Iteris
Annual Report 1996

Plain-text annual report

================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996. Commission file number 0-10605 ODETICS, INC. (Exact name of registrant as specified in its charter) Delaware 95-2588496 (State of or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1515 South Manchester Avenue, Anaheim, CA 92802 (Address of Principal Executive Offices) (Zip Code) (714) 774-5000 (Registrant's Telephone Number, Including Area Code) Securities Registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Title of Each Class Class A Common Stock, $.10 par value Class B Common Stock, $.10 par value Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tofiling requirements for the past 90 days. YES X NO ---------- ---------- The aggregate market value of the voting stock held by non-affiliates of theregistrant as of June 19, 1996 was approximately $22,750,000. Check mark indicates that disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K [_]. As of June 20, 1996, there were 5,111,472 shares of registrant's Class ACommon Stock and 1,139,431 shares of registrant's Class B Common Stockoutstanding. The following documents are incorporated by reference into this report: Part III incorporates by reference information from the proxy statement ofthe registrant for the annual meeting of stockholders to be held on September27, 1996.================================================================================ The exhibit index to this report appears at page 37 of 42 consecutivelynumbered pages. PART IITEM 1. BUSINESS.COMPANY BACKGROUND Odetics (the "Company") was founded in 1969 to supply digital recordersfor use in the U.S. space program. The Company pioneered new designs andstandards for digital magnetic tape recorders offering enhanced performance inthe adverse environments attendant to space flight, high reliability and longproduct life. In the 1970s, the Company broadened its information automationproduct line to include time-lapse VCRs for commercial and industrial securityand surveillance applications. Through the Company's GYYR Division, it is aleading supplier of time-lapse videotape cassette recorders, digital imageprocessing modules and related products used in security and surveillancesystems. In the early 1980s, the Company set out to develop the technical expertiseto apply automation to new commercial applications. As part of its initialdevelopment efforts, the Company built ODEX, a prototype six-legged walkingrobot now part of the Smithsonian Institution's permanent collection ofhistorically significant technology. The Company established the BroadcastDivision which pioneered the use of large-library cart machines in broadcasttelevision stations and satellite uplink operations. The Broadcast Division isa leading supplier of broadcast automation control systems in the U.S. The success of the Company's cart machines led the Company to pursue newapplications for information automation technologies, and in 1990, the Companyteamed with E-Systems, Inc. ("E-Systems") to develop and provide a 19mmautomated tape cartridge handling subsystem for E-Systems' EMASS mainframecomputer tape library for the U.S. Government. In 1991, in a strategic move toexpand its business into new and potentially larger markets, the Companyintroduced an automated tape handling subsystem for integration into tapelibraries designed for mid-range computers and client/server networks employingIBM 3480 and similar industry-standard tape cartridges. In January 1993, theCompany formed a separate subsidiary, ATL Products Inc., ("ATL") to pursue themarket for automated tape-libraries. The Company is a leading supplier of systems and subsystems to automatethe collection, storage, distribution and management of information. TheCompany's business strategy is to focus on selected markets in which the Companymay bring to bear its expertise in electromechanical design, real-time softwarecontrol and highly reliable system implementations to produce superior productswith a sustainable competitive advantage, and to capture major market shares.The Company's data storage products manage the vast amounts of data on computersystems, automate television and cable station operations, record videosurveillance, store information gathered in space exploration and archive moviesfor video on demand systems. 2 ATL PRODUCTS, INC. ATL Products, Inc. is a leading supplier of automated tape libraries tothe midrange and client/server computing marketplaces. The markets for theseproducts began emerging in the early 1990's as a result of the shift ofcomputing investments from the mainframe proprietary system environment to themidrange (and, later, client/server) open system environment. The growth ofthese markets is driven by two principal factors; the rapid increase in theamount of data in midrange and client/server computing environments (which ATLhas referred to as The Data Storm in its marketing literature), and the shift ofbusiness-critical applications from a mainframe to a client/server environment(which the industry has referred to as downsizing). ATL has invested in product development, production capability, industrypartnerships, and distribution channels appropriate to this market. It hasfocused upon serving the market for users whose data is understood to bebusiness critical. At the present time ATL's production is more than 1,000libraries per year. Approximately 75% of ATL's sales are made through a broadset of Value Added Resellers (VAR's) who have direct contractual relationshipswith ATL. The remaining sales are to OEM's who private-label ATL's Products. ATL entered into a partnership with Digital Equipment Corporation("Digital") in 1993 and undertook an ambitious development activity to automatethe use of Digital Linear Tape (DLT(TM)), a proprietary Digital tape formatwhich was, at that time, beginning to emerge as a cost-effective tape solutionfor open system applications. As a result of that partnership, ATL brought thefirst DLT(TM) Library to market in 1994. ATL currently has stable products andstrong customer relationships and commands the leading market share of DLT(TM)libraries which represent the fastest growing segment of the market. Accordingto Freeman Associates, a leading analyst in the data storage market, ATLProducts had a 55% share of the DLT(TM) library market in 1995. ATL's current product line consists of two families of systems referred toas the Midrange Library (MRL) family and the Small Library Products (SLP)family. The MRL family of products was originally designed in 1990 and 1991 forthe 3480-class (3480, 3490, and potentially 3590 and NCTP) of tape systems andwas extended, as a result of the alliance with Digital Equipment Corporation in1993 to the DLT(TM) tape systems. The SLP family of products was designed in1993 and 1994 for the DLT(TM) tape system. The MRL family of products is soldprimarily to the midrange and data-intensive server market, while the SLPproduct family is sold primarily to the horizontal client/server market for usein the server segment. ATL has invested significant resources and engineering effort in thedevelopment of relationships with software Integrated System Vendors (ISV's) inthe open systems storage management area. This program is called the 1/STOPprogram and has led to the native support of ATL's libraries by more than 40 ofthe leading ISV's representing over 90% of the Unix and NT storage managementmarket. A key element in the ATL business strategy is the supply of productsupport throughout the product life cycle. Anticipated useful installed life isin excess of five years and may range up to twenty years. The MRL productfamily requires modest installation support and has a six-month preventativemaintenance interval. The SLP product family requires minimal installationsupport and has twelve-month preventative maintenance intervals. ATL began to establish an installed base during 1993. Between 1993 and1995, the installed base has grown at a CAGR of over 140%. The 1,000thinstallation was made late in 1995. ATL is second only to StorageTek in thenumber of installed libraries for high performance linear tape technologies;IBM, with an installed base of approximately 500 libraries is in third place.At the present time, approximately 70% of the installed base are DLT(TM)libraries. This ratio is expected to increase to over 80% by the end of theyear since the vast majority of the shipments expected in 1996 are DLT(TM)libraries.Sales, Marketing and Principal Customers ATL's market strategy has been to emphasize management of businesscritical data and "Total Cost of Ownership" both to motivate the introduction ofautomated tape libraries into the midrange and client/server computing marketsand to differentiate ATL from its competition. 3 From 1990 through the third quarter of fiscal 1995, ATL manufacturedcertain automation subsystems utilizing 19mm technology exclusively for E-Systems. In the third quarter of fiscal 1995, the Company announced that itscontractual relationship with E-Systems was deteriorating and it would incurcharges related to the loss of E-Systems business. On November 15, 1994, theCompany initiated an action against E-Systems alleging breach of contract. On May 22, 1996, the Company announced that it and ATL Products settled all pending litigation with E-Systems, Inc. and EMASS, Inc. See "LegalProceedings" for further discussion.Manufacturing and Materials The manufacture of the MRL and SLP product families occurs on twocontinuous unit flow assembly lines. Subassembly work is subcontracted tooutside vendors to the maximum extent practicable. ATL maintains ownership ofproprietary tooling necessary for the manufacture of its products. The MRL andSLP families are both based upon architectures which have been adapted toprovide a range of products. The MRL architecture was designed for productionrates of two-hundred to six-hundred units per year. The SLP architecture wasdesigned for production rates of one thousand to four-thousand units per year. ATL purchases numerous parts and fabricated components for its automationsubsystems. Such parts and components are available from a number offabricators in Southern California.BROADCAST DIVISION The Broadcast Division's large-library cart machines automate the storageand televising of commercials, news spots and other television programmingrecorded on videotape cassettes. Cart machines increase labor efficiency byautomatically performing tape insertion and other filing tasks previouslyperformed manually or by machines with limited capacity and utility. Managementbelieves that enhanced operational efficiencies are a principal factorunderlying the increased automation of broadcast television stations andsatellite uplink operations. The Broadcast Division' earliest commercial success in the manufacture ofcart machines was with the TCS 2000 followed by the TCS 90. The recent markettrend toward smaller cart machines, coupled with digital hard disk driverecording devices was led by Odetics with the introduction of highly integratedcacheing systems employing Odetics' newest cart machine, the TCS 45. The TCS 45can be coupled with hard drive recorders available from several recognizedsuppliers to the broadcast community. Odetics now offers several automatedvideo management control systems that include software to form powerfulintegrated systems. Among these, the MicroSpot(TM) and the SpotBank(TM) do notutilize cart machines. Multi channel presentation systems, which integrate the complete line ofOdetics hardware with commonly available broadcast quality program playerdevices, are quickly becoming the core business of Odetics Broadcast Division.Sales, Marketing and Principal Customers The Broadcast Division sells directly to broadcast television stations,satellite uplink operations, and other broadcast television and cable televisionsystem operators. Sales and marketing management is located at the Company'sprincipal facilities in Anaheim, California, with a dedicated field sales forceof four persons operating in four U.S. sales regions. European sales andmarketing activities are conducted and managed by Odetics Europe, Ltd., a whollyowned subsidiary of the Company. Asia sales and marketing activities areconducted by Odetics Asia Pacific Pte Ltd., a wholly owned subsidiary of theCompany located in Singapore. Additional representative organizations areutilized to promote the Broadcast Division's products in various other foreignmarkets. Customers include major television networks such as the BritishBroadcasting Corporation, Canadian Broadcasting Corporation, CNBC/FNN, Euronews,INA (French Cultural Video Archive), International Television News (ITN), NBC,the PBS Network, Group W Satellite Communications (for the Arts & EntertainmentNetwork and Discovery Channel) and over 100 independent and network-affiliatedtelevision stations. The Broadcast Division has systems installed in over 30countries. 4 Manufacturing and Materials The Broadcast Division maintains a dedicated manufacturing area locatedwithin the Company's Anaheim, California facilities. The Company's SpotBank(TM)and MicroSpot(TM) products are manufactured at its Austin, Texas facility. TheBroadcast Division's products are manufactured primarily on a lotassembly/module build basis. At the Anaheim facility, the Broadcast Division andGyyr Division share common infrastructure support in the areas of production andinventory control, purchasing, quality assurance and manufacturing engineering.A single management structure oversees these operations. The Broadcast Division purchases cabinets and other fabricated parts andcomponents. The Broadcast Division purchases standard broadcast-quality VCRsfrom Sony Corporation, Panasonic and several other sources along with video servers from Tektronix and ASC for installation in the Company's automated videomanagement systems.GYYR DIVISION Time-lapse VCRs are employed extensively in area monitoring by banks,convenience stores, retailers and other businesses. Time-lapse VCRs arefrequently installed at automated teller machine ("ATM") and retail computerizedpayment machine locations to record pictures of individuals making transactionswhile simultaneously recording transaction information in an effort to deter andaddress incidents of theft and other crimes at these locations. Customerdemand for more sophisticated capabilities, such as computer-interfaces torecord transaction information simultaneously with video images, electronicprocessors to record multiple cameras on one VCR and digital image processingand enhancement, also have contributed to recent growth of the market for theGyyr Division's products. Management believes that many of the same marketforces at work in the U.S. exist in certain foreign markets as well and that,generally, the international markets are growing as fast as in the U. S. Duringfiscal 1996, the GYYR Division introduced a new line of Time Lapse VCR's and anew high performance FasTrans product family for communicating video and controlsignals over telephone and newer broadband communication channels.Sales, Marketing and Principal Customers The Gyyr Division markets and sells its products directly to its private-label OEM accounts. The Gyyr Division personnel located at the Company'sprincipal facilities also oversee a network of approximately 2,500 securityequipment dealers and distributors throughout the United States and Canada whosell the Gyyr Division's products to end users. The Gyyr Division utilizesforeign representatives in South America, Mexico and Asia and employs a networkof European sales and marketing representatives. Odetics Europe, Ltd. assiststhe Gyyr Division in its sales and marketing activities in European markets.The Gyyr Division also utilizes Odetics Asia Pacific Pte Ltd. to assist in salesto the Asian markets. The Gyyr Division's principal customers include majorsecurity equipment companies such as Diebold, Inc., ADT Security Systems, Inc.,Honeywell, Inc., Mosler, Inc. and other OEMs.Manufacturing and Materials The Gyyr Division maintains a dedicated manufacturing area located withinthe Company's principal facilities. The Gyyr Division primarily uses continuousunit-flow assembly lines. The Broadcast Division and Gyyr Division share commoninfrastructure support in the areas of production and inventory control,purchasing, quality assurance and manufacturing engineering. A singlemanagement structure oversees these operations. The Gyyr Division purchases VCRs modified to the Company's specificationsexclusively through Nissei Sangyo America, the U.S. distribution affiliate ofHitachi, Ltd., into which the Company incorporates certain value-added features.The Company is vulnerable to changes in Hitachi, Ltd.'s basic VCR model, whichmight necessitate changes in the design or manufacturing of the Gyyr Division'sproducts. There are numerous other suppliers of VCRs suitable for use in theGyyr Division's products, although certain changes in product design or 5 manufacturing methods may be required to accommodate such VCRs, and the GyyrDivision could experience temporary delays or interruptions in supply while suchchanges are incorporated or a new supplier is procured.COMMUNICATIONS DIVISION The Communications Division was formerly known as the ISD and IDDDivisions. Up until this year most of the Division revenues came from sales ofSpace Digital Data Recorders. During this fiscal year approximately 40% of therevenues were derived from telecommunication related sales. The telecommunications business unit supplies products that synchronizetelecommunication and computer systems and products that provide an interfacebetween the public (WAN) network and private (LAN) networks. Odetics telecom synchronization products are sold for new applications incellular telephone systems and the new PCS networks being implemented throughoutthe world. Principal customers are LGIC of Korea, and Hughes Network Systems. The synchronization products are based on leading edge G.P.S. technologies. Mostproduct applications are in the latest CDMA networks. Odetics telecom interface products are sold to local exchange carriers,interexchange carriers and local area network switch manufacturers. The productofferings fall into two categories - interface boards and stand alone systems.The interface boards are ATM and SONET based, and are sold primarily to othertelecom equipment manufacturers. The stand alone products are used asconverters, multiplexer, and network termination devices The space business unit manufactures digital data recorders that are usedin manned and unmanned space vehicles to store data gathered by onboard sensorsprior to transmission of the data to ground receiving stations. Such recordersare employed in satellite programs for space research, earth resource andenvironmental observation and weather monitoring, as well as global surveillanceand classified government programs. These recorders were originally developedfor the U.S. space program and serve as a computer mass-memory system for on-board computers used in the U.S. Space Shuttle program. At least five ofOdetics' recorders have flown on each Space Shuttle mission. The Company'sspace-qualified recorders also are utilized in satellites operated or built forthe space agencies of Canada, France, Germany and Japan, as well as the EuropeanSpace Agency. Other representative projects using Odetics' data recorders arethe French SPOT imaging satellite and the U.S. Landsat, Galileo, Magellan, andHubble Space Telescope projects.Sales, Marketing and Principal Customers The Communications Division conducts its selling and marketing activitiesworldwide directly from the Company's principal facilities. During the fiscal year ended March 31, 1996 approximately 60% of theCommunications Division's sales were derived from contracts with domestic orforeign governmental agencies and prime government contractors.Manufacturing and Materials The Communications Division production capabilities fall into twocategories: commercial and space. The telecom business unit manufactures to best commercial practices. Thegroup anticipates becoming ISO certified before the end of FY 97. Most of themanufacturing operations are final assembly and test. Board assembly and somepreliminary fabrication processes are outsourced. 6 The space production is designed for low-volume, program-managedmanufacture, often with nonrecurring engineering for individual customer needs.Because of these unique requirements, the space business unit has extensivemachining and electronic assembly capabilities in order to manage cost,schedule, and quality levels to the unusual and exacting needs of its customers.ODETICS CUSTOMER SERVICE DIVISION The Odetics Customer Service ("OCS") Division provides third-party on-sitecomputer maintenance services as well as maintenance and support services forthe ATL Product Division's automation subsystems. The market for third-partyon-site computer maintenance services includes certain U.S. Governmentinstallations and commercial businesses with large-scale automated or electronicdocument storage and retrieval systems. The OCS Division's principal customersinclude the U.S. Department of Defense, FMC Corporation, General DynamicsCorporation and Northrop Corporation.CUSTOMER SUPPORT AND SERVICES The Company provides competitive warranty service for each of its productlines, as well as follow-on service and support for which the Company typicallycharges separately. The Company also offers separate software maintenanceagreements to its customers. Management views customer support services as acritical competitive factor as well as a revenue source. The Company maintainsits own service groups and trains its customers, representatives anddistributors in the performance of user-level maintenance. Modular productdesigns with recommended spare packages are used wherever feasible to minimizemean time to repair.BACKLOG The Company's backlog of unfulfilled firm orders was approximately$24,100,000 at March 31, 1996 and approximately $21,600,000 at March 31, 1995.Approximately 72% of the Company's backlog at March 31, 1995 was recognized asrevenues in fiscal 1996 and approximately 87% of the Company's backlog at March31, 1996 is expected to be recognized as revenues in fiscal 1997. Foreign ordersin the aggregate accounted for approximately 49% of the Company's backlog at theend of fiscal 1996, as compared to approximately 59% at the end of the priorfiscal year. Pursuant to the customary terms of the Company's agreements withgovernment contractors and other customers, orders generally may be cancelled orrescheduled by the customer. Lead times for the release of purchase ordersdepend upon the scheduling and forecasting practices of the Company's individualcustomers, which also can affect the timing of the conversion of the Company'sbacklog into revenues. For these reasons, among others, the Company's backlog ata particular date may not be indicative of its future revenues.PRODUCT DEVELOPMENT The Company's business requires substantial ongoing research anddevelopment expenditures and other product development activities. For fiscalyears 1994, 1995, and 1996, the Company incurred approximately $7,300,000,$9,300,000 and $7,000,000, respectively, of Company-sponsored research anddevelopment costs and expenses, including reimbursable research and developmentexpenses of the Company allowed in the Company's negotiated General andAdministrative Rates on cost contracts with the U.S. Government. In addition tothe foregoing expenditures, the Company also conducts customer-sponsored productdevelopment, principally for the U.S. Government, under long-term contracts.The Company typically retains the right to utilize resulting technologicaldevelopments for its commercial markets. Customer-sponsored product developmentexpenditures totalled approximately $400,000, $900,000 and $0 during fiscalyears 1994, 1995, and 1996, respectively. 7 The Company expects to continue to pursue significant product developmentprograms and incur significant research and development expenditures in all ofits principal product lines and services. These programs are directed towarddeveloping new products for advanced automated libraries as well as theprocessing and distribution of digital images.COMPETITION The Company competes in each of its targeted markets against othercompanies, many of which have substantially greater financial, technical,marketing and customer service resources than the Company. The principalcompetitive factors in the markets in which the Company participates are productquality and performance, price, reliability, upgradeability, service andtechnical support. In the mid-range automated tape library market, ATL currently competesdirectly with Exabyte, IBM, Hewlett Packard, and Storage Technology.Competition, which had been limited until mid-1995 has increased significantlyas the DLT(TM) technology has become an accepted standard in much of themidrange and client/server computer markets. ATL believes that the limitednature of the competition along with a proactive channel management strategy haspreserved a high end-user perceived value for ATL's products over the last threeyears. Management believes that ATL's primary competitive advantages in thesemarkets are its expandable architecture, industry-standard interfaces, baseof system-level software support, along with the proven reliability and quality of its products. In the Broadcast Division's markets, the Company competes directly withSony, Panasonic and Avid. Sony and Panasonic are large, international suppliersof extensive professional-quality products, including cart machines, for thebroadcast television market. Avid competes in the area of disk based videoserver products - principally against the Broadcast Division's SpotBankproducts. The Broadcast Division's products compete primarily on the basis ofproduct features, including their capacity to accommodate broadcast-quality VCRsfrom all manufacturers, which is unique among product offerings in this market. The Gyyr Division's principal competitors for time-lapse VCRs arePanasonic, Toshiba, Sanyo and Sony all of which have far greater namerecognition, marketing and other resources than the Company. Numerous othercompanies, including Japanese and other offshore vendors of VCRs, also offercompetitive products. Management believes that the Gyyr Division's productscompete primarily on the basis of their value-added features, including thoserelating to digital image processing. In the Communications Division's space tape recorder market, Odeticscompetes with General Electric Corporation, Lockheed Corporation, andSchlumberger, S.A. An additional competitive factor in this market is spaceflight experience; however, with the advent of solid state recorders the Companymay face new competitors. Management believes that the use of Odetics'recorders on a number of U.S. and foreign space programs, including Landsat,SPOT, Galileo, Magellan and the Hubble Space Telescope, provides the Companywith a competitive advantage for follow-on procurements.INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS It is the Company's policy to obtain appropriate proprietary rightsprotection for any potentially significant new technology acquired or developedby the Company. The Company currently holds a number of U.S. and foreignpatents and trademarks. The patents will expire at various dates through 2012.The Company also has pending several U.S. and foreign patent applicationsrelating to certain of its products; however, there can be no assurance that anypatents will be granted pursuant to these applications. In addition to patent laws, the Company relies on copyright and tradesecret laws to protect its proprietary rights. The Company attempts to protectits trade secrets and other proprietary information through agreements withcustomers and suppliers, proprietary information agreements with the Company'sAssociates (as hereinafter defined) and consultants and other similar measures.There can be no assurance, however, that the Company will be successful inprotecting its proprietary rights. 8 While management believes its patents, patent applications, software andother proprietary know-how have value, changing technology makes the Company'sfuture success dependent principally upon its Associates' technical competenceand creative skills for continuing innovation.ASSOCIATES The Company refers to its employees as Associates. As of June 10, 1996,the Company employed 515 Associates, including 103 Associates in generalmanagement, administration and finance; 66 Associates in sales and marketing;123 Associates in product development; 172 Associates in operations,manufacturing and quality; and 51 Associates in customer service. None of theCompany's Associates is represented by a labor union and the Company has notexperienced a work stoppage.GOVERNMENT REGULATION The Company's manufacturing operations are subject to various federal,state and local laws, including those restricting the discharge of materialsinto the environment. The Company is not involved in any pending or threatenedproceedings which would require curtailment of its operations because of suchregulations. The Company continually expends funds to assure that itsfacilities are in compliance with applicable environmental regulations.However, such expenditures have not been significant in the past and nosignificant future expenditures are expected. From time to time, a portion of the Company's work relating to theOdetics' digital data recorders may constitute classified U.S. governmentinformation or may be used in classified programs of the U.S. Government. Forthis purpose, the Company and necessary Associates possess relevant securityclearances. The Company's affected facilities and operations are subject tosecurity regulations of the U.S. Government. Management believes the Company isin full compliance with these regulations.ITEM 2. PROPERTIES. The Company's headquarters and principal operations are located inAnaheim, California. In 1984, the Company purchased and renovated a three-building complex containing approximately 250,000 sq. ft. situated onapproximately 14.1 acres adjacent to the Interstate 5 freeway one block fromDisneyland. These Company-owned facilities house the Company's corporate andadministrative offices (approximately 43,000 dedicated square feet), as well asthe Broadcast and Gyyr Divisions, (approximately 87,000 dedicated square feet),the Communications Division (approximately 67,000 dedicated square feet), OCSDivision (approximately 15,000 dedicated square feet) and ATL (approximately50,000 dedicated square feet). Additionally, the Communications Division leasesapproximately 4,500 sq. ft. of space in a manufacturing facility located on 0.62acre in El Paso, Texas. The Broadcast Division leases approximately 5,000square feet in Austin, Texas to manufacture certain product families. OdeticsEurope, Ltd.'s offices are located in leased space near London, England.Odetics Asia Pacific Pte. Ltd. offices are located in leased space inSingapore. The Company estimates that the aggregate productive capacity squarefeet of its facilities is approximately 200,000. The Company currently is operating a single shift in its manufacturing andassembly facilities and it believes that its facilities are adequate for itscurrent needs and for possible future growth. However, the Company may elect toexpand or relocate its offices and facilities in the future. 9 ITEM 3. LEGAL PROCEEDINGS. On May 22, 1996, the Company announced that it and ATL Products settledall pending litigation with E-Systems, Inc. and EMASS, Inc. (collectively, "E-Systems"). The settlement was effected pursuant to a written Settlement Agreement andGeneral Release between the parties, under which E-Systems paid the Companyapproximately $6.1 million, including an amount designated as a royalty paymenton library systems sold by E-Systems which the Company alleged infringed on itspatented technology. See "Management's Discussion of Financial Condition andResults of Operations." For its part, the Company agreed for a period of fiveyears to provide spare parts and certain other customer support services for theinstalled base of DataTowers that the Company previously sold to E-Systems. Theparts and services generally will be provided in accordance with Odetics'general terms and conditions, less a specified discount. The Company also hasagreed to refurbish nine ACL 2640 units in E-Systems' possession and to pay toE-Systems any profits (net of refurbishment and sales costs) realized by theCompany from the sale of the refurbished units and to deliver to E-Systemscertain inventories of parts and supplies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourthquarter of fiscal 1996. 10 PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. At March 31, 1996, the Company's Class A Common Stock and Class B CommonStock are traded on the Nasdaq National Market under the symbols "ODETA" and"ODETB," respectively. Prior to January 4, 1994, the Company's Class A CommonStock and Class B Common Stock were traded on the American Stock Exchange("AMEX") under the symbols "OA" and "OB," respectively. The following tablesets forth for the fiscal periods indicated the high and low sale prices for theClass A Common Stock and Class B Common Stock as reported by the Nasdaq: Class A Common Stock Class B Common Stock -------------------- -------------------- High Low High Low ------- ------- ------- ------- Fiscal Year Ended March 31, 1995 1st Quarter........................ $10-5/8 $7-3/4 $10-1/2 $ 8 2nd Quarter........................ 10 7 9-1/2 7 3rd Quarter........................ 7-3/4 5-1/4 7-1/4 5-7/8 4th Quarter........................ 6-5/8 3-3/4 6-3/4 4Fiscal Year Ended March 31, 1996 1st Quarter........................ $ 5-1/2 $ 4 $ 5-3/4 $ 4-3/4 2nd Quarter........................ 6-7/8 4-1/2 6-1/2 5 3rd Quarter........................ 10 6-1/2 10-1/4 6-1/2 3rd Quarter........................ 10 6-1/2 10-1/4 6-1/2 4th Quarter........................ 10-1/8 6-3/4 10 6-3/8 As of June 20, 1996, the Company had 752 holders of record of Class ACommon Stock and 217 holders of record of Class B Common Stock according toinformation furnished by the Company's transfer agent. Pursuant to the terms of the Company's Loan and Security Agreement withits banks, the Company is restricted in declaring cash dividends on its CommonStock in an amount not to exceed in any fiscal year 10% of the Company'sconsolidated net income for the prior fiscal year. The Company paid no cashdividends on its Common Stock during fiscal 1995 and 1996 and has no currentplans to pay such dividends in the foreseeable future. The Company currentlyintends to retain any earnings for working capital and general corporatepurposes. 11 ITEM 6. SELECTED FINANCIAL DATA.CONSOLIDATED STATEMENT OF INCOME (LOSS) DATA (in thousands, except earnings pershare data): 1992 1993 1994 1995 1996 -------- ------- ------- --------- -------- Net sales................................. $40,346 $48,487 $66,063 $74,465 $ 94,466Contract revenues......................... 29,918 20,825 18,099 13,280 10,161 ------- ------- ------- ------- --------Total net sales and contract revenues..... 70,264 69,312 84,162 87,745 104,627Cost of sales............................. 27,671 33,668 44,281 51,148 63,398Cost of contract revenues................. 19,994 13,967 11,114 6,633 4,374Selling, general and administrative expenses................................ 14,627 14,169 17,162 20,899 23,678Research and development expenses......... 5,621 5,187 7,268 9,309 6,973Nonrecurring charge....................... - - - 4,809 -Interest expense.......................... 2,275 2,125 1,772 1,925 2,247 ------- ------- ------- ------- --------Income (loss) before income taxes......... 76 196 2,565 (6,978) 3,957Income tax expense (benefit).............. (13) 55 743 (2,300) 1,504 ------- ------- ------- ------- --------Net income (loss)......................... $ 89 $ 141 $ 1,822 $(4,678) $ 2,453 ======= ======= ======= ======= ========Net income (loss) per common share........ $ .02 $ .03 $ .34 $ (.80) $ .40 ======= ======= ======= ======= ========Weighted average number of common shares........................ 4,466 4,529 5,326 5,872 6,179CONSOLIDATED BALANCE SHEET DATA (in thousands): 1992 1993 1994 1995 1996 ------- ------- ------- ------- --------Working capital........................... $23,429 $23,636 $29,062 $32,733 $ 30,390Total assets.............................. 58,589 55,124 65,928 72,358 78,811Long-term debt (less current portion).................. 26,216 24,413 16,723 25,757 22,019Retained earnings......................... 8,743 8,884 10,706 6,027 8,480Stockholders' equity...................... 18,723 19,213 31,239 27,736 30,985 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.RESULTS OF OPERATIONS Odetics, Inc. (the "Company") specializes in the design and manufacture ofsystems and subsystems to automate the collection, storage, distribution andmanagement of information. The Company is organized into divisions each having primary responsibilityfor product development, manufacturing and marketing of one or more of theCompany's principal product lines or services. The Company has four distinctmanufacturing operations each tailored to the requirements of its principalproduct divisions. The following table sets forth certain income statement data as a percentageof net sales and contract revenues for the periods indicated and is intended tobe read in conjunction with management's discussion and analysis of operations: Year Ended March 31 ------------------------------- 1994 1995 1996 ------ ------ ------ Net sales..................................... 78.5% 84.9% 90.2%Contract Revenues............................. 21.5 15.1 9.8 ------ ------ ------ 100.0 100.0 100.0Cost of sales and contract revenues........... 65.8 65.8 64.8 ------ ------ ------Gross profit margin........................... 34.2 34.2 35.2 ------ ------ ------Expenses: Selling, general and administrative expenses................................... 20.4 23.8 22.6 Research and development expenses.......... 8.6 10.6 6.7 Nonrecurring charge........................ - 5.5 - Interest expense........................... 2.1 2.2 2.1 ------ ------ ------Total expenses................................ 31.1 42.1 31.4 ------ ------ ------Income (loss) before income taxes............. 3.1 (7.9) 3.8Income taxes (benefit)........................ 0.9 (2.6) 1.5 ------ ------ ------Net income (loss)............................. 2.2% (5.3)% 2.3% ====== ====== ======Net Sales and Contract Revenues Net sales and contract revenues for fiscal 1996 increased approximately$16,882,000, or 19.2%, compared to fiscal 1995. The components of this overallincrease consisted of a $20,001,000, or 26.9%, increase in net sales (commercialproducts) and a $3,119,000, or 23.5% decrease in contract revenues (governmentproducts). The increase in commercial product sales during fiscal 1996 resulted fromsales growth in all divisions involved in commercial product sales. This netsales growth was led by increased sales in the Company's Broadcast Division.The Broadcast Division's sales growth reflected an increase in shipments of itsSpotBank(TM), Cache Machine(TM), and TCS 45(TM) system is along with revenues ofupgrades to previously sold systems. The Company's wholly-owned subsidiary,ATL Products, Inc. ("ATL") also experienced strong growth in sales for thefiscal year 1996 compared to fiscal 1995. ATL's sales growth resulted from anincrease in sales of its ACL4/52 and ACL2640 product lines in both thedomestic and European markets through Odetics Europe, Ltd., a wholly ownedsubsidiary of the Company. ATL's sales still showed strong growth compared tothe prior fiscal year despite 13 the loss of E-Systems as a major customer. For fiscal 1995, E-Systems accountedfor 36% of ATL's sales revenue. ATL 's sales to customers other than E-Systemsincreased 140% in fiscal 1996 compared to fiscal 1995. The increase in commercial product sales during fiscal 1995 compared tofiscal 1994 was primarily due to sales growth in the Company's Gyyr Division("Gyyr") which led all divisional product sales increases compared to the priorfiscal year. The growth was primarily due to increased market penetration intothe North American and European markets. The Company also showed strong growthin revenues at ATL and the Company's Odetics Customer Service (OCS) Divisionwhich provides support and spare parts for ATL's products. This growth was dueto increased unit shipments of its ACL2640 product utilizing DLT technologydeveloped under a long-term agreement with Digital Equipment Corp. Government contract revenues declined in fiscal 1996 and 1995 compared tofiscal 1995 and fiscal 1994, respectively, due to changes in government spendingpatterns and a transition by the Company from certain government markets tocommercial activities.Cost of Sales and Contract Revenues Cost of sales and contract revenues as a percentage of net sales and contractrevenues (the "cost of sales percentage") for fiscal 1996 declined to 64.8%compared to 65.8% for fiscal 1995. This decrease primarily resulted fromimproved gross profits at ATL due to improved absorption of fixed manufacturingcosts on higher sales volume and a sales mix that carried overall higher grossprofit margins, and an overall commercial products sales mix that favored newand add-on feature products with higher gross profits. The cost of salespercentage also declined due to a decrease in the cost of contract revenues as aresult of a continued decline in the government manufacturing cost base andprofits due to completion of some long term contracts. The cost of sales percentage for fiscal 1995 and fiscal 1994 held constant at65.8% due to a number of offsetting factors. During fiscal 1995 the cost ofsales percentage increased for commercial products due to a product mix thatfavored a higher material content which included a higher material cost in theGyyr products caused by the deteriorating dollar/yen relationship. Thisincreased material cost was partially offset by improved absorption of fixedmanufacturing costs from increased net sales volume. The cost of salespercentage for contract revenues decreased due to a decline in the governmentmanufacturing cost base and increased profits due to completion of certain longterm contracts.Selling, General and Administrative Expenses Selling, general, and administrative (SG&A) expenses increased approximately$2,779,000, or 13.3%, in fiscal 1996 compared to the prior fiscal year, althoughas a percentage of net sales and contract revenues, SG&A declined to 22.6%compared to 23.8% in fiscal 1995. SG&A expenses primarily increased due toprofessional fees related to the E-Systems litigation and increased expensesrelated to expanding foreign operations in Odetics, Europe, Ltd., and Odetics,Asia Pacific, Pte., Ltd. a wholly-owned subsidiary. SG&A expenses increased approximately $3,737,000, or 21.8%, in fiscal 1995compared to the prior fiscal year primarily due to higher costs related to theCompany's foreign sales operations. Fiscal 1995 reflects the first full year ofoperations of Odetics Asia Pacific Pte Ltd., established to support Asian salesand marketing activities. The Company also incurred increased costs tointroduce and support Gyyr and ATL sales in the European market through OdeticsEurope, Ltd.Research and Development Expenses Research and development (R&D) expenses decreased approximately $2,336,000 to6.6% of net sales and contract revenues for fiscal 1996 compared to 10.6% forfiscal 1995. The decrease in R&D expenses as a percentage of net sales andcontract revenues reflected the effect of certain cost-cutting measuresimplemented during the second half of fiscal 1995 and completion of certainmajor R&D programs in the fourth quarter of fiscal 1995. R&D increased approximately $2,041,000, or 28.1%, in fiscal 1995 compared tothe fiscal 1994. The Company experienced increased R&D expenses across all ofits divisions in fiscal 1995 principally for prototype material, consulting, andlabor and related benefits accompanying increased new product developmentactivities. 14 Nonrecurring Charge In the third quarter of fiscal 1995, the Company recorded a non-recurringcharge of $4,393,000 for loss reserves related to downsizing and restructuringin response to a deterioration in the Company's contractual relationship with E-Systems, a major customer. The charge consisted of a $3,716,000 write-down ofinventories and accounts receivables to net realizable value, severance costs of$420,000 for staffing reductions due to the loss of the E-Systems business and$257,000 of aggregate charges for purchases, cancellation, legal fees and othercosts relating to the dispute. In the fourth quarter of fiscal 1995, the Companyundertook further measures aimed at cost cutting, staffing reductions and otherrestructuring activities which contributed to additional special charges ofapproximately $416,000 in the quarter. Cash outlays for severance and othercharges related to the E-Systems dispute were largely satisfied in fiscal 1995.Interest Expense Interest expense increased approximately $322,000 in fiscal 1996 compared tofiscal 1995 and $153,000 in fiscal 1995 compared to fiscal 1994. Theseincreases were primarily due to overall higher average outstanding line ofcredit borrowings and increased cost of borrowings.Income Taxes The effective income tax rate was 38% in fiscal 1996 compared to an incometax benefit of 33% in fiscal 1995 and a 29% income tax rate in fiscal 1994.Recognition of general business credits reduced effective tax rates below thestatutory rates. The increase in the effective tax rate for fiscal 1996 is dueto a reduction in the effect of general business tax credits on total income taxexpense.LIQUIDITY AND CAPITAL RESOURCES The Company's net income of $2,453,000 for the fiscal year ended 1996adjusted for non-cash charges of depreciation and amortization and a netreduction in operating assets and liabilities, contributed to $6,760,000 of netcash provided by operating activities during the year. The cash flow providedby operating activities was primarily used for the purchase of fixed assets andpayments for the reduction of long term borrowings. The Company has a$17,000,000 bank line of credit provided for borrowings generally at or belowthe banks prime rate. Borrowings are available for general working capitalpurposes, and at March 31, 1996, $6,000,000 was available for borrowing underthe line. The Company anticipates that net cash flow provided by operatingactivities in conjunction with its bank credit arrangements will be sufficientto execute its operating plans and meet its obligations on a timely basis.Subsequent to March 31, 1996, the Company settled its litigation with E-Systems(see Legal Proceedings) and was paid by E-Systems $6,160,000. The Company doesnot have any material commitments for capital expenditures as of March 31, 1996. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 15 Report of Independent AuditorsStockholders and Board of DirectorsOdetics, Inc.We have audited the accompanying consolidated balance sheets of Odetics, Inc. asof March 31, 1995 and 1996, and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of the three years inthe period ended March 31, 1996. Our audits also included the financialstatement schedule listed in the index at Item 14(a). These financialstatements and schedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofOdetics, Inc. at March 31, 1995 and 1996, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedMarch 31, 1996, in conformity with generally accepted accounting principles.Also, in our opinion, the related financial statement schedule, when consideredin relation to the basic financial statements taken as a whole, present fairlyin all material respects the information set forth therein. /s/ ERNST & YOUNG LLPOrange County, CaliforniaMay 24, 1996 16 Odetics, Inc. Consolidated Balance Sheets MARCH 31 1995 1996 ---------------------- (In thousands)ASSETSCurrent assets: Cash $ 378 $ 1,142 Trade accounts receivable, net of allowance for doubtful accounts of 17,813 24,772 $954,000 in 1995 and $988,000 in 1996 Costs and estimated earnings in excess of billings on uncompleted contracts 3,136 3,428 (Note 2) Inventories: Finished goods 2,690 3,717 Work in process 2,702 2,927 Materials and supplies 20,075 16,076 Prepaid expenses and other 1,533 1,122 Deferred income taxes 2,683 2,516 ----------------------Total current assets 51,010 55,700 Property, plant and equipment: Land 2,090 2,090 Buildings and improvements 16,948 17,553 Equipment 21,878 23,964 Furniture and fixtures 849 950 Allowances for depreciation (21,056) (22,950) ---------------------- 20,709 21,607 Other assets 639 1,504 ----------------------Total assets $ 72,358 $ 78,811 ====================== 17 Odetics, Inc. Consolidated Balance Sheets (continued) MARCH 31 1995 1996 --------------------- (In thousands)LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Trade accounts payable $ 8,155 $11,519 Accrued expenses 3,324 2,441 Accrued incentive programs 369 1,229 Accrued vacation 1,178 1,504 Income taxes payable - 1,412 Billings in excess of costs and estimated earnings on uncompleted 3,955 5,414 contracts (Note 2) Current portion of long-term debt (Note 3) 1,296 1,791 ---------------------Total current liabilities 18,277 25,310Long-term debt, less current portion (Note 3) 25,757 22,019Deferred income taxes (Note 5) 588 497Commitments and contingencies (Notes 3 and 8)Stockholders' equity (Notes 6 and 7): Preferred stock: Authorized shares - 2,000,000 Issued and outstanding none Common stock, $.10 par value: Authorized shares - 10,000,000 of Class A and 2,600,000 of Class B Issued and outstanding shares - none 4,935,359 of Class A and 1,160,931 of Class B at March 31, 1996 595 610 Paid-in capital 21,067 21,905 Foreign currency translation 46 (10) Retained earnings 6,028 8,480 ---------------------Total stockholders' equity 27,736 30,985 ---------------------Total liabilities and stockholders equity $72,358 $78,811 =====================See accompanying notes. 18 Odetics, Inc. Consolidated Statements of Operations YEAR ENDED MARCH 31 1994 1995 1996 ----------------------------------------- (In thousands, except per share data) Net sales and contract revenues: Net sales $66,063 $74,465 $ 94,466 Contract revenues 18,099 13,280 10,161 ----------------------------------------- 84,162 87,745 104,627 Costs and expenses: Cost of sales 44,281 51,148 63,398 Cost of contract revenues 11,114 6,633 4,374 Selling, general and administrative expenses 17,162 20,899 23,678 Research and development expenses 7,268 9,309 6,973 Nonrecurring charge (Note 4) - 4,809 - Interest expense 1,772 1,925 2,247 ----------------------------------------- 81,597 94,723 100,670 -----------------------------------------Income (loss) before income taxes 2,565 (6,978) 3,957 Income taxes (benefit) (Note 5) 743 (2,300) 1,504 -----------------------------------------Net income (loss) $ 1,822 $(4,678) $ 2,453 ========================================= Net income (loss) per share of common stock $ .34 $ (.80) $ .40 ========================================= See accompanying notes. 19 Odetics, Inc. Consolidated Statements of Stockholders' Equity COMMON STOCK --------------------------------------- SHARES OUTSTANDING ----------------------------- CLASS A CLASS B FOREIGN COMMON COMMON PAID-IN CURRENCY RETAINED STOCK STOCK AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL ------------------------------------------------------------------------------------------------------ (In thousands)Balance at March 31, 1993 3,320 1,204 $452 $ 9,908 $(31) $ 8,884 $19,213 Issuances of common stock (Notes 6 and 7) 78 26 11 707 - - 718 October 1993 issuance of common stock (net of offering costs of $1,217) 1,150 - 115 9,307 - - 9,422 Conversion of Class B common stock 37 (37) - - - - Foreign currency translation adjustments - - - - 64 - 64 Net income - - - 1,822 1,822 ------------------------------------------------------------------------------------------------------Balance at March 31, 1994 4,585 1,193 578 19,922 33 10,706 31,239 Issuances of common stock (Notes 6 and 7) 170 17 1,145 - 1,162 Conversion of Class B common stock 32 (32) - - - - - Foreign currency translation adjustments - - - - 13 - 13 Net loss - - - - - (4,678) (4,678) ------------------------------------------------------------------------------------------------------ Balance at March 31, 1995 4,787 1,161 595 21,067 46 6,028 27,736 Issuances of common stock (Notes 6 and 7) 148 - 15 837 - - 852 Foreign currency translation adjustments - - - - (56) - (56) Net income - - - - - 2,453 2,453 ------------------------------------------------------------------------------------------------------ Balance at March 31, 1996 4,935 1,161 $610 $21,904 $(10) $ 8,481 $30,985 ======================================================================================================See accompanying notes. 20 Odetics, Inc. Consolidated Statements of Cash Flows  YEAR ENDED MARCH 31 1994 1995 1996 ----------------------------------- (In thousands)OPERATING ACTIVITIESNet income (loss) $ 1,822 $ (4,678) $ 2,453Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,634 2,442 2,694 Provision for losses on accounts receivable (125) 827 170 Provision for deferred income taxes (92) (2,337) 76 (Gain) loss on sale of equipment 1 (37) (28) Changes in operating assets and liabilities (Note 10) (5,104) (2,606) 1,395 -----------------------------------Net cash provided by (used in) operating activities (864) (6,389) 6,760 INVESTING ACTIVITIESPurchases of property, plant and equipment (1,940) (3,670) (3,536)Proceeds from sale of equipment 9 73 74 -----------------------------------Net cash used in investing activities (1,931) (3,597) (3,462) FINANCING ACTIVITIESProceeds from line of credit and long-term borrowings 18,093 40,263 36,152 Principal payments on line of credit, long-term debt, and capital lease obligations (25,736) (31,222) (39,395)Net proceeds from common stock offering 9,422 - -Proceeds from issuance of common stock 672 1,151 709 -----------------------------------Net cash provided by (used in) financing activities 2,451 10,192 (2,534) -----------------------------------Increase (decrease) in cash (344) 206 764Cash at beginning of year 516 172 378 -----------------------------------Cash at end of year $ 172 $ 378 $ 1,142 =================================== See accompanying notes. 21 Odetics, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 19951. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPRINCIPLES OF CONSOLIDATIONThe consolidated financial statements include the accounts of the Company andits active subsidiaries Odetics Europe, Ltd., Odetics Asia Pacific Pte Ltd. andATL Products, Inc. During fiscal 1990, the Company incorporated Odetics Europe,Ltd. to develop European commercial sales. During fiscal 1993, the ATL Divisionwas incorporated as ATL Products, Inc. During fiscal 1995, the Companyincorporated Odetics Asia Pacific Pte Ltd. to develop commercial sales for theAsian Market. All significant intercompany accounts and transactions areeliminated in consolidation.USE OF ESTIMATESThe preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates. Significant estimates made inpreparing the consolidated financial statements include the allowances fordoubtful accounts and deferred tax assets, inventory reserves and costs tocomplete long-term contracts.REVENUE RECOGNITIONContract revenues and earnings on long-term cost-reimbursement and fixed-pricecontracts of the CompanyOs Communication Division are recognized on thepercentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Contract revenues include costs incurred plus a portion ofestimated fees or profits based on the relationship of costs incurred to totalestimated costs. Any anticipated losses on contracts are charged to earningswhen identified. Certain contracts contain incentive and/or penalty provisionswhich provide for increased or decreased revenues based upon performance inrelation to established targets. Incentive fees are recorded when earned andpenalty provisions are recorded when incurred, as long as the amounts canreasonably be determined.For all other divisions, sales and related cost of sales are recognized on thedate of shipment or, if required, upon acceptance by the customer.CASH AND CASH EQUIVALENTSCash and cash equivalents consist of cash and short-term investments withmaturities of less than ninety days. 22 Odetics, Inc. Notes to Consolidated Financial Statements1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)FAIR VALUES OF FINANCIAL INVESTMENTSFair values of cash and cash equivalents, and the current portion of long-termdebt approximate the carrying value because of the short period of time tomaturity. The fair value of long-term debt approximates its carrying valuebecause the portion of fixed rates of interest approximate current market ratesand the remaining portion has variable rates of interest.INVENTORY VALUATIONInventories are stated at the lower of cost or market. Cost is determined onthe first-in, first-out method.LONG-LIVED ASSETSThe Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 121, Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of (SFAS No. 121), in March 1995. Inaccordance with SFAS No. 121, long-lived assets and certain intangibles held andused by the Company will be reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. The recoverability test is to be performed at the lowest level atwhich undiscounted net cash flows can be directly attributable to long-livedassets. SFAS No. 121 is effective for fiscal years beginning after December 15,1995. The Company plans to adopt SFAS No. 121 in fiscal 1997 and has determinedthat there will be no material effect on the Company's financial statements uponadoption.PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment are recorded at cost. Buildings are depreciatedusing the straight-line method over their estimated useful lives up to a periodof forty years. Equipment, furniture and fixtures, including assets recordedunder capital lease obligations, are depreciated principally by the decliningbalance method over their estimated useful lives ranging from four to eightyears. 23 Odetics, Inc. Notes to Consolidated Financial Statements1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)RESEARCH AND DEVELOPMENT EXPENDITURESSoftware development costs incurred subsequent to determination of technicalfeasibility are capitalized. Amortization of capitalized software costs isprovided on a product-by-product basis at the greater of the amount computedusing (a) the ratio of current gross revenues for the product to the total ofcurrent and anticipated future gross revenues or (b) the straight-line methodover the remaining estimated economic life of the product. Amortization beginswhen product is available for general release to customers. Generally, anoriginal estimated economic life of two years is assigned to capitalizedsoftware development costs.During fiscal 1994, 1995 and 1996, software development costs were amortized tocost of sales totaling $293,000, $42,000 and $212,000, respectively. The netunamortized balances of $456,000 and $1,105,000 are classified in other assetsat March 31, 1995 and 1996, respectively.All other research and development expenditures are charged to research anddevelopment expense in the period incurred.FOREIGN CURRENCY TRANSLATIONThe balance sheet accounts of Odetics Europe, Ltd. are translated at the currentyear-end exchange rate and income statement items are translated at the averageexchange rate for the year. Resulting translation adjustments are made directlyto a separate component of stockholders' equity. Gains and losses resultingfrom transactions of the Company and its subsidiaries which are made incurrencies different from their own are immaterial and are included in income asthey occur.INCOME TAXESDeferred income tax assets and liabilities are computed for differences betweenfinancial statement and tax basis of assets and liabilities based on enacted taxlaws and rates applicable to the period in which differences are expected toaffect taxable income. Valuation allowances are established when necessary toreduce deferred tax assets to amounts which are more likely than not to berealized. The provision for income taxes is the taxes payable or refundable forthe period plus or minus the change during the period in deferred income taxassets and liabilities. 24 Odetics, Inc. Notes to Consolidated Financial Statements1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)EARNINGS (LOSS) PER SHAREEarnings (loss) per share were computed using the weighted average number ofClass A and Class B common shares outstanding during the periods. Dilutiveemployee stock options (Note 7) were considered in earnings per sharecomputations for 1994 and 1996. The weighted average number of common sharesand common equivalent shares used in the calculation of earnings per share wasapproximately 5,326,000, 5,872,000 and 6,179,000 in 1994, 1995 and 1996,respectively.STOCK OPTION PLANSThe Company follows Accounting Principles Board Opinion No. 25, Accounting forStock Issued to Employees (APB 25), and related Interpretations in accountingfor its associate stock options. Under APB 25, because the exercise price ofthe Company's associate stock options equals the market price of the underlyingstock on the date of grant, no compensation expense is recognized.The Company follows the practice of recording amounts received upon the exerciseof options by crediting common stock and additional capital. The Companyrealizes an income tax benefit from the exercise or early disposition of certainstock options. This benefit results in a decrease in current income taxespayable and an increase in additional capital.RECLASSIFICATIONSCertain amounts in the 1994 and 1995 consolidated financial statements have beenreclassified to conform with the 1996 presentation. 25 Odetics, Inc. Notes to Consolidated Financial Statements2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTSCosts incurred, estimated earnings and billings on uncompleted long-termcontracts are as follows: MARCH 31 1995 1996 ---------------------- (In thousands) Costs incurred on uncompleted $55,577 $12,622 contracts Estimated earnings 6,613 721 ---------------------- 62,190 13,343 Less billings to date 63,009 15,329 ---------------------- $ (819) $(1,986) ====================== Included in accompanying balance sheets: Costs and estimated earnings in excess of billings on uncompleted contracts $ 3,136 $ 3,428 Billings in excess of costs and estimated earnings on uncompleted contracts (3,955) (5,414) ---------------------- $ (819) $(1,986) ======================Costs and estimated earnings in excess of billings at March 31, 1995 and 1996include $1,199,000 and $557,000, respectively, that were not billable as certainmilestone objectives specified in the contracts had not been attained.Substantially all costs and estimated earnings in excess of billings at March31, 1996 are expected to be billed and collected during the year ending March31, 1997. 26 Odetics, Inc. Notes to Consolidated Financial Statements3. LONG-TERM DEBTLong-term debt consisted of the following: MARCH 31 1995 1996 -------------------- (In thousands) Note payable, collateralized by deed of trust on land and buildings with a net book value of approximately $15,000,000, payable in monthly installments through the year 2004, including interest at 9.36%. $11,829 $11,040 Secured revolving credit agreement under which the Company may borrow up to $17,000,000 with interest at the prime rate (9% as of March 31, 1996). The agreement expires on August 31, 1997. 14,100 10,700 Note payable, collateralized by equipment, payable in monthly installments through March 1999, including interest at 9.0% - 1,369 Note payable, collateralized by equipment, payable in monthly installments through November 13,  1997 including interest at 6.95%. 784 497 Notes payable, primarily collateralized by equipment, payable in monthly installments through September 1996, including interest from 7.0% to 7.3%. 340 204 -------------------- 27,053 23,810 Less current portion 1,296 1,791 -------------------- $25,757 $22,019 ==================== 27 Odetics, Inc. Notes to Consolidated Financial Statements3. LONG-TERM DEBT (CONTINUED)The revolving credit agreement is collateralized by substantially all of theCompany's assets, excluding property and plant. Under the terms of theagreement, the Company is required to comply with certain covenants, maintaincertain debt to net worth ratios, current ratios and minimum net worthrequirements.Included within the borrowing limits of the agreement, the Company has availableapproximately $4,000,000 in letters of credit and approximately $300,000 hasbeen reserved for standby letters of credit at March 31, 1996.The annual maturities of long-term debt for the five years ending March 31, 2001and thereafter are as follows: (In thousands) 1997 $ 1,791 1998 12,297 1999 1,543 2000 1,146 2001 1,261 Thereafter 5,772 ---------------- $23,810 ================Future minimum lease commitments under noncancelable operating leases are notmaterial at March 31, 1996. Rent expense for all operating leases amounted toapproximately $484,000, $766,000 and $562,000 for 1994, 1995 and 1996,respectively.4. NONRECURRING CHARGESIn December 1994, the Company recorded a nonrecurring charge of $4,393,000related to downsizing and restructuring in response to a deterioration in theCompany's contractual relationship with E-Systems, Inc., a major customer of ATLProducts, Inc. (see Note 8). The charge consisted of a $3,716,000 write-down ofinventories and accounts receivable to net realizable value and $677,000 ofseverance costs and other charges associated with the E-Systems dispute. Theseverance costs and other charges associated with the E-Systems dispute. TheCompany's restructuring plan also called for the implementation of an earlyretirement incentive program effective for the period January 1, 1995 throughMarch 31, 1995 which resulted in a nonrecurring charge of $416,000 during thefourth quarter of fiscal 1995. Approximately 100 associates, primarily inoperations, manufacturing, general management and administrative functions,received severance pay based on the number of years of service plus earlyretirees received HMO coverage for one year. Approximately $283,000 and$133,000 of the severance charges were paid in fiscal 1995 and 1996,respectively. 28 Odetics, Inc. Notes to Consolidated Financial Statements5. INCOME TAXESThe reconciliation of the income tax provision (benefit) to taxes computed atU.S. federal statutory rates is as follows: YEAR ENDED MARCH 31 1994 1995 1996 ------------------------------ (In thousands) Income tax (benefit) at statutory rates $ 897 $(2,442) $1,385 State income taxes, net of federal tax benefit 145 27 310 Recognition of general business and other credits (250) - - Decrease of valuation allowance associated with federal deferred tax assets (92) - (326) Foreign losses recorded without benefit - - 80 Other 43 115 55 ------------------------------ $ 743 $(2,300) $1,504 ============================== United States and foreign income (loss) before income taxes are as follows: YEAR ENDED MARCH 31 1994 1995 1996 ------------------------------ (In thousands) Pretax income (loss): Domestic $2,455 $(7,383) $2,194 Foreign 110 405 1,763 ------------------------------ $2,565 $(6,978) $3,957 ============================== 29 Odetics, Inc. Notes to Consolidated Financial Statements5. INCOME TAXES (CONTINUED)Significant components of the provision (benefit) for income taxes are asfollows: YEAR ENDED MARCH 31 1994 1995 1996 ----------------------------- (In thousands) Current: Federal $ 804 $ (139) $ 293 State 242 40 476 Tax benefit from stock option exercises (86) (24) (31) Research and development credits utilized (250) - - Foreign 39 136 659 ----------------------------- 749 13 1,397 Deferred: Federal (59) (2,337) 194 State (33) - (118) ----------------------------- Total deferred (92) (2,337) 76 Charge in lieu: Credit to additional paid-in capital attributable to stock option exercises 86 24 31 ----------------------------- $ 743 $(2,300) $1,504 ============================= 30 Odetics, Inc. Notes to Consolidated Financial Statements5. INCOME TAXES (CONTINUED)The components of deferred tax liabilities and assets are as follows: 1995 1996 --------------------- (In thousands) Deferred tax assets: Inventory reserves $ 2,441 $ 1,915 Deferred compensation and other payroll accruals 1,691 1,904 General business tax credit carryforwards 1,188 1,035 Alternative minimum tax credit carryforwards 800 883 Bad debt reserve 467 397 Other, net 230 377 --------------------- Total deferred tax assets 6,817 6,511 Valuation allowance for deferred tax assets (1,749) (1,450) --------------------- Net deferred tax assets 5,068 5,061 --------------------- Deferred tax liabilities: Tax over book depreciation 2,465 2,557 Capitalized interest and taxes 471 455 Other, net 37 30 --------------------- Total deferred tax liabilities 2,973 3,042 --------------------- Net deferred tax assets $ 2,095 $ 2,019 =====================At March 31, 1996, the Company had approximately $1,035,000 in research anddevelopment credit carryforwards, and $883,000 of alternative minimum tax creditcarryforwards for federal income tax purposes. For financial reportingpurposes, a valuation allowance of $1,450,000 has been recorded to offset thedeferred tax asset related to these credits. Any future benefits recognizedfrom the reduction of the valuation allowance will result in a reduction ofincome tax expense. These credit carryforwards expire at various datesbeginning in 1999.6. ASSOCIATE INCENTIVE PROGRAMSUnder the terms of a Profit Sharing Plan, the Company contributes to a trustfund such amounts as are determined annually by the Board of Directors. Nocontributions were made in 1994, 1995 or 1996. 31 Odetics, Inc. Notes to Consolidated Financial Statements6. ASSOCIATE INCENTIVE PROGRAMS (CONTINUED)In May 1990, the Company adopted a 401(k) Plan as an amendment and replacementof the former Associate Stock Purchase Plan that was an additional feature ofthe Profit Sharing Plan. Under the 401(k) Plan, eligible associates voluntarilycontribute to the plan up to 15% of their salary through payroll deductions.The Company matches 50% of contributions up to a stated limit. Under theprovisions of the 401(k) Plan, associates have four investment choices, one ofwhich is the purchase of Odetics, Class A common stock at market price. Companymatching contributions were approximately $192,000, $376,000 and $1,389,000 in1994, 1995 and 1996, respectively.Effective April 1, 1987, the Company established a noncontributory AssociateStock Ownership Plan (ASOP) for all associates with more than six months ofeligible service. The ASOP provides that Company contributions, which aredetermined annually by the Board of Directors, may be in the form of cash orshares of Company stock. No contributions were made in 1995. The Companycontributions to the ASOP were approximately $375,000 and $430,000 in 1994 and1996, respectively. Shares distributed through the ASOP Plan were included intotal outstanding shares used in the earnings per share calculation.7. STOCK OPTION AND DEFERRED COMPENSATION PLANSThe Company has adopted an Associate Stock Option Plan which provides thatoptions for shares of the Company's unissued Class A common stock may be grantedto directors and associates of the Company. Options granted enable the optionholder to purchase one share of Class A common stock at prices which are equalto or greater than the fair market value of the shares at the date of grant.Options for shares have been granted at prices ranging from $4.25 to $9.00 forone share of Class A common stock. Options expire ten years after date of grantor 90 days after termination of employment and vest ratably at 33% or 25% oneach of the first three or four anniversaries of the grant date, respectively,depending on the date of grant. Options for shares of both the Company'sunissued Class A and Class B common stock had been granted to directors andassociates of the Company and such options expired in 1994. YEAR ENDED MARCH 31 1994 1995 1996 ------------------------------------------ (In thousands, except per share data) Options outstanding at beginning of year 544 655 610 Granted 209 12 397 Exercised (89) (40) (70) Canceled (9) (17) (248) ------------------------------------------ Options outstanding at end of year 655 610 689 ========================================== 32 Odetics, Inc. Notes to Consolidated Financial Statements7. STOCK OPTION AND DEFERRED COMPENSATION PLANS (CONTINUED) YEAR ENDED MARCH 31 1994 1995 1996 ------------------------------------------------- (In thousands, except per share data) Options exercisable at March 31 285 357 288 Options available for grant at March 31 82 437 520  Option price range for exercised shares: Class A common stock $4.38 to 6.63 $4.38 to 6.13 $4.25 to 6.625 Class A and Class B common stock 11.50 - -During 1986, the Company adopted an Executive Deferral Plan under which certainexecutives may defer a portion of their annual compensation. All deferredamounts earn interest, generally with no guaranteed rate of return.Compensation charged to operations and deferred under the plan totaled $370,000,$364,000 and $302,000 for 1994, 1995 and 1996, respectively.8. LITIGATIONIn November 1994 and February 1995 the Company and E-Systems, Inc. (E-Systems),respectively filed legal actions related to E-Systems' cancellation of purchaseorders for ATL Products' DataLibrary and DataTower products. In May 1996, theparties entered into a settlement agreement under which, among other things, E-Systems agreed to pay the Company $6,160,000, all claims asserted by the partieswere released and the litigation dismissed. In addition, the parties agreed toan equitable disposition of disputed inventory and entered into a five yearservice agreement for Odetics to service units that had been sold to E-Systemsat agreed upon prices. The Company does not expect to record any material gainor loss based on the terms of the settlement agreement. 33 Odetics, Inc. Notes to Consolidated Financial Statements9. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATIONThe Company operates in one industry segment whereby it focuses on informationautomation through its design, development, manufacturing and marketing ofsubsystems and other products for specialized information automationapplications. The Company's principal products include magnetic tape cartridgeand cassette handling subsystems for Automated Tape Library (ATL) systems usedin computer mass data storage applications; large-library cart machines used inbroadcast and cable television station operations; time-lapse VCRs and relatedproducts used in commercial and industrial closed circuit television securityand surveillance applications; and space-qualified digital data recorders usedin manned and unmanned space vehicles.The Company manufactures and sells its products to commercial customers indiversified industries as well as to prime government contractors under long-term contracts. The percentage of the Company's total net sales and contractrevenues contributed by direct and indirect sales to the U.S. and foreigngovernments were approximately 27%, 19% and 10% during 1994, 1995 and 1996,respectively.The Company performs periodic credit evaluations of its customer's financialcondition and generally does not require collateral. Credit losses have beenwithin management's expectations and within amounts provided through theallowances for doubtful accounts. At March 31, 1995 and 1996, accountsreceivable from governmental agencies and prime government contractors wereapproximately $1,923,000 and $970,000, respectively. 34 Odetics, Inc. Notes to Consolidated Financial Statements9. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION (CONTINUED)Information concerning the Company's operations by geographic segment is asfollows: YEAR ENDED MARCH 31 1994 1995 1996 ---------------------------------- Sales to unaffiliated customers: United States (a) $79,861 $ 79,950 $ 87,007 Europe - Odetics Europe, Ltd. 4,301 5,627 14,553 Asia Pacific - Odetics Asia Pacific Pte Ltd. - 4,170 3,067 ---------------------------------- $84,162 $ 87,745 $104,627 ================================== Sales between geographic areas (based on invoiced prices): United States $ 4,669 $ 10,452 $ 9,563 Europe - - - Asia Pacific - - - Intercompany eliminations (4,669) (10,452) (9,563) ---------------------------------- $ - $ - $ - ================================== Income (loss) before taxes: United States $ 2,782 $ (7,019) $ 2,744 Europe 110 29 1,998 Asia Pacific - 377 (235) Intercompany eliminations (327) (365) (550) ---------------------------------- $ 2,565 $ (6,978) $ 3,957 ================================== Assets: United States $67,179 $ 76,620 $ 78,543 Europe 1,896 3,367 5,002 Asia Pacific - 1,934 740 Intercompany eliminations (3,147) (9,563) (5,474) ---------------------------------- $65,928 $ 72,358 $ 78,811 ==================================(a) Export sales from the United States to all unaffiliated foreign customers (which excludes sales to and by Odetics Europe, Ltd. and Odetics Asia Pacific Pte Ltd.) were approximately $10,000,000, $10,000,000 and $13,000,000 during 1994, 1995 and 1996, respectively. These sales were principally made to customers in Europe and the Pacific Rim. 35 Odetics, Inc. Notes to Consolidated Financial Statements10. SUPPLEMENTAL CASH FLOW INFORMATION YEAR ENDED MARCH 31 1994 1995 1996 1994 1995 1996 -------------------------------- (In thousands) Net cash used in changes in operating assets and liabilities: Increase in accounts receivable $(5,268) $ (435) $(7,129) Decrease in net costs and estimated earnings in excess of billings 986 2,064 1,167 (Increase) decrease in inventories (5,647) (3,102) 2,747 (Increase) decrease in prepaids and other assets 22 (1,109) (556) Increase (decrease) in accounts payable and accrued expenses 4,803 (24) 5,166 -------------------------------- Net cash used in changes in operating assets and liabilities $(5,104) $(2,606) $ 1,395 ================================ Cash paid during the year: Interest $ 1,937 $ 2,006 $ 2,415 Income taxes paid (refunded) 891 292 (133) Noncash transactions during the year: Issuances of common stock to satisfy associate incentive program obligation $ 46 $ 140 $ 143 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III In accordance with paragraph (3) of General Instruction G of Form 10-K(Information to be Incorporated by Reference), Items 10, 11, 12 and 13 areincorporated herein by reference from the Company's definitive proxy statementto be filed with the Securities and Exchange Commission pursuant to Regulation14A prior to the expiration of 120 days after March 31, 1996, the close of theCompany's most recent fiscal year. PART IVITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements -------------------- The following financial statements of the Company are included in Part II,Item 8, which information is incorporated herein by reference: Page ---- Report of Independent Auditors 16 Consolidated Balance Sheets - March 31, 1995 and 1996 17 Consolidated Statements of Operations - Years ended March 31, 1994, 1995 and 1996 19 Consolidated Statements of Stockholders' Equity - Years ended March 31, 1994, 1995 and 1996 20 Consolidated Statements of Cash Flows - Years ended March 31, 1994, 1995 and 1996 21 Notes to Consolidated Financial Statements 22 2. Financial Statement Schedule ----------------------------The following schedule supporting the financial statements of the Company is included herein: Page ---- Schedule II - Valuation and Qualifying Accounts 36 All other schedules for which provision is made in the applicable accountingregulations of the Securities and Exchange Commission are not required under therelated instructions or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K ------------------- None. (c) Exhibits -------- 37 The following exhibits are filed as part of this report on Form 10-K or areincorporated herein by reference: 3.1 Certificate of Incorporation of the Company filed as Exhibit 19.2 to the September 30, 1987 Form 10-Q and incorporated herein by reference. 3.2 Bylaws of the Company, as amended, filed as Exhibit 4.2 to Form S- 1 filed July 6, 1993 and incorporated herein by reference. 4.1 See Exhibit 3.1. 4.2 See Exhibit 3.2. 4.3 Specimen of Class A Common Stock and Class B Common Stock certificates filed as Exhibit 4.3 to Amendment No. 1 filed September 30, 1993 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 10.1 1981 Incentive Stock Option Plan and form of Stock Option Agreement, filed as Exhibit 4.1 to the Company's Form S-8 filed June 27, 1985 (No. 2-98656) (the "1985 Form S-8") and incorporated herein by reference. 10.2 1982 Nonstatutory Stock Option and Stock Appreciation Rights Plan and forms of Nonstatutory Stock Option and Stock Appreciation Rights Agreement, filed as Exhibit 4.2 to the 1985 Form S-8 and incorporated herein by reference. 10.3 1992 Incentive Stock Option Plan and forms of Incentive Stock Option Agreement and Non-Statutory Stock Option Agreement filed as Exhibit 4.1, 4.2 and 4.3, respectively, to the Company's Form S-8 filed March 10, 1993 (Reg. No. 33-59274) and incorporated herein by reference. 10.4 Profit Sharing Plan and Trust, filed as Exhibit 4.3 to Amendment No. 2 to the 1985 Form S-8 filed May 5, 1988 (Reg No. 2-98656) and incorporated herein by reference. 10.5 Form of Executive Deferral Plan between the Company and certain employees of the Company, filed as Exhibit 10.4 to the 1988 Form 10-K and incorporated herein by reference. 10.6 Second Amended and Restated Loan Agreement between Bank of the West and the Company entered into as of September 30, 1992, filed as Exhibit 10.6 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 10.7 Loan and Security Agreement between ATL Products, Inc. and Bank of the West entered into as of February 26, 1993, filed as Exhibit 10.6 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 10.8 Modification Agreement regarding the agreements referenced in Exhibits 10.6 and 10.7, as modified by the First Amendments to Modification Agreement from Bank of the West dated as of February 26, 1993 and August 9, 1993 filed as Exhibit 10.6 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 10.9.1 Form of Indemnity Agreement entered into by the Company, and certain officers and directors, filed as Exhibit 19.4 to the September 30, 1988 Form 10-Q and incorporated herein by reference. 10.9.2 Schedule of officers and directors covered by Indemnity Agreement filed as Exhibit 10.9.2 to Amendment No. 1 filed September 30, 1993 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 10.10 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust, filed as Exhibits 4.3.1 and 4.3.2 respectively, to Amendment No. 3 to the 1983 Form S-8 (Reg. No. 2-86220) filed June 13, 1990 and incorporated herein by reference. 10.11 Lease between the Company and Roths Properties entered into as of November 1, 1990 filed as Exhibit 10.11 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 10.12 Promissory Note in the original principal amount of $15,000,000 payable to The Northwestern Mutual Life Insurance Company ("NMLI") dated October 31, 1989 and related Deed of Trust, Security Agreement and Financing Statement between Odetics, Inc. and NMLI dated October 31, 1989 filed as Exhibit 10.12 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 21 Subsidiaries of the Registrant filed as Exhibit 22 to Amendment No. 1 filed September 30, 1993 to Form S-1 filed July 6, 1993 and incorporated herein by reference. 23 Consent of Independent Auditors. - ------------------------------- 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. ODETICS, INC.June 27, 1996 By /s/ JOEL SLUTZKY -------------------------------------------------- Joel Slutzky, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- /s/ JOEL SLUTZKY Chief Executive Officer, and June 27, 1996- ----------------------------- DirectorJoel Slutzky /s/ GREGORY A. MINER Vice President and June 27, 1996- ----------------------------- Chief Financial OfficerGregory A. Miner /s/ CRANDALL GUDMUNDSON President and June 27, 1996- ----------------------------- DirectorCrandall Gudmundson /s/ JERRY MUENCH Vice President and June 27, 1996- ----------------------------- DirectorJerry Muench /s/ KEVIN C. DALY President, ATL and June 27, 1996- ----------------------------- DirectorKevin C. Daly /s/ GARY SMITH Vice President and Controller June 27, 1996- ----------------------------- (Principal Accounting Officer)Gary Smith /s/ RALPH R. MICKELSON Director June 27, 1996- -----------------------------Ralph R. Mickelson /s/ STANLEY MOLASKY Director June 27, 1996- -----------------------------Stanley Molasky /s/ LEO WEXLER Director June 27, 1996- -----------------------------Leo Wexler /s/ PAUL WRIGHT Director June 27, 1996- -----------------------------Paul Wright 40 Schedule II - Valuation and Qualifying Accounts Odetics, Inc.- ----------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E- ----------------------------------------------------------------------------------------------------------------- Balance at Charged to Charged to Beginning of Costs and Other Accounts - Deductions - Balance at End Description Period Expenses Describe Describe of Period- ----------------------------------------------------------------------------------------------------------------- Year ended March 31, 1994: Deducted from asset accounts: Allowance for doubtful accounts $ 490,000 $ (125,000) $ - $ (28,000) (1) $ 337,000 Reserve for inventory obsolescence - - - - - ----------------------------------------------------------------------------------- Total $ 490,000 $ (125,000) $ - $ (28,000) $ 337,000 ===================================================================================Year ended March 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts $ 337,000 $ 827,000 $ - (210,000) (1) $ 954,000 Reserve for inventory obsolescence - 3,118,000 - - 3,118,000 ------------------------------------------------------------------------------------ Total $ 337,000 $3,945,000 $ - $(210,000) $4,072,000 ====================================================================================Year ended March 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $ 954,000 $ 170,000 $ - $(136,000) (1) $ 988,000 Reserve for inventory obsolescence 3,118,000 513,000 - - 3,631,000 ------------------------------------------------------------------------------------ Total $4,072,000 $ 683,000 $ - $(136,000) $4,619,000 ====================================================================================(1) Uncollectible accounts written off, net of recoveries. 41 INDEX TO EXHIBITS ----------------- SequentialExhibit No. Page No.- ----------- ---------- 3.1 Certificate of Incorporation of the Company filed as Exhibit 19.2 to the 9/30/87 Form 10-Q and incorporated herein by reference.3.2 Bylaws of the Company filed as Exhibit 19.3 to the 9/30/87 Form 10-Q and incorporated herein by reference.4.1 See Exhibit 3.14.2 See Exhibit 3.210.1 1981 Incentive Stock Option Plan and form of Stock Option Agreement, filed as Exhibit 4.1 to the Company's Form S-8 filed June 27, 1985 (No. 2-98656) (the "1985 Form S-8") and incorporated herein by reference.10.2 1982 Nonstatutory Stock Option and Stock Appreciation rights Plan and form of Nonstatutory Stock Option and Stock Appreciation Rights Agreement, filed as Exhibit 4.2 to the 1985 Form S-8 and incorporated herein by reference.10.3 Profit Sharing Plan and Trust, filed as Exhibit 4.3 to Amendment No. 2 to the 1985 Form S-8 filed May 5, 1988 (Reg No. 2-98656) and incorporated herein by reference.10.4 Form of Executive Deferral Plan between the Company and certain employees of the Company, filed as Exhibit 10.4 to the 1988 Form 10-K and incorporated herein by reference.10.5 Amended and Restated Loan Agreement between Bank of the West and the Company entered into as of September 30, 1991, filed as Exhibit 19.1 to 9/30/91 Form 10-Q and incorporated herein by reference.10.7.1 Form of Indemnity Agreement entered into by the Company, and certain Officers and Directors, filed as Exhibit 19.4 to the 9/30/88 From 10-Q and incorporated herein by reference.10.7.2 Schedule of Officers and Directors covered by Indemnity Agreement included as Exhibit 10.7.110.8 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust, filed as Exhibits 4.3.1 and 4.3.2 respectively, to Amendment No. 3 to the 1985 (Reg. No. 2-86220) Form S-8 filed June 13, 1990 and incorporated herein by reference.10.9 1992 Incentive Stock Plan and forms of Incentive Stock Option Agreement and Non-Statutory Stock Option Agreement filed as Exhibit 4.1, 4.2 and 4.3, respectively, to Company's Form S-8 filed March 10, 1993 (Reg. No. 33-59274) and incorporated herein by reference.21 Subsidiaries of the Registrant filed as Exhibit 22 to Amendment No. 1 filed September 30, 1993 to Form S-1 filed July 6, 1993 and incorporated herein by reference.23 Consent of Independent Auditors. 42 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORSWe consent to the incorporation by reference in the Registration Statement (FormS-3 No. 33-63983) of Odetics, Inc. and in the related Prospectus and in theRegistration Statement (Form S-8 No. 333-05735) pertaining to the Amended andRestated Outside Director Stock Plan of Odetics, Inc. and the Odetics, Inc. Long-Term Incentive Equity Plan of Odetics, Inc. of our report dated May 24,1996, with respect to the consolidated financial statements and schedule ofOdetics, Inc. included in this Annual Report (Form 10-K) for the year endedMarch 31, 1996. /s/ ERNST & YOUNG LLPOrange County, CaliforniaJune 28, 1996

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