Iteris
Annual Report 2001

Plain-text annual report

---------------------------------------------------------------------------------------------------------------------------------------------------------------- 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, 2001 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-10605 --------------- ODETICS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 95-2588496 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 1515 South Manchester Avenue, Anaheim, California 92802 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (714) 774-5000 --------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A common stock, $.10 par value Class B common stock, $.10 par value (Title of Class) --------------- Indicate by check mark whether the registrant: (1) has filed all 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 to suchfiling 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 21, 2001,the aggregate market value of the voting stock held by nonaffiliates of theregistrant was $21,733,846. 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 is notnecessarily a conclusive determination for other purposes. Odetics has two classes of common stock outstanding, the Class A commonstock and the Class B common stock. The rights, preferences and privileges ofeach class of common stock are identical in all respects, except for votingrights. Each share of Class A common stock entitles its holder to one-tenth ofone vote per share and each share of Class B common stock entitles its holderto one vote per share. As of June 21, 2001, there were 9,542,889 shares ofClass A common stock and 1,035,841 shares of Class B common stock outstanding.Unless otherwise indicated, all references to common stock shall collectivelyrefer to the Class A common stock and the Class B common stock DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the registrant'sdefinitive proxy statement for the annual meeting of the stockholders scheduledto be held on September 14, 2001. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ODETICS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I ITEM 1. BUSINESS...................................................... 1 ITEM 2. PROPERTIES.................................................... 16 ITEM 3. LEGAL PROCEEDINGS............................................. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................... 17 ITEM 6. SELECTED FINANCIAL DATA....................................... 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 26 ITEM 11. EXECUTIVE COMPENSATION........................................ 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 26 PART IV  ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................................... 27 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. You should not place undue reliance on theseforward-looking statements that speak only as of the date hereof. We undertakeno obligation to republish revised forward-looking statements to reflect eventsor circumstances after the date hereof or to reflect the occurrence ofunanticipated events. We encourage you to carefully review and consider thevarious disclosures made by us which describe certain factors which affect ourbusiness, including the risk factors set forth at the end of Part I, Item 1 ofthis report and in Part II, Item 7. "Management's Discussion and Analysis ofFinancial Condition and Results of Operations." PART I ITEM 1. BUSINESS General Odetics, Inc. was founded in 1969 to supply digital recorders for use in theUnited States space program. We pioneered new designs and standards for digitalmagnetic tape recorders offering high reliability and enhanced performance inthe adverse environment attendant to space flight. In the 1970s, we broadenedour information automation product line to include time-lapse videocassetterecorders for commercial security and surveillance applications, and enteredthe business of manufacturing telecom network synchronization products. Throughour Gyyr division, we became a leading supplier of time-lapse videotapecassette recorders, digital image processing modules and related products usedin security and surveillance systems. We incorporated our Gyyr division in1997, forming a wholly-owned subsidiary, Gyyr Incorporated. In October 1997, weexpanded Gyyr by acquiring Intelligent Controls Inc., a manufacturer of accesscontrol products specializing in PC based, remote site and fiber opticcommunications. In December 1999, we acquired the Security Products Division ofDigital Systems Processing, Inc., which expanded our product line to includedigital time-lapse recording based on hard disk drive technology. Beginning in the late 1970s, we developed and manufactured telecomsynchronization products in our Communications division. We incorporated ourCommunications division in fiscal 1999 as our wholly-owned subsidiary, Zyfer,Inc., as part of our business expansion to develop products for securedcommunications over the Internet. Leveraging our expertise in video image processing, we entered into theintelligent transportation system ("ITS") business with the introduction of avideo-based vehicle detection system in 1993. In June 1997, we acquired certainassets comprising the Transportation Systems business from RockwellInternational, creating our ITS division, which expanded our offerings toinclude advanced traffic management systems and advanced traveler informationsystems. We incorporated our ITS division in 1998 as Odetics ITS, Inc. InOctober 1998, we broadened our systems offerings by acquiring Meyer, MohaddesAssociates, Inc. In January 2000, we reincorporated Odetics ITS in Delaware andchanged its name to Iteris, Inc. Meyer, Mohaddes Associates, Inc. currentlyoperates as a wholly-owned subsidiary of Iteris, Inc. In the early 1980s, we developed the technical expertise to apply automationto new commercial applications and established our Odetics Broadcast division.We incorporated our Odetics Broadcast division in 1999 as Broadcast, Inc.Broadcast develops and manufactures broadcast automation control systems. Thesuccess of our video tape libraries led us to pursue new applications forinformation automation technologies. In 1991, we introduced an automated tapehandling subsystem for integration into tape libraries designed for midrangecomputers and client/server networks. In January 1993, we formed a separatesubsidiary, ATL Products, Inc., to pursue the market for automated tapelibraries. In March 1997, ATL completed an initial public offering of 1,650,000shares of its Class A common stock. We distributed our remaining 82.9% interestin ATL to our stockholders in a tax-free distribution in October 1997. 1 Today, Odetics serves as a developer of technology-oriented companies, eachwith its own marketplace, customers and products. These operations share acommon corporate overhead for support for facilities, human resources, benefitsand certain accounting, finance and executive management services. We arepursuing a business strategy to develop each of these business units with theultimate goal of monetizing them for the benefit of our stockholders. While ourstrategy also embodies the tax-free spin-off of our developed companies to ourstockholders, we cannot assure that we will be able to spin-off any of thesecompanies in the near future, if at all. We currently define our business segments as video products, telecomproducts and ITS. Our video products segment includes our Broadcast subsidiaryand our Gyyr subsidiary. Our telecom products segment includes our Zyfersubsidiary and our Mariner Networks subsidiary. Our ITS segment consists of ourIteris subsidiary. For more information concerning our business segments,please see Note 13 of Notes to Consolidated Financial Statements. Video Products Broadcast, Inc. Broadcast develops systems to automate the storage and scheduling ofcommercials, news stories and other television programming recorded onvideotape and video server storage systems. We believe that enhancedoperational efficiencies are a principal factor underlying the automation ofbroadcast television stations and satellite uplink operations as the industrytransitions to digital television. During fiscal 2001, Broadcast begantransitioning its focus from a hardware-based business to a product offeringbased on proprietary software solutions for broadband video content managementand delivery to serve broadcast and cable operations. We offer software to form powerful integrated systems, including ourAIRO(TM) automation system. Multi-channel presentation systems, which integratethe complete line of our hardware with commonly available broadcast qualityvideo disk recorders, are quickly becoming the core business of Broadcast.Broadcast is focused on video asset management, including desktop videobrowsing using a network PC architecture, which can be extended to wide areanetwork applications and Internet applications. Sales, Marketing and Principal Customers. Broadcast sells directly tobroadcast television stations, satellite uplink operations, and other broadcasttelevision and cable television system operators. The sales and marketingmanagement for Broadcast is located at our principal facilities in Anaheim,California. Broadcast maintains a dedicated field sales force of three personsoperating in three U.S. sales regions and Canada, and a sales manager for LatinAmerica, Europe and Asia. Broadcast also utilizes additional independentrepresentative organizations to promote its products in various other foreignmarkets. The customers of Broadcast include major television networks such as Fox,the Canadian Broadcasting Corporation, CNBC, Euronews, Televisa, MeasatBroadcast Network Systems, NBC, the PBS Network, Group W SatelliteCommunications, Asia Broadcast Centre, Univision and over 100 independent andnetwork-affiliated television stations. Broadcast currently has systemsinstalled in over 40 countries. Manufacturing and Materials. Broadcast maintains a dedicated manufacturingoperation located within our Anaheim, California facilities. Our AIRO productsare serviced primarily in a facility located in Austin, Texas. At our Anaheimfacility, Broadcast maintains infrastructure to support production andinventory control, purchasing, quality assurance, manufacturing andengineering. Broadcast purchases video servers from Grass Valley Group, Leitch andPinnacle Systems and video switching, conversion and monitoring equipment fromGrass Valley Group. Broadcast also purchases cabinets and other fabricatedparts and components from other third party suppliers. 2 Gyyr Incorporated Gyyr produces analog and digital video products and access control systemsthat meet the security and surveillance needs for a variety of marketsincluding banking, commercial/industrial and retail. Gyyr currently operatestwo divisions, Gyyr GCTV Products and Gyyr Electronic Access Controls. GyyrGCTV Products develops and manufactures analog and digital video products andfocuses on developing innovative solutions for digital storage assistance basedvideo surveillance. Gyyr's time-lapse VCRs are installed in automated tellermachines and retail point of sale systems to record transaction information inan effort to deter and address incidents of theft and other crimes. GyyrElectronic Access Controls develops and manufactures enterprise securitymanagement systems and focuses on developing network-based access controlproducts. Gyyr's access control systems offer managed access and monitoring ofpublic, private and high security facilities. Customer demand for moresophisticated capabilities and integration due to digital technology has alsocontributed to the recent growth in the market for Gyyr's products. Gyyr'sstrategy is to provide complete software-based system integration of digitalsecurity devices over a variety of network topologies and the Internet. Recentadditions to Gyyr's product offerings include network and Internet-based videoand device control, and video multiplexing and digital recording. In December1999, we expanded our product line to include the DVMS family of digital time-lapse recorders based on hard disk drive architecture. This product lineexpansion was the result of our acquisition of the Security Products Divisionof Digital Systems Processing, Inc. We sell our products as individual devicesas well as components of fully-integrated network security control systems. Sales, Marketing and Principal Customers. Gyyr markets and sells itsproducts through three established channels: OEMs, independent distributors andsystem integrators. Gyyr personnel located at our principal facilities andsales offices throughout the world oversee approximately 1,000 of these channelpartners. Gyyr has a business development and service organization located atour Odetics Europe Limited subsidiary. Through January 2000, Odetics EuropeLimited assisted Gyyr with management in the development of European, MiddleEast and African markets. Commencing in January 2000, Gyyr formed Gyyr EuropeLimited to succeed Odetics Europe Limited in its support services. Its Asiansales and marketing activities are managed from our Anaheim, Californiafacilities. Gyyr's principal customers include major security equipmentcompanies such as Diebold, Inc., ADT Security Systems, Inc., Honeywell, Inc.,Mosler, Inc., Hamilton Safe and ADI. Manufacturing and Materials. Gyyr maintains a dedicated manufacturing arealocated within our principal facilities in Anaheim, California. Gyyr primarilyuses continuous demand flow techniques in its assembly lines. Gyyr maintainsinfrastructure to support production and inventory control, purchasing, qualityassurance and manufacturing engineering. Gyyr purchases substantially all of its VCRs through Nissei Sangyo America,the United States distribution affiliate of Hitachi, Ltd., into which weincorporate certain value-added features. As a result of its reliance onHitachi, Ltd, Gyyr is vulnerable to Hitachi's actions, which might necessitatechanges in the design or manufacturing of Gyyr's products. While othersuppliers are available who can manufacture VCRs suitable for use in Gyyr'sproducts, we would be required to make changes in our product design ormanufacturing methods to accommodate other VCRs, and Gyyr could experiencedelays or interruptions in supply while these changes are incorporated or a newsupplier is procured. Telecom Products Zyfer, Inc. We incorporated our Communications division in 1999 as Zyfer, Inc. Zyferdevelops and manufactures telecom network synchronization products and providesservice support for space borne digital data recorders. Our telecom networksynchronization products synchronize communications for data security, timingnetworks and wireless communications systems. These products are based on GPSand oscillator technologies and are sold for new applications in wirelessnetworks and satellite communications for both commercial and governmentcustomers. Significant customers of Zyfer include the U.S. government,government subcontractors and LGIC of Korea. 3 Zyfer has developed a new class of encryption products for securingenterprise wide communications. These products provide transparent security tousers and system administrators. Transparency results from the elimination oftraditional key exchange and key management requirements and from our abilityto encrypt and decrypt at high data rates. The space borne digital recorders serviced by Zyfer are employed insatellite programs for space research, earth resource and environmentalobservation and weather monitoring, as well as global surveillance andclassified government programs. Sales, Marketing and Principal Customers. Zyfer conducts its selling andmarketing activities directly from our principal facilities in Anaheim,California. Zyfer also sells its telecom synchronization products primarilythrough manufacturers' representatives. Manufacturing and Materials. Zyfer's manufacturing processes are ISOcertified. Most of its manufacturing processes consist of final assembly andtest. Zyfer outsources board assembly and some preliminary fabricationprocesses. Mariner Networks, Inc. Mariner Networks, Inc. has developed and manufactures a family of multi-service access devices that enable branch offices to cost effectively combinetheir separate voice, video and data networks onto a single wide area transportnetwork. The Dexter(R) product family provides wire speed transport of mostdata traffic types. Mariner Networks' products include ATM, frame relay andvoice subsystems for handling intranet, data, voice and video traffic. Sales, Marketing and Principal Customers. Mariner Networks sells itsproducts through its direct sales organization and resellers in North Americaand in Europe. Mariner Networks maintains sales offices at our facilities inAnaheim, California and maintains a European subsidiary, Mariner NetworksEurope Ltd., which occupies space within Odetics Europe Limited in the UnitedKingdom. Manufacturing and Materials. Mariner Networks' manufacturing processes areISO 9000 certified and consist primarily of final assembly and test. MarinerNetworks currently outsources circuit board assembly and some fabricationprocesses. ITS Products Iteris, Inc. Iteris, Inc. designs, develops, markets and implements software-basedsolutions that improve the safety and efficiency of vehicle transportation.Using its proprietary software and ITS industry expertise, Iteris providesvideo sensor systems and transportation management and traveler informationsystems for the ITS industry. The ITS industry is comprised of companiesapplying a variety of technologies to enable the safe and efficient movement ofpeople and goods. Iteris uses its outdoor image recognition software expertiseto develop proprietary algorithms for video sensor systems that improve vehiclesafety and the flow of traffic. Our knowledge of the ITS industry enablesIteris to design and implement transportation solutions that help publicagencies reduce traffic congestion and provide greater access to travelerinformation. Iteris' proprietary image recognition systems include AutoVue and Vantage.AutoVue is a small windshield mounted sensor that utilizes proprietary softwareto detect and warn drivers of unintended lane departures. Through new softwaredevelopment, Iteris is expanding the AutoVue platform to incorporate additionalsafety and convenience features. Vantage is a video vehicle sensing system thatdetects the presence of vehicles at signalized intersections enabling a moreefficient allocation of green signal time. Iteris, Inc. designs, develops and implements software-based systems thatintegrate sensors, video surveillance, computers and advanced communicationsequipment enabling public agencies to monitor, control 4 and direct traffic flow, assist in the quick dispatch of emergency crews anddistribute real-time information about traffic conditions. Sales, Marketing and Principal Customers. Iteris markets and sells itstransportation management systems and services directly to government agenciespursuant to negotiated contracts which involve competitive bidding and specificqualification requirements. Sales of Iteris' systems generally involve longlead times and require extensive specification development, evaluation andprice negotiations. Iteris sells its Vantage vehicle detection systems primarily throughindirect sales channels comprised of independent dealers in the United Statesand Canada who sell integrated solutions and related products to the trafficintersection market. The independent dealers for Iteris are primarilyresponsible for sales, installation and support of Vantage systems. Thesedealers maintain an inventory of demonstration traffic products including theVantage vehicle detection systems and sell directly to government agencies andinstallation contractors. These dealers often have long-term arrangements withthe government agencies in their territory for the supply of various productsfor the construction and renovation of traffic intersections. Iteris holdstechnical training classes for its dealers and maintains a full-time staff ofcustomer support technicians to provide technical assistance when needed. The marketing strategy for AutoVue is to establish it as the leadingplatform for in vehicle video sensing for trucks and passenger cars. AutoVue issold directly by Iteris to vehicle manufacturers. Iteris currently has a directsales force of two product managers, and intends to expand its sales force inthe future to include engineers and product managers who will be responsiblefor sales and customer service to specific vehicle manufacturers. Since itstarget customer base is well known, Iteris currently does not plan to engage inbroad-scale marketing campaigns. Manufacturing and Materials. Iteris designs, assembles and tests thecomponents of its Vantage systems in approximately 5,000 square feet of spaceat our Anaheim facility. Production equipment consists of assembly lines andtest apparatus for final assembly and testing of the manufactured product.Production volume is based upon quarterly forecasts that Iteris readjusts on amonthly basis to control inventory. Iteris subcontracts the manufacture of itsAutoVue systems to two manufacturers. We anticipate these manufacturers will beable to produce unit volume sufficient to support sales to heavy truckmanufacturers. Iteris intends to engage additional manufacturers with expertisein high volume production to produce higher volumes for light and medium trucksand passenger cars. Iteris does not manufacture any of the hardware used in thetransportation management and traveler information systems that it designs andimplements. The production facility for Iteris is ISO 9001 certified. Customer Support and Services Each of our business units is responsible for its own customer support andservice organizations. We provide warranty service for each of our productlines, as well as follow-up service and support, for which we typically chargeseparately. We also offer separate software maintenance agreements to ourcustomers. We view customer support services as a critical competitive factoras well as a revenue source. Backlog Our backlog of unfulfilled firm orders was approximately $31.0 million as ofMarch 31, 2001 and approximately $27.3 million as of March 31, 2000.Approximately 70% of our backlog at March 31, 2000 was recognized as revenuesin fiscal 2001, and approximately 68% of our backlog at March 31, 2001 isexpected to be recognized as revenues in fiscal 2002. Pursuant to the customaryterms of our agreements with government contractors and other customers,customers can generally cancel or reschedule orders with little or nopenalties. Lead times for the release of purchase orders depend upon thescheduling and forecasting practices of our individual customers, which alsocan affect the timing of the conversion of our backlog into revenues. For thesereasons, among others, our backlog at a particular date may not be indicativeof our future revenues. 5 Product Development  Each of our business units directs and staffs its own product developmentactivities. Most of our development activities are conducted at our principalfacilities in Anaheim, California. Mariner Networks also maintains adevelopment team in La Gaude, France. Our business units require substantial ongoing research and developmentexpenditures and other product development activities. Our company-sponsoredresearch and development costs and expenses were approximately $11.2 million infiscal 1999, $16.9 million in fiscal 2000 and $18.8 in fiscal 2001. We expectto continue to pursue significant product development programs and incursignificant research and development expenditures in each of our businessunits. Competition Our business units generally face significant competition in each of theirrespective markets. Increased competition may result in price reductions,reduced gross margins and loss of market share, any of which could have amaterial adverse effect on our business, financial condition and results ofoperations. Broadcast's primary competitors include Sony, Harris, Encoda and Probel.Sony is a large, international supplier of extensive professional qualityproducts, including video tape libraries, for the broadcast television market.Harris and Probel principally provide automation control for video librariesand disk recorders. Broadcast's systems compete primarily in the arena offacility management and enterprise wide automation. We believe that thecapability of our systems to integrate the broadcast station business systemsacquisition processes, storage devices and presentation devices under arelational data base management system represents a unique and differentiablecapability. As Gyyr expands its product base from time-lapse VCRs to providingintegrated security systems in CCTV and electronic access control, it willcompete with a broader set of companies. Major Japanese competitors in Gyyr'slegacy tape-based time-lapse VCR business include Panasonic, Toshiba, Sony,Sanyo, Mitsubishi and JVC. Gyyr also competes with large systems suppliersincluding Sensormatic, Honeywell, Pelco, Ultrak, Ademco and Vicon. In the saleof access control systems, Gyyr principally competes with Casi-Rusco,Checkpoint, Cardkey and Lenel. Gyyr generally competes based upon its strengthin the integration of its various component products into systems that providecomplete solutions through the use of advanced software and networkingtechnologies. Zyfer's primary competition for network synchronization products is Datum,Inc. and TrueTime Inc. Zyfer anticipates that its competition for encryptionproducts for secured communications systems will include Cylink Corporation,Rainbow Technologies, Inc. and Redcreek Communications Inc. The competition forintegrated circuits addressing encryption applications include BroadcomCorporation, Chrysalis and HiFN. Mariner Networks' principal competition includes networking vendors VinaTechnologies, Accelerated Networks, Marconi and Nortel Networks. While we believe that AutoVue is the only commercially-available lanedeparture warning system, potential competitors including Delphi AutomotiveSystems Corporation domestically, NEC Corporation and Hitachi Ltd. in Japan andRobert Bosch Gmbh in Europe, which are currently developing video sensortechnologies for the vehicle industry that could be used for lane departurewarning systems. In the market for our Vantage vehicle detection systems, wecompete with both manufacturers of "above ground" video camera detectionsystems, such as Econolite Control Products, Inc., Trafficon, N.V. and the PeekTraffic Systems division of Thermo Electron Corporation, and other non-intrusive detection devices including microwave, infrared, ultrasonic andmagnetic detectors, as well as manufacturers and installers of in-pavementinductive loop products. The transportation management and traveler information systems market ishighly fragmented and is subject to evolving national and regional quality andsafety standards. Iteris' competitors vary in number, scope 6 and breadth of the products and services they offer. Iteris' competitors inadvanced transportation management and traveler information systems includecorporations such as TRW, Inc., Transcore, Lockheed Martin Corporation, PBFarradyne Inc., Kimley-Horn and Associates, Inc. and National EngineeringTechnology, Inc. Iteris' competitors in transportation engineering, planningand design include major firms such as Parsons Brinkerhoff, Inc. and ParsonsTransportation Group Inc., as well as many regional engineering firms. In general, the markets for the products and services offered by ourbusinesses are highly competitive and are characterized by rapidly changingtechnology and evolving standards. Many of our current and prospectivecompetitors have longer operating histories, greater name recognition, accessto larger customer bases and significantly greater financial, technical,manufacturing, distribution and marketing resources than us. As a result, theymay be able to adapt more quickly to new or emerging standards or technologiesor to devote greater resources to the promotion and sale of their products. Itis also possible that new competitors or alliances among competitors couldemerge and rapidly acquire significant market share. We believe that ourability to compete effectively in our target markets depends on a number offactors, including the success and timing of our new product development, thecompatibility of our products with a broad range of computing systems, productquality and performance, reliability, functionality, price, and service andtechnical support. Our failure to provide services and develop and marketproducts that compete successfully with those of other suppliers andconsultants in our target markets would have a material adverse effect on ourbusiness, financial condition and results of operations. Intellectual Property and Proprietary Rights Our ability to compete effectively depends in part on our ability to developand maintain the proprietary aspects of our technology. Our policy is to obtainappropriate proprietary rights protection for any potentially significant newtechnology acquired or developed each of our business units. We currently holda number of United States and foreign patents and trademarks, which will expireat various dates commencing in 2004. We also have pending a number of UnitedStates and foreign patent applications relating to certain of our products;however, we cannot be certain that any patents will be granted pursuant tothese applications. In addition to patent laws, we rely on copyright and trade secret laws toprotect our proprietary rights. We attempt to protect our trade secrets andother proprietary information through agreements with customers and suppliers,proprietary information agreements with our employees and consultants, andother similar measures. We cannot be certain that we will be successful inprotecting our proprietary rights. While we believe our patents, patentapplications, software and other proprietary know-how have value, changingtechnology makes our future success dependent principally upon our employees'technical competence and creative skills for continuing innovation. Litigation has been necessary in the past and may be necessary in the futureto enforce our proprietary rights, to determine the validity and scope of theproprietary rights of others, or to defend us against claims of infringement orinvalidity by others. An adverse outcome in such litigation or similarproceedings could subject us to significant liabilities to third parties,require disputed rights to be licensed from others or require us to ceasemarketing or using certain products, any of which could have a material adverseeffect on our business, financial condition and results of operations. Inaddition, the cost of addressing any intellectual property litigation claim,both in legal fees and expenses, as well as from the diversion of management'sresources, regardless of whether the claim is valid, could be significant andcould have a material adverse effect on our business, financial condition andresults of operations. Employees We refer to our employees as associates. As of June 20, 2001, we employed442 associates, including 72 associates in general management, administrationand finance; 65 associates in sales and marketing; 170 associates in productdevelopment; 105 associates in operations, manufacturing and quality; and30 associates in customer service. None of our associates are represented by alabor union and we have not experienced a work stoppage. 7 We provide centralized support for human resources management for each ofour business units and subsidiaries. These services include recruiting,administration and outplacement. Government Regulation Our manufacturing operations are subject to various federal, state and locallaws, including those restricting the discharge of materials into theenvironment. We are not involved in any pending or threatened proceedings whichwould require curtailment of our operations because of such regulations. Wecontinue to expend funds in connection with our compliance with applicableenvironmental regulations. These expenditures have not, however, beensignificant in the past, and we do not expect any significant expenditures inthe near future. From time to time, a portion of our work relating to network synchronizationsystems may constitute classified United States government information or maybe used in classified programs of the United States Government. For thispurpose, we possess certain relevant security clearances. Our affectedfacilities and operations are also subject to security regulations of theUnited States Government. We believe we are currently in full compliance withthese regulations. 8 RISK FACTORS Our business is subject to a number of risks, some of which are discussedbelow. Other risks are presented elsewhere in this report. You should considerthe following risks carefully in addition to the other information contained inthis report before purchasing the shares of our common stock. If any of thefollowing risks actually occur, they could seriously harm our business,financial condition or results of operations. In such case, the trading priceof our common stock could decline, and you may lose all or part of yourinvestment. We Have Experienced Substantial Losses and Expect Future Losses. Weexperienced significant operating losses of $49.8 million for the year endedMarch 31, 2001, $38.7 million for the year ended March 31, 2000 and $18.3million for the year ended March 31, 1999. In January 2001, we announced thereorganization of our business in order to reduce our operating expenses andnegative cash flow, which included the downsizing of our operations in Gyyr andBroadcast, and a 25% reduction in our total work force. We cannot assure youthat this reorganization will improve our financial performance, or that wewill be able to achieve profitability on a quarterly or annual basis in thefuture. Most of our expenses are fixed in advance, and we generally are unableto reduce our expenses significantly in the short-term to compensate for anyunexpected delay or decrease in anticipated revenues. As a result, we maycontinue to experience losses, which could cause the market price of our commonstock to decline. We Will Need to Raise Additional Capital in the Future and May Not Be Ableto Secure Adequate Funds on Terms Acceptable to Us, or at All. Our line ofcredit facility expired on December 31, 2000. While we have received anextension on this facility until July 31, 2001, we will need to obtain a newline of credit from another lender in the near future. Substantially all of ourassets have been pledged to our existing lender to secure the outstandingindebtedness under this facility ($13.5 million at March 31, 2001). We cannotassure you that we will be able to obtain a new line of credit on a timelybasis, on acceptable terms, or at all. Even if we are able to secure a new lineof credit, we anticipate that we will need to raise additional capital in thenear future, either through additional bank borrowings, the monetization ofcertain real property, the divestiture of business units or select assets, orother debt or equity financings. These conditions, together with our recurringlosses, raise substantial doubt about our ability to continue as a goingconcern. Our capital requirements will depend on many factors, including: . our ability to control costs; . increased research and development funding, and required investments in our business units; . our ability to generate operating income; . market acceptance of our products; . technological advancements and our competitors' response to our products; . capital improvements to new and existing facilities; . increased sales and marketing expenses; . potential acquisitions of businesses and product lines; and . additional working capital needs. If our capital requirements are materially different from those currentlyplanned, we may need additional capital sooner than anticipated. If additionalfunds are raised through the issuance of equity securities, the percentageownership of our stockholders will be reduced and such securities may haverights, preferences and privileges senior to our common stock. Additionalfinancing may not be available on favorable terms or at all. If adequate fundsare not available or are not available on acceptable terms, we may be unable todevelop or enhance our products, expand our sales and marketing programs, takeadvantage of future opportunities or respond to competitive pressures. 9 Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Ourquarterly revenues and operating results have fluctuated and are likely tocontinue to vary from quarter to quarter due to a number of factors, many ofwhich are not within our control. Factors that could affect our revenuesinclude, among others, the following: . our significant investment in research and development for our subsidiaries and business units; . our ability to control costs; . our ability to develop, introduce, market and gain market acceptance of new products applications and product enhancements in a timely manner; . the size, timing, rescheduling or cancellation of significant customer orders; . the introduction of new products by competitors; . the availability of components used in the manufacture of our products; . changes in our pricing policies and the pricing policies by our suppliers and competitors, pricing concessions on volume sales, as well as increased price competition in general; . the long lead times associated with government contracts or required by vehicle manufacturers; . our success in expanding and implementing our sales and marketing programs; . the effects of technological changes in our target markets; . our relatively small level of backlog at any given time; . the mix of sales among our business units; . deferrals of customer orders in anticipation of new products, applications or product enhancements; . the risks inherent in our acquisitions of technologies and businesses; . risks and uncertainties associated with our international business; . currency fluctuations and our ability to get currency out of certain foreign countries; and . general economic and market conditions. In addition, our sales in any quarter may consist of a relatively smallnumber of large customer orders. As a result, the timing of a small number oforders may impact our quarter to quarter results. The loss of or a substantialreduction in orders from any significant customer could seriously harm ourbusiness, financial condition and results of operations. Due to all of the factors listed above and other risks discussed in thisreport, our future operating results could be below the expectations ofsecurities analysts or investors. If that happens, the trading price of ourcommon stock could decline. As a result of these quarterly variations, youshould not rely on quarter-to-quarter comparisons of our operating results asan indication of our future performance. Our Operating Strategy for Developing Companies is Expensive and May Not BeSuccessful. Our business strategy entails intensive business developmentactivities, which are expensive and highly risky. The goal of this strategy isto develop companies that can be spun-off to our stockholders. This strategyhas in the past required us to make significant investments in our businessunits, both for research and development, and also to develop a separateinfrastructure for certain of our business units, sufficient to allow the unitto function as an independent public company. We expect to continue to investin the development of certain of our business units with the goal of obtainingadditional capital to support further investment and eventually completingadditional public offerings. We may not recognize the benefits of thisinvestment for a significant 10 period of time, if at all. Our ability to complete private financings or aninitial public offering of any of our business units and/or spin-off ourinterest to our stockholders will depend upon many factors, including: . the overall performance and results of operations of the particular business unit; . the potential market for our business unit; . our ability to assemble and retain a broad, qualified management team for the business unit; . our financial position and cash requirements; . the business unit's customer base and product line; . the current tax treatment of spin-off transactions and our ability to obtain favorable determination letters from the Internal Revenue Service; and . general economic and market conditions, including the receptiveness of the stock markets to initial public offerings. We may not be able to complete a successful private or public offering orspin-off of any of our business units in the near future, or at all. Duringfiscal 2001, we attempted to complete the initial public offering of Iteris. Wewithdrew the offering due to adverse market conditions. Even if we do completeadditional public offerings, we may decide not to spin-off a particularbusiness unit, or to delay the spin-off until a later date. We Must Keep Pace with Rapid Technological Change to Remain Competitive. Ourtarget markets are in general characterized by the following factors: . rapid technological advances; . downward price pressure in the marketplace as technologies mature; . changes in customer requirements; . frequent new product introductions and enhancements; and . evolving industry standards and changes in the regulatory environment. Our future success will depend upon our ability to anticipate and adapt tochanges in technology and industry standards, and to effectively develop,introduce, market and gain broad acceptance of new products and productenhancements incorporating the latest technological advancements. We believe that we must continue to make substantial investments to supportongoing research and development in order to remain competitive. We need tocontinue to develop and introduce new products that incorporate the latesttechnological advancements in hardware, storage media, operating systemsoftware and applications software in response to evolving customerrequirements. Our business and results of operations could be adverselyaffected if we do not anticipate or respond adequately to technologicaldevelopments or changing customer requirements. We cannot assure you that anysuch investments in research and development will lead to any correspondingincrease in revenue. Our Future Success Depends on the Successful Development and MarketAcceptance of New Products. We believe our revenue growth and future operatingresults will depend on our ability to complete development of new products andenhancements, introduce these products in a timely, cost-effective manner,achieve broad market acceptance of these products and enhancements, and reduceour product costs. We may not be able to introduce any new products or anyenhancements to our existing products on a timely basis, or at all. Inaddition, the introduction of any new products could adversely affect the salesof our certain of our existing products. Our future success will also depend in part on the success of severalrecently introduced products including DVMS, our family of digital time-lapserecorders; AutoVue, our lane departure warning system; and Dexter, our multi-service access device. 11 Market acceptance of our new products depends upon many factors, includingour ability to accurately predict market requirements and evolving industrystandards, our ability to resolve technical challenges in a timely and cost-effective manner and achieve manufacturing efficiencies, the perceivedadvantages of our new products over traditional products and the marketingcapabilities of our independent distributors and strategic partners. Ourbusiness and results of operations could be seriously harmed by any significantdelays in our new product development. We have experienced delays in the pastin the introduction of new products, particularly with our Roswell system,which we recently discontinued. Certain of our new products could containundetected design faults and software errors or "bugs" when first released byus, despite our testing. We may not discover these faults or errors until aftera product has been installed and used by our customers. Any faults or errors inour existing products or in any new products may cause delays in productintroduction and shipments, require design modifications or harm customerrelationships, any of which could adversely affect our business and competitiveposition. We currently outsource the manufacture of our AutoVue product line to asingle manufacturer. This manufacturer may not be able to produce sufficientquantities of this product in a timely manner or at a reasonable cost, whichcould materially and adversely affect our ability to launch or gain marketacceptance of AutoVue. We Have Significant International Sales and Are Subject to Risks Associatedwith Operating in International Markets. International product salesrepresented approximately 20% of our total net sales and contract revenues forthe fiscal year ended March 31, 2001, approximately 19% for the fiscal yearended March 31, 2000 and approximately 27% for the fiscal year ended March 31,1999. International business operations are subject to inherent risks,including, among others: . unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions; . longer accounts receivable payment cycles; . difficulties in managing and staffing international operations; . potentially adverse tax consequences; . the burdens of compliance with a wide variety of foreign laws;  . import and export license requirements and restrictions of the United States and each other country in which we operate; . exposure to different legal standards and reduced protection for intellectual property rights in some countries; . currency fluctuations and restrictions; and . political, social and economic instability. We believe that international sales will continue to represent a significantportion of our revenues, and that continued growth and profitability mayrequire further expansion of our international operations. Many of ourinternational sales are currently denominated in U.S. dollars. As a result, anincrease in the relative value of the dollar could make our products moreexpensive and potentially less price competitive in international markets. Wedo not engage in any transactions as a hedge against risks of loss due toforeign currency fluctuations. Any of these factors may adversely effect our future international salesand, consequently, on our business and operating results. Furthermore, as weincrease our international sales, our total revenues may also be affected to agreater extent by seasonal fluctuations resulting from lower sales thattypically occur during the summer months in Europe and other parts of theworld. We Need to Manage Growth and the Integration of Our Acquisitions. Over thepast few years, we have expanded our operations and made several substantialacquisitions of diverse businesses, including Intelligent 12 Controls, Inc., International Media Integration Services, Ltd., Meyer MohaddesAssociates, Inc., Viggen Corporation, certain assets of the TransportationSystems business of Rockwell International, and the Security Products Divisionof Digital Systems Processing, Inc. A key element of our business strategyinvolves expansion through the acquisition of complementary businesses,products and technologies. Acquisitions may require significant capitalinfusions and, in general, acquisitions also involve a number of special risks,including: . potential disruption of our ongoing business and the diversion of our resources and management's attention; . the failure to retain or integrate key acquired personnel; . the challenge of assimilating diverse business cultures, and the difficulties in integrating the operations, technologies and information system of the acquired companies; . increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services; . the incurrence of unforeseen obligations or liabilities; . potential impairment of relationships with employees or customers as a result of changes in management; and . increased interest expense and amortization of acquired intangible assets. Acquisitions may also materially and adversely affect our operating resultsdue to large write-offs, contingent liabilities, substantial depreciation,deferred compensation charges or goodwill amortization, or other adverse tax oraudit consequences. Our competitors are also soliciting potential acquisition candidates, whichcould both increase the price of any acquisition targets and decrease thenumber of attractive companies available for acquisition. We cannot assure youthat we will be able to consummate any additional acquisitions, successfullyintegrate any acquisitions or realize the benefits anticipated from anyacquisition. Acquisitions, combined with the expansion of our business units and recentgrowth has placed and is expected to continue to place a significant strain onour resources. To accommodate this growth, we anticipate that we will berequired to implement a variety of new and upgraded operational and financialsystems, procedures and controls, including the improvement of our accountingand other internal management systems. All of these updates will requiresubstantial additional expense as well as management effort. Our failure tomanage growth and integrate our acquisitions successfully could adverselyaffect our business, financial condition and results of operations. We Depend on Government Contracts and Subcontracts and Face Additional RisksRelated to Fixed Price Contracts. A significant portion of the sales by Iterisand a portion of our sales by Zyfer were derived from contracts withgovernmental agencies, either as a general contractor, subcontractor orsupplier. Government contracts represented approximately 25% and 26% of ourtotal net sales and contract revenues for the years ended March 31, 2000 and2001, respectively. We anticipate that revenue from government contracts willcontinue to increase in the near future. Government business is, in general,subject to special risks and challenges, including: . long purchase cycles; . competitive bidding and qualification requirements; . performance bond requirements; . delays in funding, budgetary constraints and cut-backs; and . milestone requirements and liquidated damage provisions for failure to meet contract milestones. 13 In addition, a large number of our government contracts are fixed pricecontracts. As a result, we may not be able to recover for any cost overruns.These fixed price contracts require us to estimate the total project cost basedon preliminary projections of the project's requirements. The financialviability of any given project depends in large part on our ability to estimatethese costs accurately and complete the project on a timely basis. In the eventour costs on these projects exceed the fixed contractual amount, we will berequired to bear the excess costs. These additional costs adversely affect ourfinancial condition and results of operations. Moreover, certain of ourgovernment contracts are subject to termination or renegotiation at theconvenience of the government, which could result in a large decline in our netsales in any given quarter. Our inability to address any of the foregoingconcerns or the loss or renegotiation of any material government contract couldseriously harm our business, financial condition and results of operations. The Markets in Which We Operate Are Highly Competitive and Have Many MoreEstablished Competitors. We compete with numerous other companies in our targetmarkets and we expect such competition to increase due to technologicaladvancements, industry consolidations and reduced barriers to entry. Increasedcompetition is likely to result in price reductions, reduced gross margins andloss of market share, any of which could seriously harm our business, financialcondition and results of operations. Many of our competitors have far greatername recognition and greater financial, technological, marketing and customerservice resources than we do. This may allow them to respond more quickly tonew or emerging technologies and changes in customer requirements. It may alsoallow them to devote greater resources to the development, promotion, sale andsupport of their products than we can. Recent consolidations of end users,distributors and manufacturers in our target markets have exacerbated thisproblem. As a result of the foregoing factors, we may not be able to competeeffectively in our target markets and competitive pressures could adverselyaffect our business, financial condition and results of operations. We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel andWe Do Not Have Employment Agreements with Any Key Personnel. Due to thespecialized nature of our business, we are highly dependent on the continuedservice of our executive officers and other key management, engineering andtechnical personnel, particularly Joel Slutzky, our Chief Executive Officer andChairman of the Board, and Gregory A. Miner, our Chief Operating Officer andChief Financial Officer. We do not have any employment contracts with any ofour officers or key employees. The loss of any of these persons would seriouslyharm our development and marketing efforts, and would adversely affect ourbusiness. Our success will also depend in large part upon our ability tocontinue to attract, retain and motivate qualified engineering and other highlyskilled technical personnel. Competition for employees, particularlydevelopment engineers, is intense. We may not be able to continue to attractand retain sufficient numbers of such highly skilled employees. Our inabilityto attract and retain additional key employees or the loss of one or more ofour current key employees could adversely affect upon our business, financialcondition and results of operations. We May Not be Able to Adequately Protect or Enforce Our IntellectualProperty Rights. If we are not able to adequately protect or enforce theproprietary aspects of our technology, competitors could be able to access ourproprietary technology and our business, financial condition and results ofoperations will likely be seriously harmed. We currently attempt to protect ourtechnology through a combination of patent, copyright, trademark and tradesecret laws, employee and third party nondisclosure agreements and similarmeans. Despite our efforts, other parties may attempt to disclose, obtain oruse our technologies or solutions. Our competitors may also be able toindependently develop products that are substantially equivalent or superior toour products or design around our patents. In addition, the laws of someforeign countries do not protect our proprietary rights as fully as do the lawsof the United States. As a result, we may not be able to protect ourproprietary rights adequately in the United States or abroad. From time to time, we have received notices that claim we have infringedupon the intellectual property of others. Even if these claims are not valid,they could subject us to significant costs. We have engaged in litigation inthe past, and litigation may be necessary in the future to enforce ourintellectual property rights or to determine the validity and scope of theproprietary rights of others. Litigation may also be necessary to defendagainst claims of infringement or invalidity by others. An adverse outcome inlitigation or any similar 14 proceedings could subject us to significant liabilities to third parties,require us to license disputed rights from others or require us to ceasemarketing or using certain products or technologies. We may not be able toobtain any licenses on terms acceptable to us, or at all. We also may have toindemnify certain customers or strategic partners if it is determined that wehave infringed upon or misappropriated another party's intellectual property.Any of these results could adversely affect on our business, financialcondition and results of operations. In addition, the cost of addressing anyintellectual property litigation claim, both in legal fees and expenses, andthe diversion of management resources, regardless of whether the claim isvalid, could be significant and could seriously harm our business, financialcondition and results of operations. The Trading Price of Our Common Stock Is Volatile. The trading price of ourcommon stock has been subject to wide fluctuations in the past. Since January2000, our Class A common stock has traded at prices as low as $1.88 per shareand as high as $29.44 per share. We may not be able to increase or sustain thecurrent market price of our common stock in the future. As such, you may not beable to resell your shares of common stock at or above the price you paid forthem. The market price of our common stock could continue to fluctuate in thefuture in response to various factors, including, but not limited to: . quarterly variations in operating results; . our ability to control costs and improve cash flow; . shortages announced by suppliers; . announcements of technological innovations or new products by our competitors, customers or us; . acquisitions or businesses, products or technologies; . changes in pending litigation or new litigation; . changes in investor perceptions; . our ability to spin-off any business unit; . applications or product enhancements by us or by our competitors; and . changes in earnings estimates or investment recommendations by securities analysts. The stock market in general has recently experienced volatility, which hasparticularly affected the market prices of equity securities of many hightechnology companies. This volatility has often been unrelated to the operatingperformance of these companies. These broad market fluctuations may adverselyaffect the market price of our common stock. In the past, companies that haveexperienced volatilities in the market price of their securities have been thesubject of securities class action litigation. If we were to become the subjectof a class action lawsuit, it could result in substantial losses and divertmanagement's attention and resources from other matters. We Are Controlled by Certain of Our Officers and Directors. As of June 21,2001, our officers and directors beneficially owned approximately 28% of thetotal combined voting power of the outstanding shares of our Class A commonstock and Class B common stock. As a result of their stock ownership, ourmanagement will be able to significantly influence the election of ourdirectors and the outcome of corporate actions requiring stockholder approval,such as mergers and acquisitions, regardless of how our other stockholders mayvote. This concentration of voting control may have a significant effect indelaying, deferring or preventing a change in our management or change incontrol and may adversely affect the voting or other rights of other holders ofcommon stock. Our Stock Structure and Certain Anti-Takeover Provisions May Affect thePrice of Our Common Stock. Certain provisions of our certificate ofincorporation and our stockholder rights plan could make it difficult for athird party to acquire us, even though an acquisition might be beneficial toour stockholders. These provisions could limit the price that investors mightbe willing to pay in the future for shares of our common stock. Our Class Acommon stock entitles the holder to one-tenth of one vote per share and our 15 Class B common stock entitles the holder to one vote per share. The disparityin the voting rights between our common stock, as well as our insiders'significant ownership of the Class B common stock, could discourage a proxycontest or make it more difficult for a third party to effect a change in ourmanagement and control. In addition, our Board of Directors is authorized toissue, without stockholder approval, up to 2,000,000 shares of preferred stockwith voting, conversion and other rights and preferences superior to those ofour common stock, as well as additional shares of Class B common stock. Ourfuture issuance of preferred stock or Class B common stock could be used todiscourage an unsolicited acquisition proposal. In March 1998, we adopted a stockholder rights plan and declared a dividendof preferred stock purchase rights to our stockholders. In the event a thirdparty acquires more than 15% of the outstanding voting control of our companyor 15% of our outstanding common stock, the holders of these rights will beable to purchase the junior participating preferred stock at a substantialdiscount off of the then current market price. The exercise of these rights andpurchase of a significant amount of stock at below market prices could causesubstantial dilution to a particular acquiror and discourage the acquiror frompursuing our company. The mere existence of a stockholder rights plan oftendelays or makes a merger, tender offer or proxy contest more difficult. We Do Not Pay Cash Dividends. We have never paid cash dividends on ourcommon stock and do not anticipate paying any cash dividends on either class ofour common stock in the foreseeable future. We May Be Subject to Additional Risks. The risks and uncertainties describedabove are not the only ones facing our company. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also adversely affect our business operations. ITEM 2. PROPERTIES. Our headquarters and principal operations are located in Anaheim,California. In 1984, we purchased and renovated a three building complexcontaining approximately 257,900 square feet situated on approximately 14 acresadjacent to the Interstate 5 freeway, one block from Disneyland. Our facilitieshouse our corporate and administrative offices (approximately 43,600 dedicatedsquare feet), as well as the operations of Gyyr and Broadcast, (approximately113,400 dedicated square feet), Zyfer (approximately 56,300 dedicated squarefeet), Mariner Networks (approximately 20,600 dedicated square feet) and Iteris(approximately 24,000 dedicated square feet). Broadcast leases approximately 5,000 square feet in Austin, Texas primarilyfor service and sales support. Odetics Europe Limited's offices are located inleased space near London, England. Odetics Asia Pacific Pte. Ltd. offices arelocated in leased space in Singapore. Iteris leases eleven office suitesrepresenting an aggregate of approximately 35,000 square feet within the UnitedStates for its support staff and development teams. We currently operate a single shift in each of our manufacturing andassembly facilities, and we believe that our facilities are adequate for ourcurrent needs and for possible future growth. We may, however, elect to expandor relocate its offices and facilities in the future. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Class A common stock and Class B common stock are traded on the NasdaqNational Market under the symbols "ODETA" and "ODETB," respectively. Thefollowing table sets forth for the fiscal periods indicated the high and lowsales prices for the Class A common stock and Class B common stock as reportedby the Nasdaq National Market: Class A Class B Common Stock Common Stock ------------- ------------- High Low High Low ------ ------ ------ ------ Fiscal Year Ended March 31, 2000 First Quarter.................................... $10.25 $ 7.63 $10.63 $ 8.25 Second Quarter................................... 13.00 9.13 12.13 9.13 Third Quarter.................................... 15.50 10.13 15.63 10.38 Fourth Quarter................................... 29.44 12.00 29.63 13.00 Fiscal Year Ended March 31, 2001 First Quarter.................................... 15.25 7.88 15.00 10.00 Second Quarter................................... 17.94 13.00 17.63 13.50 Third Quarter.................................... 17.00 5.53 17.00 5.63 Fourth Quarter................................... 8.00 2.94 8.25 3.00 Fiscal Year Ending March 31, 2002 First Quarter (through June 21, 2001)............ 4.60 1.88 4.64 2.95 As of June 21, 2001, we had 556 holders of record of Class A common stockand 127 holders of record of Class B common stock according to informationfurnished by our transfer agent. Dividend Policy Pursuant to the terms of our Loan and Security Agreement with our lender, weare prohibited from paying any dividends on our common stock without ourlender's consent. We have never paid or declared cash dividends on either classof our common stock, and have no current plans to pay such dividends in theforeseeable future. We currently intend to retain any earnings for workingcapital and general corporate purposes. The payment of any future dividendswill be at the discretion of our Board of Directors, and will depend upon anumber of factors, including, but not limited to, future earnings, the successof our business, activities, our capital requirements, our general financialcondition and future prospects, general business conditions, the consent of ourlender and such other factors as the Board may deem relevant. Recent Sales of Unregistered Securities During the last fiscal year, we have sold and issued the followingunregistered securities: In October 1998, Iteris acquired Meyer, Mohaddes Associates, Inc. Pursuantto the terms of the merger agreement, and as a penalty for not completing theinitial public offering of Iteris, we issued an aggregate of an additional38,995 shares of our Class A Common Stock in fiscal 2001 to the formershareholders of Meyer, Mohaddes. 17 In September 2000, we issued an aggregate of 1,199,815 shares of our Class Acommon stock to 24 accredited investors in a private placement at a purchaseprice of $14.26 per share or an aggregate purchase price of $17.1 million. B.Riley & Co. acted as a finder with respect to a portion of this offering. The sale and issuance of securities set forth above were deemed to be exemptfrom registration under the Securities Act by virtue of Section 4(2) thereof.The recipients of the securities in each of the transactions set forth in aboverepresented their intention to acquire such securities for investment only andnot with a view to or for sale in connection with any distribution thereof, andappropriate legends were affixed to the share certificates and instruments usedin such transactions. Except as indicated above, there were no underwriters,brokers or finders employed in connection with any of the foregoingtransactions. 18 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data with respect to ourconsolidated statement of operations for each of the five fiscal years in theperiod ended March 31, 2001 and the consolidated balance sheet data at March31, 1997, 1998, 1999, 2000 and 2001 are derived from our audited consolidatedfinancial statements. The consolidated financial statements for the fiscalyears ended March 31, 1997 and 1998 and our consolidated balance sheet atMarch 31, 1997, 1998 and 1999 are not included in this report. The followinginformation should be read in conjunction with "Management's Discussion andAnalysis of Financial Condition and Results of Operations" and with ourconsolidated financial statements and the related notes thereto includedelsewhere in this report. Fiscal Year Ended March 31, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data:Net sales.................... $71,748 $ 79,552 $ 70,042 $ 62,041 $ 57,030Contract revenues............ 9,032 10,284 13,331 18,666 20,039 ------- -------- -------- -------- --------Total net sales and contract revenues.................... 80,780 89,836 83,373 80,707 77,069Cost of sales................ 48,507 55,227 49,816 50,883 46,244Cost of contract revenues.... 4,907 6,530 9,007 13,431 13,781Gross profit--net sales...... 23,241 24,325 20,226 11,158 10,786Gross profit--contract revenues.................... 4,125 3,754 4,324 5,235 6,258 ------- -------- -------- -------- --------Total gross profit........... 27,366 28,079 24,550 16,393 17,044Selling, general and administrative expense...... 19,831 26,010 31,670 38,173 41,780Research and development expense..................... 7,734 9,271 11,191 16,888 18,812In process research and development................. -- 2,106 -- -- --Special charge............... -- 1,716 -- -- 6,285 ------- -------- -------- -------- --------Loss from operations......... (199) (10,924) (18,311) (38,668) (49,833)Non-operating income (expense) Royalty income............. -- -- -- 38,437 19,055 Interest expense, net...... (183) (617) (1,807) (2,048) (1,762) ------- -------- -------- -------- --------Loss before taxes............ (382) (11,541) (20,118) (2,279) (32,540)Income taxes (benefit)....... (181) (2,858) -- -- -- ------- -------- -------- -------- --------Loss from continuing operations.................. (201) (8,683) (20,118) (2,279) (32,540)Income from discontinued operations, net of income taxes....................... 3,931 2,089 -- -- -- ------- -------- -------- -------- --------Net income (loss)............ $ 3,730 $ (6,594) $(20,118) $ (2,279) $(32,540) ======= ======== ======== ======== ========Diluted earnings (loss) per share:Continuing operations........ $ (0.03) $ (1.26) $ (2.57) $ (0.25) $ (3.26)Discontinued operations...... 0.62 0.31 -- -- -- ------- -------- -------- -------- --------Earnings (loss) per share.... $ 0.59 $ (0.95) $ (2.57) $ (0.25) $ (3.26) ======= ======== ======== ======== ========Shares used in calculating diluted earnings (loss) per share....................... 6,299 6,912 7,820 9,089 9,977 ======= ======== ======== ======== ======== Fiscal Year Ended March 31, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- -------- (in thousands) Consolidated Balance Sheet Data:Working capital (deficit).... $21,903 $ 19,996 $ 15,216 $ 12,855 $ (8,845)Total assets................. 85,805 88,790 81,355 81,850 68,061Long-term debt (less current portion).................... 11,860 21,000 19,962 11,666 4,800Retained earnings (deficit).. 12,211 (3,795) (23,913) (26,192) (58,732)Total stockholders' equity... 51,828 38,580 36,323 36,110 20,378 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations The following table sets forth certain income statement data as a 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, --------------------- 1999 2000 2001 ----- ----- ----- Net sales............................................... 84.0% 76.9% 74.0%Contract revenues....................................... 16.0 23.1 26.0 ----- ----- -----Total net sales and contract revenues................... 100.0% 100.0% 100.0%Gross profit--net sales................................. 28.9 18.0 18.9Gross profit--contract revenues......................... 32.4 28.1 31.2Selling, general and administrative expense............. 38.0 47.3 54.2Research and development expense........................ 13.4 20.9 24.4Special charge.......................................... -- -- 8.2Loss from operations.................................... (22.0) (47.9) (64.7)Non-operating income (expense): Royalty income........................................ -- 47.6 24.7 Interest expense, net................................. (2.1) (2.5) (2.3)Income taxes (benefit).................................. -- -- --Net loss................................................ (24.1)% (2.8)% (42.2)% ===== ===== ===== General. We define our business segments as video products, telecom productsand ITS. The video products segment includes our wholly-owned subsidiaries,Broadcast and Gyyr. The telecom products segment includes Zyfer, our wholly-owned subsidiary (formerly known as our Communications division) andMariner Networks, our wholly-owned subsidiary. The ITS segment includesOdetics' 93% owned subsidiary, Iteris. In April 2001, Gyyr separated itsoperations into two divisions, Gyyr CCTV Products, which manufactures analogand digital storage solutions, and Gyyr Electronic Access Control, whichmanufactures enterprise security management systems. All references to oursubsidiaries in this report include the prior business and results ofoperations of such subsidiaries as business units of Odetics prior to theirincorporation. During the quarter ended December 31, 2000, we effected a restructuring toreduce our overall expenses and to further focus our business development onthose areas that we believe provide the opportunity for the highest return onstockholder capital. This restructuring included a reduction of approximately25% of our total workforce and the discontinuation of certain product lines. Asa result of these actions, we incurred charges in the amount of $9.4 million inthe three months ended December 31, 2000. Of the total charges incurred,approximately $6.3 million was classified as a non-recurring special charge,representing severance payments and the write-down of certain assets. Net Sales and Contract Revenues. Net sales and contract revenues consist of(i) sales of products and services to commercial and municipal customers ("netsales") and (ii) revenue derived from contracts with state, county andmunicipal agencies for intelligent transportation systems projects ("contractrevenues"). Contract revenues also include revenue from contracts with agenciesof the United States Government and foreign entities for space-borne recordersused for geographical information systems. Total net sales and contractrevenues decreased 4.5% to $77.1 million for the fiscal year ended March 31,2001 ("fiscal 2001") compared to $80.7 million for the fiscal year ended March31, 2000 ("fiscal 2000"), and decreased 3.2% for the fiscal year ended March31, 2000 compared to $83.4 million for the fiscal year ended March 31, 1999("fiscal 1999"). 20 Net Sales. Net sales decreased 8.1% to $57.0 million in fiscal 2001 compared to $62.0 million in fiscal 2000 as a result of declining sales in Broadcast, Mariner Networks and Gyyr, offset in part by increased sales in Iteris and Zyfer. Broadcast sales decreased 20.1% in fiscal 2001 compared to fiscal 2000 as a result of declining sales of its automated tape libraries. In the quarter ended December 31, 2000, Broadcast determined it would not pursue continued sales opportunities for its Roswell facility management system and shifted the focus of its business on sales of its AIRO Automation systems. Mariner Networks sales decreased 56.5% in fiscal 2001 compared to fiscal 2000 as a result of the transition of its product offering entirely to its emerging Dexter family of multi-service access devices for the telecommunications market. Prior to this shift in product strategy, Mariner Networks had sold a variety of network access products that have been removed from its product line. Gyyr's sales decreased 10.8% in fiscal 2001 compared to fiscal 2000 due principally to the decline in sales of analog based time-lapse recorder product families. During the quarter ended June 30, 2001, Gyyr divested its Vortex Dome and Quarterback Controller product lines as part of a broader strategy to narrow its product offering to digital and analog recording and access control systems. Iteris' product sales increased 37% in fiscal 2001, primarily due to increased unit sales of its Vantage video detection products.  Net sales decreased 11.4% to $62.0 million in fiscal 2000 compared to $70.0 million in fiscal 1999 as a result of declining sales in Broadcast, Mariner Networks and Gyyr. The decrease in Broadcast sales in fiscal 2000 reflects delays in the delivery of our Roswell facility management system. The decline in Mariner Networks' sales reflects the loss in August 1999 of IBM as a significant OEM customer of its Frame product family. Gyyr's revenues declined 6.1% in fiscal 2000 compared to fiscal 1999 primarily as a result of declining sales of its analog based time-lapse recorder product families. Gyyr made substantial investments in expanding its product line to include a broad family of integrated security solutions, including the acquisition of a line of digital time-lapse recorders. This product line expansion was the result of our acquisition of the Security Products Division of Digital Systems Processing, Inc. in December 1999. Contributions of revenue in fiscal 2000 from the expanded product offerings were not significant enough to offset the declining revenues from analog- based time-lapse recorders. Contract Revenues. Contract revenues increased 7.4% to $20.0 million in fiscal 2001 compared to $18.7 million in fiscal 2000 and increased 40.0% in fiscal 2000 compared to $13.3 million in fiscal 1999. During fiscal 1999, we acquired Meyer Mohaddes Associates, Inc. and the assets of Viggen Corporation as part of a broader strategy to significantly grow our contract systems business in the ITS market. The growth in contract revenues in fiscal 2001 and fiscal 2000 reflects the successful execution of that strategy. Contract revenues derived from Iteris represented 83.5% of total contract revenues in fiscal 2000 compared to 64.9% of total contract revenues in fiscal 1999. The increase in Iteris' contract revenues in both fiscal 2001 and fiscal 2000 was offset by continued declines in contract revenues derived from the sale of space-borne recorders and related service and equipment to agencies of the United States Government. We have focused our recent contract procurement efforts on commercial markets and the markets for Iteris' products and services. Gross Profit. Total gross profit increased 4.0% to $17.0 million in fiscal2001, compared to $16.4 million in fiscal 2000, and decreased 33.2% in fiscal2000 compared to $24.6 million in fiscal 1999. Total gross profit as a percentof net sales and contract revenues increased to 22.1% in fiscal 2001, comparedto 20.3% in fiscal 2000, and declined from 29.5% in fiscal 1999. Gross profitas a percent of net sales increased to 18.9% in fiscal 2001 compared to 18.0%in fiscal 2000. Gross profit in fiscal 2001 is net of charges totaling $3.1million, or 4.0% of net sales and contract revenues, related to the write-offof inventories associated with discontinued product lines in our Gyyr andBroadcast businesses. The charges were incurred in the third quarter of fiscal2001 and were part of an overall restructuring announced in January 2001. The increase in gross profit as a percent of net sales in fiscal 2001reflects increased gross profit on sales of Iteris Vantage products whichcomprised 17.5% of net sales in fiscal 2001 compared to 11.7% of net sales infiscal 2000. In addition to improvements in Vantage gross profits, the grossprofit performance in fiscal 2000 was 21 negatively impacted by pricing concessions to certain customers in ourBroadcast business. During fiscal 2000, gross profit on net sales was alsoimpaired due to our adjustments to inventory reserves and capitalized softwarerelated to certain discontinued products and product options in MarinerNetworks, Broadcast and Gyyr. Gross profit as a percent of contract revenues increased to 31.2% in fiscal2001 compared to 28.0% in fiscal 2000. The increase in gross profit on contractrevenues in fiscal 2001 reflects improved gross profit performance in bothIteris and Zyfer. We recognize contract revenues and related gross profit usingpercentage of completion contract accounting, and the related gross profitrecognized in any given year is primarily affected by the underlying mix ofcontract activity. Gross profit as a percent of contract revenues decreased to 28.0% in fiscal2000 compared to 32.4% in fiscal 1999. Lower gross profit on contract revenuesin fiscal 2000 reflect a mix of lower margin contract activity. Selling, General and Administrative Expense. Selling, general andadministrative expense increased 9.4% to $41.8 million (or 54.2% of total netsales and contract revenues) compared to $38.2 million (or 47.2% of total netsales and contract revenues) in fiscal 2000, and increased 20.5% in fiscal 2000compared to $31.7 million (or 38.0% of total net sales and contract revenues)in fiscal 1999. During fiscal 2001, we increased expenditures for sales andmarketing and general and administrative by approximately $4.2 million inMariner Networks principally to fund its international sales and marketingorganization to support the roll-out of its Dexter product offering. Theincreased expenditures were primarily in the area of salaries and relatedbenefits, travel and living, trade shows, and advertising and promotion. Theincrease in sales and marketing expense in Mariner Networks was partiallyoffset by decreased expenditures by Gyyr and Broadcast, which were part of ouroverall cost reduction plan. Iteris also experienced increased general andadministrative expense in fiscal 2001 related to the build up of itsadministrative infrastructure to support its planned spin-off from Odetics,originally planned for the quarter ended June 30, 2000. As a result of theaborted public offering and spin-off, general and administrative expense infiscal 2001 included a charge of approximately $360,000 related to the write-off of deferred public offering costs. During fiscal 2000, we increased expenditures for sales and marketing andgeneral and administrative in Mariner Networks, Iteris and Broadcast.Concurrent with the completion of development of Mariner Networks' Dexterproduct and its progression to beta testing, we began building additional salesand marketing and administrative functions to support anticipated revenuegrowth. In preparation for the initial public offering of Iteris, we increasedsales and marketing expense and general and administrative expense to enableIteris to execute on its expansion plans and to function as an independentpublic company. In connection with this proposed public offering, we alsoadjusted the amortization periods for goodwill that arose upon the acquisitionof the assets of the Transportation Systems business of Rockwell, and Meyer,Mohaddes Associates, Inc. The effect of the adjustment was an incrementalcharge to amortization expense of $887,000 during fiscal 2000. Iteris alsoexperienced increased sales and marketing, and general and administrativeexpenses as a result of its acquisitions of Meyer Mohaddes Associates inOctober 1998, and of certain assets of Viggen Corporation in January 1999. Inaddition, the increase in selling, general and administrative expense in fiscal2000 reflects charges of approximately $500,000 for adjustment to the allowancefor doubtful accounts in Broadcast. Research and Development Expense. Research and development expense increased11.4% to $18.8 million (or 24.4% of total net sales and contract revenues) infiscal 2001 compared $16.9 million (or 20.9% of total net sales and contractrevenues) in fiscal 2000, and increased 50.9% in fiscal 2000 compared to $11.2million (or 13.4% of total net sales and contract revenues) in fiscal 1999. Forcompetitive reasons, we closely guard the confidentiality of specificdevelopment projects. The increase in research and development expense infiscal 2001 reflects increased spending primarily by Mariner Networks andIteris, partially offset by reductions ins spending by Gyyr and Broadcast. Theincrease in research and development expense by Mariner Networks reflectscontinued development of Dexter 3000, which was released for generalavailability to the market in June 2001. The increase in Iteris research anddevelopment expense largely represents expenditures to support its developmentinitiatives for its Personalized Traveler Information Systems and, to a 22 lesser extent, continued development of its AutoVue product offering. As partof cost reduction initiatives completed in the quarter ended December 31, 2000,Iteris substantially reduced spending to support development of itsPersonalized Traveler Information Systems. Consequently, Iteris' research anddevelopment expense in the three months ended March 31, 2001 declined from thecomparable three month period ended March 31, 2000. The reductions in researchand development expense in Gyyr and Broadcast reflect the result of our overallexpense reduction efforts. The increase in research and development expense in fiscal 2000 partlyreflects the capitalization of certain development costs in fiscal 1999. Duringfiscal 1999, $2.8 million of development costs for Roswell and $2.1 million ofdevelopment costs for Dexter were capitalized as qualified software developmentcosts. The increase in research and development expense in fiscal 2000 alsoreflects increased expenditures by Iteris, Broadcast and Mariner Networks.Iteris increased its development activities 72.1% during fiscal 2000 to supportits AutoVue product development. Broadcast continued to aggressively developits Roswell facility management system and completed the development of itsMicroStation product offering. All software development activities forBroadcast during fiscal 2000 were charged as research and development expense.Mariner Networks capitalized $300,000 of software development costs in fiscal2000, significantly expanded its product development team and increasedresearch and development expenses 223.9% during fiscal 2000 compared to fiscal1999 to support the completion of its development schedule for Dexter in orderto meet a targeted beta release of the product in the first quarter of fiscal2001. Gyyr reduced its expenses for product development 27.6% in fiscal 2000compared to fiscal 1999 in response to its efforts to reduce overall operatingexpenses and because it had completed several development initiatives as of theend of fiscal 1999. The change in Zyfer's product development expenses infiscal 2000 compared to fiscal 1999 was not significant. Nonrecurring Charge. In December 2000, we recorded a nonrecurring charge of$6.3 million. Approximately $1.3 million of the charge reflects severancepayments for staffing reductions, and the remainder represents non-cash chargesfor asset write-downs and reserves established in connection with thediscontinuation of certain product lines. Royalty Income. In connection with the settlement of our action againstStorageTek, we received proceeds, net of expenses and fees, of approximately$38.4 million in October 1999, and $17.8 million in June 2000 in fullsettlement of the amounts due us. Interest Expense, Net. Interest expense, net reflects the net of interestexpense and interest income as follows: Year Ended March 31, -------------------- 1999 2000 2001 ------ ------ ------ Interest expense........................................ $1,928 $2,313 $ 2012 Interest income......................................... 121 265 250 ------ ------ ------ Interest expense, net................................... $1,807 $2,048 $1,762 ====== ====== ====== Interest expense decreased 13% in fiscal 2001 compared to fiscal 2000 andincreased 20.0% in fiscal 2000 compared to fiscal 1999. Interest expenseprimarily reflects interest charges on our line of credit borrowings andmortgage interest. The fluctuations in interest expense in fiscal 2001 andfiscal 2000 represents changes in the average outstanding borrowings on ourline of credit to fund negative operating cash flow. Interest income in fiscal2001 and fiscal 2000 is primarily related to interest earned on invested cashreceived from our settlement with StorageTek. Interest income in fiscal 1999was derived primarily from a note receivable due from ATL Products, Inc., ourformer subsidiary. ATL repaid in full the outstanding balance of its notereceivable in July 1998. Income Taxes. We have not provided income tax benefit for the lossesincurred in fiscal 2001, 2000 and 1999 due to the uncertainty as to theultimate realization of the benefit. 23 Liquidity and Capital Resources During fiscal 2001 and 2000, we reported operating losses of $49.8 millionand $38.7 million, respectively, and we had a working capital deficiency of$8.8 million at March 31, 2001. We financed our operations in fiscal 2001 and2000 largely through cash received from the settlement of certain litigationwith StorageTek, debt and equity financings and, to a lesser extent, throughthe sale of assets of certain of our subsidiaries. In October 1999, we settled litigation with StorageTek in exchange forlicense fees payable to us in the aggregate amount of $100.0 million, $80.0million of which was paid on the settlement date (resulting in net cash to usof $38.4 million after payment of the related expenses). In June 2000, weamended the settlement agreement with StorageTek to provide for theacceleration of the payment of the $20.0 million still owed to us. Under theterms of the amendment, StorageTek paid us $17.8 million in cash during fiscal2001 to complete the settlement. During fiscal 2001, we used $20.1 million of cash to fund operations, whichreflects our net loss of $32.5 million, offset by non-cash charges of $5.0million for depreciation and amortization, $4.0 million for the write off ofcapitalized software and goodwill, and a $4.6 million reduction in netoperating assets and liabilities. During fiscal 2001, we also sold certainassets of Zyfer and of our solid state recording product line for $1.9 millionin cash. In connection with these sales, we recorded a non-operating gain of$1.2 million. In fiscal 2000, we sold an option to purchase our principal facilities inAnaheim California to Manchester Capital LLC for an aggregate purchase price of$5.0 million. We used $5.6 million in cash in fiscal 2001 to repurchase thisoption, which included accrued interest. At March 31, 2001, we had $13.5 million outstanding on a $17.0 million lineof credit with Transamerica Business Credit. While this line of credit expiredon December 31, 2000, we received an extension until July 31, 2001. Inaddition, due to the breach of certain financial and other covenants under thisline of credit, we entered into a forbearance agreement in May 2001 withTransamerica that expires July 31, 2001. Under the terms of this forbearanceagreement and the extension, we are prohibited from making further borrowingsunder the line of credit. In May 2001, we received $16.0 million pursuant to a promissory note securedby a first trust deed on our principal facilities in Anaheim, California. Thispromissory note is due in May 2002 and bears annual interest at the rate of10%. In connection with this loan, we issued warrants to this lender topurchase 426,667 shares of our Class A common stock at an exercise price of $4per share. If we prepay this note prior to six months following its issuance,the lender, at its option, may convert up to $1.6 million of the principalamount on this note into our Class A common stock at a conversion price of $4per share. Of the $16.0 million proceeds received from the promissory note financing,we used approximately $6 million to retire the pre-existing first trust deed onour Anaheim real property and $5.9 million to reduce the borrowings dueTransamerica under the line of credit to $7.6 million in May 2001 in accordancewith the terms of the forbearance agreement. We used the balance of theproceeds from this financing, after payment of expenses, for general workingcapital purposes. In January 2001, we announced that in response to tightening credit andcapital markets we were taking a number of actions to reduce our operatingexpenses, improve our gross profit and operating profit performance, and narrowour negative operating cash flow and operating losses. Concurrent with thoseactions, we incurred charges in the three months ended December 31, 2000totaling $9.4 million. Approximately $1.3 million of these charges incurredwere cash charges related to severance payments for staffing reductions and thebalance were non-cash charges related to asset write-downs and reservesestablished in connection with the discontinuation of certain products. We expect that our operations will continue to use net cash for theforeseeable future. During fiscal 2002, we expect to have an ongoing need toraise cash by securing additional debt or equity financing, or by divestingcertain assets to fund our operations until they return to profitability andpositive operating cash 24 flow. We are currently considering the sale and leaseback of our principaloperating facilities in Anaheim, California and are in negotiations with afinancial institution to provide a new line of credit. We cannot be certainthat our plan to sell and leaseback of our facilities will be successful, thatwe will be able to secure a new line of credit on terms acceptable to us, or atall, or that our existing lender will continue to extend our existing borrowingrelationship. Our future cash requirements will be highly dependent on ourability to control expenses as well as the successful execution of the revenueplans by each of our businesses. As a result, any projections of future cashrequirements and cash flows are subject to substantial uncertainty.  These conditions, together with our recurring operating losses, raisesubstantial doubt about our ability to continue as a going concern. Ourconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orliabilities that may result from the outcome of this uncertainty. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. We are exposed to interest rate risk primarily from our long-term debtarrangements. Under our current policies, we do not use interest ratederivative instruments to manage our exposure to interest rate changes. The following table provides information about our debt obligations that aresensitive to changes in interest rates. Expected maturity date March 31, ------------------------------------------------ Fair 2002 2003 2004 2005 Total value ------ ------ ------ ------ ------- ------- (dollars in thousands) Fixed rate debt.............. $6,990 $1,804 $1,653 $1,343 $11,790 $11,790 Average interest rate........ 8.87% 9.18% 9.36% 9.36% 9.02% ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by Regulation S-Xare included in thisForm 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Identification of Directors. The information under the heading "Electionof Directors," appearing in our proxy statement, is incorporated herein byreference. (b) Identification of Executive Officers. The information under the heading"Executive Compensation and Other Information," appearing in our proxystatement, is incorporated herein by reference. (c) Compliance with Section 16(a) of the Exchange Act. The information underthe heading "Executive Compensation and Other Information," appearing in ourproxy statement, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under the heading "Executive Compensation," appearing in ourproxy statement, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the heading "Principal Stockholders and Common StockOwnership of Certain Beneficial Owners and Management," appearing in our proxystatement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the heading "Certain Transactions," appearing in ourproxy statement, is incorporated herein by reference. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: 1. Financial Statements. The following financial statements of Odetics areincluded in a separate section of this Annual Report on Form 10-K commencing onthe pages referenced below: Page ---- Report of Independent Auditors........................................ F-2 Consolidated Balance Sheets as of March 31, 2000 and 2001............. F-3 Consolidated Statements of Operations for the years ended March 31, 1999, 2000 and 2001.................................................. F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 2000 and 2001........................................ F-5 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 2000 and 2001.................................................. F-6 Notes to Consolidated Financial Statements............................ F-7 2. Financial Statement Schedules. Schedule II -- Valuation and Qualifying Accounts......................... S-1 All other schedules have been omitted because they are not required or therequired information is included in our consolidated financial statements andnotes thereto. 3. Exhibits. 3.1 Certificate of Incorporation of Odetics, as amended (incorporated by reference to Exhibit 19.2 to Odetics' Quarterly Report on Form 10-Q for the quarter ended September 30, 1987). 3.2 Bylaws of Odetics, as amended (incorporated by reference to Exhibit 4.2 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on July 6, 1993). 4.1 Specimen of Class A Common Stock and Class B Common Stock certificates (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on September 30, 1993). 4.2 Form of rights certificate for Odetics' preferred stock purchase rights (incorporated by reference to Exhibit A of Exhibit 4 to Odetics' Current Report on Form 8-K as filed with the SEC on May 1, 1998). 10.1 Profit Sharing Plan and Trust (incorporated by reference to Exhibit 10.3 to Odetics' Amendment No. 2 to the Registration Statement on Form S-8 (Reg. No. 002-98656) as filed with the SEC on May 5, 1988). 10.2 Form of Executive Deferral Plan between Odetics and certain employees of Odetics (incorporated by reference to Exhibit 10.4 to Odetics' Annual Report on Form 10-K for the year ended March 31, 1988). 10.3 Loan and Security Agreement dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics, and Schedule to Loan Agreement (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999).  10.4 Amendment to Loan Agreement dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics, and related Schedule to Loan Agreement dated December 28, 1998 (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999). 27 10.5 Revolving Credit Note dated December 28, 1998 payable to Transamerica Business Credit Corporation in the original principal amount of $17,000,000 (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999). 10.6 Letter of Credit Agreement dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999). 10.7 Security Agreement in Copyrighted Works dated December 28, 1998 between Transamerica Business Credit Corporation and Odetics (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999). 10.8 Patent and Trademark Security Agreement dated December 28, 1998 between Transamerica Business Credit Corporation and Odetics (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999). 10.9 Cross-Corporate Continuing Guaranty dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics (incorporated by reference to the same exhibit number in Odetics' Annual Report on Form 10-K for the year ended March 31, 1999). 10.10 Amendments to Loan Agreement dated December 22, 2000, February 28, 2001 and May 29, 2001 among Transamerica Business Credit Corporation and Odetics and its subsidiaries. 10.11 Forbearance Agreement dated May 28, 2001 among Transamerica Business Credit Corporation and Odetics and its subsidiaries. 10.12 Form of Indemnity Agreement entered into by Odetics and certain of its officers and directors (incorporated by reference to Exhibit 19.4 to Odetics' Quarterly Report on Form 10-Q for the quarter ended September 30, 1988). 10.13 Schedule of officers and directors covered by Indemnity Agreement (incorporated by reference to Exhibit 10.9.2 to Amendment No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on July 6, 1993). 10.14 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust (incorporated by reference to Exhibits 4.3.1 and 4.3.2, respectively, to Amendment No. 3 to Odetics' Registration Statement on Form S-3 (Reg. No. 002-86220) as filed with the SEC on June 13, 1990). 10.15 1997 Stock Incentive Plan of Odetics (incorporated by reference to Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 10.16 Form of Notice of Grant of Stock Option (incorporated by reference to Exhibit 99.2 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000) 10.17 Form of Stock Option Agreement (incorporated by reference to Exhibit 99.3 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 10.18 Form of Addendum to Stock Option Agreement--Involuntary Termination Following Corporate Transaction or Change in Control (incorporated by reference to Exhibit 99.4 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 10.19 Form of Addendum to Stock Option Agreement--Limited Stock Appreciation Rights (incorporated by reference to Exhibit 99.5 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 10.20 Form of Stock Issuance Agreement (incorporated by reference to Exhibit 99.6 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000) 10.21 Form of Addendum to Stock Issuance Agreement--Involuntary Termination Following Corporate Transaction/Change in Control (incorporated by reference to Exhibit 99.7 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 10.22 Form of Notice of Grant of Automatic Stock Option--Initial Grant filed as Exhibit 99.8 filed as Exhibit (incorporated by reference to Exhibit 99.8 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 28 10.23 Form of Notice of Grant of Automatic Stock Option--Annual Grant (incorporated by reference to Exhibit 99.9 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000). 10.24 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the (incorporated by reference to Exhibit 99.10 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 19, 2000). 10.25 Rights Agreement dated April 24, 1998 between Odetics and BankBoston, N.A., which includes the form of Certificate of Designation for the junior participating preferred stock as Exhibit A, the form of rights certificate as Exhibit B and the summary of rights to purchase Series A preferred shares as Exhibit C (incorporated by reference to Exhibit 4 to Odetics' Current Report on Form 8-K as filed with the SEC on May 1, 1998). 10.26 1994 Long-Term Equity Plan of Odetics (incorporated by reference to Exhibit 4.3 to Odetics' Registration Statement on Form S-8 (File No. 333-05735) as filed with the SEC on June 11, 1996). 10.27 Subordinated Convertible Note Purchase Agreement dated January 25, 2000 between Iteris, Inc. and DaimlerChrysler GmbH (incorporated by reference to Exhibit 10.31 to Odetics' Annual Report on Form 10-K as filed with the SEC on June 29, 2000). 10.28 Subordinated Convertible Note dated January 25, 2000 between Iteris, Inc. and DaimlerChrysler GmbH (incorporated by reference to Exhibit 10.32 to Odetics' Annual Report on Form 10-K as filed with the SEC on June 29, 2000). 10.29 Securities Purchase Agreement dated May 29, 2001, by and between Odetics and Castle Creek Technology Partners LLC. Included from the Agreement are Exhibit A (form of Senior Convertible Promissory Note), Exhibit B-1 (form of Stock Purchase Warrant), Exhibit B-2 (form of Stock Purchase Warrant), Exhibit B-3 (form of Stock Purchase Warrant), and Exhibit D (form of Deed of Trust) (incorporated by reference to Exhibit 99.1 to Odetics' Current Report on Form 8-K as filed with the SEC on June 1, 2001). 10.30 Registration Rights Agreement dated May 29, 2001, by and between Odetics and Castle Creek Technology Partners LLC (incorporated by reference to Exhibit 99.2 to Odetics' Current Report on Form 8-K as filed with the SEC on June 1, 2001). 10.31 Amendment to Rights Agreement, dated May 21, 2001, by and between Odetics and Fleet National Bank (a.k.a. Bank Boston, N.A. (incorporated by reference to Exhibit 99.4 to Odetics' Current Report on Form 8-K as filed with the SEC on June 1, 2001). 21 Subsidiaries of Odetics (incorporated by reference to Exhibit 21 to Odetics' Annual Report on Form 10-K as filed with the SEC on June 29, 2000). 23.1 Consent of Independent Auditors. (b) Reports on Form 8-K On August 16, 2000, we filed a Current Report on Form 8-K to announce thatIteris, Inc., a subsidiary of Odetics, Inc., reached an agreement with FordMotor Company to become the exclusive supplier of the optical lane departurewarning systems to be installed on future Ford, Lincoln and Mercury badgedvehicles produced and sold in the United States. Under terms of the agreement,Ford will receive warrants to purchase up to approximately 9.9% of Iteriscommon stock if Ford meets predetermined Auto Vue purchase volumes over the sixyear term of the agreement. The warrants will not be fully exercisable untilFord purchases a number of units that results in sales of approximately $90million dollars over the life of the agreement. However, Ford has no obligationto purchase any Auto Vue products under the agreement. Ford will not play arole in the management of Iteris. 29 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 July 13, 2001. ODETICS, INC. 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, ourtrue 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 lawfully door 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, July 13, 2001____________________________________ President and Chairman of Joel Slutzky the Board (principal executive officer) /s/ Crandall Gudmundson Director July 13, 2001____________________________________ Crandall Gudmundson /s/ Jerry Muench Director July 13, 2001____________________________________ Jerry Muench /s/ Kevin C. Daly Director July 13, 2001____________________________________ Kevin C. Daly /s/ Gary Smith Vice President and July 13, 2001____________________________________ Controller (principal Gary Smith accounting officer) /s/ Thomas L. Thomas Director July 13, 2001____________________________________ Thomas L. Thomas 30 Signature Title Date --------- ----- ---- /s/ John Seazholtz Director July 13, 2001____________________________________ John Seazholtz /s/ Paul E. Wright Director July 13, 2001____________________________________ Paul E. Wright /s/ Gregory A. Miner Vice President, Director and July 13, 2001____________________________________ Chief Operating Officer and Gregory A. Miner Chief Financial Officer (principal financial officer) 31 ODETICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets as of March 31, 2000 and 2001................ F-3 Consolidated Statements of Operations for the years ended March 31, 1999, 2000 and 2001........................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 2000 and 2001................................................. F-6 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 2000 and 2001........................................................... F-7 Notes to Consolidated Financial Statements............................... F-8 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, 2000 and 2001, and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of the three years inthe period ended March 31, 2001. Our audits also included the financialstatement schedule listed in Item 14(a). These financial statements andschedule are the responsibility of the Company's management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits. We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for 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, 2000 and 2001, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended March 31, 2001, in conformity with accounting principles generallyaccepted in the United States. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein. The accompanying consolidated financial statements have been preparedassuming the Company will continue as a going concern. As discussed in Note 1to the consolidated financial statements, the Company's recurring losses fromoperations and working capital deficit raise substantial doubt about itsability to continue as a going concern. Management's plans as to these mattersare also described in Note 1. The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty. /s/ Ernst & Young LLP Orange County, CaliforniaMay 15, 2001, except for Notes 1 and 16,as to which the date is May 29, 2001 F-2 ODETICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) March 31 ------------------ 2000 2001 -------- -------- ASSETS ------Current assets: Cash and cash equivalents................................ $ 4,880 $ 2,218 Trade accounts receivable, net of allowance for doubtful accounts of $2,068 in 2000 and $1,644 in 2001........... 13,576 14,380 Costs and estimated earnings in excess of billings on uncompleted contracts................................... 3,283 3,296 Inventories: Finished goods........................................... 1,203 1,644 Work in process.......................................... 859 51 Materials and supplies................................... 16,150 11,371 Prepaid expenses and other............................... 1,978 1,078 -------- -------- Total current assets................................... 41,929 34,038Property, plant and equipment: Land..................................................... 2,060 2,060 Buildings and improvements............................... 18,868 18,982 Equipment................................................ 30,652 32,667 Furniture and fixtures................................... 2,676 2,692 Allowances for depreciation.............................. (33,520) (35,266) -------- -------- 20,736 21,135Capitalized software costs, net............................ 6,482 2,090Goodwill, net of accumulated amortization of $2,723 in 2000 and $1,924 in 2001........................................ 12,004 10,622Other assets............................................... 699 176 -------- --------Total assets............................................... $ 81,850 $ 68,061 ======== ======== F-3 ODETICS, INC. CONSOLIDATED BALANCE SHEETS--(continued) (In thousands, except share and per share amounts) March 31 ------------------ 2000 2001 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------Current liabilities: Trade accounts payable................................... $ 10,702 $ 10,644 Accrued payroll and related.............................. 4,892 4,559 Accrued expenses......................................... 2,313 2,354 Contract reserve......................................... 3,056 2,290 Billings in excess of costs and estimated earnings on uncompleted contracts................................... 1,303 2,575 Revolving line of credit................................. 3,706 13,471 Current portion of long-term debt........................ 3,102 6,990 -------- --------Total current liabilities.................................. 29,074 42,883Long-term debt, less current portion....................... 11,666 4,800Other liabilities.......................................... 5,000 --Commitments (Note 12)Stockholders' equity: Preferred stock: Authorized shares--2,000,000 Issued and outstanding--none........................... -- -- Common stock, $.10 par value: Authorized shares--10,000,000 of Class A and 2,600,000 of Class B Issued and outstanding shares--8,183,470 of Class A and 1,051,541 of Class B at March 31, 2000; 9,468,620 of Class A and 1,035,841 of Class B at March 31, 2001.... 923 1,050 Paid-in capital.......................................... 61,200 78,548 Treasury stock, 4,564 and 93 shares in 2000 and 2001, respectively............................................ (22) (1) Notes receivable from employees ......................... (61) (51) Accumulated other comprehensive income (loss)............ 262 (436) Accumulated deficit...................................... (26,192) (58,732) -------- --------Total stockholders' equity................................. 36,110 20,378 -------- --------Total liabilities and stockholders' equity................. $ 81,850 $ 68,061 ======== ======== See accompanying notes. F -4 ODETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share information) Year ended March 31 ---------------------------- 1999 2000 2001 -------- -------- -------- Net sales and contract revenues: Net sales..................................... $ 70,042 $ 62,041 $ 57,030 Contract revenues............................. 13,331 18,666 20,039 -------- -------- -------- 83,373 80,707 77,069 Costs and expenses: Cost of sales................................. 49,816 50,883 46,244 Cost of contract revenues..................... 9,007 13,431 13,781 Selling, general and administrative expense... 31,670 38,173 41,780 Research and development expense.............. 11,191 16,888 18,812 Special charge................................ -- -- 6,285 -------- -------- -------- 101,684 119,375 126,902 -------- -------- --------Loss from operations............................ (18,311) (38,668) (49,833) Non-operating income (expense) Royalty income................................ -- 38,437 17,825 Gain on sale of product lines................. -- -- 1,230 Interest expense, net......................... (1,807) (2,048) (1,762) -------- -------- --------Net loss........................................ $(20,118) $ (2,279) $(32,540) ======== ======== ========Basic and diluted loss per share................ $ (2.57) $ (0.25) $ (3.26) ======== ======== ========Shares used in computing basic and diluted loss per share...................................... 7,820 9,089 9,977 ======== ======== ======== See accompanying notes. F-5 ODETICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Common stock --------------------- Shares outstanding ------------- Class Class Notes Accumulated A B receivable other Compre- common common Paid-in Treasury from comprehensive Accumulated hensive stock stock Amount capital stock employees income (loss) deficit Total income ------ ------ ------ ------- -------- ---------- ------------- ----------- -------- -------- Balance at March 31, 1998................... 6,203 1,062 $ 726 $45,240 $(239) $(3,377) $ 25 $ (3,795) $ 38,580 Issuances of common stock ............... 1,736 -- 175 14,339 -- -- -- -- 14,514 Conversion of Class B common stock......... 2 (2) -- -- -- -- -- -- -- Purchase of treasury stock................ -- -- -- -- (1) -- -- -- (1) Payments on notes receivable........... -- -- -- -- -- 3,281 -- -- 3,281 Foreign currency translation adjustments.......... -- -- -- -- -- -- 67 -- 67 $ 67 Net loss.............. -- -- -- -- -- -- -- (20,118) (20,118) (20,118) ----- ----- ------ ------- ----- ------- ----- -------- -------- --------Balance at March 31, 1999................... 7,941 1,060 901 59,579 (240) (96) 92 (23,913) 36,323 $(20,051) ======== Issuances of common stock ............... 234 -- 22 1,621 218 -- -- -- 1,861 Conversion of Class B common stock......... 8 (8) -- -- -- -- -- -- -- Payments on notes receivable........... -- -- -- -- -- 35 -- -- 35 Foreign currency translation adjustments.......... -- -- -- -- -- -- 170 -- 170 $ 170 Net loss.............. -- -- -- -- -- -- -- (2,279) (2,279) (2,279) ----- ----- ------ ------- ----- ------- ----- -------- -------- --------Balance at March 31, 2000................... 8,183 1,052 923 61,200 (22) (61) 262 (26,192) 36,110 $ (2,109) ======== Issuances of common stock ............... 1,270 -- 127 17,348 21 -- -- -- 17,496 Conversion of Class B common stock......... 16 (16) -- -- -- -- -- -- -- Payments on notes receivable........... -- -- -- -- -- 10 -- -- 10 Foreign currency translation adjustments.......... -- -- -- -- -- -- (698) -- (698) $ (698) Net loss.............. -- -- -- -- -- -- -- (32,540) (32,540) (32,540) ----- ----- ------ ------- ----- ------- ----- -------- -------- --------Balance at March 31, 2001................... 9,469 1,036 $1,050 $78,548 $ (1) $ (51) $(436) $(58,732) $ 20,378 $(33,238) ===== ===== ====== ======= ===== ======= ===== ======== ======== ======== See accompanying notes. F-6 ODETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended March 31 ---------------------------- 1999 2000 2001 -------- -------- -------- Operating activitiesNet loss......................................... $(20,118) $ (2,279) $(32,540)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................. 5,205 7,185 4,967 Write-off of capitalized software.............. -- -- 4,014 Gain on sale of product lines.................. -- -- (1,230) Provision for losses on accounts receivable.... 332 745 78 Provision for deferred income taxes............ 915 -- -- Changes in operating assets and liabilities (Note 14)..................................... 1,560 1,179 4,621 -------- -------- -------- Net cash provided by (used in) operating activities.................................. (12,106) 6,830 (20,090)Investing activitiesPurchases of property, plant and equipment, net.. (2,747) (2,169) (2,502)Repurchase of real estate option................. -- -- (5,000)Proceeds from sale of product lines.............. -- -- 1,877Proceeds from option to sell real estate......... -- 5,000 --Software development costs....................... (4,944) (330) --Purchase of net assets of acquired business...... -- (1,500) (42)Net cash received from ATL....................... 10,019 -- --Other............................................ -- 213 (688) -------- -------- -------- Net cash provided by (used in) investing activities.................................. 2,328 1,214 (6,355)Financing activitiesProceeds from line of credit and long-term borrowings...................................... 44,527 23,966 26,644Principal payments on line of credit and long- term debt....................................... (45,089) (29,528) (19,857)Proceeds from issuance of common stock........... 9,996 1,611 16,996 -------- -------- --------Net cash provided by (used in) financing activities...................................... 9,434 (3,951) 23,783 -------- -------- --------Increase (decrease) in cash...................... (344) 4,093 (2,662)Cash and cash equivalents at beginning of year... 1,131 787 4,880 -------- -------- --------Cash and cash equivalents at end of year......... $ 787 $ 4,880 $ 2,218 ======== ======== ======== See accompanying notes. F-7 ODETICS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 1. Formation and Operations Odetics, Inc. (the Company) serves as a developer of technology orientedcompanies, each with its own marketplace, customers and products, including theCompany's wholly-owned subsidiaries Gyyr, Inc., Broadcast, Inc., MarinerNetworks, Inc., Zyfer, Inc., Odetics Europe Limited, Odetics GYYR Limited,Odetics Mariner Limited, Odetics Asia Pacific Pte. Ltd., and its 93% ownedsubsidiary, Iteris, Inc. In January 2001, the Company announced that in response to tightening creditand capital markets it was taking a number of actions to reduce its operatingexpenses, improve its gross profit and operating profit performance, and narrowits negative operating cash flow and operating losses. Concurrent with thoseactions, the Company incurred charges in the three months ended December 31,2000 totaling $9.4 million (Note 4). Including these charges, during fiscal2001 and 2000, the Company experienced operating losses of $49.8 million and$38.7, respectively, and at March 31, 2001 had a working capital deficit of$8.8 million. Contributing to the working capital deficit at March 31, 2001, is $13.5million of borrowings from Transamerica Business Credit under a $17.0 millionline of credit. This line of credit expired on December 31, 2000, however, theCompany received an extension until July 31, 2001. Due to the breach of certainfinancial and other covenants under this line of credit, the Company enteredinto a forbearance agreement with Transamerica in May 2001. Under the terms ofthis forbearance agreement and the extension, the Company is prohibited frommaking any further borrowings under the line of credit. The Company financed its operations in fiscal 2000 and 2001 largely throughcash received from the settlement of certain litigation with StorageTek (Note15), debt and equity financings and, to a lesser extent, through the sale ofassets of certain of its subsidiaries. In May 2001, the Company received $16.0 million pursuant to a promissorynote secured by a first trust deed on its principal facilities in Anaheim,California. This promissory note is due in May 2002 and bears annual interestat the rate of 10%. Of the $16.0 million of proceeds received from thepromissory note financing, the Company used approximately $6.0 million toretire the pre-existing first trust deed on its Anaheim real property and $5.9million to reduce the borrowings due Transamerica under the line of credit to$7.6 million in accordance with the terms of the forbearance agreement. Thebalance of the proceeds from this financing, after payment of expenses, isavailable to the Company for general working capital purposes. The Company expects that its operations will continue to use net cash forthe foreseeable future. During fiscal 2002, the Company expects to have anongoing need to raise cash by securing additional debt or equity financing, orby monetizing (divesting) certain assets to fund its operations until theyreturn to profitability and positive operating cash flow. The Company is currently considering the sale and leaseback of its principaloperating facilities in Anaheim, California and is in negotiations with afinancial institution to provide a new line of credit. However, the Companycannot be certain that its plan to sell and leaseback of its facilities will besuccessful, that it will be able to secure a new line of credit on termsacceptable to us, or at all, or that its existing lender will continue toextend its existing borrowing relationship. The Company's future cashrequirements will be highly dependent on its ability to control expenses aswell as the successful execution of the revenue plans by each of ourbusinesses. As a result, any projections of future cash requirements and cashflows are subject to substantial uncertainty. These conditions raise substantial doubt about the Company's ability tocontinue as a going concern. The accompanying consolidated financial statementsdo not include any adjustments to reflect the possible future F-8 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) effects on the recoverability and classification of assets or liabilities thatmay result from the outcome of this uncertainty. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts ofthe Company and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation. 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, inventoryreserves, certain accrued liabilities, costs to complete long-term contractsand estimates of future cash flows used to determine the recoverability of longlived assets. Revenue Recognition Product revenues and related cost of sales are recognized on the date ofshipment or, if required, upon acceptance by the customer, provided that theCompany believes collectibility of the net sales amount is probable.Accordingly, at the date revenue is recognized, the significant uncertaintiesconcerning the sale have been resolved. Contract revenues is derived primarily from long-term contracts withgovernmental agencies. Contract revenue includes costs incurred plus a portionof estimated fees or profits determined on the percentage of completion methodof accounting based on the relationship of costs incurred to total estimatedcosts. Any anticipated losses on contracts are charged to earnings whenidentified. Changes in job performance and estimated profitability, includingthose arising from contract penalty provisions and final contract settlementsmay result in revisions to cost and revenue and are recognized in the period inwhich the revisions are determined. Profit incentives are included in revenuewhen their realization is reasonably assured. Certain products sold by the Company include software which is integral tothe functionality of the product. When such products do not require significantproduction, modification or customization of the software, revenue isrecognized upon delivery, assuming the fee is fixed and collectibility isprobable. If an arrangement requires significant production, modification orcustomization of the software, the arrangement is accounted for on thepercentage of completion method of accounting as costs are incurred. Revenues from follow-on service and support, for which the Company chargesseparately, are recognized when earned. Revenues from computer softwaremaintenance agreements are recognized ratably over the term of the agreements.When computer software maintenance is included in a software license agreement,an appropriate portion of the license fee is deferred and recognized over themaintenance period. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments withmaturities of less than ninety days. F-9 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Concentration of Credit Risk The Company performs periodic credit evaluations of its customers'financial condition and generally does not require collateral. Credit losseshave been within management's expectations and within amounts provided throughthe allowances for doubtful accounts. At March 31, 2000 and 2001, accountsreceivable from governmental agencies and prime government contractors wereapproximately $3,639,000 and $3,719,000, respectively. Fair Values of Financial Instruments Fair values of cash and cash equivalents, and the current portion of long-term debt approximate the carrying value because of the short period of timeto maturity. The fair value of long-term debt approximates carrying valuebecause the related rates of interest approximate current market rates and hasvariable rates of interest. Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determinedon the 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. Long-Lived Assets Long-lived assets and certain identifiable intangibles held and used by theCompany are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. The Company believes no impairment of the carrying value of itslong-lived assets, inclusive of goodwill, existed at March 31, 2001. TheCompany's analysis was based on an estimate of future undiscounted cash flowsusing forecasts contained in the Company strategic plan. It is at leastreasonably possible that the Company's estimate of future undiscounted cashflows may change during fiscal 2002. If the Company's estimate of futureundiscounted cash flow should change or if the strategic plan is not achieved,future analyses may indicate insufficient future undiscounted cash flows torecover the carrying value of the Company's long-lived assets, in which casesuch assets would be written down to estimated fair value. Goodwill Goodwill, representing the excess of the purchase price over the fair valueof the net assets of acquired entities, is being amortized using the straight-line method over the estimated useful lives ranging from three to fifteenyears. Research and Development Expenditures Software development costs incurred subsequent to determination oftechnical feasibility are capitalized. Amortization of capitalized softwarecosts is provided on a product-by-product basis at the greater of the amountcomputed using (a) the ratio of current gross revenues for the product to thetotal of current and anticipated future gross revenues or (b) the straight-line method over the remaining estimated economic life of the product.Amortization begins when product is available for general release tocustomers. Generally, an original estimated economic life of two to five yearsis assigned to capitalized software development costs. F-10 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During fiscal 1999, 2000 and 2001, software development costs were amortizedto cost of sales totaling $1,063,000, $1,515,000 and $940,000, respectively.During fiscal 2001, the Company discontinued certain product lines, resultingin the write-off of $3.5 million of previously capitalized software developmentcosts (Note 4). All other research and development expenditures are charged to expense inthe period incurred. Warranty The Company provides a warranty of one to two years on all products andrecords a related provision for estimated warranty costs at the date of thesale. The estimated warranty liability at March 31, 2000 and 2001 was $596,000and $389,000, respectively. Comprehensive Income (Loss) Statement of Financial Accounting Standards No. 130, establishes standardsfor reporting and displaying comprehensive income (loss) and its components inthe consolidated financial statements. For the Company, the only component ofaccumulated other comprehensive income (loss) is the cumulative foreigncurrency translation adjustment recorded in stockholders' equity. 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. Loss Per Share Basic and diluted loss per share is computed using the weighted averagenumber of shares of common stock outstanding during the year and excludes theanti-dilutive effects of options. 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 thealternative fair value accounting provided for under Statement of FinancialAccounting Standard No. 123, Accounting for Stock-Based Compensation("Statement 123"), requires use of option valuation models that were notdeveloped for use in valuing employee stock options. Under APB 25, if theexercise price of the Company's employee stock options equals the market priceof the underlying stock on the date of grant, no compensation expense isrecognized.  In March 2000, the Financial Accounting Standards Board issuedInterpretation No. 44, Accounting for Certain Transactions Involving StockCompensation - an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44clarifies the definition of employee for purposes of applying AccountingPractice Board Opinion No. 25, Accounting for Stock Issued to Employees, thecriteria for determining whether a plan qualifies as a F-11 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) noncompensatory plan, the accounting consequence of various modifications tothe terms of a previously fixed stock option or award, and the accounting foran exchange of stock compensation awards in a business combination. FIN 44 iseffective July 1, 2000, but certain conclusions cover specific events thatoccur after either December 15, 1998, or January 12, 2000. The adoption of FIN44 did not have a material effect on the Company's financial position orresults of operations. 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 which haveno 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 can materiallyaffect the fair value estimate, in management's option, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options. Advertising Expenses The Company expenses advertising costs as incurred. Advertising expensetotaled $2,622,000, $2,488,000 and $3,491,000 in the years ended March 31,1999, 2000 and 2001, respectively. Derivative Instruments and Hedging Activities In June 1998 Statement of Financial Accounting Standard No. 133, Accountingfor Derivative Instruments and Hedging Activities ("Statement 133"), wasissued, which establishes new standards for recording derivatives in financialstatements. This statement requires recording all derivative instruments asassets or liabilities, measured at fair value. Statement 133, as amended, iseffective for fiscal years beginning after June 15, 2000. Management does notanticipate the adoption of this statement will have a significant impact on theconsolidated results of operations or financial position of the Company. Reclassifications Certain amounts in the 1999 and 2000 consolidated financial statements havebeen reclassified to conform with the 2001 presentation. 3. Acquisitions and Dispositions On September 12, 1998, the Company acquired International Media IntegrationServices Limited, a United Kingdom corporation (IMIS), pursuant to the terms ofa Sale and Purchase of Shares Agreement whereby the Company purchased all ofthe issued and outstanding shares of stock of IMIS for an aggregate purchaseprice of $970,000 which was paid in 173,214 shares of the Company's Class Acommon stock. The acquisition has been accounted for as a purchase, and thepurchase price has been allocated to the fair value of the net assets acquired,primarily acquired technology, which is being amortized over its expecteduseful life of 5 years. On October 16, 1998, the Company, through its subsidiary, Iteris, Inc.,acquired Meyer, Mohaddes Associates, Inc., a provider of transportation,engineering and planning services (MMA). Pursuant to the terms of the mergeragreement, the Company purchased all of the issued and outstanding shares ofstock of MMA for $4.3 million, by issuing 55,245 shares of the Company's ClassA common stock valued at $250,000 and 810,153 shares of Iteris, Inc.'s commonstock after giving effect to the purchase price adjustment required by themerger agreement and a 1.874916-to-1 split of Iteris common stock. The resultsof operations of MMA are included in the Company's consolidated results ofoperations from the date of acquisition. F-12 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The merger agreement provided for MMA shareholders to receive additionalshares of the Company's Class A common stock with a then market value of$250,000 at each of April 16, 1999, October 16, 1999, April 16, 2000, October16, 2000 and April 16, 2001 in the event the Company did not consummate aninitial public offering of the common stock of Iteris, Inc. by each and any ofthose dates. Pursuant to this provision, Odetics issued an additional 164,461shares of its Class A common stock to the MMA shareholders through April 16,2001, which was recorded by the Company as additional goodwill. In addition, ifIteris does not complete its initial public offering by October 2001, then theholders of the Iteris common stock issued in this transaction will have theright to require Odetics to repurchase the Iteris common stock for a purchaseprice of $10 per share of Iteris. At any time prior to the initial publicoffering of Iteris, Odetics has the right to require these shareholders to sellall of their shares of Iteris common stock at a purchase price of $10 pershare. Odetics has the option to pay the purchase price for theses shares incash or in Odetics' Class A common stock valued as of five business days priorto the date of the event triggering the payment. On January 19, 1999, the Company, through its subsidiary, Iteris, Inc.,acquired certain assets and assumed certain liabilities of Viggen Corporation,a provider of transportation, engineering and planning services, for anaggregate purchase price of $275,000 evidenced by the issuance of 27,603 sharesof the Company's Class A common stock which were issued in April 1999. Theacquisition has been accounted for as a purchase and the purchase price,including direct costs of the acquisition, has been allocated to the fair valueof the net assets acquired with the excess approximating $746,000 allocated togoodwill. The results of operations of Viggen are included in the Company'sconsolidated results of operations from the date of acquisition. On December 1, 1999, the Company through its wholly owned subsidiary, Gyyr,Inc., acquired the security products division of Digital Processing Systems,Inc. (DPS), a manufacturer of digital security recorder products. Pursuant tothe terms of the Asset Purchase Agreement, the Company purchased certain assetsand assumed certain liabilities of DPS for an aggregate purchase price ofapproximately $3.5 million. The Company paid $1.5 million on December 1, 1999and $1 million on December 1, 2000. The final payment of $1 million is due onDecember 1, 2001. This acquisition was accounted for as a purchase andaccordingly, the result of operations for DPS are included in the Company'sconsolidated results of operations from the date of acquisition. The excess ofcost over the fair value of the net assets of approximately $3.4 million hasbeen recorded as goodwill. During fiscal 2001, the Company sold certain assets of its sold staterecording product line and of its Zyfer subsidiary for cash proceeds of $1.9million. In connection with these sales the Company recorded gains aggregating$1.2 million. Pro forma information related to these transactions is not material to theCompany's historical consolidated results of operations. 4. Special Charge During fiscal 2001, the Company approved a number of actions to reduceoperating expenses and improve profitability and cash flows. These actionsincluded a reduction in workforce of 104 employees and the discontinuance ofcertain product lines. As a result of these actions the company recorded thefollowing as special charge (in thousands): Severance and related costs.......................................... $1,305 Write-off of capitalized software.................................... 3,452 Write-off of goodwill................................................ 562 Write-off deferred costs............................................. 966 ------ $6,285 ====== F-13 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, the Company reserved or wrote-off inventory in the amount of$3.1 million, primarily related to discontinued products in its Broadcast andGyyr subsidiaries. This charge is included in cost of sales in the accompanyingconsolidated statement of operations. 5. Related Party Transaction In July 1999, the Company sold an option to an investment company controlledby certain officers and shareholders of the Company, for an aggregate purchaseprice of $5.0 million to purchase certain real property of Odetics. In August2000 the Company repurchased the option for $5.6 million which represented theoriginal purchase price plus accrued interest. 6. Costs and Estimated Earnings on Uncompleted Contracts Costs incurred, estimated earnings and billings on uncompleted long-termcontracts are as follows: March 31 --------------- 2000 2001 ------- ------- (In thousands) Costs incurred on uncompleted contracts..................... $21,971 $14,054 Estimated earnings.......................................... 1,648 1,054 ------- ------- 23,619 15,108 Less billings to date....................................... 21,639 14,387 ------- ------- $ 1,980 $ 721 ======= ======= Included in accompanying balance sheets: Costs and estimated earnings in excess of billings on uncompleted contracts.................................... $ 3,283 $ 3,296 Billings in excess of costs and estimated earnings on uncompleted contracts.................................... 1,303 2,575 ------- ------- $ 1,980 $ 721 ======= ======= Costs and estimated earnings in excess of billings at March 31, 2000 and2001 include $150,000 and $232,575, 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, 2001 are expected to be billed and collected during the year ending March31, 2002. 7. Revolving Line of Credit and Long-Term Debt In December 1998, the Company entered into a $17.0 million revolving line ofcredit, which provided for borrowings at the prime rate plus 2.0% (9.0% atMarch 31, 2001). The revolving line of credit is collateralized bysubstantially all of the Company's assets. Under the terms of the loan andsecurity agreement, the Company is required to comply with certain covenants,maintain certain debt to net worth ratios, working capital current ratios andminimum net worth requirements, and prohibits the payment of dividends withoutthe lender's consent. As amended, the line of credit expires on July 31, 2001(Note 1). On January 25, 2000, the Company through its subsidiary, Iteris, Inc.,entered into a joint venture agreement, pursuant to which the Company obtaineda Subordinated Convertible Promissory Note in the amount of $3.75 million. Thenote is convertible into Iteris' common stock either at the option of the jointventure partner at any time prior to the maturity, or automatically upon aninitial public offering of Iteris' common stock or a change in control event,as defined in the agreement. The number of shares issuable upon conversion issubject to the fair value of the Iteris's common stock on the date ofconversion. The note matures on January 25, 2002 and bears interest at 8.0% perannum. All accrued interest will be forgiven if the conversion feature istriggered. F-14 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-term debt consisted of the following: March 31 -------------- 2000 2001 ------- ------ (In thousands) Note payable, accruing interest at 9.36%, collateralized by deed of trust on land and buildings with a net book value of approximately $14.4 million, paid in May 2001 (Note 1)...... $ 7,027 $5,874 Notes payable, accruing interest at 8.00%, payable upon maturity in January 2002.................................... 3,750 3,750 Note payable, in two equal annual installments in December 2001 and 2002............................................... 2,000 1,000 Notes payable, accruing interest at 7.55% to 17.08%, collateralized by equipment, payable in monthly installments through 2003................................................ 1,991 1,166 ------- ------ 14,768 11,790 Less current portion......................................... 3,102 6,990 ------- ------ $11,666 $4,800 ======= ====== The annual maturities of long-term debt through March 31, 2005 are asfollows: (In thousands) 2002.......................................................... $ 6,990 2003.......................................................... 1,804 2004.......................................................... 1,653 2005.......................................................... 1,343 ------- $11,790 ======= 8. Income Taxes The reconciliation of the income tax benefit from continuing operations totaxes computed at U.S. federal statutory rates is as follows:  Year ended March 31 ------------------------- 1999 2000 2001 ------- ------ -------- (In thousands) Income tax benefit at statutory rates............ $(6,840) $ (775) $(11,064) Increase (decrease) of valuation allowance ...... 5,373 (773) 8,353 Foreign losses recorded without benefit.......... 1,061 1,258 2,255 Nondeductible goodwill amortization.............. 31 191 153 Other............................................ 375 99 303 ------- ------ -------- $ -- $ -- $ -- ======= ====== ======== F-15 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) United States and foreign loss from continuing operations before incometaxes are as follows: Year ended March 31 --------------------------- 1999 2000 2001 -------- ------- -------- (In thousands) Pretax (income) loss: Domestic...................................... $(16,997) $ 1,317 $(25,918) Foreign....................................... (3,121) (3,596) (6,622) -------- ------- -------- $(20,118) $(2,279) $(32,540) ======== ======= ======== Significant components of the income taxes benefit from continuingoperations are as follows: Year ended March 31 ------------------ 1999 2000 2001 ----- ----- ----- (In thousands) Current: Federal................................................. $(915) $ -- $ -- State................................................... -- -- -- Foreign................................................. -- -- -- ----- ----- ----- Total current......................................... (915) -- -- Deferred: -- -- -- Federal................................................. 915 -- -- State................................................... -- -- -- Foreign................................................. -- -- -- ----- ----- ----- Total deferred........................................ 915 -- -- ----- ----- ----- $ -- $ -- $ -- ===== ===== ===== The components of deferred tax assets and liabilities are as follows: 2000 2001 ------- -------- (In thousands) Deferred tax assets: Inventory reserves...................................... $ 730 $ 738 Deferred compensation and other payroll accruals........ 1,016 1,074 Net operating loss carryover............................ 4,417 14,578 Credit carryforwards.................................... 1,519 2,051 Bad debt and other reserves............................. 1,120 1,300 Other, net.............................................. 400 281 ------- -------- Total deferred tax assets................................. 9,202 20,022 Valuation allowance for deferred tax assets............... (6,145) (17,378) ------- -------- Net deferred tax assets................................... 3,057 2,644 ------- -------- Deferred tax liabilities: Tax over book depreciation.............................. 1,973 1,990 Capitalized interest and taxes.......................... 451 434 Cash to accrual adjustment.............................. 347 174 Other, net.............................................. 286 46 ------- -------- Total deferred tax liabilities............................ 3,057 2,644 ------- -------- Net deferred taxes........................................ $ -- $ -- ======= ======== F-16 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At March 31, 2001, for federal income tax purposes, the Company hadapproximately $1,238,000 in general business credit carryforwards and $534,000of alternative minimum tax credit carryforwards. The Company also has$37,096,000 of net operating loss carryforwards for federal income tax purposeswhich begin to expire in 2019, and $640,000 of net operating loss carryfowardswhich were acquired as part of the ICI acquisition. For financial reportingpurposes, a valuation allowance has been recorded to offset the deferred taxasset related to these credits and net operating losses. Any future benefitsrecognized from the reduction of the valuation allowance related to thesecarryforwards will result in a reduction of income tax expense, other than theICI operating loss carryforwards realization of which will result in anadjustment of assets acquired in this acquisition. The business creditcarryforwards expire at various dates beginning in 2002 and the acquired netoperating losses begin to expire in 2003. Because of the "change of ownership" provision of the Tax Reform Act of1986, utilization of the Company's net operating loss carryforwards may besubject to an annual limitation against taxable income in future periods. As aresult of the annual limitation, a portion of these carryforwards may expirebefore ultimately becoming available to reduce future income tax liabilities. 9. Associate Incentive Programs Under the terms of a Profit Sharing Plan, the Company contributes to a trustfund such amounts as are determined annually by the Board of Directors. Nocontributions were made in 1999, 2000 or 2001. 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 $644,000,$677,000 and $795,000 in 1999, 2000 and 2001, respectively. Effective April 1, 1987, the Company established a noncontributory AssociateStock Ownership Plan (ASOP) for all associates with more than six months ofeligible service. The ASOP provides that Company contributions, which aredetermined annually by the Board of Directors, may be in the form of cash orshares of Company stock. The Company contributions to the ASOP wereapproximately $55,000, $69,000 and $17,000 in 1999, 2000 and 2001,respectively. Shares distributed through the ASOP Plan were included in totaloutstanding shares used in the earnings per share calculation. 10. Deferred Compensation Plans 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$377,000, $110,000 and $128,000 for 1999, 2000 and 2001, respectively. 11. Stock Option 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 which areequal to or greater than the fair market value of the shares at the date ofgrant. Options expire ten years after F-17 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) date of grant or 90 days after termination of employment and vest ratably at33% on each of the first three anniversaries of the grant date. A summary of all Company stock option activity is as follows: Year ended March 31 -------------------------------------------------- 1999 2000 2001 ---------------- ---------------- ---------------- 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......... 563 $4.67 628 $ 5.27 801 $ 7.68 Granted.................. 149 7.36 358 10.36 120 13.47 Exercised................ (59) 4.63 (152) 4.65 24 7.95 Canceled................. (25) 4.63 (33) 4.65 93 8.21 --- ---- ---Options outstanding at end of year................... 628 5.27 801 7.68 804 8.44 === ==== ===Exercisable at end of year...................... 165 219 531 === ==== ===Available for grant at end of year................... 37 114 487 === ==== ===Weighted average fair value of options granted........ $3.81 $ 5.25 $ 7.03 ===== ====== ====== The exercise price for options outstanding as of March 31, 2001, ranged from$4.50 to $15.625. The weighted-average remaining contractual life of thoseoptions is 8.0 years. Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans In calculating pro forma information regarding net income and earning pershare, as required by Statement No. 123, the fair value was estimated at thedate of grant using a Black-Scholes option pricing model with the followingassumption: Years ended March 31 ---------------------- 1999 2000 2001 ------ ------ ------ Dividend rate........................................... 0.0 0.0 0.0Expected life--years.................................... 7.0 7.0 7.0Risk-free interest rate................................. 6.0 6.0 6.0Volatility of common stock.............................. 0.4 0.4 0.4 F-18 ODETICS, INC. 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. The Company'spro forma information for the year ended March 31, 1999, 2000 and 2001 follows(in thousands, except per share data): 1999 2000 2001 -------- ------- --------- Pro forma: Net loss.................................... $(20,555) $(2,969) $(33,512) Basic and diluted loss per share............ $ (2.63) $ (0.33) $ (3.36) Iteris, Inc.'s Stock Options In September 1997, Iteris granted options to purchase up to 899,960 sharesof its common stock to certain members of its senior management at an exerciseprice of $1.07 per share. The options granted vested ratably at 25% on each ofthe first four anniversaries of the grant date. Subsequently, Iteris' Board of Directors adopted and approved the 1998 StockIncentive Plan (the "Plan"), as amended in February 2000, authorized 3,000,000shares of Iteris' common stock for issuance under the Plan. Options to purchase1,731,485 shares of common stock, at exercise prices ranging from $1.60 to$9.07 per share, were outstanding at March 31, 2001. Options expire ten yearsafter date of grant or 90 days after termination of employment. The optionsgranted vested ratably at 25% on each of the first four anniversaries of thegrant date. Mariner Networks, Inc.'s Stock Options In March 2000, Mariner's Board of Directors adopted a Special ExecutiveStock Option Plan which provides for the granting of stock options for sharesof Mariner's unissued common stock to certain officers, key employees, non-employee members of the Board of Directors, consultants and independentcontractors. A total of 1,500,000 shares of Mariner's common stock are reservedfor issuance under this plan. In March 2000, Mariner's Board of Directors also adopted the 1999 EmployeeStock Option Plan which provides options for shares of Mariner's common stockto associates, non-employee members of the Board of Directors of Mariner,Odetics or other Odetics' subsidiaries and independent consultants. A total of1,000,000 shares of Mariner's common stock are reserved for issuance under thisplan. Options expire ten years after date of grant or 90 days after termination ofemployment and vest upon the optionee's completion of five years of servicemeasured from the vesting commencement date as specified on the stock optionagreements. The vesting of these options will accelerate upon initial publicoffering of Mariner's common stock. Options to purchase 1,727,250 shares ofMariner's common stock were outstanding at March 31, 2001 under these plans. Zyfer, Inc.'s Stock Option Plans In April 2000, Zyfer's Board of Directors adopted a Special Executive StockOption Plan which provides for the granting of stock options for shares ofZyfer's unissued common stock to certain officers, key employees, non-employeemembers of the Board of Directors, consultants and independent contractors. Atotal of 1,176,500 shares of Zyfer's common stock are reserved for issuanceunder this plan. In April 2000, Zyfer's Board of Directors also adopted the 1999 EmployeeStock Option Plan which provides options for shares of Zyfer's common stock toassociates, non-employee members of the Board of Directors of Zyfer, Odetics orother Odetics' subsidiaries and independent consultants. A total of 588,500shares of Zyfer's common stock are reserved for issuance under this plan. 19 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Options expire ten years after date of grant or 90 days after termination ofemployment and vest upon the optionee's completion of five years of servicemeasured from the vesting commencement date as specified on the stock optionagreements. The vesting of these options will accelerate upon initial publicoffering of Zyfer's common stock. Options to purchase 885,000 shares of Zyfer'scommon stock were outstanding at March 31, 2001. 12. Commitments The Company has lease commitments for facilities in various locationsthroughout the United States. The annual commitment under these noncancelableoperating leases at March 31, 2001 is as follows: Fiscal Year ----------- (in thousands) 2002....................................................... $307 2003....................................................... 121 2004....................................................... 35 ---- $463 ==== Rent expense under operating leases totaled $725,000, $973,000 and$1,040,000, respectively for the years ended March 31, 1999, 2000 and 2001. 13. Business Segment and Geographic Information The Company operates in three reportable segments: intelligenttransportation systems, video products which includes products for thetelevision broadcast and video security markets, and telecommunications. Theaccounting policies of the reportable segments are the same as those describedin the summary of significant accounting policies except that certain expenses,such as interest, amortization of certain intangibles and certain corporateexpenses are not allocated to the segments. In addition, certain assetsincluding cash and cash equivalents, deferred taxes and certain long-lived andintangible assets are not allocated to the segments. Intersegment sales arerecorded at the selling segment's cost plus profit. The reportable segments are each managed separately because they manufactureand distribute distinct products or provide services with different processes. F-20 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Selected financial information for the Company's reportable segments as ofand for the years ended March 31, 1999, 2000 and 2001 follows: Intelligence Video Telecom Transportation Products Product Total -------------- -------- -------- -------- (In thousands) Year ended March 31, 1999Revenue from external customers.. $14,580 $ 46,755 $ 13,974 $ 75,309Intersegment revenues............ -- 5,351 94 5,445Depreciation and amortization.... 765 2,282 1,199 4,246Segment income (loss)............ (3,865) (5,381) (2,617) (11,863)Segment assets................... 17,943 38,831 8,954 65,728Expenditure for long-lived assets.......................... 4,924 3,457 3,084 11,465Year ended March 31, 2000Revenue from external customers.. $23,411 $ 38,958 $ 9,664 $ 72,033Intersegment revenues............ -- 6,001 84 6,085Depreciation and amortization.... 1,962 2,637 1,182 5,781Segment income (loss)............ (4,407) (16,350) (7,824) (28,581)Segment assets................... 19,240 38,831 8,954 67,025Expenditure for long-lived assets.......................... 470 760 1,108 2,338Year ended March 31, 2001Revenue from external customers.. $28,057 $ 39,726 $ 7,883 $ 75,666Intersegment revenues............ -- 1,183 57 1,240Depreciation and amortization.... 1,502 2,513 447 4,462Segment income (loss)............ (3,942) (15,767) (14,042) (33,751)Segment assets................... 18,709 22,706 11,965 53,380Expenditure for long-lived assets, net..................... 1,392 631 506 2,529 F-21 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following reconciles segment income to consolidated income before incometaxes and segment assets and deprecation and amortization to consolidatedassets and consolidated depreciation and amortization: 1999 2000 2001 -------- -------- -------- (In thousands) RevenueTotal revenues for reportable segments........... $ 80,754 $ 78,118 $ 76,906Non reportable segment revenues.................. 8,064 8,673 1,403Elimination of Intersegment sales................ (5,445) (6,084) (1,240) -------- -------- -------- Total consolidated revenues.................. $ 83,373 $ 80,707 $ 77,069 ======== ======== ========Segment Profit or LossTotal profit or loss for reportable segments..... $(11,863) $(28,581) $(33,751)Other profit or loss............................. (1,201) (3,618) (2,893)Unallocated amounts: Corporate and other expenses................... (5,247) (6,469) (5,674) Royalty income................................. -- 38,437 17,825 Special charge................................. -- -- (6,285) Interest expense............................... (1,807) (2,048) (1,762) -------- -------- -------- Loss from continuing operations before income taxes....................................... $(20,118) $ (2,279) $(32,540) ======== ======== ========AssetsTotal assets for reportable segments............. $ 65,728 $ 67,025 $ 53,380Assets held at Corporate......................... 15,627 14,825 14,681 -------- -------- -------- Total assets................................. $ 81,355 $ 81,850 $ 68,061 ======== ======== ========Depreciation and AmortizationDepreciation and amortization for reportable segments........................................ $ 4,246 $ 5,781 $ 4,462Other............................................ 959 1,404 505 -------- -------- -------- Total depreciation and amortization.......... $ 5,205 $ 7,185 $ 4,967 ======== ======== ======== Selected financial information for the Company's operations by geographicsegment is as follows: 1999 2000 2001 ------- ------- ------- (In thousands) Geographic Area RevenueUnited States.......................................... $61,171 $65,285 $61,506Europe................................................. 7,582 8,509 7,340Asia Pacific Rim....................................... 6,287 2,821 2,703Other.................................................. 8,333 4,092 5,520 ------- ------- ------- Total net revenue.................................... $83,373 $80,707 $77,069 ======= ======= =======Geographic Area Long-Lived AssetsUnited States.......................................... $39,424 $38,805 $33,586Europe................................................. 1,612 1,101 414Asia Pacific Rim....................................... 33 15 23 ------- ------- ------- Total long-lived assets.............................. $41,069 $39,921 $34,023 ======= ======= ======= F-22 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Supplemental Cash Flow Information Year ended March 31 ------------------------- 1999 2000 2001 ------- ------- ------- (In thousands) Net cash used in changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable....... $(2,706) $ 4,568 $ (882) (Increase) decrease in net costs and estimated earnings in excess of billings.................. 276 (833) 1,259 (Increase) decrease in inventories............... 4,825 (2,227) 4,499 Increase in prepaids and other assets............ 111 428 861 Increase (decrease) in accounts payable and accrued expenses................................ (946) (757) (1,116) ------- ------- -------Net cash used in changes in operating assets and liabilities....................................... $ 1,560 $ 1,179 $ 4,621 ======= ======= =======Cash paid during the year: Interest......................................... $ 1,997 $ 1,995 $ 1,768 Income taxes paid (refunded)..................... (463) (1,144) 86Noncash transactions during the year: Purchase of subsidiary for stock................. $ 5,845 $ -- $ -- Acquisition of business for note payable......... -- 2,000 -- Stock issuance to former MMA shareholders........ -- 251 500 15. Legal Proceedings On October 11, 1999, the Company settled a patent infringement case it hadbrought against Storage Technology Corporation (StorageTek). Through anagreement, StorageTek agreed to pay the Company a license fee totaling $100.0million for use of the Company's United States Patent No. 4,779,151. Under theagreement, the license fee was payable in three installments: $80.0 millionupon signing of the agreement, and two annual installments of $10.0 millionpayable in each of October 2000 and 2001. In connection with the initialpayment, the Company received $38.4 million, net of legal fees and other directexpenses, which is reflected in the accompanying consolidated statement ofoperations as royalty income. On June 12, 2000, the Company and StorageTek amended the agreement, wherebyStorageTek agreed to pay a final discounted payment of $17.8 millionimmediately in full settlement of the $20.0 million otherwise due to completethe settlement, which is reflected in the accompanying consolidated financialstatements as royalty income. 16. Subsequent Event In connection with entering into the $16.0 million promissory in May 2001(Note 1), the Company granted the lender a warrant to purchase 426,667 sharesof the Company's Class A common stock at an exercise price of $4.00 per share.The warrant expires in May 2006. During the term of the promissory note,assuming certain prepayment milestones are not met, the lender will receivewarrants to purchase up to an additional 426,667 shares of the Company's ClassA common stock at an exercise price equal to 110% of the then current marketprice. If the Company prepays the note prior to six months following itsissuance, up to $1.6 million of the principal amount is convertible, at thelender's option, into the Company's Class A common stock at a conversion priceof $4.00 per share. F-23 Schedule II Odentics, Inc. Valuation and Qualifying Accounts Balance at Charged to Charged Balance at Beginning Costs and to Deductions End of Description of Period Expenses Accounts Describe Period ----------- ---------- ---------- -------- ---------- ---------- Year ended March 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts.............. $ 432,000 $ 332,000 $125,000 $ (50,000) $ 839,000 Reserve for inventory obsolescence.......... 2,881,000 1,590,000 0 (1,300,000) 3,171,000  Year ended March 31, 2000 Deducted from asset accounts: Allowance for doubtful accounts............... $ 839,000 $1,293,000 $ 0 $ (64,000) $2,068,000 Reserve for inventory obsolescence.......... 3,171,000 1,438,000 0 (1,123,000) 3,486,000 Year ended March 31, 2001 Deducted from asset accounts: Allowance for doubtful accounts............... $2.068,000 $ 78,000 $ 0 $ (502,000) $1,644,000 Reserve for inventory obsolescence.......... 3,486,000 4,925,000 0 (4,443,000) 3,968,000 S-1 EXHIBIT 10.10TBCC Amendment to Loan Documents Borrowers: Odetics, Inc., a Delaware corporation Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporationAddress: 1515 S. Manchester Anaheim, California 92802Date: May 29, 2001 THIS AMENDMENT TO LOAN DOCUMENTS is entered into between TRANSAMERICABUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC") having itsprincipal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018and having an office at 15260 Ventura Blvd., Suite 1240, Sherman Oaks,California 91403, and the borrowers named above (jointly and severally, the"Borrower"). This Amendment is executed and delivered pursuant to a ForbearanceAgreement of substantially even date among the parties hereto (the "ForbearanceAgreement"). The parties hereto agree to amend the Loan and Security Agreement betweenthem, dated December 28, 1998 (as amended, the "Loan Agreement"), as follows,effective as of the date hereof. (This Amendment, the Loan Agreement, any priorwritten amendments to said agreements signed by TBCC and the Borrower, and allother written documents and agreements between TBCC and the Borrower arereferred to herein collectively as the "Loan Documents". Capitalized terms usedbut not defined in this Amendment shall have the meanings set forth in the LoanAgreement.) 1. Maximum Credit. Effective on the date hereof, Section 1 of theSchedule is hereby amended in its entirety to read as follows: "1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of (1) or (2) below: (1) $17,000,000 ("Dollar Limit"), at any one time outstanding; or (2) an amount equal to the sum of (i), (ii), and (iii) below: Transamerica Business Credit Amendment to Loan Documents (i) 85% of the amount of Borrower's Eligible Receivables (as defined in Section 9.1(n) above) (other than Unbilled Eligible Receivables), plus (ii) the lesser of (i) $2,000,000, or (ii) 50% of the Value of Borrower's Eligible Inventory (as defined in Section 9.1(m) above), plus (iii) the lesser of (i) $2,000,000, or (ii) 70% (the "Equipment Advance Rate") of the appraised orderly liquidation value of Eligible Equipment (as defined below). (a). Value. "Value", as used above, means the lower of cost or ----- wholesale market value of Borrower's Eligible Inventory. (b). [omitted] --------- (c). Equipment. "Eligible Equipment" shall mean Equipment which TBCC in --------- its sole discretion deems eligible for borrowing, based on such considerations as TBCC in its sole discretion may deem appropriate from time to time and less any such reserves as TBCC, in its sole discretion, may require. Without limiting the fact that the determination of which Equipment is eligible for borrowing is a matter of TBCC's sole discretion, the following are the minimum requirements for Equipment to be Eligible Equipment: (i) the Equipment must be in good condition and repair; (ii) the Equipment must meet all applicable governmental standards; (iii) the Equipment must conform in all respects to the warranties and representations set forth in this Agreement; (iv) the Equipment must at all times be subject to TBCC's duly perfected, first priority security interest; and (v) the Equipment must be in Borrower's exclusive possession, and situated at Borrower's chief executive office or at one of the other Borrower locations set forth on this Schedule. (d). Appraisals. Appraisals of the orderly liquidation value of the ---------- Eligible Equipment may be done from time to time, at TBCC's option, at the cost of Borrower, and by an appraiser selected by TBCC, but no more frequently than once every six-months (except that such limitation on the frequency of appraisals shall not apply if an Event of Default or an event which, with notice or passage of time or both, would constitute an Event of Default, has occurred and is continuing). (e). No Further Loans. After May __, 2001 no further Loans of any kind ---------------- will be made to Borrower, but if at any time the total outstanding Loans and other monetary Obligations Transamerica Business Credit Amendment to Loan Documents exceed the Credit Limit, as set forth above, Borrower shall repay the excess to Lender immediately without notice or demand." 2. Extension of Maturity Date. Section 4 of the Schedule is herebyamended in its entirety to read as follows: "4. MATURITY DATE (Section 1.6) July 31, 2001 (the "Maturity Date"), subject to early termination as provided in Section 1.6 above." 3. Representations True. The Borrower represents and warrants to TBCCthat all representations and warranties set forth in the Loan Agreement, asamended hereby, are true and correct, except for representations and warrantiesthat may be breached as a result of an Existing Default (as defined in theForbearance Agreement). 4. General Provisions. This Amendment, the Loan Agreement, theForbearance Agreement, and the other Loan Documents set forth in full all of therepresentations and agreements of the parties with respect to the subject matterhereof and supersede all prior discussions, representations, agreements andunderstandings between the parties with respect to the subject hereof. Exceptas herein expressly amended, all of the terms and provisions of the LoanAgreement and the other Loan Documents shall continue in full force and effectand the same are hereby ratified and confirmed.ODETICS, INC. TRANSAMERICA BUSINESS CREDIT CORPORATION By /s/ ---------------------------- President or Vice President By /s/ By /s/ ---------------------------- --------------------------- Secretary or Ass't Secretary Title ------------------------ ODETICS ITS, INC. GYYR INCORPORATED By /s/ By /s/ ---------------------------- ---------------------------- President or Vice President President or Vice President By /s/ By /s/ ---------------------------- ---------------------------- Secretary or Ass't Secretary Secretary or Ass't Secretary Transamerica Business Credit Amendment to Loan Documents MARINER NETWORKS, INC. MEYER, MOHADDES ASSOCIATES, INC. By /s/ By /s/ ---------------------------- ---------------------------- President or Vice President President or Vice President By /s/ By /s/ ---------------------------- ---------------------------- Secretary or Ass't Secretary Secretary or Ass't Secretary GUARANTOR'S CONSENT The undersigned, guarantor, acknowledges that its consent to the foregoingAmendment to Loan Documents is not required, but the undersigned neverthelessdoes hereby consent to the foregoing Amendment and to the documents andagreements referred to therein and to all future modifications and amendmentsthereto, and any termination thereof, and to any and all other present andfuture documents and agreements between or among the foregoing parties. Nothingherein shall in any way limit any of the terms or provisions of the ContinuingGuaranty of the undersigned, all of which are hereby ratified and affirmed. ODETICS EUROPE LIMITED By /s/ ---------------------------- President or Vice President By /s/ ---------------------------- Secretary or Ass't Secretary TBCC Amendment to Loan Documents Borrowers: Odetics, Inc., a Delaware corporation Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporationAddress: 1515 S. Manchester Anaheim, California 92802Date: February 28, 2001 THIS AMENDMENT TO LOAN Documents is entered into between TRANSAMERICABUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC") having itsprincipal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018and having an office at 15260 Ventura Blvd., Suite 1240, Sherman Oaks,California 91403, and the borrowers named above (jointly and severally, the"Borrower"). The parties hereto agree to amend the Loan and Security Agreement betweenthem, dated December 28, 1998 (as amended, if at all, the "Loan Agreement"), asfollows, effective as of the date hereof. (This Amendment, the Loan Agreement,any prior written amendments to said agreements signed by TBCC and the Borrower,and all other written documents and agreements between TBCC and the Borrower arereferred to herein collectively as the "Loan Documents". Capitalized terms usedbut not defined in this Amendment shall have the meanings set forth in the LoanAgreement.) 1. Extension of Maturity Date. Section 4 of the Schedule is herebyamended in its entirety to read as follows: "4. MATURITY DATE (Section 1.6) March 31, 2001 (the "Maturity Date"), subject to early termination as provided in Section 1.6 above." 2. Fee. In consideration for TBCC entering into this Amendment, theBorrower shall concurrently pay TBCC a fee in the amount of $30,000, which shallbe non-refundable and in addition to all interest and other fees payable to TBCCunder the Loan Documents. TBCC is authorized to charge said fee to theBorrower's loan account. -1- Transamerica Business Credit Amendment to Loan Documents ________________________________________________________________________ 3. Representations True. The Borrower represents and warrants to TBCCthat all representations and warranties set forth in the Loan Agreement, asamended hereby, are true and correct. 4. General Provisions. This Amendment, the Loan Agreement, and the otherLoan Documents set forth in full all of the representations and agreements ofthe parties with respect to the subject matter hereof and supersede all priordiscussions, representations, agreements and understandings between the partieswith respect to the subject hereof. Except as herein expressly amended, all ofthe terms and provisions of [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -2- Transamerica Business Credit Amendment to Loan Documents ________________________________________________________________________the Loan Agreement and the other Loan Documents shall continue in full force andeffect and the same are hereby ratified and confirmed.ODETICS, INC. TRANSAMERICA BUSINESS CREDIT CORPORATION By /s/ By /s/ ------------------------------- ------------------------------- President or Vice President Title----------------------------By /s/ ------------------------------- Secretary or Ass't Secretary ODETICS ITS, INC. GYYR INCORPORATED By /s/ By /s/ ------------------------------- ------------------------------- President or Vice President President or Vice President By /s/ By /s/ ------------------------------- ------------------------------- Secretary or Ass't Secretary Secretary or Ass't Secretary MARINER NETWORKS, INC. MEYER, MOHADDES ASSOCIATES, INC. By /s/ By /s/ ------------------------------- ------------------------------- President or Vice President President or Vice President By /s/ By /s/ ------------------------------- ------------------------------- Secretary or Ass't Secretary Secretary or Ass't Secretary Guarantor's Consent The undersigned, guarantor, acknowledges that its consent to the foregoingAmendment is not required, but the undersigned nevertheless does hereby consentto the foregoing Amendment and to the documents and agreements referred totherein and to all future modifications and amendments thereto, and anytermination thereof, and to any and all other present and future documents andagreements between or among the foregoing parties. Nothing herein shall in anyway limit any of the terms or -3- Transamerica Business Credit Amendment to Loan Documents ________________________________________________________________________provisions of the Continuing Guaranty of the undersigned, all of which arehereby ratified and affirmed. ODETICS EUROPE LIMITED By /s/ -------------------------------- President or Vice President By /s/ -------------------------------- Secretary or Ass't Secretary -4- --------------------------------------------------------------------------------TBCC Amendment to Loan DocumentsBorrowers: Odetics, Inc., a Delaware corporation Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporationAddress: 1515 S. Manchester Anaheim, California 92802Date: December 22, 2000 THIS AMENDMENT TO LOAN Documents is entered into between TRANSAMERICABUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC") having itsprincipal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018and having an office at 15260 Ventura Blvd., Suite 1240, Sherman Oaks,California 91403, and the borrowers named above (jointly and severally, the"Borrower"). The parties hereto agree to amend the Loan and Security Agreement betweenthem, dated December 28, 1998 (as amended, if at all, the "Loan Agreement"), asfollows, effective as of the date hereof. (This Amendment, the Loan Agreement,any prior written amendments to said agreements signed by TBCC and the Borrower,and all other written documents and agreements between TBCC and the Borrower arereferred to herein collectively as the "Loan Documents". Capitalized terms usedbut not defined in this Amendment shall have the meanings set forth in the LoanAgreement.) 1. Extension of Maturity Date. Section 4 of the Schedule is herebyamended in its entirety to read as follows: "4. MATURITY DATE (Section 1.6) February 28, 2001 (the "Maturity Date"), subject to early termination as provided in Section 1.6 above." 2. Removal of Automatic Renewal Provision. Section 1.6(a) of the LoanAgreement is hereby amended in its entirety to read as follows: "(a) The term of this Agreement shall be from the date of this Agreement to the Maturity Date set forth in the Schedule, unless sooner terminated in accordance with -1- Transamerica Business Credit Amendment to Loan Documents-------------------------------------------------------------------------------- the terms of this Agreement. On the Maturity Date or on any earlier termination of this Agreement Borrower shall pay in full all Obligations, and notwithstanding any termination of this Agreement all of TBCC's security interests and all of TBCC's other rights and remedies shall continue in full force and effect until payment and performance in full of all Obligations." 3. Fee. In consideration for TBCC entering into this Amendment, theBorrower shall concurrently pay TBCC a fee in the amount of $20,000, which shallbe non-refundable and in addition to all interest and other fees payable to TBCCunder the Loan Documents. TBCC is authorized to charge said fee to theBorrower's loan account. 4. Representations True. The Borrower represents and warrants to TBCCthat all representations and warranties set forth in the Loan Agreement, asamended hereby, are true and correct. 5. General Provisions. This Amendment, the Loan Agreement, and the otherLoan Documents set forth in full all of the representations and agreements ofthe parties with respect to the subject matter hereof and supersede all priordiscussions, representations, agreements and understandings between the partieswith respect to the subject hereof. Except as herein expressly amended, all ofthe terms and provisions of [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -2- Transamerica Business Credit Amendment to Loan Documents--------------------------------------------------------------------------------the Loan Agreement and the other Loan Documents shall continue in full force andeffect and the same are hereby ratified and confirmed.ODETICS, INC. TRANSAMERICA BUSINESS CREDIT CORPORATION By /s/ ------------------------------ President or Vice President By /s/ ------------------------------By /s/ Title ------------------------------ --------------------------- Secretary or Ass't SecretaryODETICS ITS, INC. GYYR INCORPORATED By /s/ By /s/ ------------------------------ ------------------------------ President or Vice President President or Vice President By /s/ By /s/ ------------------------------ ------------------------------ Secretary or Ass't Secretary Secretary or Ass't SecretaryMARINER NETWORKS, INC. MEYER, MOHADDES ASSOCIATES, INC. By /s/ By /s/ ------------------------------ ------------------------------ President or Vice President President or Vice President By /s/ By /s/ ------------------------------ ------------------------------ Secretary or Ass't Secretary Secretary or Ass't Secretary Guarantor's Consent The undersigned, guarantor, acknowledges that its consent to the foregoingAmendment is not required, but the undersigned nevertheless does hereby consentto the foregoing Amendment and to the documents and agreements referred totherein and to all future modifications and amendments thereto, and anytermination thereof, and to any and all other present and future documents andagreements between or among the foregoing parties. Nothing herein shall in anyway limit any of the terms or -3- Transamerica Business Credit Amendment to Loan Documents--------------------------------------------------------------------------------provisions of the Continuing Guaranty of the undersigned, all of which arehereby ratified and affirmed. ODETICS EUROPE LIMITED By /s/ ------------------------------- President or Vice President By /s/ ------------------------------- Secretary or Ass't Secretary -4- EXHIBIT 10.11 FORBEARANCE AGREEMENT THIS FORBEARANCE AGREEMENT (this "Agreement") dated as of May 28, 2001, ismade by and between, on the one hand, Odetics, Inc., a Delaware corporation,Iteris, Inc., a Delaware corporation (formerly Odetics ITS, Inc., a Californiacorporation), Gyyr Incorporated, a California corporation, Mariner Networks,Inc., a Delaware corporation, and Meyer, Mohaddes Associates, Inc., a Californiacorporation (collectively, the "Borrower"), and, on the other hand, TRANSAMERICABUSINESS CREDIT CORPORATION, a Delaware corporation (the "Lender"). WHEREAS, the Borrower and the Lender are parties to a Loan and SecurityAgreement dated December 28, 1998 (as the same has been amended in writing, the"Security Agreement") (the Security Agreement and all documents executed inconnection therewith and relating thereto hereinafter collectively referred toas the "Loan Documents"; each capitalized term used but not defined herein shallhave the meaning given to such term in the Security Agreement); and WHEREAS, the Borrower has notified the Lender that the following Events ofDefault, as defined in the Security Agreement, have occurred and/or currentlyexist (collectively, the "Existing Defaults"): 1. Borrower is in breach of the financial covenants set forth in Section 9(d) of the Schedule to the Security Agreement relating to working capital and unsecured indebtedness. 2. Events have occurred which can reasonably be expected to have a Material Adverse Effect (as defined in the Security Agreement). 3. Borrower has not complied with Section 1.4 of the Loan Agreement. 4. Any event in existence on the date hereof which constitutes an Event of Default or which, with the giving of notice or the passage of time or both, would constitute an Event of Default, and which does not and will not have a material adverse effect on the value of the Collateral. WHEREAS, the Borrower acknowledges and agrees that, based on the ExistingDefaults, the Lender has the right to exercise its rights and remedies under theLoan Documents; and WHEREAS, the Borrower has requested that the Lender forbear temporarilyfrom exercising its rights and remedies under the Loan Documents; and WHEREAS, in consideration of the promises and undertakings of the Borrowercontained herein, the Lender is willing to forbear from exercising its rightsand remedies with respect to the Loan Documents but only on the terms andsubject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other good andvaluable consideration, the parties hereto agree as follows: 1. Forbearance. During the Forbearance Period, as defined below, and subject ----------- to the satisfaction of the conditions precedent set forth in Section 2 hereof,the Lender shall not seek to exercise any of its rights or remedies under theLoan Documents based upon the Existing Defaults. For purposes hereof, the"Forbearance Period" shall mean the period beginning on the date hereof andending on the earlier of: (i) July 31, 2001; (ii) the date of the occurrence ofa Forbearance Default, as defined below; (iii) the date of any sale ofsubstantially all of the stock or assets of Gyrr Incorporated; or (iv) the dateupon which the Borrower receives funds pursuant to the Refinancing, as definedbelow.2. Conditions to Forbearance. This Agreement shall not be effective unless and ------------------------- until each of the following conditions shall have been satisfied in the Lender'ssole discretion, which Borrower agrees to satisfy concurrently herewith: (a) The Lender shall have received executed counterparts of this Agreement duly executed by the Borrower; (b) The Borrower shall pay all of the costs and expenses of the Lender incurred in connection with the preparation, negotiation and delivery of this Agreement, including, without limitation, the reasonable fees and expenses of its counsel; (c) The Lender shall have received a resolution authorizing this Agreement, the matters covered hereby and the transactions contemplated hereby; (d) The Lender shall have received from the Borrower $61,000, by wire transfer, representing the initial installment of the Forbearance Fee, as defined below; and (e) Borrower shall pay the Lender the sum of $5,000,000, by wire transfer, to be applied to the outstanding Obligations in such manner as Lender shall determine in its discretion.3. Covenants. To induce the Lender to enter into this Agreement, the Borrower --------- hereby covenants, represents and agrees that: (a) The Borrower shall pay to the Lender a Report Monitoring Fee in the amount of $5,000 per calendar month, beginning April 1, 2001. The Report Monitoring Fee for the months of April and May shall be added to the Obligations on the date and shall bear like interest as the Obligations. The Report Monitoring Fee for subsequent months shall be paid on the first of each month, commencing June 1, 2001. (b) On or before May 25, 2001, the Borrower shall pay the Lender an additional sum of $2,000,000, by wire transfer, to be applied to the outstanding Obligations in such manner as Lender shall determine in its discretion. (c) The Borrower shall not request, and the Lender shall not make, any further Loans on or after the date of this Agreement. Borrower and Lender are, concurrently, signing an Amendment to the Security Agreement, which, among other things, is amending the Credit Limit. If at any time the total outstanding Loans and other monetary Obligations exceed the Credit Limit, as so amended, Borrower shall repay the excess to Lender immediately without notice or demand. Borrower shall not be obligated to comply with Section 1.4 of the Loan Agreement during the Forbearance Period. (d) Borrower has provided the Lender with a letter of intent pursuant to which another lender is to provide the Borrower with sufficient financing to pay off all of the Obligations (the "Refinancing"), and Borrower represents that the same is in full force and effect, and said other lender is proceeding with actions necessary to provide the Refinancing. (e) In consideration of the Lender entering into this Agreement, the Borrower shall pay the Lender fees (the "Forbearance Fees") as follows, which shall be fully earned on the date hereof and shall be non-refundable: (i) $61,000, concurrently with the execution of this Agreement; and (ii) $30,000 on June 1, 2001. (f) The Borrower shall cooperate with the Lender in all respects, and shall pay all of the costs and expenses incurred, in connection with the Lender's obtaining any appraisal(s) and environmental report(s), up to an amount not to exceed $8,600, including but not limited to a Phase One report, with respect to real property owned by the Borrower in Anaheim, California (the "Anaheim Real Property"). (g) The Borrower shall not permit any liens, charges, deeds of trust, mortgages, security interests, adverse claims, or other encumberances to attach to the Anaheim Real Property, other than those which exist as of the date of this Agreement, except (i) involuntary liens securing an amount not to exceed $100,000, which are not delinquent, and (ii) Borrower shall be permitted to borrow up to $16,000,000 secured by a first trust deed on the Anaheim Real Property in connection with a refinancing of the present first trust deed on the Anaheim Real Property, and the same shall not be deemed to be a Forbearance Default (as defined below). (h) All proceeds received by the Borrower in connection with any sale of any assets, including but not limited to equity securities, shall be immediately applied to pay the Obligations.4. Representations and Warranties of the Borrower. To induce the Lender to ---------------------------------------------- enter into this Agreement, the Borrower represents and warrants as follows: (a) The recitals in this Agreement are true and correct in all respects. (b) This Agreement has been duly executed and delivered. (c) The Borrower is a corporation duly organized, validly existing, and in good standing under its state of incorporation. (d) The execution, delivery and performance by the Borrower of this Agreement and the documents contemplated hereby or delivered in connection herewith (i) are within Borrower's powers, (ii) have been duly authorized by all necessary action, and (iii) do not contravene (A) any documents, contracts or agreements to which Borrower is a party or by which it is bound or affected, or (B) any requirements of any law or regulation to which Borrower is bound or affected. (e) No authorization, approval, or other action by, and no notice to or filing with, any governmental authority is required for the due execution, delivery, and performance by Borrower of this Agreement or any of the documents contemplated hereby or delivered in connection herewith to which Borrower is a party. (f) This Agreement and each of the documents contemplated hereby or delivered in connection herewith to which Borrower is a party constitute, and each of such documents to which Borrower is to be a party when delivered hereunder will constitute, the legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. (g) There is no pending or, to the best of Borrower's knowledge after due inquiry, threatened action or proceeding affecting Borrower which (i) could individually or in the aggregate be reasonably expected to have a material adverse effect on Borrower, or (ii) purports to affect the legality, validity, or enforceability of this Agreement, the transactions contemplated hereby, or any of the documents contemplated hereby or delivered in connection herewith. (h) All representations and warranties of Borrower in the Loan Documents are incorporated herein in full by this reference and are true and correct in all material respects as of the date hereof except for representations and warranties that expressly relate to an earlier date, in which case such representations and warranties were true and correct as of such earlier date. (i) There are currently no Events of Default, except the Existing Defaults.5. Forbearance Default; Rights upon Forbearance Default. ---------------------------------------------------- (a) Each of the following shall constitute a "Forbearance Default" hereunder: (i) The existence of any Event of Default (other than the Existing Defaults); or (ii) The Borrower shall fail to keep or perform any of the covenants or agreements contained herein (except that a failure to pay the amount due under Section 3(b) above shall not constitute a Forbearance Default if it is cured within 15 days after it occurs and Borrower concurrently pays Lender a late fee in the amount of $1,000 for each day from May 30, 2001 to the date the payment is made); or (iii) Any representation or warranty of Borrower shall be false, misleading or incorrect in any material respect. (b) Upon the occurrence of a Forbearance Default or the termination of the Forbearance Period, the Lender may exercise its rights and remedies under the Loan Documents and applicable law.6. Reservation of Rights. The Borrower acknowledges that, except as expressly --------------------- set forth herein, the Lender may at any time exercise any or all of the rightsand remedies available to it under the Loan Documents and applicable law. 7. Acknowledgement of Obligations. The Borrower acknowledges that, as of May ------------------------------ 17, 2001, the Borrower is indebted to the Lender in the amount of $12,641,686.82plus applicable residuals, fees, costs, late charges and expenses and that suchobligations are absolute and unconditional and are the legal, valid and bindingobligations of the Borrower without offset, defense or counterclaim, andinterest, costs, and expenses continue to accrue with respect thereto.8. Reaffirmation of Loan Documents. ------------------------------- (a) Borrower hereby reaffirms the Loan Documents and acknowledges that it is indebted to the Lender under the Loan Documents and that its obligations under the Loan Documents are absolute and unconditional, are its legal, valid and binding obligations without offset, defense or counterclaim, and interest, costs and expenses continue to accrue with respect thereto. (b) The Borrower hereby reaffirms, confirms and acknowledges all of the terms of the Loan Documents.9. Effect and Construction of Agreement. Except as expressly provided herein, ------------------------------------ the Loan Documents shall remain in full force and effect in accordance with itsrespective terms, and this Agreement shall not be construed to: (a) waive or impair any rights, powers or remedies of the Lender under the Loan Documents upon termination of the Forbearance Period, with respect to the Existing Defaults or otherwise; or (b) constitute an agreement by the Lender or require the Lender to extend the Forbearance Period, or grant additional forbearance periods, or extend the term of the Loan Documents or the time for payment of any amounts due under the Loan Documents.The Borrower acknowledges that it has consulted with counsel and with such otherexperts and advisors as it has deemed necessary in connection with thenegotiation, execution and delivery of this Agreement and the other documentsexecuted in connection herewith. In the event of any inconsistency between theterms of this Agreement and the Loan Documents, the terms of this Agreementshall govern.10. Release. In consideration of the foregoing, Borrower hereby releases, -------- remises acquits and forever discharges the Lender and the Lender's employees,agents, representatives, consultants, attorneys, fiduciaries, servants officers,directors, partners, predecessors, successors and assigns, subsidiarycorporations, parent corporations and related corporate divisions (all of theforegoing hereinafter called the "Released Parties"), from any and all actionsand causes of action, judgments, executions, suits, debts, claims, demands,liabilities, obligations, damages and expenses of any and every character, knownor unknown, direct or indirect, at law or in equity, of whatsoever kind ornature, whether heretofore or hereafter arising, for or because of any matter orthing done, omitted or suffered to be done by any of the Released Parties priorto and including the date of execution hereof, and in any way directly orindirectly arising out of or in any way connected to this Agreement or any ofthe Loan Documents (all of the foregoing hereinafter called the "ReleasedMatters"). The Borrower acknowledges that the agreements in this paragraph areintended to be in full satisfaction of all or any alleged injuries or damagesarising in connection with the Released Matters. The Borrower represents andwarrant to the Lender that it has not purported to transfer, assign, pledge or otherwise convey any of its right,title or interest in any Released Matter to any other Person and that theforegoing constitutes a full and complete release of all Released Matters.11. Miscellaneous. ------------- (a) Further Assurances. The Borrower agrees to execute such other and ------------------- further documents and instruments as the Lender may reasonably request to implement the provisions of this Agreement. (b) Benefit of Agreement. This Agreement shall be binding upon and inure -------------------- to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. No other Person shall be entitled to claim any right or benefit hereunder, including, without limitation, the status of a third party beneficiary of this Agreement. (c) Integration. This Agreement constitutes the entire agreement and ----------- understanding among the parties relating to the subject matter hereof and supersedes all prior proposals, negotiations, agreements and understandings relating to such subject matter. In entering into this Agreement, the Borrower acknowledges that it is relying on no statement, representation, warranty, covenant or agreement of any kind made by the Lender or any employee or agent of the Lender, except for the agreements of the Lender set forth herein. (d) Invalidity. The provisions of this Agreement are intended to be ---------- severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or enforceability without in any manner affecting the validity or enforceability of such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. (e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ------------- INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW PRINCIPLES. (f) Counterparts; Telecopied Signatures. This Agreement may be executed in ------------------------------------ any number of counterparts and by different parties to this Agreement in separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. (g) Notices. Any notices with respect to this Agreement shall be given in -------- the manner and to the addresses provided in the Security Agreement or to such other address as any party may designate to the other parties hereto in the manner specified in the Security Agreement. (h) Headings. The titles and headings of the numbered paragraphs of this -------- Agreement have been inserted for convenience of reference only and are not intended to summarize or otherwise describe the subject matter of such paragraphs and shall not be given any consideration in the construction of this Agreement. (i) Survival. All representations, warranties, covenants, agreements, -------- undertakings, waivers and releases of the Borrower contained herein shall survive the termination of the Forbearance Period or payment in full of the obligations. (j) Amendments, Etc. No Purported amendment, modification, rescission, --------------- waiver or releases of any provision of this Agreement shall be effective unless the same shall be in writing and signed by each of the parties hereto, and any such waiver shall be effective only in the specific instance and for the specific purpose for which given. (k) Cost and Expenses. The Borrower shall pay on demand all costs and ----------------- expenses of the Lender including, without limitation, all reasonable attorneys and other professionals' fees and related disbursements incurred in connection with the administration and enforcement of this Agreement or with respect to advising the Lender of its rights and responsibilities hereunder and under the Loan Documents.12. SUBMISSION TO JURISDICTION; JURY WAIVER. BORROWER IRREVOCABLY SUBMITS TO --------------------------------------- THE JURISDICTION OF ANY ILLINOIS STATE OR FEDERAL COURT SITTING IN ILLINOIS FORANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THETRANSACTIONS CONTEMPLATED HEREBY, AND BORROWER IRREVOCABLY AGREES THAT ALLCLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINEDIN SUCH ILLINOIS STATE OR FEDERAL COURT. BORROWER AND LENDER IRREVOCABLY WAIVEALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISINGOUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be dulyexecuted and delivered by their respective duly authorized officers as of thedate first above written.ODETICS, INC. MARINER NETWORKS, INC. By: /s/ By: /s/ -------------------------------- --------------------------------Title: Title: ----------------------------- ------------------------------ GYYR INCORPORATED ITERIS, INC. By: /s/ By: /s/ -------------------------------- --------------------------------Title: Title: ----------------------------- ----------------------------- MEYER, MOHADDES ASSOCIATES, TRANSAMERICA BUSINESS CREDIT INC. CORPORATION By: /s/ By: /s/ -------------------------------- --------------------------------Title: Title: ----------------------------- ----------------------------- GUARANTOR'S CONSENT The undersigned, guarantor, acknowledges that its consent to the foregoingForbearance Agreement is not required, but the undersigned nevertheless doeshereby consent to the foregoing Forbearance Agreement and to the documents andagreements referred to therein and to all future modifications and amendmentsthereto, and any termination thereof, and to any and all other present andfuture documents and agreements between or among the foregoing parties. Nothingherein shall in any way limit any of the terms or provisions of the ContinuingGuaranty of the undersigned, all of which are hereby ratified and affirmed. ODETICS EUROPE LIMITED By: /s/ ----------------------------- Title: -------------------------- EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements(Form S-3 Nos. 333-40555, 333-63911, 333-66717, 333-69677, 333-74509, 333-91903, 333-88185, 333-40726 and 333-46420) of Odetics, Inc. and in the relatedProspectuses, and in the Registration Statements (Form S-8 Nos. 333-05735, 333-44907 and 333-30396) of our report dated May 15, 2001, except for Notes 1 and16, as to which the date is May 29, 2001, with respect to the consolidatedfinancial statements and schedule of Odetics, Inc. included in this AnnualReport (Form 10-K) for the year ended March 31, 2001. /s/ Ernst & Young LLP Orange County, CaliforniaJuly 13, 2001

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