageTek's patents. Prior to trial, the
court dismissed two of the infringement claims against us and the third claim
was dismissed upon resolution between the parties. In October 1999, we entered
into a settlement agreement with StorageTek pursuant to which we granted them a
non-exclusive license of this patent and released StorageTek from past
infringement and all claims to civil actions. In exchange for settlement, we
received total consideration of $100 million, of which $80 million was paid
during the fiscal year ended March 31, 2000, and $10 million was to be paid in
each of fiscal years ending March 31, 2001 and 2002. The initial cash payment
of $80 million resulted in cash proceeds to us, net of expenses and fees, of
approximately $38.4 million. In June 2000, we amended the settlement agreement
with StorageTek to provide for the acceleration of the $10 million payments.
Under the terms of the amendment, StorageTek paid us $17.8 million immediately
in full settlement of the $20 million otherwise due to us to complete the
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A common stock and Class B common stock are traded on the Nasdaq
National Market under the symbols "ODETA" and "ODETB," respectively. The
following table sets forth for the fiscal periods indicated the high and low
sales prices for the Class A common stock and Class B common stock as reported
by the Nasdaq National Market:
Class A Class B
Common Stock Common Stock
----------------- -----------------
High Low High Low
-------- ------ ------- -------
Fiscal Year Ended March 31, 1999
First Quarter............................. $ 17 1/8 $ 8 3/8 $ 17 $ 9
Second Quarter............................ 13 5/8 4 5/8 14 1/4 5
Third Quarter............................. 8 3/4 4 1/16 9 5/8 4
Fourth Quarter............................ 10 5/8 7 1/16 10 3/4 7 3/8
Fiscal Year Ended March 31, 2000
First Quarter............................. 10 1/4 7 5/8 10 5/8 8 1/4
Second Quarter............................ 13 9 1/8 12 1/8 9 1/8
Third Quarter............................. 15 1/2 10 1/8 15 5/8 10 3/8
Fourth Quarter............................ 29 7/16 12 29 5/8 13
Fiscal Year Ending March 31, 2001
First Quarter (through June 26, 2000)..... 15 8 7/8 14 1/2 10
As of June 26, 2000, we had 627 holders of record of Class A common stock
and 141 holders of record of Class B common stock according to information
furnished by our transfer agent.
Dividend Policy
Pursuant to the terms of our Loan and Security Agreement with our lender,
we are prohibited from paying any dividends on our common stock without our
lender's consent. We have never paid or declared cash dividends on either class
of our common stock, and have no current plans to pay such dividends in the
foreseeable future. We currently intend to retain any earnings for working
capital and general corporate purposes. The payment of any future dividends
will be at the discretion of our Board of Directors, and will depend upon a
number of factors, including, but not limited to, future earnings, the success
of our business, activities, our capital requirements, our general financial
condition and future prospects, general business conditions, the consent of our
lender and such other factors as the Board may deem relevant.
21
Recent Sales of Unregistered Securities
During the last fiscal year, we have sold and issued the following
unregistered securities:
In October, 1998, Iteris acquired Meyer, Mohaddes Associates, Inc. in
exchange for 55,245 shares of our Class A common stock. Pursuant to the terms
of the merger agreement, we issued an aggregate of 46,726 additional shares of
our Class A Common Stock in fiscal 1999 and an additional 20,181 shares of our
Class A Common Stock in April 2000 to the four former shareholders of Meyer,
Mohaddes as a penalty for not completing the initial public offering of Iteris.
The sale and issuance of securities set forth above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof. The recipients of the securities in each of the transactions set forth
in above represented their intention to acquire such securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments used in such transactions. Except as indicated above, there were no
underwriters, brokers or finders employed in connection with any of the
foregoing transactions.
22
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data with respect to our
consolidated statement of operations for each of the five fiscal years in the
period ended March 31, 2000 and the consolidated balance sheet data at March 31,
1996, 1997, 1998, 1999 and 2000 are derived from our audited consolidated
financial statements. The consolidated financial statements for the fiscal
years ended March 31, 1996 and 1997 and our consolidated balance sheet at March
31, 1996, 1997 and 1998 are not included in this report. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with our
consolidated financial statements and the related notes thereto included
elsewhere in this report.
Fiscal Year Ended March 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net sales...................... $65,056 $71,748 $ 79,552 $ 70,042 $ 62,041
Contract revenues.............. 10,161 9,032 10,284 13,331 18,666
------- ------- -------- -------- --------
Total net sales and contract
revenues...................... 75,217 80,780 89,836 83,373 80,707
Cost of sales.................. 44,535 48,507 55,227 49,816 50,883
Cost of contract revenues...... 4,374 4,907 6,430 9,007 13,431
Selling, general and
administrative expense........ 15,620 19,831 26,010 31,670 38,173
Research and development
expenses...................... 5,242 7,734 9,271 11,191 16,888
In process research and
development................... -- -- 2,106 -- --
Restructuring charge........... -- -- 1,716 -- --
------- ------- -------- -------- --------
Income (loss) from operations.. 5,446 (199) (10,924) (18,311) (38,668)
Non-operating income (expense)
Royalty income................ -- -- -- -- 38,437
Interest expense, net......... (386) (183) (617) (1,807) (2,048)
------- ------- -------- -------- --------
Income (loss) before taxes..... 5,060 (382) (11,541) (20,118) (2,279)
Income taxes (benefit)......... 1,418 (181) (2,858) -- --
------- ------- -------- -------- --------
Income (loss) from
continuing operations......... 3,642 (201) (8,683) (20,118) (2,279)
Income (loss) from
discontinued operations, net
of income taxes............... (1,189) 3,931 2,089 -- --
------- ------- -------- -------- --------
Net income (loss).............. $ 2,453 $ 3,730 $ (6,594) $(20,118) $ (2,279)
======= ======= ======== ======== ========
Diluted earnings (loss) per
share(1):
Continuing operations.......... $ 0.59 $ (0.03) $ (1.26) $ (2.57) $ (0.25)
Discontinued operations........ (0.19) 0.62 0.31 -- --
------- ------- -------- -------- --------
Earnings (loss) per share...... $ 0.40 $ 0.59 $ (0.95) $ (2.57) $ (0.25)
======= ======= ======== ======== ========
Shares used in calculating
diluted earnings (loss) per
share......................... 6,179 6,299 6,912 7,820 9,089
_____________________________
(1) The earnings (loss) per share amounts prior to fiscal 1998 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128 Earnings per Share.
23
Fiscal Year Ended March 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
Consolidated Balance Sheet Data: (in thousands)
Working capital........................ $20,610 $21,903 $19,996 $ 15,216 $ 12,855
Total assets........................... 73,013 85,805 88,790 81,355 81,850
Long-term debt (less current portion).. 22,019 11,860 21,000 19,962 11,666
Retained earnings (deficit)............ 8,481 12,211 (3,795) (23,913) (26,192)
Total stockholders' equity............. 30,985 51,828 38,580 36,323 36,110
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
The following table sets forth certain income statement data as a
percentage of total net sales and contract revenues for the periods indicated
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations:
As of March 31,
--------------------------
1998 1999 2000
----- ----- -----
Net sales....................................... 88.6% 84.0% 76.9%
Contract revenues............................... 11.4 16.0 23.1
----- ----- -----
Total net sales and contract revenues........... 100.0% 100.0% 100.0%
Cost of sales................................... 61.4 59.7 63.0
Cost of contract revenues....................... 7.2 10.8 16.6
Selling, general and administrative expenses.... 29.0 38.0 47.3
Research and development expenses............... 10.3 13.4 20.9
In process research and development............. 2.3 -- --
Restructuring charge............................ 1.9 -- --
----- ----- -----
Loss from operations............................ (12.2) (22.0) (47.9)
Non-operating income (expense)
Royalty income................................. -- -- 47.6
Interest expense, net.......................... (0.7) (2.1) (2.5)
----- ----- -----
Loss before taxes............................... (12.9) (24.1) (2.8)
Income taxes (benefit).......................... (3.2) -- --
----- ----- -----
Loss from continuing operations................. (9.7) (24.1) (2.8)
Income from discontinued operations, net of
income taxes.................................... 2.4 -- --
----- ----- -----
Net loss........................................ (7.3)% (24.1)% (2.8)%
----- ----- -----
General. We define our business segments as video products, telecom
products and ITS. The video products segment includes our wholly-owned
subsidiaries, Broadcast, Inc. and Gyyr, Inc. The telecom products segment
includes Zyfer, Inc., our wholly-owned subsidiary (formerly known as our
Communications division) that manufactures timing and synchronization products,
and Mariner Networks, Inc., our wholly-owned subsidiary. The ITS segment
includes Odetics' 93% owned subsidiary, Iteris, Inc. On October 31, 1997, we
completed the spin-off of our 82.9% interest in ATL Products, Inc. by
distributing our 8,005,000 shares of Class A common stock to our stockholders of
record on October 31, 1997. In connection with the spin-off, we restated our
financial statements to reflect continuing and discontinued operations.
Discontinued operations reflect our interest in the operations of ATL for all
periods presented. All references to our subsidiaries in this report include
the prior business and results of operations of such subsidiaries as business
units of Odetics prior to their incorporation.
Net Sales and Contract Revenues. Net sales and contract revenues consist of
(i) sales of products and services to commercial and municipal customers ("net
sales") and (ii) revenues derived from contracts with state, county and
municipal agencies for intelligent transportation systems projects ("contract
revenues"). Contract revenues also include revenue from contracts with agencies
of the United States Government and foreign entities for space-borne recorders
25
used for geographical information systems. Total net sales and contract revenues
decreased 3.2% to $80.7 million for the fiscal year ended March 31, 2000
("fiscal 2000") compared to $83.4 million for the fiscal year ended March 31,
1999 ("fiscal 1999"), and decreased 7.2% in fiscal 1999 from $89.8 million for
the fiscal year ended March 31, 1998 ("fiscal 1998").
Net Sales. Net sales decreased 11.4% to $62.0 million in fiscal 2000
compared to $70.0 million in fiscal 1999 as a result of declining sales in
Broadcast, Mariner Networks and Gyyr. The decrease in Broadcast sales in fiscal
2000 reflects delays in the delivery of our Roswell facility management system.
We believe that the Roswell system represents key enabling software that
facilitates the sale of Broadcast systems. The decline in Mariner Networks'
sales reflects the loss in August 1999 of IBM as a significant OEM customer of
its Fraim Product family. Gyyr's revenues declined 6.1% in fiscal 2000 compared
to fiscal 1999 primarily as a result of declining sales of its analog based
time-lapse recorder product families. Gyyr has made substantial investments in
expanding its product line to include a broad family of integrated security
solutions, including the acquisition of a line of digital time-lapse recorders.
This product line expansion was the result of our acquisition of the Security
Products Division of Digital Systems Processing, Inc. Contributions of revenue
in fiscal 2000 from the expanded product offerings were not significant enough
to offset the declining revenues from analog-based time-lapse recorders.
Net sales decreased 12.0% to $70.0 million in fiscal 1999 compared to $79.6
million in fiscal 1998 as a result of a 10.2% decrease in Gyyr's sales and a
58.6% decrease in Zypher's sales. The decrease in Gyyr's sales reflects reduced
purchases by certain of its OEM customers who sell to the banking industry
segment of the electronic security market. This market segment has undergone
substantial consolidation in the current fiscal year that has negatively
impacted demand for certain of our products including video multiplexers and
time-lapse video tape decks. The decrease in sales in our telecom products
segment reflects a decrease in sales by Zyfer of timing and synchronization
products to LGIC of Korea, a significant customer. The decline in sales to this
customer largely reflects adverse economic conditions in Asia. Sales by Iteris
increased 360.0% in fiscal 1999 compared to fiscal 1998 partially offsetting the
decline in sales of Gyyr and Zyfer. The increase in Iteris' sales was primarily
the result of increasing market acceptance of our Vantage line of video-based
traffic intersection control systems. We also experienced a 140% increase in
Mariner Networks' sales in fiscal 1999 compared to fiscal 1998 primarily due to
increased sales of network interface products. Sales of Mariner Networks
products represented 2.0% of our total net sales and contract revenues in fiscal
1998 compared to 6.0% in fiscal 1999. During fiscal 1999, Broadcast sales were
relatively flat compared to fiscal 1998.
Contract Revenues. Contract revenues increased 40.0% to $18.7 million in
fiscal 2000 compared to $13.3 million in fiscal 1999, and increased 29.6% in
fiscal 1999 from $10.3 million in fiscal 1998. The growth in contract revenues
in fiscal 2000 compared to fiscal 1999 primarily reflects increased contract
volume in our Iteris subsidiary. During fiscal 1999, Iteris completed the
acquisition of Meyer Mohaddes Associates, Inc. and the assets of Viggen
Corporation. In fiscal 2000 compared to fiscal 1999, Iteris experienced a 59%
growth in contract revenues in Meyer Mohaddes Associates Inc., a 34% growth in
contact revenues related to its acquisition of Viggen's assets, and a 37% growth
in its base business of contracts.
26
Approximately one-half of the increase in contract revenues in fiscal 1999
compared to fiscal 1998 resulted from the acquisition of Meyer Mohaddes. The
balance of the increase in contract revenues in fiscal 1999 represents overall
increased contract volume in Iteris. The increases in Iteris' contract revenues
in both fiscal 2000 and fiscal 1999 were offset by continued declines in
contract revenues derived from the sale of space-borne recorders and related
service and equipment to agencies of the United States Government. We have
focused our recent contract procurement efforts on commercial markets and the
markets for Iteris' products and services.
Gross Profit. Total gross profit as a percent of net sales and contract
revenues decreased to 20.3% in fiscal 2000, compared to 29.4% in fiscal 1999,
and 31.4% in fiscal 1998. Gross profit as a percent of net sales decreased to
18.0% in fiscal 2000 compared to 28.9% in fiscal 1999. The decrease in gross
profit as a percent of net sales reflects lower sales levels and higher
unabsorbed manufacturing costs in Video Products and Telecom Products. Gross
profit performance in fiscal 2000 was negatively impacted by pricing concessions
to certain customers in our Broadcast business. During fiscal 2000 gross profit
was impaired due to our adjustments to inventory reserves and capitalized
software related to certain discontinued products and product options in our
Mariner Networks, Broadcast and Gyyr businesses. As a result of increasing
sales volume, we experienced improved gross profit performance during fiscal
2000 on sales of Vantage Product by our Iteris subsidiary.
Gross profit as a percent of contract revenues decreased to 28.0% in fiscal
2000 compared to 32.4% in fiscal 1999. Contract revenue derived from our Iteris
subsidiary comprised 83.5% of total contract revenue in fiscal 2000 compared to
64.9% of total contract revenue in fiscal 1999. Gross profit earned on Iteris'
contracts activity is generally lower than gross profit historically earned by
Odetics on other government contract activities.
The decrease in gross profit in fiscal 1999 compared to fiscal 1998
reflects decreased gross profit performance in Broadcast and Zyfer. The
decrease in gross profit in Broadcast resulted from an unfavorable sales mix of
low margin product sales in the fourth quarter of fiscal 1999, in addition to an
increase in charges for warranty liabilities that are included in cost of sales.
Gross profit in Zyfer decreased from 46.5% of sales in fiscal 1998 to 36.7% of
sales in fiscal 1999, as a result of the decline in sales to LGIC of Korea.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 20.5% to $38.2 million (or 47.2% of total net
sales and contract revenues) in fiscal 2000 compared to $31.7 million (or 38.0%
of total net sales and contract revenues) in fiscal 1999, and increased 21.8% in
fiscal 1999 compared to $26.0 million (or 29.0% of total net sales and contract
revenues) in fiscal 1998. During fiscal 2000, we increased expenditures for
sales and marketing and general and administrative expenses in Mariner Networks,
Iteris and Broadcast. Concurrent with the completion of development of Mariner
Networks' Dexter product and its progression to beta testing, we began building
additional sales and marketing and administrative functions to support
anticipated revenue growth. During fiscal 2000, we attempted to execute a
public offering of Iteris. As a result of the volatility of the public equity
markets, we aborted the planned initial public offering and in May 2000,
withdrew the Registration Statement on Form S-1. In preparation for the initial
public offering of Iteris, we
27
increased expenditures for sales and marketing and general and administrative
expenses to enable Iteris to execute on its aggressive growth plans and to
function as an independent public company. As part of the process of filing a
Registration Statement on Form S-1 for Iteris with the Securities and Exchange
Commission, we adjusted the amortization periods for goodwill that arose upon
the acquisition of the assets of the Transportation Systems business of
Rockwell, and Meyer, Mohaddes Associates, Inc. The effect of the adjustment was
an incremental charge to amortization expense of $887,000 during fiscal 2000.
Iteris also experienced increased sales and marketing, and general and
administrative expenses as a result of its acquisitions of Meyer Mohaddes
Associates in October 1998, and of certain assets of Viggen Corporation in
January 19, 1999. The increase in selling, general and administrative expense in
fiscal 2000 also reflects charges of approximately $500,000 for adjustment to
the allowance for doubtful accounts in Broadcast.
During fiscal 1999, we increased sales and marketing expenditures $3.9
million or 20.7% over fiscal 1998 levels. Sales and marketing expense increased
in our Iteris, Gyyr, Broadcast and Mariner Networks businesses in fiscal 1999.
Approximately $514,000 of the increase in fiscal 1999 was attributable to Meyer
Mohaddes, which was acquired by Iteris in October 1998. The other increases in
spending were incurred to support planned growth in sales and market share and
were incurred principally in the areas of labor and benefits, sales commissions,
advertising and promotions, and charges related to support increased presence in
international markets, particularly Europe. These increases were partially
offset by decreased spending in Zyfer, which enforced general spending cutbacks
in response to the sharp reduction in sales in fiscal 1999 accompanying the
Asian economic crisis. General and administrative expense increased $1.2
million in fiscal 1999 compared to fiscal 1998 primarily as a result of the
write off of deferred costs associated with our delay in the initial public
offering of Iteris, an increase in goodwill amortization as a result of the
acquisitions of Meyer Mohaddes Associates and International Media Integration
Services, and the administrative infrastructure that accompanied the acquisition
of Meyer Mohaddes Associates.
Research and Development Expense. Research and development expense
increased 50.9% to $16.9 million (or 20.9% of total net sales and contract
revenues) in fiscal 2000 compared to $11.2 million (or 13.4% of total net sales
and contract revenues) in fiscal 1999, and increased 20.7% in fiscal 1999
compared to $9.3 million (or 10.3% of total net sales and contract revenues) in
fiscal 1998. For competitive reasons, we closely guard the confidentiality of
specific development projects. During fiscal 1999, $2.8 million of development
costs for Roswell and $2.1 million of development costs for Dexter were
capitalized as qualified software development costs. The increase in research
and development expense in fiscal 2000 also reflects increased expenditures by
Iteris, Broadcast and Mariner Networks. Iteris increased its development
activities 72.1% during fiscal 2000 to support its AutoVue product development.
Broadcast continued to aggressively develop its Roswell facility management
system and completed the development of its MicroStation product offering. All
software development activities for Broadcast during fiscal 2000 were charged as
research and development expense. Mariner Networks capitalized $300,000 of
software development costs in fiscal 2000, significantly expanded its product
development team and increased research and development expenses 223.9% during
fiscal 2000 compared to fiscal 1999 to support the completion of its development
schedule for Dexter in order to meet a targeted beta release of the product in
the first quarter of fiscal 2001. Gyyr reduced its expenses for product
development
28
27.6% in fiscal 2000 compared to fiscal 1999 in response to its efforts to
reduce overall operating expenses and because it had completed several
development initiatives as of the end of fiscal 1999. The change in Zyfer's
product development expenses in fiscal 2000 compared to fiscal 1999 was not
significant.
The increase in research and development expense in fiscal 1999 compared to
fiscal 1998 principally reflects increased product development activity in Gyyr,
Mariner Networks and Zyfer. Most of these increases represent engineering labor
and related benefits, prototype material and consulting fees. Gyyr completed an
aggressive product development schedule during fiscal 1999 intended to broaden
its product family beyond time-lapse video recorders. During fiscal 1999, Gyyr
introduced its Vortex family of domes for facility monitoring, expanded its
video multiplexer product line, and launched a new Internet based security
product called Tango. Mariner Networks added substantial investment in the
development of Dexter, a broadband wide area access concentrator. Mariner
Networks also invested development resources in FRAIM, an extension to its
family of products offering Frame Relay to ATM communications. Zyfer also
experienced increased development costs related to its high performance G.P.S.
based synchronization product.
Restructuring Charge. In March 1998, we recorded a nonrecurring charge of
$1.7 million. This charge reflects severance costs related to retirement of
certain of our founders and officers, and to a lesser extent, costs incurred to
terminate a joint venture relationship in China.
Royalty Income. In connection with the settlement of our action against
StorageTek, we received proceeds, net of expenses and fees, of approximately
$38.4 million in October 1999. Under our revised settlement agreement with
StorageTek, we received an additional $17.8 million in June 2000 in full
settlement of the amounts due to us. See Item 3. Legal Proceedings.
Interest Expense, Net. Interest expense, net reflects the net of interest
expense and interest income as follows:
Year Ended March 31,
----------------------------------
1998 1999 2000
------- ------- -------
Interest expense......... $1,609 $1,928 $2,313
Interest income.......... 992 121 265
------- ------- -------
Interest expense, net.... $ 617 $1,807 $2,048
======= ======= =======
Interest expense increased 20.0% in fiscal 2000 compared to fiscal 1999,
and decreased 19.8% in fiscal 1999 compared to fiscal 1998. Interest expense
primarily reflects interest charges on Odetics line of credit borrowings and
mortgage interest. The increase in fiscal 2000 represents increased average
outstanding borrowings on our line of credit to fund negative operating cash
flow. Interest income in fiscal 2000 primarily related to interest earned on
invested cash received from our settlement with StorageTek. Interest income in
fiscal 1999 and
29
fiscal 1998 was derived primarily from a note receivable due from ATL Products,
Inc., our former subsidiary. ATL repaid in full the outstanding balance of its
note receivable in July 1998.
In-Process Research and Development. In the fourth quarter of fiscal 1998,
we completed the purchase price allocation related to our acquisition of
Intelligent Controls and determined that $2.1 million of the purchase price was
attributable to the value of research and development activities in process at
the date of acquisition, constituting the development of an integrated building
access and security system that Gyyr began selling in the latter part of fiscal
1999 as the Access 202 product family. In accordance with the provisions of
FASB Statement No. 2, "Accounting for Research and Development Costs," we
recorded a charge in fiscal 1998 for this in-process research and development.
Subsequent to this acquisition, we incurred an additional $94,000 and $469,000
of research and development expense in fiscal 1998 and 1999, respectively,
related to this product development effort.
Income Taxes. We have not provided income tax benefit for the losses
incurred in fiscal 2000 and 1999 due to the uncertainty as to the ultimate
realization of the benefit. We provided for a tax benefit from continuing
operations at an effective rate of (24.8)% in fiscal 1998. The tax benefit
recorded in 1998 was less than the statutory rate because no benefit was
recorded in connection with $2.1 million write-off of purchased research and
development expenses associated with the acquisition of Intelligent Controls, a
reduction in the benefit of general business credits on total expense, and
foreign losses recorded in Singapore for which no tax benefit was recognized.
Loss from Continuing Operations. In connection with the spin-off of our
82.9% ownership interest in ATL on October 31, 1997, we restated our financial
statements to present the results of operations of ATL as discontinued
operations for all periods presented. Loss from continuing operations reflects
our continuing operations including Gyyr, Broadcast, Zyfer, Mariner Networks and
Iteris.
Liquidity and Capital Resources
Odetics serves as an incubator of high technology companies, each with its
own marketplace, customers and products. The process of incubating companies
implies a potentially high investment of cash as each entity moves through its
development stage in preparation for an initial public offering or a strategic
sale. We generally fund the cash flow requirements of each entity by seeking
investors who have both strategic and financial interests directly in the
subsidiaries of Odetics. We also fund our operations through the sale of
Odetics common stock and more traditional debt financing.
During fiscal 2000, net cash provided by operating activities was $7.0
million. Cash used to fund purchases of property plant and equipment was $2.2
million, reflecting a decrease of 21.0% from fiscal 1999. Net cash provided by
operating activities in fiscal 2000 included the receipt of $38.4 million from
our settlement of litigation with Storage Technology Corporation ("StorageTek").
In October 1999, we settled litigation with StorageTek in exchange for
license fees payable to us of $100 million, $80 million of which was paid on the
settlement date. The initial
30
payment of $80 million resulted in cash proceeds to us, net of expenses and
fees, of approximately $38.4 million. We used a portion of the proceeds to
retire outstanding borrowings on our line of credit with Transamerica Business
Credit, and to reduce trade accounts payable. We retained the balance of these
funds to support our general working capital requirements. Under the terms of
the original settlement agreement, we were to receive two additional payments of
$10 million each in September 2000 and 2001.
In June 2000, we amended the settlement agreement with StorageTek to
provide for the acceleration of the two $10 million payments. Under the terms
of the amendment, StorageTek paid us $17.8 million immediately in full
settlement of the $20 million otherwise payable to us to complete the
settlement. We recognized non-operating income in the amount of $17.8 million
in the quarter ended June 30, 2000, and used the cash proceeds to pay down
borrowings on our line of credit and retained the balance of the cash to fund
our general working capital requirements.
We currently have a $17.0 million line of credit with Transamerica Business
Credit providing for borrowings at their prime rate plus 2.0% (11.0% at March
31, 2000). At March 31, 2000, approximately $3.7 million of borrowings were
outstanding under this line of credit. We anticipate that the cash flow
available from our line of credit, proceeds from equity offerings of our
common stock and the stock of our subsidiaries, and amounts received from the
litigation settlement, and, if necessary, the sale of certain assets, will be
sufficient for us to execute our current operating plans and meet our
obligations on a timely basis for at least the next twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to changes in interest rates primarily from our long-term
debt arrangements. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate changes.
The following table provides information about our debt obligations that
are sensitive to changes in interest rates.
Expected maturity date
March 31,
-----------------------------------------------------------------------
2001 2002 2003 2004 2005 Total Fair value
------ ------ ------ ------ ------ ------- ----------
(dollars in thousands)
Long-term debt:
Fixed rate............ $3,102 $6,988 $1,813 $1,666 $1,199 $14,768 $14,768
Average interest rate. 8.67% 8.87% 9.18% 9.36% 9.36% 9.02%
Variable rate......... $3,706 -- -- -- -- $ 3,706 $ 3,706
Average interest rate. 11.00% 11.00%
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. The information under the heading
"Election of Directors," appearing in our proxy statement, is incorporated
herein by reference.
(b) Identification of Executive Officers. The information under the
heading "Executive Compensation and Other Information," appearing in our proxy
statement, is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information
under the heading "Executive Compensation and Other Information," appearing in
our proxy statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation," appearing in
our proxy statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Principal Stockholders and Common Stock
Ownership of Certain Beneficial Owners and Management," appearing in our proxy
statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions," appearing in our
proxy statement, is incorporated herein by reference.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following financial statements of
Odetics are included in a separate section of this Annual Report on Form 10-K
commencing on the pages referenced below:
Page
----
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999........... F-3
Consolidated Statements of Operations for the years ended March 31,
2000, 1999 and 1998............................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998..................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31,
2000, 1999 and 1998............................................... F-6
Notes to Consolidated Financial Statements.......................... F-7
2. Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.................... S-1
All other schedules have been omitted because they are not required or the
required information is included in our consolidated financial statements and
notes thereto.
3. Exhibits.
3.1 Certificate of Incorporation of Odetics, as amended (incorporated by
reference to Exhibit 19.2 to Odetics' Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987).
3.2 Bylaws of Odetics, as amended (incorporated by reference to Exhibit
4.2 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-
67932) as filed with the SEC on July 6, 1993).
4.1 Specimen of Class A Common Stock and Class B Common Stock
certificates (incorporated by reference to Exhibit 4.3 to Amendment
No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-
67932) as filed with the SEC on September 30, 1993).
4.2 Form of rights certificate for Odetics' preferred stock purchase
rights (incorporated by reference to Exhibit A of Exhibit 4 to
Odetics' Current Report on Form 8-K as filed with the SEC on May 1,
1998).
10.1 Profit Sharing Plan and Trust (incorporated by reference to Exhibit
10.3 to Odetics' Amendment No. 2 to the Registration Statement on
Form S-8 (Reg. No. 002-98656) as filed with the SEC on May 5, 1988).
10.2 Form of Executive Deferral Plan between Odetics and certain
employees of Odetics (incorporated by reference to Exhibit 10.4 to
Odetics' Annual Report on Form 10-K for the year ended March 31,
1988).
10.3* Loan and Security Agreement dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics, and Schedule to Loan Agreement
(incorporated by reference to the same exhibit number in Odetics'
Annual Report on Form 10-K for the year ended March 31, 1999).
33
10.4* Amendment to Loan Agreement dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics, and related Schedule to Loan Agreement
dated December 28, 1998 (incorporated by reference to the same
exhibit number in Odetics' Annual Report on Form 10-K for the year
ended March 31, 1999).
10.5* Revolving Credit Note dated December 28, 1998 payable to
Transamerica Business Credit Corporation in the original principal
amount of $17,000,000 (incorporated by reference to the same exhibit
number in Odetics' Annual Report on Form 10-K for the year ended
March 31, 1999).
10.6* Letter of Credit Agreement dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics (incorporated by reference to the same
exhibit number in Odetics' Annual Report on Form 10-K for the year
ended March 31, 1999).
10.7* Security Agreement in Copyrighted Works dated December 28, 1998
between Transamerica Business Credit Corporation and Odetics
(incorporated by reference to the same exhibit number in Odetics'
Annual Report on Form 10-K for the year ended March 31, 1999).
10.8* Patent and Trademark Security Agreement dated December 28, 1998
between Transamerica Business Credit Corporation and Odetics
(incorporated by reference to the same exhibit number in Odetics'
Annual Report on Form 10-K for the year ended March 31, 1999).
10.9* Cross-Corporate Continuing Guaranty dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics (incorporated by reference to the same
exhibit number in Odetics' Annual Report on Form 10-K for the year
ended March 31, 1999).
10.10 Form of Indemnity Agreement entered into by Odetics and certain of
its officers and directors (incorporated by reference to Exhibit
19.4 to Odetics' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988).
10.11 Schedule of officers and directors covered by Indemnity Agreement
(incorporated by reference to Exhibit 10.9.2 to Amendment No. 1 to
Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as
filed with the SEC on July 6, 1993).
10.12 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust
(incorporated by reference to Exhibits 4.3.1 and 4.3.2,
respectively, to Amendment No. 3 to Odetics' Registration Statement
on Form S-3 (Reg. No. 002-86220) as filed with the SEC on June 13,
1990).
10.13 Separation and Distribution Agreement dated March 1, 1997 between
Odetics and ATL (incorporated by reference to Exhibit 10.13 to
Odetics' Annual Report on Form 10-K for the year ended March 31,
1997)
10.14 Tax Allocation Agreement dated March 1, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.14 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1997).
10.15 Services Agreement dated March 21, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.15 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1997).
10.16 Promissory Note dated April 1, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.16 to Odetics' Annual
Report on Form 10-K for the year ended March 31, 1997).
10.17 1997 Stock Incentive Plan of Odetics (incorporated by reference to
Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File
No. 333-44907) as filed with the SEC on January 26, 1998).
10.18 Form of Notice of Grant of Stock Option (incorporated by reference
to Exhibit 99.2 to Odetics' Registration Statement on Form S-8 (File
No. 333-44907) as filed with the SEC on January 26, 1998)
10.19 Form of Stock Option Agreement (incorporated by reference to Exhibit
99.3 to Odetics' Registration Statement on Form S-8 (File No. 333-
44907) as filed with the SEC on January 26, 1998).
10.20 Form of Addendum to Stock Option Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control (incorporated by
reference to Exhibit 99.4 to Odetics' Registration Statement on Form
S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998).
34
10.21 Form of Addendum to Stock Option Agreement--Limited Stock
Appreciation Rights (incorporated by reference to Exhibit 99.5 to
Odetics' Registration Statement on Form S-8 (File No. 333-44907) as
filed with the SEC on January 26, 1998).
10.23 Form of Stock Issuance Agreement (incorporated by reference to
Exhibit 99.6 to Odetics' Registration Statement on Form S-8 (File
No. 333-44907) as filed with the SEC on January 26, 1998)
10.24 Form of Addendum to Stock Issuance Agreement--Involuntary
Termination Following Corporate Transaction/Change in Control
(incorporated by reference to Exhibit 99.7 to Odetics' Registration
Statement on Form S-8 (File No. 333-44907) as filed with the SEC on
January 26, 1998).
10.25 Form of Notice of Grant of Automatic Stock Option--Initial Grant
filed as Exhibit 99.8 filed as Exhibit (incorporated by reference to
Exhibit 99.8 to Odetics' Registration Statement on Form S-8 (File
No. 333-44907) as filed with the SEC on January 26, 1998).
10.26 Form of Notice of Grant of Automatic Stock Option--Annual Grant
(incorporated by reference to Exhibit 99.9 to Odetics' Registration
Statement on Form S-8 (File No. 333-44907) as filed with the SEC on
January 26, 1998).
10.27 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to
the (incorporated by reference to Exhibit 99.10 to Odetics'
Registration Statement on Form S-8 (File No. 333-44907) as filed
with the SEC on January 26, 1998).
10.28 Rights Agreement dated April 24, 1998 between Odetics and
BankBoston, N.A., which includes the form of Certificate of
Designation for the junior participating preferred stock as Exhibit
A, the form of rights certificate as Exhibit B and the summary of
rights to purchase Series A preferred shares as Exhibit C
(incorporated by reference to Exhibit 4 to Odetics' Current Report
on Form 8-K as filed with the SEC on May 1, 1998).
10.29 Promissory Note in the original principal amount of $15,000,000
payable to The Northwestern Mutual Life Insurance Company dated
October 31, 1989 and related Deed of Trust, Security Agreement and
Financing Statement between Odetics, Inc. and Northwestern Mutual
dated October 31, 1989 (incorporated by reference to Exhibit 10.12
to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932)
as filed with the SEC July 6, 1993).
10.30 1994 Long-Term Equity Plan of Odetics (incorporated by reference to
Exhibit 4.3 to Odetics' Registration Statement on Form S-8 (File No.
333-05735) as filed with the SEC on June 11, 1996).
10.31 Subordinated Convertible Note Purchase Agreement between Iteris,
Inc. and DaimlerChrysler GmbH, dated January 25, 2000.
10.32 Subordinated Convertible Note between Iteris, Inc. and
DaimlerChrysler GmbH, dated January 25, 2000.
21 Subsidiaries of Odetics.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on June 29, 2000.
ODETICS, INC