Iteris Annual Report 1998

=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-10605 ---------------- ODETICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 95-2588496 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)1515 SOUTH MANCHESTER AVENUE, ANAHEIM, CALIFORNIA 92802 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (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: CLASS A COMMON STOCK, $.10 PAR VALUE CLASS B COMMON STOCK, $.10 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all 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 tosuch filing requirements for the past 90 days. Yes [X] No [_] Indicate by a check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [_] Based on the closing sale price on Nasdaq National Market on June 25, 1998,the aggregate market value of the voting stock held by nonaffiliates of theregistrant was $68,466,928. For the purposes of this calculation, shares ownedby officers, directors and 10% stockholders known to the registrant have beendeemed to be owned by affiliates. This determination of affiliate status isnot necessarily a conclusive determination for other purposes. The Company has two classes of common stock outstanding, the Class A CommonStock and the Class B Common Stock. The rights, preferences and privileges ofeach class of common stock are identical in all respects, except for votingrights. Each share of Class A Common Stock entitles its holder to ten votesper share and each share of Class B Common Stock entitles its holder to onevote per share. As of June 25, 1998, there were 6,202,778 shares of Class ACommon Stock and 1,062,041 shares of Class B Common Stock outstanding. Unlessotherwise indicated, all references to "Common Stock" shall collectively referto the Class A Common Stock and the Class B Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the registrant'sdefinitive proxy statement (the "Proxy Statement") for the Annual Meeting ofthe Stockholders scheduled to be held on September 11, 1998. =============================================================================== ODETICS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PAGE ---- PART I ITEM 1. BUSINESS....................................................... 1 ITEM 2 PROPERTIES..................................................... 14 ITEM 3. LEGAL PROCEEDINGS.............................................. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................................ 15 ITEM 6. SELECTED FINANCIAL DATA........................................ 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 20 ITEM 11. EXECUTIVE COMPENSATION......................................... 20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8- K.............................................................. 21 i Note: When used in this Annual Report on Form 10-K and the informationincorporated herein by reference, the words "expect(s)," "feel(s),""believe(s)," "will," "may," "anticipate(s)," and similar expressions areintended to identify forward-looking statement. Such statements are subject tocertain risks and uncertainties which could cause actual results to differmaterially from those projected. Readers are cautioned not to place unduereliance on these forward-looking statements which speak only as of the datehereof. Odetics, Inc. undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof orto reflect the occurrence of unanticipated events. Readers are also urged tocarefully review and consider the various disclosures made by the Companywhich describe certain factors which affect the Company's business, includingthe risk factors set forth at the end of Part I, Item 1 of this Report and inPart II, Item 7. "Management's Discussion and Analysis of Financial Conditionand Results of Operations." PART I ITEM 1. BUSINESS GENERAL Odetics, Inc. (the "Company") was founded in 1969 to supply digitalrecorders for use in the United States space program. The Company pioneerednew designs and standards for digital magnetic tape recorders offering highreliability and enhanced performance in the adverse environment attendant tospace flight. In the 1970s, the Company broadened its information automationproduct line to include time-lapse videocassette recorders for commercial andindustrial security and surveillance applications. Through the Company's GyyrDivision, it became a leading supplier of time-lapse videotape cassetterecorders, digital image processing modules and related products used insecurity and surveillance systems. The Company incorporated its Gyyr Divisionin 1997, forming a wholly owned subsidiary, Gyyr, Inc. ("Gyyr"). In October1997, the Company expanded Gyyr by acquiring Intelligent Controls Inc.("ICI"), a manufacturer of access control products specializing in PC based,remote site and fiber optic communications. Leveraging the Company's expertise in video image processing, the Companyintroduced a video vehicle detection system in 1993, representing theCompany's first product for use in intelligent transportation systems ("ITS").In June 1997, the Company acquired certain assets comprising theTransportation Systems business from Rockwell International, creating theCompany's ITS Division, which expanded the Company's offerings to includeAdvanced Traffic Management Systems and Advanced Traveler Information Systems.The Company incorporated its ITS Division in 1998 as Odetics ITS, Inc. and hasannounced that it intends to commence a public offering of a minority interestin Odetics ITS in the third quarter of fiscal 1998. In the early 1980s, the Company set out to develop the technical expertiseto apply automation to new commercial applications and established itsBroadcast Division. The Broadcast Division develops and manufactures broadcastautomation control systems and pioneered the use of large library cartmachines in broadcast television stations and satellite uplink operations. Thesuccess 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. to develop and provide a 19mm automated tapecartridge handling subsystem. In 1991, in a strategic move to expand itsbusiness into new and potentially larger markets, the Company introduced anautomated tape handling subsystem for integration into tape libraries designedfor midrange computers and client/server networks. In January 1993, theCompany formed a separate subsidiary, ATL Products, Inc. ("ATL") to pursue themarket for automated tape libraries. In March 1997, ATL completed an initialpublic offering of 1,650,000 shares of its Class A Common Stock. The Companydistributed its remaining 82.9% interest in ATL to its stockholders in a tax-free distribution (the "Distribution") in October 1997. The Company is a leading supplier of communications equipment and servicesfor the television broadcast, video security, telecommunications andintelligent traffic solutions markets. The Company's products automatetelevision and cable station operations, facilitate broadband communications,record video surveillance, store information gathered in space exploration andreduce traffic congestion. 1 BROADCAST DIVISION The Broadcast Division's video tape libraries automate the storage andtelevising of commercials, news spots and other television programmingrecorded on videotape cassettes. Automated video libraries increase laborefficiency by automatically performing tape insertion and other filing taskspreviously performed manually or by machines with limited capacity andutility. The Company believes that enhanced operational efficiencies are aprincipal factor underlying the increased automation of broadcast televisionstations and satellite uplink operations. The Broadcast Division's TCS2000 represented its earliest commercial successin the manufacture of video tape libraries followed by the TCS90. The recentmarket trend toward smaller libraries, coupled with digital hard diskrecording devices was led by the Company with the introduction of highlyintegrated caching systems employing the Company's newest cart machine, theTCS45. The TCS45 can be coupled with hard drive recorders available fromseveral recognized suppliers to the broadcast community. The Company nowoffers software to form powerful integrated systems, including theMicroSpot(TM) and the SpotBank(TM). In fiscal 1999, the Company intends torelease the Roswell Total Facility Management System, which is designed tointegrate and manage all schedules, media, equipment and on air operations ata television broadcast facility. Multi-channel presentation systems, whichintegrate the complete line of the Company's hardware with commonly availablebroadcast quality video disk recorders, are quickly becoming the core businessof the Broadcast Division. Sales, Marketing and Principal Customers The Broadcast Division sells directly to broadcast television stations,satellite uplink operations, and other broadcast television and cabletelevision system operators. Sales and marketing management is located at theCompany's principal facilities in Anaheim, California, with a dedicated fieldsales force of four persons operating in four U.S. sales regions plus a salesmanager for Latin America. European sales and marketing activities areconducted and managed by Odetics Europe, Ltd., a wholly-owned subsidiary ofthe Company. Asia sales and marketing activities are conducted by Odetics AsiaPacific Pte Ltd., a wholly-owned subsidiary of the Company located inSingapore. Additional independent representative organizations are utilized topromote the Broadcast Division's products in various other foreign markets. Customers include major television networks such as the British BroadcastingCorporation, Canadian Broadcasting Corporation, CNBC/FNN, Euronews, Televisa,Measat Broadcast Network Systems, NBC, the PBS Network, Group W SatelliteCommunications (for the Arts & Entertainment Network and Discovery Channel),Asia Broadcast Centre, Univision and over 100 independent and network-affiliated television stations. The Broadcast Division has systems installedin over 30 countries. Manufacturing and Materials The Broadcast Division maintains a dedicated manufacturing area locatedwithin the Company's Anaheim, California facilities. The Company's SpotBankand MicroSpot products are manufactured primarily on a lot assembly/modulebuild basis in a second manufacturing plant located in Austin, Texas. At theAnaheim facility, the Broadcast Division and Gyyr share common infrastructuresupport in the areas of production and inventory control, purchasing, qualityassurance, manufacturing and engineering. A single management structureoversees these operations. The Broadcast Division purchases video servers from Tektronix, Leitch andHewlett Packard along with video switching, conversion and monitoringequipment from Tektronix and Leitch for installation in the Company'sautomated video management systems. It also purchases cabinets and otherfabricated parts and components. 2 GYYR, INC. During fiscal 1997, the Company formed a wholly-owned subsidiary, Gyyr Inc.,a California corporation ("Gyyr") to operate the business of its former GyyrDivision. Gyyr produces box solutions for the data challenges faced bysecurity dealers, integrators and end users. Time-lapse VCRs are employedextensively in area monitoring by banks, convenience stores, retailers andother businesses. Time-lapse VCRs are frequently installed at automated tellermachine and retail computerized payment machine locations to record picturesof individuals making transactions while simultaneously recording transactioninformation in an effort to deter and address incidents of theft and othercrimes at these locations. Customer demand for more sophisticatedcapabilities, such as computer interfaces to record transaction informationsimultaneously with video images, electronic processors to record multiplecameras on one VCR and digital image processing and enhancement, also havecontributed to recent growth of the market for Gyyr's products. The Companyrecently introduced a new line of time-lapse VCRs and video multiplexers, andthe ControLink,(TM) which combines remote control capabilities, telemetry andcontrol parts to create a cost effective close circuit television controlsystem. In October 1997, the Company acquired ICI, a manufacturer of accesscontrol and video badging systems for the electronic security markplace, thatis currently operated as part of Gyyr. Sales, Marketing and Principal Customers Gyyr markets and sells its products directly to its private label OEMaccounts. Gyyr personnel located at the Company's principal facilities alsooversee a network of approximately 2,500 security equipment dealers anddistributors worldwide who sell Gyyr's products to end users. Gyyr utilizesforeign representatives in Latin America, and employs a business developmentand service staff through Odetics Europe, Ltd., a wholly-owned United Kingdomsubsidiary of the Company. Odetics Europe, Ltd. assists Gyyr in its sales andmarketing activities in European markets. Gyyr also utilizes Odetics AsiaPacific Pte Ltd. to assist in sales to the Asian markets. Gyyr's principalcustomers include major security equipment companies such as Diebold, Inc.,ADT Security Systems, Inc., Honeywell, Inc., Mosler, Inc., Hamilton Safe andother OEMs. Manufacturing and Materials Gyyr maintains a dedicated manufacturing area located within the Company'sfacilities located in Anaheim, California and in Lynnwood, Washington. Gyyrprimarily uses continuous unit flow assembly lines. Gyyr and the BroadcastDivision share common infrastructure support in the areas of production andinventory control, purchasing, quality assurance and manufacturingengineering. A single management structure oversees these operations. Gyyr purchases VCRs modified to the Company's specifications exclusivelythrough Nissei Sangyo America, the United States distribution affiliate ofHitachi, Ltd., into which the Company incorporates certain value-addedfeatures. The Company is vulnerable to changes in Hitachi, Ltd.'s basic VCRmodel, which might necessitate changes in the design or manufacturing ofGyyr's products. There are numerous other suppliers of VCRs suitable for usein Gyyr's products, although certain changes in product design ormanufacturing methods may be required to accommodate such VCRs, and Gyyr couldexperience temporary delays or interruptions in supply while such changes areincorporated or a new supplier is procured. COMMUNICATIONS DIVISION The Company's Communications Division includes telecommunications relatedproducts and space borne digital data recorders. The Communications Divisionsupplies products that synchronize telecommunication and computer systems andproducts that provide an interface between the wide area network ("WAN") andthe local area networks ("LAN"). 3 Odetics telecom synchronization products are sold for new applications incellular telephone systems and the new PCS networks being implementedthroughout the world. The principal customer of the Communications Division isLGIC of Korea. See "Risk Factors--Risks Associated with International Sales."The synchronization products are based on G.P.S. technologies. Most productapplications are in the latest CDMA networks. The Company's telecom interface products are sold to local exchangecarriers, interexchange carriers and local area network switch manufacturers.The product offerings fall into two categories: interface boards and standalone systems. The interface boards are asynchronous transfer mode and SONETbased, and are sold primarily to other telecom equipment manufacturers. The space business unit manufactures digital data recorders that are used inmanned and unmanned space vehicles to store data gathered by onboard sensorsprior to transmission of the data to ground receiving stations. Theserecorders are employed in satellite programs for space research, earthresource and environmental observation and weather monitoring, as well asglobal surveillance and classified government programs. Sales, Marketing and Principal Customers The Communications Division conducts its selling and marketing activitiesworldwide directly from the Company's principal facilities. The Company'stelecom synchronization products are sold primarily through indirect salesorganizations. Sales of network interface products are primarily made throughindirect sales channels. During the fiscal year ended March 31, 1998,approximately 25% of the Communication Division's sales were derived fromcontracts with domestic or foreign governmental agencies and prime governmentcontractors. Manufacturing and Materials The Communications Division production capabilities fall into twocategories: commercial and space. The telecom business unit manufactures tobest commercial practices. This group became ISO certified in February 1997.Most of the manufacturing operations consist of final assembly and test. TheCompany outsources board assembly and some preliminary fabrication processes. The space production is designed for low volume, program-managedmanufacture, often with nonrecurring engineering for individual customerneeds. Because of these unique requirements, the space business unit hasextensive machining and electronic assembly capabilities in order to managecost, schedule, and quality levels to the unusual and exacting needs of itscustomers. ODETICS ITS, INC. Odetics ITS, Inc provides intelligent transportation systems, services andproducts to public agencies, vehicle manufacturers and consumers to addressthe growing demand for reduced congestion, enhanced roadway efficiency andimproved safety. By combining the diverse expertise of transportation systems,software and electrical engineers with proprietary information technology,Odetics ITS has developed the core competencies necessary to design andimplement innovative advanced transportation management systems. As one of thetwo companies developing and maintaining the National ITS Architecture,Odetics ITS is well positioned to shape the future direction of ITS deploymentin the United States. Odetics ITS also leverages its proprietary outdoor image processingalgorithms and sensor technology to develop new ITS products. The Vantagevehicle detection system provides reliable detection and visual imagery undera broad range of weather and lighting conditions. The flexibility, ease ofinstallation and low maintenance of Vantage represent an attractivealternative to inductive loops for traffic surveillance. The Lane Trackersystem, which provides an audible warning of lane departures, was jointlydeveloped between Odetics ITS and Daimler Benz and integrates the proprietarytechnologies of both companies. The Company believes Lane Tracker will be thefirst commercially available, image processing based lane departure warningsystem. 4 Sales, Marketing and Principal Customers Odetics ITS markets and sells its transportation management systems andservices directly to end user government authorities pursuant to negotiatedcontracts and individual purchase agreements. Odetics ITS employs three fulltime Regional Managers in California, Michigan and Washington D.C. and hasengaged one independent agent in China. Sales of Odetics ITS' systemsgenerally involve long lead times and require extensive specificationdevelopment, evaluation and price negotiations. The Vantage vehicle detection systems are primarily sold through indirectsales channels comprised of approximately twenty independent dealers in theUnited States and Canada who sell integrated solutions and related products tothe traffic intersection market. Odetics ITS's agreement with theseindependent dealers typically prohibits such dealers from distributingcompetitive video detection systems. These dealers often have long-term supplyarrangements with the government agencies in their territory for the supply ofvarious products for the construction and renovation of traffic intersections.Odetics ITS' dealers generally maintain an inventory of demonstration trafficproducts including the Vantage vehicle detection systems and sell directly togovernment agencies and installation contractors. Such dealers are primarilyresponsible for sales, installation and support of the Vantage products.Odetics ITS holds technical training classes for its dealers and maintains afull time staff of customer support technicians to provide technicalassistance when needed. Odetics ITS employs two full time Regional SalesManagers in California and Texas to support the dealer sales channel and oneDistrict Sales Manager who sells direct to end user agencies and contractors. Odetics ITS intends to sell its Lane Tracker Systems initially to heavytruck manufacturers through its product line management personnel. Sales ofproducts to vehicle manufacturers generally require lengthy and complex designprocesses which could take up to four years. The Company anticipates thatOdetics ITS will have to rely to a large extent on the marketing activities ofthe vehicle manufacturers who will have the ultimate access to the consumers.Odetics ITS has, however, engaged an independent sales agent to assist itsmarketing and sales activities in Europe. Manufacturing and Materials Odetics ITS maintains a manufacturing facility in the Company's headquartersin Anaheim, California for the manufacture of its Vantage products. Themanufacturing activities of Odetics ITS consist primarily of testing andassembly. Odetics ITS currently shares certain manufacturing activities andemployees with the Communications Division. The Company intends to outsourcethe manufacture of its Lane Tracker system and currently relies on onemanufacturer for this product. Such manufacturer has not, to date, commencedvolume production of the Lane Tracker product line, and accordingly, will needto expand capacity rapidly to accommodate full production. CUSTOMER SUPPORT AND SERVICES The Company provides warranty service for each of its product lines, as wellas follow-on service and support for which the Company typically chargesseparately. The Company also offers separate software maintenance agreementsto its customers. Management views customer support services as a criticalcompetitive factor as well as a revenue source. The Company maintains its ownservice groups and trains its customers, representatives and distributors inthe performance of user level maintenance. Modular product designs withrecommended spare packages are used wherever feasible to minimize mean time torepair. BACKLOG The Company's backlog of unfulfilled firm orders was approximately $21.6million as of March 31, 1998 and approximately $17.6 million at March 31,1997. Approximately 92.7% of the Company's backlog at March 31, 1997 wasrecognized as revenues in fiscal 1998 and approximately 97.7% of the Company'sbacklog 5 at March 31, 1998 is expected to be recognized as revenues in fiscal 1999.Pursuant to the customary terms of the Company's agreements with governmentcontractors 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'sindividual customers, which also can affect the timing of the conversion ofthe Company's backlog into revenues. For these reasons, among others, theCompany's backlog at a particular date may not be indicative of its futurerevenues. PRODUCT DEVELOPMENT The Company's business requires substantial ongoing research and developmentexpenditures and other product development activities. For fiscal 1996, 1997and 1998, the Company incurred approximately $5.2 million, $7.7 million and$9.3 million, respectively, of Company sponsored research and developmentcosts and expenses, including reimbursable research and development expensesof the Company allowed in the Company's negotiated general and administrativerates on cost contracts with the United States Government. 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 faces significant competition in each of its targeted markets.Increased competition is likely to result in price reductions, reduced grossmargins and loss of market share, any of which could have a material adverseeffect on the Company's business, financial condition and results ofoperations. The Broadcast Division's primary competitors include Sony, Panasonic, Avid,Louth and Pro-bel. Sony and Panasonic are large, international suppliers ofextensive 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. Louth and Probel principally provide automation control for videolibraries and disk recorders. The Broadcast Division's products competeprimarily on the basis of product features, including their capacity toaccommodate broadcast quality VCRs from all manufacturers, which is uniqueamong product offerings in this market. Gyyr's principal competitors for time-lapse VCRs include Panasonic, Toshiba,Sanyo and Sony, all of which have far greater name recognition, marketing andother resources than the Company. Numerous other companies, including Japaneseand other offshore vendors of VCRs, also offer competitive products.Management believes that Gyyr's products compete primarily on the basis oftheir value-added features, including those relating to digital imageprocessing. The primary competition for the Communications Division's networksynchronization products is Datum, Inc. In the Communications Division's spacetape recorder market, the Company primarily competes with Seaker, GeneralElectric Corporation, Lockheed Martin, and Schlumberger, S.A. An additionalcompetitive factor in this market is space flight experience; however, withthe advent of solid state recorders, the Company may face new competitors inthis market. The Company believes its emerging network interface products areaddressing market niches. Odetics ITS' competitors in the traffic management services market includeITS divisions of large corporations including Lockheed Martin and TRW, as wellas many civil engineering firms. The Company believes that the principal basesof competition in the transportation management services market is theexperience of key individuals and their relationships with governmentagencies, project management experience, name recognition and the ability todevelop integrated software to link various aspects and components of thetraffic management system. The Company expects increased competition in itstransportation management 6 services business as additional competitors gain experience and expertise withthe National ITS Architecture.In the market for vehicle detection, the Companycompetes primarily with manufacturers and installers of inductive loops, withother manufacturers of video camera detection systems such as Image SensingSystems, Inc. and the Peek business unit of Thermo Power, and to a lesserextent with other non-intrusive detection devices including microwave,infrared, ultrasonic and magnetic detectors. The Company is not aware of anyother company that currently sells a vision based lane tracking safety devicefor in-vehicle applications. The markets for the Company's products and services are highly competitiveand are characterized by rapidly changing technology and evolving standards.The Company believes that its ability to compete depends on a number offactors, including the success and timing of new product development by theCompany and its competitors, compatibility of the Company's products with abroad range of computing systems, product quality and performance,reliability, functionality, price, and service and technical support. Many ofthe Company's current and prospective competitors have longer operatinghistories, greater name recognition, access to larger customer bases andsignificantly greater financial, technical, manufacturing, distribution andmarketing resources than the Company. As a result, they may be able to adaptmore quickly to new or emerging standards or technologies or to devote greaterresources to the promotion and sale of their products than the Company.Accordingly, it is possible that new competitors or alliances amongcompetitors could emerge and rapidly acquire significant market share. Thefailure of the Company to provide services and develop and market productsthat compete successfully with those of other suppliers and consultants in themarket would have a material adverse effect on the Company's business,financial condition and results of operations INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company's ability to compete effectively depends in part on its abilityto develop and maintain the proprietary aspects of its technology. TheCompany's policy is to obtain appropriate proprietary rights protection forany potentially significant new technology acquired or developed by theCompany. The Company currently holds a number of United States and foreignpatents and trademarks. The patents will expire at various dates through 2012.The Company also has pending a number of United States and foreign patentapplications relating to certain of its products; however, there can be noassurance that any patents will be granted pursuant to these applications. In addition to patent laws, the Company relies on copyright and trade secretlaws to protect its proprietary rights. The Company attempts to protect itstrade secrets and other proprietary information through agreements withcustomers and suppliers, proprietary information agreements with the Company'sAssociates (as hereinafter defined) and consultants and other similarmeasures. There can be no assurance, however, that the Company will besuccessful in protecting its proprietary rights. 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. Litigation has been necessaryin the past and may be necessary in the future to enforce the Company'sproprietary rights, to determine the validity and scope of the proprietaryrights of others, or to defend the Company against claims of infringement orinvalidity by others. An adverse outcome in such litigation or similarproceedings could subject the Company to significant liabilities to thirdparties, require disputed rights to be licensed from others or require theCompany to cease marketing or using certain products, any of which could havea material adverse effect on the Company's business, financial condition andresults of operations. In addition, the cost of addressing any intellectualproperty litigation claim, both in legal fees and expenses and the diversionof management resources, regardless of whether the claim is valid, could besignificant and could have a material adverse effect on the Company's resultsof operations. ASSOCIATES The Company refers to its employees as Associates. As of June 11, 1998, theCompany employed 554 Associates, including 124 Associates in generalmanagement, administration and finance; 78 Associates in sales 7 and marketing; 161 Associates in product development; 154 Associates inoperations, manufacturing and quality; and 46 Associates in customer service.None of the Company's Associates is represented by a labor union and theCompany has not experienced a work stoppage. GOVERNMENT REGULATION The Company's manufacturing operations are subject to various federal, stateand local laws, including those restricting the discharge of materials intothe 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 its digitaldata recorders may constitute classified United States government informationor may be used in classified programs of the United States Government. Forthis purpose, the Company and certain Associates possess relevant securityclearances. The Company's affected facilities and operations are subject tosecurity regulations of the United States Government. The Company believes itis in full compliance with these regulations. 8 RISK FACTORS The Company's business is subject to a number of risks, some of which arediscussed below. Other risks are presented elsewhere in this Report. Thefollowing risks should be considered carefully in addition to the otherinformation contained in this Report in evaluating the Company and itsbusiness before purchasing the shares of the Company's Common Stock. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experiencedwide fluctuations in quarterly and annual operating results in the past andmay continue to experience fluctuations in the future based on a number offactors, not all of which are in the Company's control. These factors include,without limitation, the size and timing of significant customer orders; theintroduction of new products by competitors; the availability of componentsused in the manufacture of the Company's products; the expenditure ofsubstantial funds for research and development for its subsidiaries anddivisions; changes in pricing policies by the Company, its suppliers or itscompetitors and increased price competition; the ability of the Company todevelop, introduce, market and gain market acceptance of new products(particularly the Roswell, ControLink, Vantage and Lane Tracker), applicationsand product enhancements in a timely manner and to control costs; the longlead times associated with government contracts or required by vehiclemanufacturers; the Company's success in expanding and implementing its salesand marketing programs; technological changes in the markets in which theCompany operates; the reduction in revenues from government programs; therelatively thin level of backlog at any given time; the mix of sales among theCompany's divisions; deferrals of customer orders in anticipation of newproducts, applications or product enhancements; currency fluctuations; andgeneral economic and market conditions. Moreover, the Company's sales in anyquarter typically consist of a relatively small number of large customerorders, and the timing of a small number of orders can impact quarter toquarter results. The loss of or a substantial reduction in orders from anysignificant customer could have a material adverse effect on the Company'sbusiness, financial condition and results of operations. The Company's growthin revenues in recent periods may not be sustainable and may not be indicativeof future operating results, and there can be no assurance that the Companywill continue to achieve profitability on a quarterly or annual basis in thefuture. Due to all of the foregoing factors and other risks discussed below,it is possible that in some future period the Company's operating results maybe below the expectations of analysts and investors. In such event, the marketprice of the Company's securities would probably be materially and adverselyaffected. UNCERTAINTY OF INCUBATOR STRATEGY. The Company has initiated a strategy tonurture its business divisions with the goal of conducting additional initialpublic offerings. The Company's ability to complete an initial public offeringof any of its divisions or subsidiaries will depend upon numerous factors,including, without limitation, the overall performance of such division, itsgrowth potential, management team, market size, customer base, product lineand results of operations, as well as general economic and market conditions.There can be no assurance that the Company will be able to complete asuccessful initial public offering of any of its divisions in the near future,if at all. RAPID TECHNOLOGICAL CHANGE; EFFECT OF NEW PRODUCT INTRODUCTIONS ANDUNCERTAIN MARKET ACCEPTANCE. The markets served by the Company arecharacterized by rapid technological advances, downward price pressure in themarketplace as technologies mature, changes in customer requirements, frequentnew product introductions and enhancements, and evolving industry standards.The Company's business requires substantial ongoing research and developmentefforts and expenditures, and its future success will depend on its ability toenhance its current products, reduce product costs and develop and introducenew products which incorporate the latest technological advancements inhardware, storage media, operating system software and applications softwarein response to evolving customer requirements. The Company's failure toanticipate or respond adequately to technological developments and changingcustomer requirements, the occurrence of significant delays in new productdevelopment or introduction or the failure of any new products to gain marketacceptance could impair the Company's competitiveness and could materially andadversely affect the Company's business, financial condition and results ofoperations. There can be no assurance that the Company will be able tointroduce new products or enhancements to existing products on a timely basis,if at all, or the 9 effect to which such introductions will have on sales of existing products. Tothe extent new products are introduced, they may contain undetected designfaults and software errors or "bugs" when first released by the Company that,despite testing by the Company, are discovered only after a product has beeninstalled and used by customers. Although the Company has not experienced anymaterial adverse effect resulting from any such faults or errors to date,there can be no assurance that faults or errors in the Company's existingproducts or in new products introduced by the Company will not be discoveredin the future, causing delays in product introduction and shipments orrequiring design modifications that could adversely affect the Company'scompetitive position and results of operations. The Company's success is alsodependent in large part upon achieving broad market acceptance of certain newproducts including its Roswell, ControLink, Vantage and Lane Tracker products.There can be no assurance that any such products or enhancements thereto willbe able to achieve broad market acceptance. Market acceptance of the Company'snew products depends upon numerous factors, including the ability to resolvetechnical challenges in a timely and cost-effective manner, the perceivedadvantages over traditional products and the marketing capabilities of theCompany's independent distributors and strategic partners. In addition, theCompany anticipates that the manufacture of Lane Tracker will be outsourced toa single manufacturer. There can be no assurance that this manufacturer willbe able to manufacture sufficient quantities in a timely manner or at areasonable cost, either of which could materially and adversely affect theCompany's ability to launch or gain market acceptance of Lane Tracker. RISKS ASSOCIATED WITH INTERNATIONAL SALES; EFFECT OF ASIAN ECONOMICCRISIS. International product sales represented approximately 30%, 36% and 34%of the Company's total net sales and contract revenues for the fiscal yearsended March 31, 1996, 1997 and 1998, respectively. The Company's products soldby its telecommunications operations are sold principally to LGIC of Korea. Asa result of economic uncertainty in Asia, particularly Korea, the Company'ssales in this region declined during the fourth quarter of fiscal 1998 andcould be further impacted by the currency devaluations and related economicproblems in this region. The Company believes that international sales willcontinue to represent a significant portion of its revenues, and thatcontinued growth and profitability will require further expansion of itsinternational operations. The Company's international sales are currentlydenominated primarily in U.S. dollars, and an increase in the relative valueof the dollar could make the Company's products more expensive and, therefore,potentially less price competitive in international markets. Additional risksinherent in international business activities generally include unexpectedchanges in regulatory requirements, tariffs and other trade barriers, longeraccounts receivable payment cycles, difficulties in managing and staffinginternational operations, potentially adverse tax consequences includingrestrictions on the repatriation of earnings, the burdens of compliance with awide variety of foreign laws, currency fluctuations and political andeconomical instability. The Company does not engage in any transactions as ahedge against risks of loss due to foreign currency fluctuations. There can beno assurance that such factors will not have a material adverse effect on theCompany's future international sales and, consequently, the Company'sbusiness, operating results and financial condition. Furthermore, as theCompany increases its international sales, its total revenues may also beaffected to a greater extent by seasonal fluctuations resulting from lowersales that typically occur during the summer months in Europe and other partsof the world. MANAGEMENT OF GROWTH; RISKS RELATED TO POSSIBLE ACQUISITIONS. Over the pastyear, the Company has significantly expanded its operations and has completedthe acquisition of certain assets of the Transportation Business of RockwellInternational as well as ICI, and the Company intends to continue to pursue anacquisition strategy. This period of rapid growth and expansion has placed,and continues to place, a significant strain on the Company's resources. Toaccommodate this growth, the Company will be required to implement a varietyof new and upgraded operational and financial systems, procedures andcontrols, including the improvement of its accounting and other internalmanagement systems, all of which require substantial management effort. Therecan be no assurance that the such efforts can be accomplished successfully.There can be no assurance that the Company will be able to identify, acquire,profitably manage or successfully integrate any such business into the Companywithout incurring substantial delays or other operational or financialproblems. Moreover, competitors of the Company are also soliciting potentialacquisition candidates, which could both increase the price of any acquisitiontargets and decrease the number of attractive companies available foracquisition. Acquisitions may require significant capital infusions and, ingeneral, involve a number of special risks, including the diversion of 10 management's attention, the failure to retain or successfully integrate keyacquired personnel, the challenge of operating diverse business divisions,increased costs to improve managerial, operational, financial andadministrative systems, legal liabilities and increased interest expense andamortization of acquired intangible assets, any of which could materially andadversely affect the Company's business, financial condition and results ofoperations. RELIANCE ON GOVERNMENT CONTRACTS AND SUBCONTRACTORS; RISKS RELATED TO FIXEDPRICE CONTRACTS. Substantially all of net sales by Odetics ITS and a portionof the net sales of the Communications Division for the year ended March 31,1998 were derived from contracts with governmental agencies, either as ageneral contractor, subcontractor or supplier. Government business is, ingeneral, subject to special risks and challenges such as long purchase cycles,competitive bidding and qualification requirements, performance bondrequirements, delays in funding, budgetary constraints, milestone requirementsand liquidated damage provisions for failure to meet contract milestones. Inaddition, an increasing number of the Company's government contracts are fixedprice contracts, pursuant to which the Company benefits from cost savings, butis unable to recover for any cost overruns. Such fixed price contracts requirethe Company to estimate the total project cost based on preliminaryprojections of the project's requirements. The financial viability of anygiven project depends in large part on the Company's ability to estimate suchcosts accurately and complete the project on a timely basis. In the event theCompany's costs on such projects exceed the fixed contractual cost, theCompany will be required to bear the excess costs. Such costs could exceedproject profit margins or even revenues, and accordingly, could have amaterial adverse effect on the Company's financial condition and results ofoperations. Moreover, certain of the Company's government contracts aresubject to termination or renegotiation at the convenience of the government,which could result in a large decline in net sales in any given quarter. TheCompany's inability to address any of the foregoing concerns or the loss orrenegotiation of any material government contract could have a materialadverse effect on the Company's business, financial condition and results ofoperations. COMPETITION. The Company competes in each of its markets with numerous othercompanies, many of which have far greater name recognition and financial,technological, marketing and customer service resources than the Company andmay be able to respond more quickly to new or emerging technologies andchanges in customer requirements, or devote greater resources to thedevelopment, promotion, sale and support of their products than the Company.The Company believes the principal competitive factors in the markets in whichthe Company participates are product quality and performance, price,reliability, upgradeability, service and technical support. There can be noassurance that the Company will be able to compete effectively in the marketsfor its products. Increased competition is likely to result in pricereductions, reduced gross margins and loss of market share, any of which couldhave a material adverse affect upon the Company's business, operating resultsand financial condition. DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends to asignificant extent on its senior management and other key employees, inparticular Joel Slutzky, the Company's Chief Executive Officer. The loss ofthe services of Mr. Slutzky or certain key employees would have a materialadverse effect on the Company's development and marketing efforts. TheCompany's future success will also depend in large part upon its ability toattract, retain and motivate highly skilled employees. Competition foremployees, particularly development engineers, is intense, and there can be noassurance that the Company will be able to continue to attract and retainsufficient numbers of such highly skilled employees. The Company's inabilityto attract and retain additional key employees or the loss of one or more ofits current key employees could have a material adverse effect upon theCompany's business, financial condition and results of operations. DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The Company'sability to compete effectively depends in part on its ability to develop andmaintain proprietary aspects of its technology which the Company attempts toprotect with a combination of patent, copyright, trademark and trade secretlaws, employee and third party nondisclosure agreements and similar means.Such rights may not preclude competitors from developing substantiallyequivalent or superior products to the Company's products. In addition, thelaws of some foreign countries do not protect the Company's proprietary rightsas fully as do the laws of the United States. There can be no assurance thatthe Company's means of protecting its proprietary rights in the United Statesor abroad will be adequate, that future patents will be issued, or thatcompetitors will not independently 11 develop technologies that are similar or superior to the Company's technology,duplicate the Company's technology, or design around any patent of theCompany. Moreover, litigation has been necessary in the past and may benecessary in the future to enforce the Company's intellectual property rights,to determine the validity and scope of the proprietary rights of others, or todefend the Company against claims of infringement or invalidity by others. Anadverse outcome in such litigation or similar proceedings could subject theCompany to significant liabilities to third parties, require disputed rightsto be licensed from others or require the Company to cease marketing or usingcertain products, any of which could have a material adverse effect on theCompany's business, financial condition and results of operations. If theCompany is required to obtain licenses under patents or proprietary rights ofothers, there can be no assurance that any required licenses would be madeavailable on terms acceptable to the Company, if at all. In addition, the costof addressing any intellectual property litigation claim, both in legal feesand expenses and the diversion of management resources, regardless of whetherthe claim is valid, could be significant and could have a material adverseeffect on the Company's results of operations. VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stockhas been in the past and could be in the future subject to wide fluctuationsin response to quarterly variations in operating results, shortages announcedby suppliers, announcements of technological innovations or new products,applications or product enhancements by the Company or its competitors,changes in financial estimates by securities analysts and other events orfactors. In addition, the stock market has experienced volatility which hasparticularly affected the market prices of equity securities of many hightechnology companies and which often has been unrelated to the operatingperformance of such companies. These broad market fluctuations may adverselyaffect the market price of the Company's securities. CONCENTRATION OF OWNERSHIP. As of June 25, 1998, the Company's officers anddirectors beneficially owned a majority of the total combined voting power ofthe outstanding shares of Class A Common Stock and Class B Common Stock. As aresult of their stock ownership, management will be able to significantlyinfluence the election of the Company's directors and the outcome of corporateactions requiring stockholder approval, such as mergers and acquisitions,regardless of how other stockholders of the Company may vote. Thisconcentration of voting control may have a significant effect in delaying,deferring or preventing a change in management or change in control of theCompany and may adversely affect the voting or other rights of other holdersof Common Stock. ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, BYLAWS, STOCK STRUCTURE ANDSTOCKHOLDER RIGHTS PLAN. The Company has two classes of Common Stock which aresubstantially identical other than with respect to voting power. The Company'sClass A Common Stock entitles the holder to 1/10th vote per share and Class BCommon Stock entitles the holder to one vote per share, with concentration ofownership of the Class B Common Stock in the Company's officers and directorsand their affiliates. In addition, the Company's Board of Directors is electedannually on a split vote basis, with the holders of Class A Common Stockcurrently being entitled to elect two of the directors and holders of theClass B Common Stock currently being entitled to elect the remaining sixdirectors. These provisions could have the effect of discouraging a proxycontest or making it more difficult for a third party acquiring a substantialblock of the Company's Common Stock to effect a change in management andcontrol of the Company. Such provisions also could limit the price thatinvestors might be willing to pay in the future for shares of the Company'sCommon Stock. The Board of Directors of the Company is authorized to issue,without stockholder approval, up to 2,000,000 shares of Preferred Stock withvoting, conversion and other rights and preferences, as well as additionalshares of Class B Common Stock, which could adversely affect the voting poweror other rights of the holders of Class A Common Stock. Although the Companyhas no current plans to issue any shares of Preferred Stock or additionalshares of Class B Common Stock, the future issuance of Preferred Stock orClass B Common Stock or of rights to purchase Preferred Stock or Class BCommon Stock could be used to discourage an unsolicited acquisition proposal.In March 1998, the Company's Board of Directors adopted a stockholder rightsplan, pursuant to which the Company declared a dividend of preferred stockpurchase rights to the Company's stockholders. Each right entitles the holderto purchase one one-thousandth of a share of junior participating Series APreferred Stock of the Company at an 12 exercise price of $60. While the rights generally are only exercisable if aperson or group acquires 15% or more of the Company's stock, the exercise ofthe rights could cause substantial dilution to a particular acquiror. Althoughthe purpose of the Stockholder Rights Plans is to provide an incentive topotential acquirors to deal directly with the Company's Board of Directors,the existence of the stockholder rights plan could be considered to delay ormake a merger, tender offer or proxy contest more difficult. YEAR 2000 COMPLIANCE. Many currently installed computer systems and softwareproducts are coded to accept only two digit entries in the date code field.These date code fields will need to accept four digit entries to distinguish21st century dates from 20th century dates. As a result, in less than threeyears, computer systems and/or software used by many companies may need to beupgraded to comply with such "Year 2000" requirements. Significant uncertaintyexists in the hardware and software industry concerning the potential effectsassociated with such compliance. Although the Company's core products aredesigned to be Year 2000 compliant, there can be no assurance that suchproducts contain all necessary date code changes. The Company is exploringchanges to its existing information systems to become Year 2000 compliant. TheCompany will be required to expend additional resources to make suchcorrections to its products and information systems, which corrections may notbe able to be made on a timely basis, if at all. The Company believes that thepurchasing patterns of customers and potential customers may be affected byYear 2000 issues in a variety of ways. Many companies are expendingsignificant resources to correct or patch their current systems for Year 2000compliance. These expenditures may result in reduced funds available topurchase products such as those offered by the Company. Many potentialcustomers may also choose to defer purchasing Year 2000 compliant productsuntil they believe it is absolutely necessary, thus resulting in potentiallystalled market sales within the industry. In addition, Year 2000 issues couldcause a significant number of companies, including current customers of theCompany, to reevaluate their current system needs, and as a result considerswitching to other systems or suppliers. Any of the foregoing could result ina material adverse effect on the Company's business financial condition andresults of operation. ITEM 2. PROPERTIES. The Company's headquarters and principal operations are located in Anaheim,California. In 1984, the Company purchased and renovated a three buildingcomplex containing approximately 250,000 square feet situated on approximately14 acres adjacent to the Interstate 5 freeway one block from Disneyland. TheseCompany-owned facilities house the Company's corporate and administrativeoffices (approximately 43,000 dedicated square feet), as well as Gyyr and theBroadcast Division, (approximately 87,000 dedicated square feet), theCommunications Division (approximately 67,000 dedicated square feet), andOdetics ITS (approximately 25,000 dedicated square feet). The Communications Division leases approximately 4,500 square feet of spacein a manufacturing facility located on 0.62 acre in El Paso, Texas. TheBroadcast Division leases approximately 5,000 square feet in Austin, Texas tomanufacture certain product families. Odetics Europe Limited's offices arelocated in leased space near London, England. Odetics Asia Pacific Pte. Ltd.offices are located in leased space in Singapore. 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 electto expand or relocate its offices and facilities in the future. ITEM 3. LEGAL PROCEEDINGS. The Company brought an action against Storage Technology Corporation("StorageTek") in the Eastern District Court of Virginia alleging thatStorageTek had infringed the Company's patent covering robotics tape cassettehandling systems (United States Patent No. 4,779,151). StorageTekcounterclaimed alleging that the Company infringed several of StorageTek'spatents. Prior to trial, the court dismissed two of the infringement claimsagainst the Company and the third claim was resolved between the parties. InJanuary 1996, the jury determined that the patent claims were not infringedunder the doctrines of equivalents based upon a claim 13 construction defined by the court prior to the trial. The jury also concludedthat the Company's patent was not invalid. In June 1997, the United StatesCourt of Appeals for the Federal Circuit vacated the lower court's claimconstruction and findings of noninfringement of the Company's patent. Theappellate court remanded the case for consideration of infringement under aproper claim construction. In August 1997, the appellate court denied apetition for rehearing requested by StorageTek. The case was returned to theFederal District Court for retrial, and in March 1998, the jury awarded theCompany damages in the amount of $70.6 million. In June 1998, the U.S.District Court for the Eastern District of Virginia granted an injunctionagainst StorageTek enjoining StorageTek from making, selling or using anyinfringing devices, including the ACS4400, PowderHorn, Wolfcreek and Genesisautomated tape library systems that include a pass through port. In June 1998,the U.S. District Court issued an order requesting the parties to brief theissues of whether StorageTek's motion for judgment as a matter of law shouldhave been granted, and whether the injunction previously order by the courtagainst StorageTek should be stayed pending appeal. The Company has compliedwith the Court's request for further briefing and will argue in support of itsposition. 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 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock and Class B Common Stock are traded onthe Nasdaq National Market under the symbols "ODETA" and "ODETB,"respectively. The following table sets forth for the fiscal periods indicatedthe high and low sale prices for the Class A Common Stock and Class B CommonStock as reported by the Nasdaq National Market: CLASS A CLASS B COMMON STOCK COMMON STOCK ---------------- ---------------- HIGH LOW HIGH LOW ------- -------- -------- ------- FISCAL YEAR ENDED MARCH 31, 1997 First Quarter............................... $21 $ 6 1/4 $20 $ 6 5/8 Second Quarter.............................. 16 1/4 6 3/4 16 1/2 8 1/4 Third Quarter............................... 17 3/4 11 1/2 17 1/2 12 Fourth Quarter.............................. 23 1/4 11 3/4 22 1/4 13 3/4FISCAL YEAR ENDED MARCH 31, 1998 First Quarter............................... $14 1/2 $ 9 3/4 $14 1/2 $10 1/2 Second Quarter.............................. 19 1/4 12 1/4 19 1/4 12 Third Quarter(1)............................ 21 3/4 4 5/8 21 4 1/2 Fourth Quarter.............................. 8 3/4 4 9/16 10 1/16 4 1/4- --------(1) The Company's stock prices for the periods following October 31, 1997 giveeffect to the Distribution. As of June 25, 1998, the Company had 733 holders of record of Class A CommonStock and 178 holders of record of Class B Common Stock according toinformation furnished by the Company's transfer agent. DIVIDEND POLICY Pursuant to the terms of the Company's Loan and Security Agreement with itsbanks, 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 never paid ordeclared cash dividends on its Common Stock, and has no current plans to paysuch dividends in the foreseeable future. The Company currently intends toretain any earnings for working capital and general corporate purposes. Thepayment 14 of any future dividends will be at the discretion of the Company's Board ofdirectors, and will depend upon a number of factors, including, but notlimited to, future earnings, the success of the Company's business,activities, its capital requirements, the general financial condition andfuture prospects of the Company, general business conditions, the consent ofthe Company's principal lender and such other factors as the Board may deemrelevant. RECENT SALES OF UNREGISTERED SECURITIES In October, 1997, the Company issued an aggregate of 173,867 shares of itsClass A Common Stock to the stockholders of ICI in connection with the mergerof a wholly-owned subsidiary of the Company into ICI, in exchange for all ofthe outstanding Common Stock of ICI. The sale and issuance of such securitieswas exempt from registration under the Act by virtue of Section 4(2) thereof.No broker, dealers or underwriters were involved in this transaction. SinceApril 1, 1996, the Company has not sold any other unregistered securities. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data with respect to theCompany's consolidated statement of operations for each of the five fiscalyears in the period ended March 31, 1998 and the consolidated balance sheetdata at March 31, 1994, 1995, 1996, 1997 and 1998 are derived from the auditedconsolidated financial statements of the Company. The consolidated financialstatements for the fiscal years ended March 31, 1994 and 1995 and theCompany's consolidated balance sheet at March 31, 1996 are not included inthis Report. The following information should be read in conjunction with"Management's Discussion and Analysis of Financial Condition and Results ofOperations" and with the Consolidated Financial Statements of the Company andthe related notes thereto included elsewhere in this Report. FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA:Net sales........................ $45,557 $51,824 $65,056 $71,748 $ 79,552Contract revenues................ 18,099 13,280 10,161 9,032 10,284 ------- ------- ------- ------- --------Total net sales and contract revenues........................ 63,656 65,104 75,217 80,780 89,836Cost of sales.................... 28,564 34,225 44,535 48,507 55,227Cost of contract revenues........ 11,114 6,633 4,374 4,907 6,430Selling, general and administrative expenses......... 13,305 16,199 15,620 19,831 26,010Research and development expenses........................ 4,983 6,061 5,242 7,734 9,271In process research and development..................... -- -- -- -- 2,106Nonrecurring charge.............. -- 767 -- -- 1,716Interest expense, net............ 1,230 682 386 183 617 ------- ------- ------- ------- --------Income (loss) from continuing operations before income taxes.. 4,460 537 5,060 (382) (11,541)Income taxes (benefit)........... 1,501 177 1,418 (181) (2,858) ------- ------- ------- ------- --------Income (loss) from continuing operations...................... 2,959 360 3,642 (201) (8,683)Income (loss) from discontinued operations, net of income taxes. (1,137) (5,038) (1,189) 3,931 2,089 ------- ------- ------- ------- --------Net income (loss)................ $ 1,822 $(4,678) $ 2,453 $ 3,730 $ (6,594) ======= ======= ======= ======= ========Diluted earnings (loss) per share(1):Continuing operations............ $ 0.55 $ 0.06 $ 0.59 $ (0.03) $ (1.26)Discontinued operations.......... (0.21) (0.86) (0.19) 0.62 0.31 ------- ------- ------- ------- --------Earnings (loss) per share........ $ 0.34 $ (0.80) $ 0.40 $ 0.59 j$ (0.95) ======= ======= ======= ======= ========Shares used in calculating diluted earnings (loss) per share........................... 5,326 5,872 6,179 6,299 6,912- -------(1) The earnings (loss) per share amounts prior to fiscal 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128 Earnings per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements. === === === === === 15 FISCAL YEAR ENDED MARCH 31, --------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA:Working Capital......... $20,052 $24,892 $20,610 $21,903 $19,996Total assets............ 63,070 70,098 73,013 85,805 88,790Long-term debt (less current portion)....... 16,723 25,757 22,019 11,860 21,000Retained earnings....... 10,706 6,027 8,481 12,211 (3,795)Total stockholders' equity................. 31,239 27,736 30,985 51,828 38,580 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The Company is organized into separate divisions or subsidiaries, eachhaving primary responsibility for product development, manufacturing andmarketing of one or more of the Company's principal product lines or services.The Company has four distinct manufacturing operations each tailored to therequirements of its principal product divisions. The following table sets forth certain income statement data as a percentageof total net sales and contract revenues for the periods indicated and shouldbe read in conjunction with Management's Discussion and Analysis of FinancialCondition and Results of Operations: AS OF MARCH 31, ------------------- 1996 1997 1998 ----- ----- ----- Net sales.............................................. 86.5% 88.8% 88.6% Contract revenues...................................... 13.5 11.2 11.4 ----- ----- ----- Total net sales and contract revenues.................. 100.0 100.0 100.0 Cost of sales.......................................... 59.2 60.0 61.4 Cost of contract revenues.............................. 5.8 6.1 7.2 Selling, general and administrative expenses........... 20.8 24.5 29.0 Research and development expenses...................... 7.0 9.6 10.3 In process research and development.................... 0.0 0.0 2.3 Nonrecurring charge.................................... 0.0 0.0 1.9 Interest expense, net.................................. 0.5 0.2 0.7 ----- ----- ----- Income (loss) from continuing operations before income taxes................................................. 6.7 (0.4) (12.8) Income taxes (benefit)................................. 1.9 (0.2) (3.2) ----- ----- ----- Income (loss) from continuing operations............... 4.8 (0.2) (9.6) Income (loss) from discontinued operations, net of in- come taxes............................................ (1.5) 4.8 2.3 ----- ----- ----- Net income (loss)...................................... 3.3% 4.6% (7.3)% ===== ===== ===== General. On October 31, 1997, the Company completed the spin-off of its82.9% interest in ATL by distributing the Company's 8,005,000 shares of ClassA Common Stock to the Company's stockholders of record on October 31, 1997. Inconnection with the spin-off, the Company's financial statements have beenrestated to reflect continuing and discontinued operations. Discontinuedoperations reflect the Company's interest in the operations of ATL for allperiods presented. Net Sales and Contract Revenues. Net sales and contract revenues consist of:(i) sales of products and services to commercial customers ("net sales") and(ii) revenues derived from contracts with state, county, and municipalagencies for intelligent transportation systems projects and from contractswith agencies of the United States Government and foreign entities for spacerecorders used for geographical information systems ("contract 16 revenues"). Total net sales and contract revenues increased 11.2% to $89.8million for the fiscal year ended March 31, 1998 ("fiscal 1998") compared to$80.8 million for the fiscal year ended March 31, 1997 ("fiscal 1997"), andincreased 7.4% in fiscal 1997 from $75.2 million for the year fiscal yearended March 31, 1996 ("fiscal 1996"). Net sales increased 10.9% to $79.6 million in fiscal 1998 compared to $71.7million in fiscal 1997 primarily as a result of an 18% increase in sales byGyyr and a 79% increase in sales of the Company's timing and synchronizationproducts sold by the Company's Communications Division to a major Koreantelecommunications customer. While sales in fiscal 1998 to this customerincreased as compared to fiscal 1997, the Company experienced a significantdecline in fourth quarter sales to this customer largely due to the economiccrisis in Asia. During fiscal 1998, Gyyr increased sales of electronicsecurity equipment and service revenue. The Company completed the acquisitionof ICI which also contributed to the increased sales. The salesincreases in Gyyr and in the Communications Division were offset by declinesin sales in the Company's Broadcast Division which resulted from delays indelivery of "Roswell." The Company's net sales increased 10.3% to $71.7 million in fiscal 1997compared to $65.0 million in fiscal 1996 primarily as a result of increasedsales of timing and synchronization products and increased sales of networkinterface devices manufactured by the Communications Division, in addition toan increase in sales of Gyyr. Increased sales in Gyyr and the CommunicationsDivision were offset by a decrease in sales of the Broadcast Division. Contract revenues increased 13.9% to $10.3 million in fiscal 1998 comparedto $9.0 million in fiscal 1997. Contract revenues decreased 11.0% to $9.0million in fiscal 1997 compared to $10.2 million in fiscal 1996. In the firstquarter of fiscal 1998, the Company acquired certain assets of theTransportation Systems business of Rockwell International, which wereconsolidated into the Company's ITS business. The increase in contractrevenues in fiscal 1998 reflects the revenue contribution from ITS. Theincrease in contract revenues in ITS in fiscal 1998 was partially offset bydeclines in contract revenues from the sale of space recorders and relatedservice and equipment to agencies of the United States Government. The Companyintends to focus strategically on commercial markets and the markets for ITSproducts and services. Gross Profit. Total gross profit as a percent of net sales and contractrevenues decreased to 31.4% in fiscal 1998, compared to 33.9% in fiscal 1997,and 35.0% in fiscal 1996. The decrease in fiscal 1998 compared to fiscal 1997reflects decreased gross profit performance in Broadcast on an unfavorablesales mix and higher unabsorbed manufacturing overhead, which was partiallyoffset by improved gross profit performance in Gyyr and the CommunicationsDivision due to changes in product mix toward products with higher margins,improved efficiencies associated with increased sales volume, and improvedmargin contribution from the acquisition of ICI in October 1997. The decreasein fiscal 1998 also reflects a lower gross profit contribution on contractrevenues from the Company's ITS business compared to other contract revenuesduring fiscal 1997. The decrease in total gross profit in fiscal 1997 compared to fiscal 1996reflects decreased gross profits on contract revenues, which was partiallyoffset by increased gross profit performance in Gyyr as a result of improvedsales mix favoring higher margin products and improved absorption ofmanufacturing overhead costs. The Company's gross profits on contract revenuesin each accounting period reflect the mix of contracts currently underdevelopment, and can be expected to vary from period to period. Selling, General and Administrative Expense. Selling, general andadministrative expense increased 31.2% to $26.0 million (or 29.0% of total netsales and contract revenues) in fiscal 1998 compared to $19.8 million (or24.5% of total net sales and contract revenues) in fiscal 1997, and increased27.0% in fiscal 1997 compared to $15.6 million (or 20.8% of total net salesand contract revenues) in fiscal 1996. The Company has experienced increasedcosts across all of its operating divisions and subsidiaries for sales,marketing, and administrative activities as a function of its planned growth.The expenses include labor costs, sales commissions on increased sales volume,advertising and promotion to support new product roll-out, and costs relatedto international expansion, particularly in Europe and Asia. In addition,selling, general and administrative expense increased in absolute dollars infiscal 1998 related to the Company's acquisitions of ICI and certain assets ofthe Transportation Systems business of Rockwell International discussed above. 17 Research and Development Expense. Research and development expense increased19.9% to $9.3 million (or 10.3% of total net sales and contract revenues) infiscal 1998 compared to $7.7 million (or 9.6% of total net sales and contractrevenues) in fiscal 1997, and increased 47.5% in fiscal 1997 compared to $5.2million (or 7.0% of total net sales and contract revenues) in fiscal 1996. Forcompetitive reasons, the Company closely guards the confidentiality ofspecific development projects. Increased spending for research and developmentboth in terms of absolute dollars and as a percent of revenues reflectsprimarily expenses for engineering labor and related benefits, prototypematerial costs and consulting fees. The Company experienced increased expensesfor research and development expense in each of Gyyr, the Broadcast Divisionand the Communications Division. The acquisitions of ICI and certain assets ofthe Transportation Systems business did not materially impact the increases incurrent year research and development expenses. Nonrecurring Charge. In March 1998, the Company recorded a nonrecurringcharge of $1.7 million. The charge reflects severance costs related toretirement of certain of the Company's founders and officers, and to a lesserextent, costs incurred to terminate a joint venture relationship in China. Interest Expense, Net. Interest Expense, net reflects the net of interestexpense and interest income as follows: FISCAL 1996 FISCAL 1997 FISCAL 1998 ----------- ----------- ----------- Interest Expense......................... $2,247 $1,890 $1,609 Interest Income.......................... 1,861 1,707 992 ------ ------ ------ Interest Expense, net.................... $ 386 $ 183 $ 617 ====== ====== ====== Interest expense decreased 14.9% in fiscal 1998 compared to fiscal 1997, anddecreased 15.9% in fiscal 1997 compared to fiscal 1996. This decreaserepresents reduced average outstanding borrowings on the Company's line ofcredit. Interest income was derived primarily from a note receivable due fromATL, the Company's former subsidiary. The reduction in interest income in eachof the last three fiscal years reflects principal reduction on this note,which pursuant to its terms is payable in sixteen quarterly installments byATL. In-Process Research and Development. In the fourth quarter of fiscal 1998,the Company completed the purchase price allocation related to its acquisitionof ICI and determined that $2.1 million of the purchase price was attributableto the value of research and development activities in process at the date ofacquisition. In accordance with the provisions of FASB Statement No. 2,"Accounting for Research and Development Cost," the Company recorded a chargein fiscal 1998 for such in-process research and development. Income Taxes. The Company's effective tax rate from continuing operationswas 28.0%, (47.4%) and (24.8)% in fiscal 1996, 1997 and 1998, respectively.The tax benefit recorded in 1998 was less than the statutory rate because nobenefit was recorded in connection with $2.1 million write-off of purchasedresearch and development expenses associated with the acquisition of ICI, areduction in the benefit of general business credits on total expense, andforeign losses recorded in Singapore for which no tax benefit was recognized.The recognition of general business credits in 1996 reduced the Company'seffective tax rates below the statutory rates, while such credits increasedthe tax benefit recorded in 1997. In 1997, the Company entered into a Tax Allocation Agreement with ATLeffective April 1, 1996 pursuant to which ATL made payments to the Company, orthe Company made payments to ATL, as appropriate, in an amount equal to thetaxes attributable to the operations of the Company on its consolidatedfederal, and consolidated or combined state income tax returns. In addition,the Tax Allocation Agreement provided that members of the Company'sconsolidated group generating tax losses after April 1, 1996 will be paid byother members of the group that utilize such tax losses to reduce such othermembers' tax liability. Accordingly, the tax provisions for ATL was recordedas a component of the income (loss) from discontinued operations at a 40%effective tax rate for each fiscal year. The Tax Allocation Agreement waseffectively canceled upon completion of the spin-out of ATL on October 31,1997. 18 Income (Loss) from Continuing Operations. In connection with the spin-off ofits 82.9% ownership interest in ATL on October 31, 1997, the Company restatedits financial statements to present the results of operations of ATL asdiscontinued operations for all periods presented. Income (loss) fromcontinuing operations reflects the continuing operations of the Companyincluding Gyyr, the Broadcast Division and the Communications Division. LIQUIDITY AND CAPITAL RESOURCES On October 31, 1997, the Company completed the spin-off of its holdings inATL. The effect of the spin-off was to reduce total assets of the Company byapproximately $11.6 million, representing the net assets of the discontinuedoperations reported in the Company's Form 10-Q for the second quarter offiscal 1998. The Company's net loss of $6.6 million incurred during fiscal 1998contributed to negative cash flow from operating activities of $7.9 million.The losses were funded primarily by increased borrowings on the Company's lineof credit facility with its principal banks and cash received from ATLdiscussed below. The Company has a $17.0 million bank line of credit withImperial Bank and Comerica Bank-California which provides for borrowingsgenerally at the lesser of the bank's prime rate (8.5% at March 31, 1998) orthe bank's LIBOR rate plus 2.25%. Borrowings are available for general workingcapital purposes, and at March 31, 1998, approximately $3.9 million wasavailable for borrowing under the line. The Company's borrowing's under theline are secured by substantially all of the Company's assets. At March 31,1998, the Company was in violation of certain financial ratio covenants. Thebank has waived compliance with those covenants at March 31, 1998 and thecovenants are expected to be modified to allow the Company to be in compliancewith the requirements of the line of credit facility in future periods. In April 1997, ATL issued a promissory note payable to Odetics in theoriginal principal amount of $13.0 million, representing the aggregate balanceof ATL's interest bearing advances from the Company outstanding followingATL's initial public offering. The note bears interest at a rate equal to theCompany's cost of borrowing (8.5% at March 31, 1998). Principal and intereston this note are payable to the Company in sixteen quarterly installments atthe end of each calendar quarter. During fiscal 1998, the Company received$3.0 million in cash from ATL as payments of principal and interest on thisnote. The Company anticipates that the combination of net cash flow from operatingactivities, proceeds from its promissory note due from ATL, together withfuture borrowings under its line of credit with its principal banks, willenable it to execute its operating plans and meet its obligations on a timelybasis for at least the next twelve months. YEAR 2000 COMPLIANCE Significant uncertainty exists in the hardware and software industryconcerning the potential effects associated with compliance with Year 2000requirements. Although the Company's core products are designed to be Year2000 compliant, there can be no assurance that such products contain allnecessary date code changes. The Company is exploring changes to its existinginformation systems to become Year 2000 compliant. The Company will berequired to expend additional resources to make such corrections to itsproducts and information systems, which corrections may not be able to be madeon a timely basis, if at all. The Company believes that the purchasingpatterns of customers and potential customers may be affected by Year 2000issues in a variety of ways. Many companies are expending significantresources to correct or patch their current systems for Year 2000 compliance.These expenditures may result in reduced funds available to purchase productssuch as those offered by the Company. Many potential customers may also chooseto defer purchasing Year 2000 compliant products until they believe it isabsolutely necessary, thus resulting in potentially stalled market saleswithin the industry. In addition, Year 2000 issues could cause a significantnumber of companies, including current customers of the Company, to reevaluatetheir current system needs, and as a result consider switching to othersystems or suppliers. Any of the foregoing could result in a material adverseeffect on the Company's business financial condition and results of operation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by Regulation S-Xare included in this Form 10-K commencing on page F-1. 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) IDENTIFICATION OF DIRECTORS. The information under the caption "Electionof Directors," appearing in the Proxy Statement, is incorporated herein byreference. (b) IDENTIFICATION OF EXECUTIVE OFFICERS. The information under the headings"Executive Compensation and Other Information," appearing in the ProxyStatement, is incorporated herein by reference. (C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information underthe caption "Section 16(a) Beneficial Ownership Reporting Compliance,"appearing in the Proxy Statement, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under the headings "Executive Compensation and OtherInformation," appearing in the Proxy Statement, is incorporated herein byreference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the headings "Principal Stockholders and Common StockOwnership of Certain Beneficial Owners and Management," appearing in the ProxyStatement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the heading "Certain Transactions," appearing in theProxy Statement, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. FINANCIAL STATEMENTS. The following financial statements of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the pages referenced below: PAGE ---- Index to Consolidated Financial Statements............................. F-1 Report of Ernst & Young LLP, Independent Auditors...................... F-2 Consolidated Balance Sheets as of March 31, 1997 and 1998.............. F-3 Consolidated Statements of Operations for the years ended March 31, 1996, 1997 and 1998................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1997 and 1998 ........................................ F-5 Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1997 and 1998................................................... F-6 Notes to Consolidated Financial Statements............................. F-7 2. FINANCIAL STATEMENT SCHEDULES. The following financial statement scheduleof the Company is included in a separate section of this Annual Report on Form10-K commencing on the pages referenced below. All other schedules have beenomitted because they are not applicable, not required, or the information isincluded in the consolidated financial statements of notes thereto. PAGE ---- Schedule II--Consolidated Valuation and Qualifying Accounts............. S-1 20 3. EXHIBITS. 3.1 Certificate of Incorporation of the Company filed as Exhibit 19.2 to the Company's Form 10-Q for the quarter ended September 30, 1987 and incorporated herein by reference. 3.2 Bylaws of the Company, as amended, filed as Exhibit 4.2 to the Company's Form S-1 filed July 6, 1993 and incorporated herein by reference. 4.1 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 the Company's 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 (Reg. 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 Nonstatutory 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 Company's Form 10-K for the year ended March 31, 1988 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 the Company's 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 the Company's 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 the Company's 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 Company's Form 10-Q for the quarter ended September 30, 1988 and incorporated herein 10-Q for the quarter ended September 30, 1988 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 the Company's 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 Company's 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 the Company's 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 the Company's Form S-1 filed July 6, 1993 and incorporated herein by reference. 21 10.13 Separation and Distribution Agreement between the Company and ATL dated March 1, 1997, filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 as filed with the Commission on June 30, 1997 (the "1997 Form 10-K"). 10.14 Tax Allocation Agreement between the Company and ATL dated March 1, 1997, filed as Exhibit 10.14 to the Company's 1997 Form 10-K. 10.15 Services Agreement between the Company and ATL dated March 21, 1997, filed as Exhibit 10.15 to the Company's 1997 Form 10-K. 10.16 Promissory Note between the Company and ATL dated April 1, 1997, filed as Exhibit 10.16 to the Company's 1997 Form 10-K. 10.17 Amendment Number Six to Loan and Security Agreement dated March 31, 1997 between the Company, Gyyr, Imperial Bank and Comerica Bank-California, filed as Exhibit 10.17 to the Company's 1997 Form 10-K. 10.18 1997 Stock Incentive Plan filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-44907) as filed with the Commission on January 26, 1998 (the "1998 Form S-8"). 10.19 Form of Notice of Grant of Stock Option filed as Exhibit 99.2 to the Company's 1998 Form S-8. 10.20 Form of Stock Option Agreement filed as Exhibit 99.3 to the Company's 1998 Form S-8. 10.21 Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) filed as Exhibit 99.4 to the Company's 1998 Form S-8. 10.22 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Rights) filed as Exhibit 99.5 to the Company's 1998 Form S-8. 10.23 Form of Stock Issuance Agreement filed as Exhibit 99.6 to the Company's 1998 Form S-8. 10.24 Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) filed as Exhibit 99.7 to the Company's 1998 Form S-8. 10.25 Form of Notice of Grant of Automatic Stock Option (Initial Grant) filed as Exhibit 99.8 to the Company's 1998 Form S-8 10.26 Form of Notice of Grant of Automatic Stock Option (Annual Grant) filed as Exhibit 99.9 to the Company's 1998 Form S-8 10.27 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the Company's 1998 Form S-8 21 Subsidiaries of the Company. 23.1 Consent of Independent Auditors. 27 Financial Data Schedule. b. Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated October 31, 1997 was filed with the Securities and Exchange Commission reporting the Distribution of the Company's interest in ATL to the Company's stockholders, and the restatement of the Company's financial statements to reflect the operations of ATL as discontinued. 22 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 signedon its behalf by the undersigned, thereunto duly authorized, in the City ofAnaheim, State of California, on June 29, 1998. ODETICS, INC. /s/ Joel Slutzky By: _________________________________ Joel Slutzky Chief Executive Officer, President and Chairman of the Board POWER OF ATTORNEY We, the undersigned officers and directors of Odetics, Inc., do herebyconstitute and appoint Joel Slutzky and Gregory A. Miner, and each of them,our true and lawful attorneys-in-fact and agents, each with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this Report, and tofile the same, with exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite or necessary to be done inand about the premises, as fully to all intents and purposes as he might orcould do in person, hereby, ratifying and confirming all that each of saidattorneys-in-fact and agents, or his substitute or substitutes, may lawfullydo or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, thisReport has been signed below by the following persons in the capacities and onthe dates indicated: SIGNATURE TITLE DATE --------- ----- ---- /s/ Joel Slutzky Chief Executive Officer, June 29, 1998____________________________________ President and Chairman of Joel Slutzky the Board (principal executive officer) /s/ Crandall Gudmundson Director June 29, 1998____________________________________ Crandall Gudmundson /s/ Jerry Muench Director June 29, 1998____________________________________ Jerry Muench /s/ Kevin C. Daly Director June 29, 1998____________________________________ Kevin C. Daly /s/ Gary Smith Vice President and June 29, 1998____________________________________ Controller (principal Gary Smith accounting officer) /s/ Ralph R. Mickelson Director June 29, 1998____________________________________ Ralph R. Michelson 23 SIGNATURE TITLE DATE --------- ----- ---- /s/ Leo Wexler Director June 29, 1998____________________________________ Leo Wexler /s/ John Seazholtz Director June 29, 1998____________________________________ John Seazholtz /s/ Paul E. Wright Director June 29, 1998____________________________________ Paul E. Wright /s/ Gregory A. Miner Vice President, Director, June 29, 1998____________________________________ Chief Operating Officer and Gregory A. Miner Chief Financial (principal financial officer) 24 ODETICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors............................................ F-2Consolidated Balance Sheets as of March 31, 1997 and 1998................. F-3Consolidated Statements of Operations for the years ended March 31, 1996, 1997 and 1998............................................................ F-4Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1997 and 1998.................................................. F-5Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1997 and 1998............................................................ F-6Notes to Consolidated Financial Statements................................ F-7 F-1 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of DirectorsOdetics, Inc. We have audited the accompanying consolidated balance sheets of Odetics,Inc. as of March 31, 1997 and 1998, and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of the three yearsin the period ended March 31, 1998. Our audits also included the financialstatement schedule listed in Item 14(a). These financial statements andschedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Odetics, Inc. at March 31, 1997 and 1998, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended March 31, 1998, in conformity with generally accepted accountingprinciples. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as awhole, presents fairly in all material respects the information set forththerein. /s/ Ernst & Young LLP Orange County, CaliforniaMay 4, 1998 F-2 ODETICS, INC. CONSOLIDATED BALANCE SHEETS MARCH 31 , ------------------ 1997 1998 -------- -------- (IN THOUSANDS) ASSETSCurrent assets: Cash and cash equivalents................................ $ 1,865 $ 1,131 Trade accounts receivable, net of allowance for doubtful accounts of $350,000 in 1997 and $432,000 in 1998....... 17,127 15,048 Current portion of ATL note receivable (Note 4).......... 3,249 3,249 Receivable from ATL (Note 4)............................. 2,148 1,553 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 5).......................... 1,922 2,583 Inventories: Finished goods......................................... 498 569 Work in process........................................ 2,968 2,176 Materials and supplies................................. 12,184 18,065 Prepaid expenses and other............................... 978 1,592 Income taxes receivable.................................. -- 1,039 Deferred income taxes.................................... 547 1,558 -------- --------Total current assets....................................... 43,486 48,563Property, plant and equipment: Land..................................................... 2,090 2,090 Buildings and improvements............................... 17,642 18,481 Equipment................................................ 24,234 28,006 Furniture and fixtures................................... 968 1,312 Allowances for depreciation.............................. (23,824) (26,550) -------- -------- 21,110 23,339Net assets of discontinued operations...................... 8,723 --Long term ATL note receivable less current portion (Note 4)........................................................ 9,748 6,770Goodwill, net of accumulated amortization of $306,000 in 1997 and $571,000 in 1998................................. 169 5,850Other assets............................................... 2,569 4,268 -------- -------- Total assets.......................................... $ 85,805 $ 88,790 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Trade accounts payable................................... $ 8,802 $ 13,672 Accrued payroll and related.............................. 5,306 5,093 Accrued expenses......................................... 1,788 2,083 Income taxes payable..................................... 1,276 -- Contract loss accrual.................................... -- 4,541 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 5).......................... 2,690 1,580 Current portion of long-term debt (Note 6)............... 1,721 1,598 -------- --------Total current liabilities.................................. 21,583 28,567Revolving line of credit................................... 2,100 12,800Long-term debt, less current portion (Note 6).............. 9,760 8,200Deferred income taxes (Note 8)............................. 534 643Commitments and contingencies (Notes 6 and 11)Stockholders' equity (Notes 9 and 10): 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--5,315,653 of Class A and 1,064,241 of Class B at March 31, 1997; 6,202,778 of Class A and 1,062,041 of Class B at March 31, 1998. 638 726 Paid-in capital.......................................... $ 38,927 $ 45,240 Treasury stock, 0 and 50,000 shares in 1997 and 1998, respectively............................................ -- (239) Notes receivable from employees (Note 10)................ -- (3,377) Foreign currency translation............................. 52 25 Retained earnings........................................ 12,211 (3,795) -------- -------- Total stockholders' equity............................ 51,828 38,580 -------- -------- Total liabilities and stockholders' equity............ $ 85,805 $ 88,790 ======== ======== See accompanying notes. F-3 ODETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED MARCH 31, -------------------------- 1996 1997 1998 ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales and contract revenues: Net sales........................................ $65,056 $71,748 $ 79,552 Contract revenues................................ 10,161 9,032 10,284 ------- ------- -------- 75,217 80,780 89,836Costs and expenses: Cost of sales.................................... 44,535 48,507 55,227 Cost of contract revenues........................ 4,374 4,907 6,430 Selling, general and administrative expenses..... 15,620 19,831 26,010 Research and development expenses................ 5,242 7,734 9,271 In process research and development.............. -- -- 2,106 Nonrecurring charge (Note 7)..................... -- -- 1,716 Interest expense, net............................ 386 183 617 ------- ------- -------- 70,157 81,162 101,377 ------- ------- --------Income (loss) from continuing operations before income taxes...................................... 5,060 (382) (11,541)Income taxes (benefit) (Note 8).................... 1,418 (181) (2,858) ------- ------- --------Income (loss) from continuing operations........... 3,642 (201) (8,683)Income (loss) from discontinued operations, net of income taxes...................................... (1,189) 3,931 2,089 ------- ------- --------Net income (loss).................................. $ 2,453 $ 3,730 $ (6,594) ======= ======= ========Basic earnings (loss) per share: Continuing operations............................ $ .60 $ (.03) $ (1.26) Discontinued operations.......................... (.20) .62 .31 ------- ------- -------- Earnings (loss) per share........................ $ .40 $ .59 $ (.95) ======= ======= ========Diluted earnings (loss) per share: Continuing operations............................ $ .59 $ (.03) $ (1.26) Discontinued operations.......................... (.19) .62 .31 ------- ------- -------- Earnings (loss) per share........................ $ .40 $ .59 $ (.95) ======= ======= ======== See accompanying notes. F-4 ODETICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY COMMON STOCK --------------------- SHARES SHARES OUTSTANDING ------------- CLASS CLASS NOTE A B RECEIVABLE FOREIGN COMMON COMMON PAID-IN TREASURY FROM CURRENCY RETAINED STOCK STOCK AMOUNT CAPITAL STOCK EMPLOYEES TRANSLATION EARNINGS TOTAL ------ ------ ------ ------- -------- ---------- ----------- -------- -------- (IN THOUSANDS) Balance at March 31, 1995................... 4,787 1,161 $595 $21,067 $ -- $ -- $ 46 $ 6,028 $ 27,736 Issuances of common stock (Notes 9 and 10).................. 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 Issuances of common stock (Notes 9 and 10).................. 284 -- 28 2,568 -- -- -- -- 2,596 Conversion of Class B common stock......... 97 (97) -- -- -- -- -- -- -- Issuance of ATL Products, Inc. common stock (Note 2) -- -- -- 14,455 -- -- -- -- 14,455 Foreign currency translation adjustments.......... -- -- -- -- -- -- 62 -- 62 Net income............ -- -- -- -- -- -- -- 3,730 3,730 ----- ----- ---- ------- ----- ------- ---- ------- --------Balance at March 31, 1997................... 5,316 1,064 638 38,927 -- -- 52 12,211 51,828 Issuances of common stock (Notes 9 and 10).................. 885 -- 88 7,968 -- (3,377) -- -- 4,679 Conversion of Class B common stock......... 2 (2) -- -- -- -- -- -- -- Spin-off of ATL Products, Inc. common stock (Note 2)....... -- -- -- (1,655) -- -- -- (9,412) (11,067) Purchase of treasury stock................ -- -- -- -- (239) -- -- -- (239) Foreign currency translation adjustments.......... -- -- -- -- -- -- (27) -- (27) Net loss.............. -- -- -- -- -- -- (6,594) (6,594) ----- ----- ---- ------- ----- ------- ---- ------- --------Balance at March 31, 1998................... 6,203 1,062 $726 $45,240 $(239) $(3,377) $ 25 $(3,795) $ 38,580 ===== ===== ==== ======= ===== ======= ==== ======= ======== See accompanying notes. F-5 ODETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED MARCH 31, ---------------------------- 1996 1997 1998 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIESNet income (loss) .............................. $ 2,453 $ 3,730 $ (6,594)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: (Income) loss from discontinued operations.... 1,189 (3,931) (2,089) Depreciation and amortization................. 2,244 3,119 2,912 Write-off of in process research and development.................................. -- -- 2,106 Contribution to ASOP.......................... 430 517 511 Provision for losses on accounts receivable... 170 277 155 Provision (benefit) for deferred income taxes. 76 266 (902) Gain on sale of assets........................ 314 377 16 Net proceeds from settlement of litigation (Note 11).................................... -- 5,860 -- Foreign currency translation gain............. (56) 62 (27) Changes in net assets of discontinued operations................................... 86 1,291 -- Changes in operating assets and liabilities (Note 13).................................... 2,875 (7,464) (3,989) -------- -------- --------Net cash provided by (used in) operating activities..................................... 9,781 4,104 (7,901)INVESTING ACTIVITIESPurchases of property, plant and equipment...... (3,038) (3,307) (3,834)Proceeds from sale of equipment................. 74 12 5Purchase of net assets of acquired business..... -- -- (2,171)Net cash (paid to) received from ATL............ (3,232) 8,066 2,978 -------- -------- --------Net cash provided by (used in) investing activi- ties........................................... (6,196) 4,771 (3,022)FINANCING ACTIVITIESProceeds from line of credit and long-term borrowings..................................... 36,152 54,840 49,176Principal payments on line of credit, long-term debt, and capital lease obligations............ (39,395) (65,069) (40,159)Proceeds from issuance of common stock.......... 422 2,078 1,172 -------- -------- --------Net cash provided by (used in) financing activities..................................... (2,821) (8,151) 10,189 -------- -------- --------Increase in cash................................ 764 724 (734)Cash and cash equivalents at beginning of year.. 377 1,141 1,865 -------- -------- --------Cash and cash equivalents at end of year........ $ 1,141 $ 1,865 $ 1,131 ======== ======== ======== See accompanying notes. F-6 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Odetics, Inc. (the Company) includethe accounts of the Company and its subsidiaries Odetics Europe, Ltd., OdeticsAsia and Pacific Pte Ltd. During fiscal 1990, the Company incorporated OdeticsEurope, Ltd. to develop European commercial sales. During fiscal 1995, theCompany incorporated Odetics Asia Pacific Pte Ltd. to develop commercial salesfor the Asian Market. All significant intercompany accounts and transactionsare eliminated in consolidation. On October 31, 1997, the Company completed the spin-off of its 82.9%interest in ATL Products, Inc. (ATL) by distributing the Company's 8,005,000shares of Class A Common Stock to the Company's stockholders of record onOctober 31, 1997. As a result of the spin-off, the Company's financialstatements have been restated to reflect the operations of ATL as discontinuedoperations. USE OF ESTIMATES The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.Significant estimates made in preparing the consolidated financial statementsinclude the allowances for doubtful accounts and deferred tax assets,inventory reserves and costs to complete long-term contracts. REVENUE RECOGNITION Contract revenues and earnings on long-term cost-reimbursement and fixed-price contracts of the Company's Communication and Intelligent TransportationDivisions are recognized on the percentage-of-completion method of accountingas costs are incurred (cost-to-cost basis). Contract revenues include costsincurred plus a portion of estimated fees or profits based on the relationshipof costs incurred to total estimated costs. Any anticipated losses oncontracts are charged to earnings when identified. Certain contracts containincentive and/or penalty provisions that provide for increased or decreasedrevenues based upon performance in relation to established targets. Incentivefees are recorded when earned and penalty provisions are recorded whenincurred, as long as the amounts can reasonably be determined. For all other divisions, sales and related cost of sales are recognized onthe date of shipment or, if required, upon acceptance by the customer. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and short-term investments withmaturities of less than ninety days. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of cash and cash equivalents, and the current portion of long-term debt approximate the carrying value because of the short period of timeto maturity. The fair value of long-term debt and the note receivable from ATLapproximates carrying value because the related rates of interest approximatecurrent market rates and have variable rates of interest. F-7 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INVENTORY VALUATION Inventories are stated at the lower of cost or market. Cost is determined onthe first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Buildings aredepreciated using the straight-line method over their estimated useful livesup to a period of forty years. Equipment, furniture and fixtures, includingassets recorded under capital lease obligations, are depreciated principallyby the declining balance method over their estimated useful lives ranging fromfour to eight years. The Company reviews, long-lived assets and certain intangibles held and usedby the Company for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Therecoverability test is performed at the lowest level at which undiscounted netcash flows can be directly attributable to long-lived assets. GOODWILL Goodwill is being amortized using the straight-line method over theestimated useful life of 15 years. RESEARCH AND DEVELOPMENT EXPENDITURES Software 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 1996, 1997 and 1998, software development costs were amortizedto cost of sales totaling $212,000, $473,000, and $585,000, respectively. Thenet unamortized balances of $1,843,000 and $3,785,000 are classified in otherassets at March 31, 1997 and 1998, respectively. All other research and development expenditures are charged to research anddevelopment expense in the period incurred. FOREIGN CURRENCY TRANSLATION The balance sheet accounts of Odetics Europe, Ltd. are translated at thecurrent year-end exchange rate and income statement items are translated atthe average exchange rate for the year. Resulting translation adjustments aremade directly to a separate component of stockholders' equity. Gains andlosses resulting from transactions of the Company and its subsidiaries whichare made in currencies different from their own are immaterial and areincluded in income as they occur. INCOME TAXES Deferred income tax assets and liabilities are computed for differencesbetween financial statement and tax basis of assets and liabilities based onenacted tax laws and rates applicable to the period in which differences areexpected to affect taxable income. Valuation allowances are established whennecessary to reduce deferred tax assets to amounts which are more likely thannot to be realized. The provision for income taxes is the taxes payable orrefundable for the period plus or minus the change during the period indeferred income tax assets and liabilities. F-8 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) EARNINGS (LOSS) PER SHARE During fiscal 1998 the Company adopted the provisions of FASB Statement No.128, Earnings Per Share (Statement No. 128) and the accounting rules set forthin staff Accounting Bulletin 98 issued by the Securities and ExchangeCommission on February 3, 1998. Under Statement No. 128, diluted earnings pershare reflects the dilutive effects of options, warrants and convertiblesecurities while basic earnings per share is calculated solely on the basis ofthe Company's net loss divided by weighted average number of common sharesoutstanding. Earnings per share for all periods presented have been restatedto conform with the provisions of Statement No. 128. The following table sets forth the computation of net income (loss) pershare: YEARS ENDED MARCH 31, ------------------------------- 1996 1997 1998 --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Numerator: Income (loss) from continuing operation. $ 3,642 $ (201) $ (8,683) Income (loss) from discontinued operations............................. (1,189) 3,931 2,089 --------- --------- --------- Net income (loss)....................... $ 2,453 $ 3,730 $ (6,594) ========= ========= ========= Denominator for basic earnings (loss) per common share............................. 6,020,000 6,299,000 6,912,000 Effect of dilutive securities: Stock options........................... 159,000 -- -- --------- --------- --------- Denominator for diluted earnings (loss) per common share......................... 6,179,000 6,299,000 6,912,000 ========= ========= ========= STOCK COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees (APB 25) and relatedInterpretations in accounting for its employee stock options because, asdiscussed below, the alternative fair value accounting provided for under FASBStatement No. 123, Accounting for Stock-Based Compensation, requires use ofoption valuation models that were not developed for use in valuing employeestock options. Under APB 25, because the exercise price of the Company'semployee stock options equals the market price of the underlying stock on thedate of grant, no compensation expense is recognized. To calculate the pro forma information required by Statement 123, theCompany uses the Black-Scholes option pricing model. The Black-Scholes modelwas developed for use in estimating the fair value of traded options whichhave no vesting restrictions and are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because the Company's employee stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management's option, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options. ADVERTISING EXPENSES The Company expenses advertising costs as incurred. Advertising expensetotaled $578,000, $1,020,000 and $2,226,000 in the years ended March 31, 1996,1997 and 1998, respectively. F-9 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement No. 130, Reporting ComprehensiveIncome, which establishes standards for the reporting and display ofcomprehensive income and its components in financial statements. Comprehensiveincome generally represents all changes in shareholders' equity except thoseresulting from investments by distributions to shareholders. Statement No. 130is effective for fiscal years beginning after December 15, 1997 and requiresrestatement of earlier periods presented. Also in June 1997, the FASB issued Statement No. 131, Disclosures aboutSegments of an Enterprise and Related Information, which requires publicly-held companies to report financial and descriptive information about itsoperating segments in financial statements issued to shareholders for interimand annual periods. The statement also requires additional disclosures withrespect to products and services, geographical areas of operations, and majorcustomers. Statement No. 131 is effective for fiscal years beginning afterDecember 15, 1997 and requires restatement of earlier periods presented. RECLASSIFICATIONS Certain amounts in the 1996 and 1997 consolidated financial statements havebeen reclassified to conform with the 1998 presentation. 2. ATL PRODUCTS, INC. On March 13, 1997, ATL Products, Inc. (ATL), which at that time was awholly-owned subsidiary of the Company, completed an initial public offeringof 1,650,000 shares of its common stock, at an offering price of $11 per share(the Offering). Following the Offering, the Company's beneficial ownershipinterest in the ATL totaled 82.9%. On October 31, 1997, the Company completed a tax-free spin-off of itsremaining 82.9% interest in ATL to the Company's stockholders, pursuant towhich each holder of the Company's Class A and Class B Common as of October31, 1997, received approximately 1.1 shares of Class A Common Stock of ATL foreach share of the Company's Common Stock then held. Following the spin-off, the Company has accounted for ATL as a discontinuedoperation and has presented its ownership interest in the results of ATL'soperations for all periods as a separate component of the consolidatedstatements of operations. Net sales of ATL for fiscal 1996, 1997 and for theseven month period ending October 31, 1997 are $29.4 million, $60.0 millionand $47.4 million, respectively. 3. ACQUISITIONS On June 20, 1997, the Company acquired certain assets and assumed certainliabilities of the Transportation Systems business of Rockwell International(Rockwell). Revenues and costs related to contracts assumed from Rockwell areincluded in the accompanying statement of operations since the date ofacquisition. The total cost of the acquisition was approximately $2.2 millionin cash. Assets with a fair value of $1.3 million were acquired and $5.0million of liabilities were assumed. The excess of cost over the fair value ofnet assets acquired of $5.9 million has been recorded as goodwill, and isbeing amortized over its expected benefit period of 15 years. On October 29, 1998, the Company acquired the net assets of IntelligentControls Inc. (ICI). The total cost of the acquisition was approximately $2.7million which was paid in the Company's Class A common stock. A total of $1.0million of assets were acquired and $0.4 million of liabilities were assumed.In connection with the purchase, $2.1 million of in process research anddevelopment was written off. F-10 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro forma results of operations combining the results of the Company and ICIfor fiscal 1997 and 1998 are not presented since such amounts are notmaterially different from the Company's reported results. 4. TRANSACTIONS WITH ATL In April 1997, the Company entered into a promissory note receivable withATL in the original principal amount of $13.0 million representing theaggregate balance of ATL's interest bearing advances from the Company. Thenote bears interest at a rate equal to the Company's cost of borrowing (8.5%at March 31, 1998). Principal and interest on the note are payable to theCompany in quarterly installments of $3.3 million through fiscal 2001. Up to the time its spin-off, the operating results of ATL were included inthe consolidated federal income tax return of the Company. Effective upon theclose of ATL's initial public offering, the companies entered into a taxsharing agreement, which was effective retroactively to April 1, 1996, wherebythe consolidated federal and state income tax liabilities for a given tax yearwere allocated to the companies in Odetics group according to their relativeand separate taxable income for such year. Amounts receivable from ATL underthis arrangement totaled $2.1 million in 1997 and $1.6 million in 1998. Thetax sharing agreement was canceled upon the spin-out of Odetics remaininginterest in ATL in October 1997. The Company and ATL are parties to an agreement whereby ATL is charged forcertain corporate general and administrative functions performed by theCompany. These charges totaled $1,534,000, $1,551,000 and $506,000 in theyears ended March 31, 1996, 1997 and 1998, respectively, and are nettedagainst general and administrative expense in the accompanying consolidatedstatements of operations. These charges consist of certain accounting,auditing, income tax, payroll and treasury functions, the administration ofemployee incentive programs, marketing support, facilities management, certainlegal services and other support services. Charges were allocated to ATL basedon actual amounts incurred or agreed upon amounts or percentages thatmanagement of the Company believes are reasonable. Amounts due from ATL thatare included in accounts receivable are $509,000 and $49,000 as of March 31,1997 and 1998, respectively. 5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs incurred, estimated earnings and billings on uncompleted long-termcontracts are as follows: MARCH 31, ---------------- 1997 1998 ------- ------- (IN THOUSANDS) Costs incurred on uncompleted contracts.................. $17,483 $22,861 Estimated earnings....................................... 1,848 1,903 ------- ------- 19,331 24,764 Less billings to date.................................... 20,099 23,761 ------- ------- $ (768) $ 1,003 ======= ======= Included in accompanying balance sheets: Costs and estimated earnings in excess of billings on uncompleted contracts................................. $ 1,922 $ 2,583 Billings in excess of costs and estimated earnings on uncompleted contracts................................. (2,690) (1,580) ------- ------- $ (768) $ 1,003 ======= ======= F-11 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Costs and estimated earnings in excess of billings at March 31, 1997 and1998 include $279,000 and $740,000, respectively, that were not billable ascertain milestone objectives specified in the contracts had not been attained.Substantially all costs and estimated earnings in excess of billings at March31, 1998 are expected to be billed and collected during the year ending March31, 1999. 6. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT The Company has a $17.0 million revolving line of credit with a bank whichprovides for borrowings generally at the lesser of the bank's prime rate (8.5%at March 31, 1998) or the bank's LIBOR rate plus 2.25%. Borrowings areavailable for general working capital purposes, and at March 31, 1998,approximately $3.9 million was available for borrowing under the line. Theline expires August 31, 1999. The revolving credit agreement is collateralized by substantially all of theCompany's assets, excluding the land and buildings. 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. At March 31, 1998, the Company was in violation of certainfinancial ratio covenants. The bank has waived compliance with those covenantsat March 31, 1998, and the covenants are expected to be modified to allow theCompany to be in compliance with the requirements of the revolving creditagreement in future periods. Included within the borrowing limits of the agreement, the Company hasavailable approximately $14,900,000 in letters of credit and approximately$300,000 has been reserved for standby letters of credit at March 31, 1998. Long-term debt consisted of the following: MARCH 31, -------------- 1997 1998 ------- ------ (IN THOUSANDS) Note payable, collateralized by deed of trust on land and buildings with a net book value of approximately $13,000,000, payable in monthly installments through the year 2004, including interest at 9.36%................... $10,171 $9,218 Notes payable, collateralized by equipment, payable in monthly installments through March 1999, including interest at 6.95% to 9.0%................................ 1,310 580 ------- ------ 11,481 9,798 Less current portion...................................... 1,721 1,598 ------- ------ $ 9,760 $8,200 ======= ====== The annual maturities of long-term debt for the five years ending March 31,2003 and thereafter are as follows: (IN THOUSANDS) 1999.......................... $1,598 2000.......................... 1,146 2001.......................... 1,261 2002.......................... 1,383 2003.......................... 1,518 Thereafter.................... 2,892 ------ $9,798 ====== F-12 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. NONRECURRING CHARGE In March 1998, the Company recorded a nonrecurring charge of $1.7 million.The charge reflects severance costs related to retirement of certain of theCompany's founders and officers, and to a lesser extent, costs incurred toterminate a joint venture relationship in China. 8. INCOME TAXES The reconciliation of the income tax provision (benefit) from continuingoperations to taxes computed at U.S. federal statutory rates is as follows: YEAR ENDED MARCH 31, ---------------------- 1996 1997 1998 ------ ----- ------- (IN THOUSANDS) Income tax (benefit) at statutory rates............. $1,345 $(130) $(3,915) Acquired in process research and development........ -- -- 715 State income taxes, net of federal tax benefit...... 244 (22) 189 Decrease of valuation allowance associated with fed- eral deferred tax assets........................... (326) (99) (175) Foreign losses recorded without benefit............. 80 -- 118 Foreign income at lower tax rate.................... -- -- 15 Nondeductible goodwill amortization................. 7 7 11 Other............................................... 68 63 184 ------ ----- ------- $1,418 $(181) $(2,858) ====== ===== ======= United States and foreign income (loss) from continuing operations beforeincome taxes are as follows: YEAR ENDED MARCH 31, ---------------------- 1996 1997 1998 ------ ----- -------- (IN THOUSANDS) Pretax income (loss): Domestic........................................... $4,556 $(372) $ (9,726) Foreign............................................ 504 (10) (1,815) ------ ----- -------- $5,060 $(382) $(11,541) ====== ===== ======== Significant components of the provision (benefit) for income taxes fromcontinuing operations are as follows: YEAR ENDED MARCH 31, ------------------------ 1996 1997 1998 ------ ------- ------- (IN THOUSANDS) Current: Federal......................................... $ 220 $ (347) $(1,143) State........................................... 463 (145) (328) Tax benefit from stock option exercises......... (31) (801) (300) Foreign......................................... 659 45 (485) ------ ------- ------- Total current..................................... 1,311 (1,248) (2,256) Deferred: Federal......................................... 194 350 (1,516) State........................................... (118) (84) 614 ------ ------- ------- Total deferred.................................... 76 266 (902) Charge in lieu: Credit to additional paid-in capital attributable to stock option exercises......... 31 801 300 ------ ------- ------- $1,418 $ (181) $(2,858) ====== ======= ======= F-13 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of deferred tax assets and liabilities are as follows: 1997 1998 ------- ------- (IN THOUSANDS) Deferred tax assets: Inventory reserves....................................... $ 530 $ 979 Deferred compensation and other payroll accruals......... 1,848 2,077 Acquired net operating loss carryforwards................ -- 217 General business tax credit carryforwards................ 322 951 Alternative minimum tax credit carryforwards............. 883 404 Bad debt reserve......................................... 149 185 Other reserves........................................... 749 328 Other, net............................................... 71 338 ------- ------- Total deferred tax assets.................................. 4,552 5,479 Valuation allowance for deferred tax assets................ (1,351) (1,490) ------- ------- Net deferred tax assets.................................... 3,201 3,989 ------- ------- Deferred tax liabilities: Tax over book depreciation............................... 2,690 2,576 Capitalized interest and taxes........................... 468 468 Other, net............................................... 30 30 ------- ------- Total deferred tax liabilities............................. 3,188 3,074 ------- ------- Net deferred tax assets.................................... $ 13 $ 915 ======= ======= At March 31, 1998, for federal income tax purposes, the Company hadapproximately $951,000 in general business credit carryforwards, $404,000 ofalternative minimum tax credit carryforwards, and $640,000 of net operatingloss carryfowards which were acquired as part of the ICI acquisition. Forfinancial reporting purposes, a valuation allowance has been recorded tosubstantially offset the deferred tax asset related to these credits andacquired net operating losses. Any future benefits recognized from thereduction of the valuation allowance related to these carryforwards willresult in a reduction of income tax expense. The credit carryforwards expireat various dates beginning in 2005 and the acquired net operating losses beginexpiring in 2002. 9. ASSOCIATE INCENTIVE PROGRAMS Under 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 1996, 1997 or 1998. In May 1990, the Company adopted a 401(k) Plan as an amendment andreplacement of the former Associate Stock Purchase Plan that was an additionalfeature of the Profit Sharing Plan. Under the 401(k) Plan, eligible associatesvoluntarily contribute to the plan up to 15% of their salary through payrolldeductions. The Company matches 50% of contributions up to a stated limit.Under the provisions of the 401(k) Plan, associates have four investmentchoices, one of which is the purchase of Odetics, Class A common stock atmarket price. Company matching contributions were approximately $580,000,$525,000 and $548,000 in 1996, 1997 and 1998, 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 F-14 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Company stock. The Company contributions to the ASOP were approximately$430,000, $517,000 and $511,000 in 1996, 1997 and 1998, respectively. Sharesdistributed through the ASOP Plan were included in total outstanding sharesused in the earnings per share calculation. 10. STOCK OPTION AND DEFERRED COMPENSATION PLANS The Company has adopted an Associate Stock Option Plan which provides thatoptions for shares of the Company's unissued Class A common stock may begranted to directors and associates of the Company. Options granted enable theoption holder to purchase one share of Class A common stock at prices whichare equal to or greater than the fair market value of the shares at the dateof grant. Options for shares have been granted at prices ranging from $4.25,to $9.90 for one share of Class A common stock. Options expire ten years afterdate of grant or 90 days after termination of employment and vest ratably at33% on each of the first three anniversaries of the grant date. Options forshares of both the Company's unissued Class A and Class B common stock hadbeen granted to directors and associates of the Company and such optionsexpired in 1994. YEAR ENDED MARCH 31, -------------------------------------------------- 1996 1997 1998 ---------------- ---------------- ---------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Options outstanding at beginning of year.......... 627 $6.85 691 $5.32 640 $6.41 Granted................... 381 4.72 183 9.17 502 4.63 Exercised................. (70) 4.76 (217) 5.41 (578) 4.79 Canceled.................. (247) 8.43 (17) 4.43 (1) 5.99 ---- ----- ---- ----- ---- -----Options outstanding at end of year.................... 691 $5.32 640 $6.41 563 $4.67 ==== ===== ==== ===== ==== =====Exercisable at end of year.. 288 308 -- ==== ==== ====Available for grant at end of year.................... 520 164 157 ==== ==== ====Option price range for exercised shares: $4.25 to $6.625 $4.25 to $9.00 $4.88 to $9.90 The range of exercise prices for options outstanding as of March 31, 1998,was $4.63 to $5.09. The weighted-average remaining contractual life andexercise price of those options is 9.83 years and $4.67, respectively. In connection with the completed spin-off of the Company's interest in ATL,the Company accelerated the exercisability of all stock options thenoutstanding and made secured loans to option holders to facilitate theexercise of the options. Loans were made in amounts up to the exercise priceof their options, which totaled $3.4 million. These notes are full recourse,are secured by the shares of stock of the Company and ATL, are interestbearing with a rate of 5.7% and are due five years from the exercise date.Loans must be repaid upon sale of the underlying shares of stock or upontermination of employment. In calculating pro forma information regarding net income and earnings pershare, as required by Statement 123, the fair value was estimated at the dateof grant using a Black-Scholes option pricing model with the followingweighted-average assumptions for the options on the Company's Class A commonstock: risk-free interest rate of 6.0%; a dividend yield of 0%; volatility ofthe expected market price of the Company's common stock of .40; and aweighted-average expected life of the option of 7 years. F-15 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) For purposes of pro forma disclosures, the estimated fair value of theoptions is amortized to expense over the options' vesting period. TheCompany's pro forma information for the years ended March 31, 1997 and 1998follows: 1996 1997 1998 ---------- ---------- ----------- Pro forma net income..................... $2,252,000 $3,441,000 $(7,084,000) Pro forma net income per share........... $ .36 $ .55 $ (1.03) During 1986, the Company adopted an Executive Deferral Plan under whichcertain executives may defer a portion of their annual compensation. Alldeferred amounts earn interest, generally with no guaranteed rate of return.Compensation charged to operations and deferred under the plan totaled$302,000, $410,000 and $302,000 for 1996, 1997 and 1998, respectively. 11. COMMITMENTS AND CONTINGENCIES The Company brought an action against Storage Technology Corporation(StorageTek) in the Eastern District Court of Virginia alleging thatStorageTek had infringed the Company's patent covering robotics tape cassettehandling systems (United States Patent No. 4,779,151). StorageTek counterclaimed alleging that the Company infringed several of StorageTek's patents.Prior to the trial, the court dismissed two of the infringement claims againstthe Company and the third claim was resolved between the parties. In January1996, the jury determined that the patent claims were not infringed under thedoctrines of equivalents based upon a claim construction defined by the courtprior to the trial. The jury also concluded that the Company's patent was notinvalid. In June 1997, the United States Court of Appeals for the FederalCircuit vacated the lower court's claim construction and findings ofnoninfringement of the Company's patent. The appellate court remanded the casefor consideration of infringement under a proper claim construction. In August1997, the appellate court denied a petition for rehearing requested byStorageTek. The case was returned to the Federal District court for retrial,and in March 1998, the jury awarded the Company damages in the amount of $70.6million. Defendants have indicated they intend to appeal. The accompanyingfinancial statements do not include any amounts related to the Company'spotential revenues related to the verdict. In November 1994 and February 1995, the Company and E-Systems, Inc. (E-Systems), respectively filed legal actions related to E-Systems' cancellationof purchase orders for ATL Products' DataLibrary and DataTower products. InMay 1996, the parties entered into a settlement agreement under which, amongother things, E-Systems agreed to pay the Company $6,160,000, all claimsasserted by the parties were released and the litigation dismissed. Inaddition, the parties agreed to an equitable disposition of disputed inventoryand entered into a five year service agreement for Odetics to service unitsthat had been sold to E-Systems at agreed upon prices. The Company has notrecorded any material gain or loss based on the terms of the settlementagreement. The Company has two lease commitments for facilities in Washington andMichigan as a result of two acquisitions in the current fiscal year. Theannual commitment under these noncancelable operating leases at March 31, 1998is as follows (in thousands): FISCAL YEAR ----------- 1999.................................................................... $229 2000.................................................................... 185 2001.................................................................... 64 ---- $478 ==== F-16 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION The Company operates in one industry segment whereby it focuses oninformation automation through its design, development, manufacturing andmarketing of subsystems and other products for specialized informationautomation applications. The Company's principal products include magnetictape cartridge and cassette handling subsystems for automated tape librarysystems used in computer mass data storage applications; large-library cartmachines used in broadcast and cable television station operations; time-lapseVCRs and related products used in commercial and industrial closed circuittelevision security and surveillance applications; and space-qualified digitaldata recorders used in 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 United States andforeign governments were approximately 10%, 11% and 12% during 1996, 1997 and1998, respectively. The Company performs periodic credit evaluations of its customers' 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, 1997 and 1998, accountsreceivable from governmental agencies and prime government contractors wereapproximately $1,034,000 and $2,801,000, respectively. Information concerning the Company's continuing operations by geographicsegment is as follows: YEAR ENDED MARCH 31, -------------------------- 1996 1997 1998 ------- ------- -------- Sales to unaffiliated customers: United States (a)............................. $64,317 $72,780 $ 83,615 Europe--Odetics Europe, Ltd................... 7,833 4,494 5,442 Asia Pacific--Odetics Asia Pacific Pte Ltd.... 3,067 3,506 779 Asia Pacific--Odetics Asia Pacific Pte Ltd.... 3,067 3,506 779 ------- ------- -------- $75,217 $80,780 $ 89,836 ======= ======= ======== Sales between geographic areas (based on invoiced prices): United States................................. $ 5,582 $ 4,418 $ 4,197 Europe........................................ -- -- -- Asia Pacific.................................. -- -- -- Intercompany eliminations..................... (5,582) (4,418) (4,197) ------- ------- -------- $ -- $ -- $ -- ======= ======= ======== Income (loss) before taxes: United States................................. $ 4,556 $ (372) $ (9,726) Europe........................................ 739 (444) (1,469) Asia Pacific.................................. (235) 434 (346) Intercompany eliminations..................... -- -- -- ------- ------- -------- $5,060 $ (382) $(11,541) ======= ======= ======== Assets: United States, including net assets of discontinued operations...................... $67,271 $81,711 $ 85,492 Europe........................................ 5,002 2,118 3,085 Asia Pacific.................................. 740 1,976 213 Intercompany eliminations..................... -- -- -- ------- ------- -------- $73,013 $85,805 $ 88,790 ======= ======= ======== F-17 ODETICS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) - --------(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 $12,000,000, $21,000,000 and $24,000,000 during 1996, 1997 and 1998, respectively. These sales were principally made to customers in Europe and the Pacific Rim. 13. SUPPLEMENTAL CASH FLOW INFORMATION YEAR ENDED MARCH 31, ------------------------- 1996 1997 1998 ------- ------- ------- (IN THOUSANDS) Net cash used in changes in operating assets and liabilities, net of litigation settlement and acquisitions: Increase in accounts receivable.............. $(1,382) $(4,511) $ 2,689 (Increase) decrease in net costs and estimated earnings in excess of billings.... 1,167 (1,217) (1,771) (Increase) decrease in inventories........... 2,485 401 (4,604) Increase in prepaids and other assets........ (936) (4,060) (2,883) Increase (decrease) in accounts payable and accrued expenses............................ 1,541 1,923 2,580 ------- ------- ------- Net cash used in changes in operating assets and liabilities............................... $ 2,875 $(7,464) $(3,989) ======= ======= ======= Cash paid during the year: Interest..................................... $ 2,415 $ 1,888 $ 1,526 Income taxes paid (refunded)................. (133) 975 365 Noncash transactions during the year: Spin-off of ATL Products, Inc................ $ -- $ -- $11,067 Purchase of net assets of ICI for stock...... -- -- 628 F-18 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS ODETICS, INC. COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- --------------------- ------------ ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ----------- ---------- ---------- ---------- ------------ ---------- Year ended March 31, 1996:(1) Deducted from asset accounts: Allowance for doubtful accounts.. $ 327,000 $ 132,000 $-- $133,000(2) $ 326,000 Reserve for inventory obsolescence....... 2,099,000 -- $-- 288,000 1,811,000 ---------- ---------- ---- -------- ---------- Total............. $2,426,000 $ 132,000 $-- $421,000 $2,137,000 ========== ========== ==== ======== ==========Year ended March 31, 1997:(1) Deducted from asset accounts: Allowance for doubtful accounts.. $ 326,000 $ 24,000 $-- $ -- $ 350,000 Reserve for inventory obsolescence....... 1,811,000 626,000 -- -- 2,437,000 ---------- ---------- ---- -------- ---------- Total............. $2,137,000 $ 650,000 $-- $ -- $2,787,000 ========== ========== ==== ======== ==========Year ended March 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts.. $ 350,000 $ 155,000 $-- $ 73,000(2) $ 432,000 Reserve for inventory obsolescence....... 2,437,000 1,240,000 -- 796,000 2,881,000 ---------- ---------- ---- -------- ---------- Total............. $2,787,000 $1,395,000 $-- $869,000 $3,313,000 ========== ========== ==== ======== ==========- --------(1) Amounts have been restated to reflect the continuing operations of the Company, excluding the accounts of ATL Products, Inc. (2) Uncollectible accounts written off, net of recoveries. S-1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement(Form S-3 Nos. 33-63983 and 333-40555) of Odetics, Inc. and in the relatedProspectuses, and in the Registration Statements (Form S-8 Nos. 333-05735 and333-44907) of our report dated May 4, 1998, with respect to the consolidatedfinancial statements and schedule of Odetics, Inc. included in this AnnualReport (Form 10-K) for the year ended March 31, 1998. /s/ Ernst & Young LLP Orange County, CaliforniaJune 26, 1998 EXHIBIT 21 LIST OF SUBSIDIARIES STATE OR OTHER JURISDICTION OF INCORPORATION OWNERSHIP NAME OF ENTITY OR ORGANIZATION INFORMATION -------------- ----------------- ----------- Odetics ITS, Inc. (formerly known as Centro Corporation)....... California 100% owned Gyyr, Inc...................................... California 100% owned Odetics Europe Limited......................... England and Wales 100% owned Odetics Asia Pacific Pte. Ltd.................. Singapore 100% owned Odetics International Sales Corporation........ California 100% owned

5 1,000 YEAR YEAR YEAR MAR-31-1996 MAR-31-1997 MAR-31-1998 APR-01-1995 APR-01-1996 APR-01-1997 MAR-31-1996 MAR-31-1997 MAR-31-1998 1,141 1,865 1,131 0 0 0 14,613 17,127 15,048 326 350 432 17,403 15,650 20,810 40,152 43,486 48,563 42,016 44,934 49,889 21,609 23,824 26,550 73,013 85,805 88,790 19,542 21,583 28,567 0 0 0 0 0 0 0 0 0 610 638 726 30,375 51,190 37,854 73,013 85,805 88,790 65,056 71,748 79,552 75,217 80,780 89,836 44,535 48,507 55,227 48,909 53,414 61,657 21,248 27,748 39,720 0 0 0 386 183 617 5,060 (382) (11,541) 1,418 (181) (2,858) 3,642 (201) (8,683) (1,189) 3,931 2,089 0 0 0 0 0 0 2,453 3,730 (6,594) 0.40 0.59 (0.95) 0.40 0.59 (0.95)

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Iteris Annual Report 1998

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Iteris
Annual Report 1998