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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-10605
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ODETICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-2588496
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1515 SOUTH MANCHESTER AVENUE, ANAHEIM, CALIFORNIA 92802
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 774-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.10 PAR VALUE
CLASS B COMMON STOCK, $.10 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sale price on Nasdaq National Market on June 25, 1998,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $68,466,928. For the purposes of this calculation, shares owned
by officers, directors and 10% stockholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
The Company has two classes of common stock outstanding, the Class A Common
Stock and the Class B Common Stock. The rights, preferences and privileges of
each class of common stock are identical in all respects, except for voting
rights. Each share of Class A Common Stock entitles its holder to ten votes
per share and each share of Class B Common Stock entitles its holder to one
vote per share. As of June 25, 1998, there were 6,202,778 shares of Class A
Common Stock and 1,062,041 shares of Class B Common Stock outstanding. Unless
otherwise indicated, all references to "Common Stock" shall collectively refer
to the Class A Common Stock and the Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's
definitive proxy statement (the "Proxy Statement") for the Annual Meeting of
the Stockholders scheduled to be held on September 11, 1998.
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ODETICS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2 PROPERTIES..................................................... 14
ITEM 3. LEGAL PROCEEDINGS.............................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 15
ITEM 6. SELECTED FINANCIAL DATA........................................ 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 20
ITEM 11. EXECUTIVE COMPENSATION......................................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-
K.............................................................. 21
i
Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s),"
"believe(s)," "will," "may," "anticipate(s)," and similar expressions are
intended to identify forward-looking statement. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. Odetics, Inc. undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company
which describe certain factors which affect the Company's business, including
the risk factors set forth at the end of Part I, Item 1 of this Report and in
Part II, Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PART I
ITEM 1. BUSINESS
GENERAL
Odetics, Inc. (the "Company") was founded in 1969 to supply digital
recorders for use in the United States space program. The Company pioneered
new designs and standards for digital magnetic tape recorders offering high
reliability and enhanced performance in the adverse environment attendant to
space flight. In the 1970s, the Company broadened its information automation
product line to include time-lapse videocassette recorders for commercial and
industrial security and surveillance applications. Through the Company's Gyyr
Division, it became a leading supplier of time-lapse videotape cassette
recorders, digital image processing modules and related products used in
security and surveillance systems. The Company incorporated its Gyyr Division
in 1997, forming a wholly owned subsidiary, Gyyr, Inc. ("Gyyr"). In October
1997, the Company expanded Gyyr by acquiring Intelligent Controls Inc.
("ICI"), a manufacturer of access control products specializing in PC based,
remote site and fiber optic communications.
Leveraging the Company's expertise in video image processing, the Company
introduced a video vehicle detection system in 1993, representing the
Company's first product for use in intelligent transportation systems ("ITS").
In June 1997, the Company acquired certain assets comprising the
Transportation Systems business from Rockwell International, creating the
Company's ITS Division, which expanded the Company's offerings to include
Advanced Traffic Management Systems and Advanced Traveler Information Systems.
The Company incorporated its ITS Division in 1998 as Odetics ITS, Inc. and has
announced that it intends to commence a public offering of a minority interest
in Odetics ITS in the third quarter of fiscal 1998.
In the early 1980s, the Company set out to develop the technical expertise
to apply automation to new commercial applications and established its
Broadcast Division. The Broadcast Division develops and manufactures broadcast
automation control systems and pioneered the use of large library cart
machines in broadcast television stations and satellite uplink operations. The
success of the Company's cart machines led the Company to pursue new
applications for information automation technologies, and in 1990, the Company
teamed with E-Systems, Inc. to develop and provide a 19mm automated tape
cartridge handling subsystem. In 1991, in a strategic move to expand its
business into new and potentially larger markets, the Company introduced an
automated tape handling subsystem for integration into tape libraries designed
for midrange computers and client/server networks. In January 1993, the
Company formed a separate subsidiary, ATL Products, Inc. ("ATL") to pursue the
market for automated tape libraries. In March 1997, ATL completed an initial
public offering of 1,650,000 shares of its Class A Common Stock. The Company
distributed its remaining 82.9% interest in ATL to its stockholders in a tax-
free distribution (the "Distribution") in October 1997.
The Company is a leading supplier of communications equipment and services
for the television broadcast, video security, telecommunications and
intelligent traffic solutions markets. The Company's products automate
television and cable station operations, facilitate broadband communications,
record video surveillance, store information gathered in space exploration and
reduce traffic congestion.
1
BROADCAST DIVISION
The Broadcast Division's video tape libraries automate the storage and
televising of commercials, news spots and other television programming
recorded on videotape cassettes. Automated video libraries increase labor
efficiency by automatically performing tape insertion and other filing tasks
previously performed manually or by machines with limited capacity and
utility. The Company believes that enhanced operational efficiencies are a
principal factor underlying the increased automation of broadcast television
stations and satellite uplink operations.
The Broadcast Division's TCS2000 represented its earliest commercial success
in the manufacture of video tape libraries followed by the TCS90. The recent
market trend toward smaller libraries, coupled with digital hard disk
recording devices was led by the Company with the introduction of highly
integrated caching systems employing the Company's newest cart machine, the
TCS45. The TCS45 can be coupled with hard drive recorders available from
several recognized suppliers to the broadcast community. The Company now
offers software to form powerful integrated systems, including the
MicroSpot(TM) and the SpotBank(TM). In fiscal 1999, the Company intends to
release the Roswell Total Facility Management System, which is designed to
integrate and manage all schedules, media, equipment and on air operations at
a television broadcast facility. Multi-channel presentation systems, which
integrate the complete line of the Company's hardware with commonly available
broadcast quality video disk recorders, are quickly becoming the core business
of the Broadcast Division.
Sales, Marketing and Principal Customers
The Broadcast Division sells directly to broadcast television stations,
satellite uplink operations, and other broadcast television and cable
television system operators. Sales and marketing management is located at the
Company's principal facilities in Anaheim, California, with a dedicated field
sales force of four persons operating in four U.S. sales regions plus a sales
manager for Latin America. European sales and marketing activities are
conducted and managed by Odetics Europe, Ltd., a wholly-owned subsidiary of
the Company. Asia sales and marketing activities are conducted by Odetics Asia
Pacific Pte Ltd., a wholly-owned subsidiary of the Company located in
Singapore. Additional independent representative organizations are utilized to
promote the Broadcast Division's products in various other foreign markets.
Customers include major television networks such as the British Broadcasting
Corporation, Canadian Broadcasting Corporation, CNBC/FNN, Euronews, Televisa,
Measat Broadcast Network Systems, NBC, the PBS Network, Group W Satellite
Communications (for the Arts & Entertainment Network and Discovery Channel),
Asia Broadcast Centre, Univision and over 100 independent and network-
affiliated television stations. The Broadcast Division has systems installed
in over 30 countries.
Manufacturing and Materials
The Broadcast Division maintains a dedicated manufacturing area located
within the Company's Anaheim, California facilities. The Company's SpotBank
and MicroSpot products are manufactured primarily on a lot assembly/module
build basis in a second manufacturing plant located in Austin, Texas. At the
Anaheim facility, the Broadcast Division and Gyyr share common infrastructure
support in the areas of production and inventory control, purchasing, quality
assurance, manufacturing and engineering. A single management structure
oversees these operations.
The Broadcast Division purchases video servers from Tektronix, Leitch and
Hewlett Packard along with video switching, conversion and monitoring
equipment from Tektronix and Leitch for installation in the Company's
automated video management systems. It also purchases cabinets and other
fabricated parts and components.
2
GYYR, INC.
During fiscal 1997, the Company formed a wholly-owned subsidiary, Gyyr Inc.,
a California corporation ("Gyyr") to operate the business of its former Gyyr
Division. Gyyr produces box solutions for the data challenges faced by
security dealers, integrators and end users. Time-lapse VCRs are employed
extensively in area monitoring by banks, convenience stores, retailers and
other businesses. Time-lapse VCRs are frequently installed at automated teller
machine and retail computerized payment machine locations to record pictures
of individuals making transactions while simultaneously recording transaction
information in an effort to deter and address incidents of theft and other
crimes at these locations. Customer demand for more sophisticated
capabilities, such as computer interfaces to record transaction information
simultaneously with video images, electronic processors to record multiple
cameras on one VCR and digital image processing and enhancement, also have
contributed to recent growth of the market for Gyyr's products. The Company
recently introduced a new line of time-lapse VCRs and video multiplexers, and
the ControLink,(TM) which combines remote control capabilities, telemetry and
control parts to create a cost effective close circuit television control
system. In October 1997, the Company acquired ICI, a manufacturer of access
control and video badging systems for the electronic security markplace, that
is currently operated as part of Gyyr.
Sales, Marketing and Principal Customers
Gyyr markets and sells its products directly to its private label OEM
accounts. Gyyr personnel located at the Company's principal facilities also
oversee a network of approximately 2,500 security equipment dealers and
distributors worldwide who sell Gyyr's products to end users. Gyyr utilizes
foreign representatives in Latin America, and employs a business development
and service staff through Odetics Europe, Ltd., a wholly-owned United Kingdom
subsidiary of the Company. Odetics Europe, Ltd. assists Gyyr in its sales and
marketing activities in European markets. Gyyr also utilizes Odetics Asia
Pacific Pte Ltd. to assist in sales to the Asian markets. Gyyr's principal
customers include major security equipment companies such as Diebold, Inc.,
ADT Security Systems, Inc., Honeywell, Inc., Mosler, Inc., Hamilton Safe and
other OEMs.
Manufacturing and Materials
Gyyr maintains a dedicated manufacturing area located within the Company's
facilities located in Anaheim, California and in Lynnwood, Washington. Gyyr
primarily uses continuous unit flow assembly lines. Gyyr and the Broadcast
Division share common infrastructure support in the areas of production and
inventory control, purchasing, quality assurance and manufacturing
engineering. A single management structure oversees these operations.
Gyyr purchases VCRs modified to the Company's specifications exclusively
through Nissei Sangyo America, the United States distribution affiliate of
Hitachi, Ltd., into which the Company incorporates certain value-added
features. The Company is vulnerable to changes in Hitachi, Ltd.'s basic VCR
model, which might necessitate changes in the design or manufacturing of
Gyyr's products. There are numerous other suppliers of VCRs suitable for use
in Gyyr's products, although certain changes in product design or
manufacturing methods may be required to accommodate such VCRs, and Gyyr could
experience temporary delays or interruptions in supply while such changes are
incorporated or a new supplier is procured.
COMMUNICATIONS DIVISION
The Company's Communications Division includes telecommunications related
products and space borne digital data recorders. The Communications Division
supplies products that synchronize telecommunication and computer systems and
products that provide an interface between the wide area network ("WAN") and
the local area networks ("LAN").
3
Odetics telecom synchronization products are sold for new applications in
cellular telephone systems and the new PCS networks being implemented
throughout the world. The principal customer of the Communications Division is
LGIC of Korea. See "Risk Factors--Risks Associated with International Sales."
The synchronization products are based on G.P.S. technologies. Most product
applications are in the latest CDMA networks.
The Company's telecom interface products are sold to local exchange
carriers, interexchange carriers and local area network switch manufacturers.
The product offerings fall into two categories: interface boards and stand
alone systems. The interface boards are asynchronous transfer mode and SONET
based, and are sold primarily to other telecom equipment manufacturers.
The space business unit manufactures digital data recorders that are used in
manned and unmanned space vehicles to store data gathered by onboard sensors
prior to transmission of the data to ground receiving stations. These
recorders are employed in satellite programs for space research, earth
resource and environmental observation and weather monitoring, as well as
global surveillance and classified government programs.
Sales, Marketing and Principal Customers
The Communications Division conducts its selling and marketing activities
worldwide directly from the Company's principal facilities. The Company's
telecom synchronization products are sold primarily through indirect sales
organizations. Sales of network interface products are primarily made through
indirect sales channels. During the fiscal year ended March 31, 1998,
approximately 25% of the Communication Division's sales were derived from
contracts with domestic or foreign governmental agencies and prime government
contractors.
Manufacturing and Materials
The Communications Division production capabilities fall into two
categories: commercial and space. The telecom business unit manufactures to
best commercial practices. This group became ISO certified in February 1997.
Most of the manufacturing operations consist of final assembly and test. The
Company outsources board assembly and some preliminary fabrication processes.
The space production is designed for low volume, program-managed
manufacture, often with nonrecurring engineering for individual customer
needs. Because of these unique requirements, the space business unit has
extensive machining and electronic assembly capabilities in order to manage
cost, schedule, and quality levels to the unusual and exacting needs of its
customers.
ODETICS ITS, INC.
Odetics ITS, Inc provides intelligent transportation systems, services and
products to public agencies, vehicle manufacturers and consumers to address
the growing demand for reduced congestion, enhanced roadway efficiency and
improved safety. By combining the diverse expertise of transportation systems,
software and electrical engineers with proprietary information technology,
Odetics ITS has developed the core competencies necessary to design and
implement innovative advanced transportation management systems. As one of the
two companies developing and maintaining the National ITS Architecture,
Odetics ITS is well positioned to shape the future direction of ITS deployment
in the United States.
Odetics ITS also leverages its proprietary outdoor image processing
algorithms and sensor technology to develop new ITS products. The Vantage
vehicle detection system provides reliable detection and visual imagery under
a broad range of weather and lighting conditions. The flexibility, ease of
installation and low maintenance of Vantage represent an attractive
alternative to inductive loops for traffic surveillance. The Lane Tracker
system, which provides an audible warning of lane departures, was jointly
developed between Odetics ITS and Daimler Benz and integrates the proprietary
technologies of both companies. The Company believes Lane Tracker will be the
first commercially available, image processing based lane departure warning
system.
4
Sales, Marketing and Principal Customers
Odetics ITS markets and sells its transportation management systems and
services directly to end user government authorities pursuant to negotiated
contracts and individual purchase agreements. Odetics ITS employs three full
time Regional Managers in California, Michigan and Washington D.C. and has
engaged one independent agent in China. Sales of Odetics ITS' systems
generally involve long lead times and require extensive specification
development, evaluation and price negotiations.
The Vantage vehicle detection systems are primarily sold through indirect
sales channels comprised of approximately twenty independent dealers in the
United States and Canada who sell integrated solutions and related products to
the traffic intersection market. Odetics ITS's agreement with these
independent dealers typically prohibits such dealers from distributing
competitive video detection systems. These dealers often have long-term supply
arrangements with the government agencies in their territory for the supply of
various products for the construction and renovation of traffic intersections.
Odetics ITS' dealers generally maintain an inventory of demonstration traffic
products including the Vantage vehicle detection systems and sell directly to
government agencies and installation contractors. Such dealers are primarily
responsible for sales, installation and support of the Vantage products.
Odetics ITS holds technical training classes for its dealers and maintains a
full time staff of customer support technicians to provide technical
assistance when needed. Odetics ITS employs two full time Regional Sales
Managers in California and Texas to support the dealer sales channel and one
District Sales Manager who sells direct to end user agencies and contractors.
Odetics ITS intends to sell its Lane Tracker Systems initially to heavy
truck manufacturers through its product line management personnel. Sales of
products to vehicle manufacturers generally require lengthy and complex design
processes which could take up to four years. The Company anticipates that
Odetics ITS will have to rely to a large extent on the marketing activities of
the vehicle manufacturers who will have the ultimate access to the consumers.
Odetics ITS has, however, engaged an independent sales agent to assist its
marketing and sales activities in Europe.
Manufacturing and Materials
Odetics ITS maintains a manufacturing facility in the Company's headquarters
in Anaheim, California for the manufacture of its Vantage products. The
manufacturing activities of Odetics ITS consist primarily of testing and
assembly. Odetics ITS currently shares certain manufacturing activities and
employees with the Communications Division. The Company intends to outsource
the manufacture of its Lane Tracker system and currently relies on one
manufacturer for this product. Such manufacturer has not, to date, commenced
volume production of the Lane Tracker product line, and accordingly, will need
to expand capacity rapidly to accommodate full production.
CUSTOMER SUPPORT AND SERVICES
The Company provides warranty service for each of its product lines, as well
as follow-on service and support for which the Company typically charges
separately. The Company also offers separate software maintenance agreements
to its customers. Management views customer support services as a critical
competitive factor as well as a revenue source. The Company maintains its own
service groups and trains its customers, representatives and distributors in
the performance of user level maintenance. Modular product designs with
recommended spare packages are used wherever feasible to minimize mean time to
repair.
BACKLOG
The Company's backlog of unfulfilled firm orders was approximately $21.6
million as of March 31, 1998 and approximately $17.6 million at March 31,
1997. Approximately 92.7% of the Company's backlog at March 31, 1997 was
recognized as revenues in fiscal 1998 and approximately 97.7% of the Company's
backlog
5
at March 31, 1998 is expected to be recognized as revenues in fiscal 1999.
Pursuant to the customary terms of the Company's agreements with government
contractors and other customers, orders generally may be cancelled or
rescheduled by the customer. Lead times for the release of purchase orders
depend upon the scheduling and forecasting practices of the Company's
individual customers, which also can affect the timing of the conversion of
the Company's backlog into revenues. For these reasons, among others, the
Company's backlog at a particular date may not be indicative of its future
revenues.
PRODUCT DEVELOPMENT
The Company's business requires substantial ongoing research and development
expenditures and other product development activities. For fiscal 1996, 1997
and 1998, the Company incurred approximately $5.2 million, $7.7 million and
$9.3 million, respectively, of Company sponsored research and development
costs and expenses, including reimbursable research and development expenses
of the Company allowed in the Company's negotiated general and administrative
rates on cost contracts with the United States Government.
The Company expects to continue to pursue significant product development
programs and incur significant research and development expenditures in all of
its principal product lines and services. These programs are directed toward
developing new products for advanced automated libraries as well as the
processing and distribution of digital images.
COMPETITION
The Company faces significant competition in each of its targeted markets.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Broadcast Division's primary competitors include Sony, Panasonic, Avid,
Louth and Pro-bel. Sony and Panasonic are large, international suppliers of
extensive professional quality products, including cart machines, for the
broadcast television market. Avid competes in the area of disk based video
server products, principally against the Broadcast Division's SpotBank
products. Louth and Probel principally provide automation control for video
libraries and disk recorders. The Broadcast Division's products compete
primarily on the basis of product features, including their capacity to
accommodate broadcast quality VCRs from all manufacturers, which is unique
among product offerings in this market.
Gyyr's principal competitors for time-lapse VCRs include Panasonic, Toshiba,
Sanyo and Sony, all of which have far greater name recognition, marketing and
other resources than the Company. Numerous other companies, including Japanese
and other offshore vendors of VCRs, also offer competitive products.
Management believes that Gyyr's products compete primarily on the basis of
their value-added features, including those relating to digital image
processing.
The primary competition for the Communications Division's network
synchronization products is Datum, Inc. In the Communications Division's space
tape recorder market, the Company primarily competes with Seaker, General
Electric Corporation, Lockheed Martin, and Schlumberger, S.A. An additional
competitive factor in this market is space flight experience; however, with
the advent of solid state recorders, the Company may face new competitors in
this market. The Company believes its emerging network interface products are
addressing market niches.
Odetics ITS' competitors in the traffic management services market include
ITS divisions of large corporations including Lockheed Martin and TRW, as well
as many civil engineering firms. The Company believes that the principal bases
of competition in the transportation management services market is the
experience of key individuals and their relationships with government
agencies, project management experience, name recognition and the ability to
develop integrated software to link various aspects and components of the
traffic management system. The Company expects increased competition in its
transportation management
6
services business as additional competitors gain experience and expertise with
the National ITS Architecture.In the market for vehicle detection, the Company
competes primarily with manufacturers and installers of inductive loops, with
other manufacturers of video camera detection systems such as Image Sensing
Systems, Inc. and the Peek business unit of Thermo Power, and to a lesser
extent with other non-intrusive detection devices including microwave,
infrared, ultrasonic and magnetic detectors. The Company is not aware of any
other company that currently sells a vision based lane tracking safety device
for in-vehicle applications.
The markets for the Company's products and services are highly competitive
and are characterized by rapidly changing technology and evolving standards.
The Company believes that its ability to compete depends on a number of
factors, including the success and timing of new product development by the
Company and its competitors, compatibility of the Company's products with a
broad range of computing systems, product quality and performance,
reliability, functionality, price, and service and technical support. Many of
the Company's current and prospective competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, technical, manufacturing, distribution and
marketing resources than the Company. As a result, they may be able to adapt
more quickly to new or emerging standards or technologies or to devote greater
resources to the promotion and sale of their products than the Company.
Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. The
failure of the Company to provide services and develop and market products
that compete successfully with those of other suppliers and consultants in the
market would have a material adverse effect on the Company's business,
financial condition and results of operations
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its technology. The
Company's policy is to obtain appropriate proprietary rights protection for
any potentially significant new technology acquired or developed by the
Company. The Company currently holds a number of United States and foreign
patents and trademarks. The patents will expire at various dates through 2012.
The Company also has pending a number of United States and foreign patent
applications relating to certain of its products; however, there can be no
assurance that any patents will be granted pursuant to these applications.
In addition to patent laws, the Company relies on copyright and trade secret
laws to protect its proprietary rights. The Company attempts to protect its
trade secrets and other proprietary information through agreements with
customers and suppliers, proprietary information agreements with the Company's
Associates (as hereinafter defined) and consultants and other similar
measures. There can be no assurance, however, that the Company will be
successful in protecting its proprietary rights.
While management believes its patents, patent applications, software and
other proprietary know-how have value, changing technology makes the Company's
future success dependent principally upon its Associates' technical competence
and creative skills for continuing innovation. Litigation has been necessary
in the past and may be necessary in the future to enforce the Company's
proprietary rights, to determine the validity and scope of the proprietary
rights of others, or to defend the Company against claims of infringement or
invalidity by others. An adverse outcome in such litigation or similar
proceedings could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from others or require the
Company to cease marketing or using certain products, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the cost of addressing any intellectual
property litigation claim, both in legal fees and expenses and the diversion
of management resources, regardless of whether the claim is valid, could be
significant and could have a material adverse effect on the Company's results
of operations.
ASSOCIATES
The Company refers to its employees as Associates. As of June 11, 1998, the
Company employed 554 Associates, including 124 Associates in general
management, administration and finance; 78 Associates in sales
7
and marketing; 161 Associates in product development; 154 Associates in
operations, manufacturing and quality; and 46 Associates in customer service.
None of the Company's Associates is represented by a labor union and the
Company has not experienced a work stoppage.
GOVERNMENT REGULATION
The Company's manufacturing operations are subject to various federal, state
and local laws, including those restricting the discharge of materials into
the environment. The Company is not involved in any pending or threatened
proceedings which would require curtailment of its operations because of such
regulations. The Company continually expends funds to assure that its
facilities are in compliance with applicable environmental regulations.
However, such expenditures have not been significant in the past and no
significant future expenditures are expected.
From time to time, a portion of the Company's work relating to its digital
data recorders may constitute classified United States government information
or may be used in classified programs of the United States Government. For
this purpose, the Company and certain Associates possess relevant security
clearances. The Company's affected facilities and operations are subject to
security regulations of the United States Government. The Company believes it
is in full compliance with these regulations.
8
RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. Other risks are presented elsewhere in this Report. The
following risks should be considered carefully in addition to the other
information contained in this Report in evaluating the Company and its
business before purchasing the shares of the Company's Common Stock.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced
wide fluctuations in quarterly and annual operating results in the past and
may continue to experience fluctuations in the future based on a number of
factors, not all of which are in the Company's control. These factors include,
without limitation, the size and timing of significant customer orders; the
introduction of new products by competitors; the availability of components
used in the manufacture of the Company's products; the expenditure of
substantial funds for research and development for its subsidiaries and
divisions; changes in pricing policies by the Company, its suppliers or its
competitors and increased price competition; the ability of the Company to
develop, introduce, market and gain market acceptance of new products
(particularly the Roswell, ControLink, Vantage and Lane Tracker), applications
and product enhancements in a timely manner and to control costs; the long
lead times associated with government contracts or required by vehicle
manufacturers; the Company's success in expanding and implementing its sales
and marketing programs; technological changes in the markets in which the
Company operates; the reduction in revenues from government programs; the
relatively thin level of backlog at any given time; the mix of sales among the
Company's divisions; deferrals of customer orders in anticipation of new
products, applications or product enhancements; currency fluctuations; and
general economic and market conditions. Moreover, the Company's sales in any
quarter typically consist of a relatively small number of large customer
orders, and the timing of a small number of orders can impact quarter to
quarter results. The loss of or a substantial reduction in orders from any
significant customer could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's growth
in revenues in recent periods may not be sustainable and may not be indicative
of future operating results, and there can be no assurance that the Company
will continue to achieve profitability on a quarterly or annual basis in the
future. Due to all of the foregoing factors and other risks discussed below,
it is possible that in some future period the Company's operating results may
be below the expectations of analysts and investors. In such event, the market
price of the Company's securities would probably be materially and adversely
affected.
UNCERTAINTY OF INCUBATOR STRATEGY. The Company has initiated a strategy to
nurture its business divisions with the goal of conducting additional initial
public offerings. The Company's ability to complete an initial public offering
of any of its divisions or subsidiaries will depend upon numerous factors,
including, without limitation, the overall performance of such division, its
growth potential, management team, market size, customer base, product line
and results of operations, as well as general economic and market conditions.
There can be no assurance that the Company will be able to complete a
successful initial public offering of any of its divisions in the near future,
if at all.
RAPID TECHNOLOGICAL CHANGE; EFFECT OF NEW PRODUCT INTRODUCTIONS AND
UNCERTAIN MARKET ACCEPTANCE. The markets served by the Company are
characterized by 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.
The Company's business requires substantial ongoing research and development
efforts and expenditures, and its future success will depend on its ability to
enhance its current products, reduce product costs and develop and introduce
new products which incorporate the latest technological advancements in
hardware, storage media, operating system software and applications software
in response to evolving customer requirements. The Company's failure to
anticipate or respond adequately to technological developments and changing
customer requirements, the occurrence of significant delays in new product
development or introduction or the failure of any new products to gain market
acceptance could impair the Company's competitiveness and could materially and
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to
introduce new products or enhancements to existing products on a timely basis,
if at all, or the
9
effect to which such introductions will have on sales of existing products. To
the extent new products are introduced, they may contain undetected design
faults and software errors or "bugs" when first released by the Company that,
despite testing by the Company, are discovered only after a product has been
installed and used by customers. Although the Company has not experienced any
material adverse effect resulting from any such faults or errors to date,
there can be no assurance that faults or errors in the Company's existing
products or in new products introduced by the Company will not be discovered
in the future, causing delays in product introduction and shipments or
requiring design modifications that could adversely affect the Company's
competitive position and results of operations. The Company's success is also
dependent in large part upon achieving broad market acceptance of certain new
products including its Roswell, ControLink, Vantage and Lane Tracker products.
There can be no assurance that any such products or enhancements thereto will
be able to achieve broad market acceptance. Market acceptance of the Company's
new products depends upon numerous factors, including the ability to resolve
technical challenges in a timely and cost-effective manner, the perceived
advantages over traditional products and the marketing capabilities of the
Company's independent distributors and strategic partners. In addition, the
Company anticipates that the manufacture of Lane Tracker will be outsourced to
a single manufacturer. There can be no assurance that this manufacturer will
be able to manufacture sufficient quantities in a timely manner or at a
reasonable cost, either of which could materially and adversely affect the
Company's ability to launch or gain market acceptance of Lane Tracker.
RISKS ASSOCIATED WITH INTERNATIONAL SALES; EFFECT OF ASIAN ECONOMIC
CRISIS. International product sales represented approximately 30%, 36% and 34%
of the Company's total net sales and contract revenues for the fiscal years
ended March 31, 1996, 1997 and 1998, respectively. The Company's products sold
by its telecommunications operations are sold principally to LGIC of Korea. As
a result of economic uncertainty in Asia, particularly Korea, the Company's
sales in this region declined during the fourth quarter of fiscal 1998 and
could be further impacted by the currency devaluations and related economic
problems in this region. The Company believes that international sales will
continue to represent a significant portion of its revenues, and that
continued growth and profitability will require further expansion of its
international operations. The Company's international sales are currently
denominated primarily in U.S. dollars, and an increase in the relative value
of the dollar could make the Company's products more expensive and, therefore,
potentially less price competitive in international markets. Additional risks
inherent in international business activities generally include unexpected
changes in regulatory requirements, tariffs and other trade barriers, longer
accounts receivable payment cycles, difficulties in managing and staffing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, the burdens of compliance with a
wide variety of foreign laws, currency fluctuations and political and
economical instability. The Company does not engage in any transactions as a
hedge against risks of loss due to foreign currency fluctuations. There can be
no assurance that such factors will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's
business, operating results and financial condition. Furthermore, as the
Company increases its international sales, its total revenues may also be
affected to a greater extent by seasonal fluctuations resulting from lower
sales that typically occur during the summer months in Europe and other parts
of the world.
MANAGEMENT OF GROWTH; RISKS RELATED TO POSSIBLE ACQUISITIONS. Over the past
year, the Company has significantly expanded its operations and has completed
the acquisition of certain assets of the Transportation Business of Rockwell
International as well as ICI, and the Company intends to continue to pursue an
acquisition strategy. This period of rapid growth and expansion has placed,
and continues to place, a significant strain on the Company's resources. To
accommodate this growth, the Company will be required to implement a variety
of new and upgraded operational and financial systems, procedures and
controls, including the improvement of its accounting and other internal
management systems, all of which require substantial management effort. There
can be no assurance that the such efforts can be accomplished successfully.
There can be no assurance that the Company will be able to identify, acquire,
profitably manage or successfully integrate any such business into the Company
without incurring substantial delays or other operational or financial
problems. Moreover, competitors of the Company are also soliciting potential
acquisition candidates, which could both increase the price of any acquisition
targets and decrease the number of attractive companies available for
acquisition. Acquisitions may require significant capital infusions and, in
general, involve a number of special risks, including the diversion of
10
management's attention, the failure to retain or successfully integrate key
acquired personnel, the challenge of operating diverse business divisions,
increased costs to improve managerial, operational, financial and
administrative systems, legal liabilities and increased interest expense and
amortization of acquired intangible assets, any of which could materially and
adversely affect the Company's business, financial condition and results of
operations.
RELIANCE ON GOVERNMENT CONTRACTS AND SUBCONTRACTORS; RISKS RELATED TO FIXED
PRICE CONTRACTS. Substantially all of net sales by Odetics ITS and a portion
of the net sales of the Communications Division for the year ended March 31,
1998 were derived from contracts with governmental agencies, either as a
general contractor, subcontractor or supplier. Government business is, in
general, subject to special risks and challenges such as long purchase cycles,
competitive bidding and qualification requirements, performance bond
requirements, delays in funding, budgetary constraints, milestone requirements
and liquidated damage provisions for failure to meet contract milestones. In
addition, an increasing number of the Company's government contracts are fixed
price contracts, pursuant to which the Company benefits from cost savings, but
is unable to recover for any cost overruns. Such fixed price contracts require
the Company to estimate the total project cost based on preliminary
projections of the project's requirements. The financial viability of any
given project depends in large part on the Company's ability to estimate such
costs accurately and complete the project on a timely basis. In the event the
Company's costs on such projects exceed the fixed contractual cost, the
Company will be required to bear the excess costs. Such costs could exceed
project profit margins or even revenues, and accordingly, could have a
material adverse effect on the Company's financial condition and results of
operations. Moreover, certain of the Company's government contracts are
subject to termination or renegotiation at the convenience of the government,
which could result in a large decline in net sales in any given quarter. The
Company's inability to address any of the foregoing concerns or the loss or
renegotiation of any material government contract could have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION. The Company competes in each of its markets with numerous other
companies, many of which have far greater name recognition and financial,
technological, marketing and customer service resources than the Company and
may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or devote greater resources to the
development, promotion, sale and support of their products than the Company.
The Company believes the principal competitive factors in the markets in which
the Company participates are product quality and performance, price,
reliability, upgradeability, service and technical support. There can be no
assurance that the Company will be able to compete effectively in the markets
for its products. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse affect upon the Company's business, operating results
and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends to a
significant extent on its senior management and other key employees, in
particular Joel Slutzky, the Company's Chief Executive Officer. The loss of
the services of Mr. Slutzky or certain key employees would have a material
adverse effect on the Company's development and marketing efforts. The
Company's future success will also depend in large part upon its ability to
attract, retain and motivate highly skilled employees. Competition for
employees, particularly development engineers, is intense, and there can be no
assurance that the Company will be able to continue to attract and retain
sufficient numbers of such highly skilled employees. The Company's inability
to attract and retain additional key employees or the loss of one or more of
its current key employees could have a material adverse effect upon the
Company's business, financial condition and results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The Company's
ability to compete effectively depends in part on its ability to develop and
maintain proprietary aspects of its technology which the Company attempts to
protect with a combination of patent, copyright, trademark and trade secret
laws, employee and third party nondisclosure agreements and similar means.
Such rights may not preclude competitors from developing substantially
equivalent or superior products to the Company's products. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
as fully as do the laws of the United States. There can be no assurance that
the Company's means of protecting its proprietary rights in the United States
or abroad will be adequate, that future patents will be issued, or that
competitors will not independently
11
develop technologies that are similar or superior to the Company's technology,
duplicate the Company's technology, or design around any patent of the
Company. Moreover, litigation has been necessary in the past and may be
necessary in the future to enforce the Company's intellectual property rights,
to determine the validity and scope of the proprietary rights of others, or to
defend the Company against claims of infringement or invalidity by others. An
adverse outcome in such litigation or similar proceedings could subject the
Company to significant liabilities to third parties, require disputed rights
to be licensed from others or require the Company to cease marketing or using
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to obtain licenses under patents or proprietary rights of
others, there can be no assurance that any required licenses would be made
available on terms acceptable to the Company, if at all. In addition, the cost
of addressing any intellectual property litigation claim, both in legal fees
and expenses and the diversion of management resources, regardless of whether
the claim is valid, could be significant and could have a material adverse
effect on the Company's results of operations.
VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock
has been in the past and could be in the future subject to wide fluctuations
in response to quarterly variations in operating results, shortages announced
by suppliers, announcements of technological innovations or new products,
applications or product enhancements by the Company or its competitors,
changes in financial estimates by securities analysts and other events or
factors. In addition, the stock market has experienced volatility which has
particularly affected the market prices of equity securities of many high
technology companies and which often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's securities.
CONCENTRATION OF OWNERSHIP. As of June 25, 1998, the Company's officers and
directors beneficially owned a majority of the total combined voting power of
the outstanding shares of Class A Common Stock and Class B Common Stock. As a
result of their stock ownership, management will be able to significantly
influence the election of the Company's directors and the outcome of corporate
actions requiring stockholder approval, such as mergers and acquisitions,
regardless of how other stockholders of the Company may vote. This
concentration of voting control may have a significant effect in delaying,
deferring or preventing a change in management or change in control of the
Company and may adversely affect the voting or other rights of other holders
of Common Stock.
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, BYLAWS, STOCK STRUCTURE AND
STOCKHOLDER RIGHTS PLAN. The Company has two classes of Common Stock which are
substantially identical other than with respect to voting power. The Company's
Class A Common Stock entitles the holder to 1/10th vote per share and Class B
Common Stock entitles the holder to one vote per share, with concentration of
ownership of the Class B Common Stock in the Company's officers and directors
and their affiliates. In addition, the Company's Board of Directors is elected
annually on a split vote basis, with the holders of Class A Common Stock
currently being entitled to elect two of the directors and holders of the
Class B Common Stock currently being entitled to elect the remaining six
directors. These provisions could have the effect of discouraging a proxy
contest or making it more difficult for a third party acquiring a substantial
block of the Company's Common Stock to effect a change in management and
control of the Company. Such provisions also could limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Board of Directors of the Company is authorized to issue,
without stockholder approval, up to 2,000,000 shares of Preferred Stock with
voting, conversion and other rights and preferences, as well as additional
shares of Class B Common Stock, which could adversely affect the voting power
or other rights of the holders of Class A Common Stock. Although the Company
has no current plans to issue any shares of Preferred Stock or additional
shares of Class B Common Stock, the future issuance of Preferred Stock or
Class B Common Stock or of rights to purchase Preferred Stock or Class B
Common Stock could be used to discourage an unsolicited acquisition proposal.
In March 1998, the Company's Board of Directors adopted a stockholder rights
plan, pursuant to which the Company declared a dividend of preferred stock
purchase rights to the Company's stockholders. Each right entitles the holder
to purchase one one-thousandth of a share of junior participating Series A
Preferred Stock of the Company at an
12
exercise price of $60. While the rights generally are only exercisable if a
person or group acquires 15% or more of the Company's stock, the exercise of
the rights could cause substantial dilution to a particular acquiror. Although
the purpose of the Stockholder Rights Plans is to provide an incentive to
potential acquirors to deal directly with the Company's Board of Directors,
the existence of the stockholder rights plan could be considered to delay or
make a merger, tender offer or proxy contest more difficult.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than three
years, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the hardware and software industry concerning the potential effects
associated with such compliance. Although the Company's core products are
designed to be Year 2000 compliant, there can be no assurance that such
products contain all necessary date code changes. The Company is exploring
changes to its existing information systems to become Year 2000 compliant. The
Company will be required to expend additional resources to make such
corrections to its products and information systems, which corrections may not
be able to be made on a timely basis, if at all. The Company believes that the
purchasing patterns of customers and potential customers may be affected by
Year 2000 issues in a variety of ways. Many companies are expending
significant resources to correct or patch their current systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products such as those offered by the Company. Many potential
customers may also choose to defer purchasing Year 2000 compliant products
until they believe it is absolutely necessary, thus resulting in potentially
stalled market sales within the industry. In addition, Year 2000 issues could
cause a significant number of companies, including current customers of the
Company, to reevaluate their current system needs, and as a result consider
switching to other systems or suppliers. Any of the foregoing could result in
a material adverse effect on the Company's business financial condition and
results of operation.
ITEM 2. PROPERTIES.
The Company's headquarters and principal operations are located in Anaheim,
California. In 1984, the Company purchased and renovated a three building
complex containing approximately 250,000 square feet situated on approximately
14 acres adjacent to the Interstate 5 freeway one block from Disneyland. These
Company-owned facilities house the Company's corporate and administrative
offices (approximately 43,000 dedicated square feet), as well as Gyyr and the
Broadcast Division, (approximately 87,000 dedicated square feet), the
Communications Division (approximately 67,000 dedicated square feet), and
Odetics ITS (approximately 25,000 dedicated square feet).
The Communications Division leases approximately 4,500 square feet of space
in a manufacturing facility located on 0.62 acre in El Paso, Texas. The
Broadcast Division leases approximately 5,000 square feet in Austin, Texas to
manufacture certain product families. Odetics Europe Limited's offices are
located in leased space near London, England. Odetics Asia Pacific Pte. Ltd.
offices are located in leased space in Singapore.
The Company currently is operating a single shift in its manufacturing and
assembly facilities and it believes that its facilities are adequate for its
current needs and for possible future growth. However, the Company may elect
to expand or relocate its offices and facilities in the future.
ITEM 3. LEGAL PROCEEDINGS.
The Company brought an action against Storage Technology Corporation
("StorageTek") in the Eastern District Court of Virginia alleging that
StorageTek had infringed the Company's patent covering robotics tape cassette
handling systems (United States Patent No. 4,779,151). StorageTek
counterclaimed alleging that the Company infringed several of StorageTek's
patents. Prior to trial, the court dismissed two of the infringement claims
against the Company and the third claim was resolved between the parties. In
January 1996, the jury determined that the patent claims were not infringed
under the doctrines of equivalents based upon a claim
13
construction defined by the court prior to the trial. The jury also concluded
that the Company's patent was not invalid. In June 1997, the United States
Court of Appeals for the Federal Circuit vacated the lower court's claim
construction and findings of noninfringement of the Company's patent. The
appellate court remanded the case for consideration of infringement under a
proper claim construction. In August 1997, the appellate court denied a
petition for rehearing requested by StorageTek. The case was returned to the
Federal District Court for retrial, and in March 1998, the jury awarded the
Company damages in the amount of $70.6 million. In June 1998, the U.S.
District Court for the Eastern District of Virginia granted an injunction
against StorageTek enjoining StorageTek from making, selling or using any
infringing devices, including the ACS4400, PowderHorn, Wolfcreek and Genesis
automated tape library systems that include a pass through port. In June 1998,
the U.S. District Court issued an order requesting the parties to brief the
issues of whether StorageTek's motion for judgment as a matter of law should
have been granted, and whether the injunction previously order by the court
against StorageTek should be stayed pending appeal. The Company has complied
with the Court's request for further briefing and will argue in support of its
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock and Class B Common Stock are traded on
the Nasdaq National Market under the symbols "ODETA" and "ODETB,"
respectively. The following table sets forth for the fiscal periods indicated
the high and low sale prices for the Class A Common Stock and Class B Common
Stock as reported by the Nasdaq National Market:
CLASS A CLASS B
COMMON STOCK COMMON STOCK
---------------- ----------------
HIGH LOW HIGH LOW
------- -------- -------- -------
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter............................... $21 $ 6 1/4 $20 $ 6 5/8
Second Quarter.............................. 16 1/4 6 3/4 16 1/2 8 1/4
Third Quarter............................... 17 3/4 11 1/2 17 1/2 12
Fourth Quarter.............................. 23 1/4 11 3/4 22 1/4 13 3/4
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter............................... $14 1/2 $ 9 3/4 $14 1/2 $10 1/2
Second Quarter.............................. 19 1/4 12 1/4 19 1/4 12
Third Quarter(1)............................ 21 3/4 4 5/8 21 4 1/2
Fourth Quarter.............................. 8 3/4 4 9/16 10 1/16 4 1/4
- --------
(1) The Company's stock prices for the periods following October 31, 1997 give
effect to the Distribution.
As of June 25, 1998, the Company had 733 holders of record of Class A Common
Stock and 178 holders of record of Class B Common Stock according to
information furnished by the Company's transfer agent.
DIVIDEND POLICY
Pursuant to the terms of the Company's Loan and Security Agreement with its
banks, the Company is restricted in declaring cash dividends on its Common
Stock in an amount not to exceed in any fiscal year 10% of the Company's
consolidated net income for the prior fiscal year. The Company never paid or
declared cash dividends on its Common Stock, and has no current plans to pay
such dividends in the foreseeable future. The Company currently intends to
retain any earnings for working capital and general corporate purposes. The
payment
14
of any future dividends will be at the discretion of the Company's Board of
directors, and will depend upon a number of factors, including, but not
limited to, future earnings, the success of the Company's business,
activities, its capital requirements, the general financial condition and
future prospects of the Company, general business conditions, the consent of
the Company's principal lender and such other factors as the Board may deem
relevant.
RECENT SALES OF UNREGISTERED SECURITIES
In October, 1997, the Company issued an aggregate of 173,867 shares of its
Class A Common Stock to the stockholders of ICI in connection with the merger
of a wholly-owned subsidiary of the Company into ICI, in exchange for all of
the outstanding Common Stock of ICI. The sale and issuance of such securities
was exempt from registration under the Act by virtue of Section 4(2) thereof.
No broker, dealers or underwriters were involved in this transaction. Since
April 1, 1996, the Company has not sold any other unregistered securities.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data with respect to the
Company's consolidated statement of operations for each of the five fiscal
years in the period ended March 31, 1998 and the consolidated balance sheet
data at March 31, 1994, 1995, 1996, 1997 and 1998 are derived from the audited
consolidated financial statements of the Company. The consolidated financial
statements for the fiscal years ended March 31, 1994 and 1995 and the
Company's consolidated balance sheet at March 31, 1996 are not included in
this Report. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements of the Company and
the related notes thereto included elsewhere in this Report.
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales........................ $45,557 $51,824 $65,056 $71,748 $ 79,552
Contract revenues................ 18,099 13,280 10,161 9,032 10,284
------- ------- ------- ------- --------
Total net sales and contract
revenues........................ 63,656 65,104 75,217 80,780 89,836
Cost of sales.................... 28,564 34,225 44,535 48,507 55,227
Cost of contract revenues........ 11,114 6,633 4,374 4,907 6,430
Selling, general and
administrative expenses......... 13,305 16,199 15,620 19,831 26,010
Research and development
expenses........................ 4,983 6,061 5,242 7,734 9,271
In process research and
development..................... -- -- -- -- 2,106
Nonrecurring charge.............. -- 767 -- -- 1,716
Interest expense, net............ 1,230 682 386 183 617
------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes.. 4,460 537 5,060 (382) (11,541)
Income taxes (benefit)........... 1,501 177 1,418 (181) (2,858)
------- ------- ------- ------- --------
Income (loss) from continuing
operations...................... 2,959 360 3,642 (201) (8,683)
Income (loss) from discontinued
operations, net of income taxes. (1,137) (5,038) (1,189) 3,931 2,089
------- ------- ------- ------- --------
Net income (loss)................ $ 1,822 $(4,678) $ 2,453 $ 3,730 $ (6,594)
======= ======= ======= ======= ========
Diluted earnings (loss) per
share(1):
Continuing operations............ $ 0.55 $ 0.06 $ 0.59 $ (0.03) $ (1.26)
Discontinued operations.......... (0.21) (0.86) (0.19) 0.62 0.31
------- ------- ------- ------- --------
Earnings (loss) per share........ $ 0.34 $ (0.80) $ 0.40 $ 0.59 j$ (0.95)
======= ======= ======= ======= ========
Shares used in calculating
diluted earnings (loss) per
share........................... 5,326 5,872 6,179 6,299 6,912
- -------
(1) The earnings (loss) per share amounts prior to fiscal 1998 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128 Earnings per Share. For further discussion of earnings
per share and the impact of Statement No. 128, see the notes to the
consolidated financial statements.
=== === === === ===
15
FISCAL YEAR ENDED MARCH 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE
SHEET DATA:
Working Capital......... $20,052 $24,892 $20,610 $21,903 $19,996
Total assets............ 63,070 70,098 73,013 85,805 88,790
Long-term debt (less
current portion)....... 16,723 25,757 22,019 11,860 21,000
Retained earnings....... 10,706 6,027 8,481 12,211 (3,795)
Total stockholders'
equity................. 31,239 27,736 30,985 51,828 38,580
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company is organized into separate divisions or subsidiaries, each
having primary responsibility for product development, manufacturing and
marketing of one or more of the Company's principal product lines or services.
The Company has four distinct manufacturing operations each tailored to the
requirements of its principal product divisions.
The following table sets forth certain income statement data as a percentage
of total net sales and contract revenues for the periods indicated and should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations:
AS OF MARCH 31,
-------------------
1996 1997 1998
----- ----- -----
Net sales.............................................. 86.5% 88.8% 88.6%
Contract revenues...................................... 13.5 11.2 11.4
----- ----- -----
Total net sales and contract revenues.................. 100.0 100.0 100.0
Cost of sales.......................................... 59.2 60.0 61.4
Cost of contract revenues.............................. 5.8 6.1 7.2
Selling, general and administrative expenses........... 20.8 24.5 29.0
Research and development expenses...................... 7.0 9.6 10.3
In process research and development.................... 0.0 0.0 2.3
Nonrecurring charge.................................... 0.0 0.0 1.9
Interest expense, net.................................. 0.5 0.2 0.7
----- ----- -----
Income (loss) from continuing operations before income
taxes................................................. 6.7 (0.4) (12.8)
Income taxes (benefit)................................. 1.9 (0.2) (3.2)
----- ----- -----
Income (loss) from continuing operations............... 4.8 (0.2) (9.6)
Income (loss) from discontinued operations, net of in-
come taxes............................................ (1.5) 4.8 2.3
----- ----- -----
Net income (loss)...................................... 3.3% 4.6% (7.3)%
===== ===== =====
General. On October 31, 1997, the Company completed the spin-off of its
82.9% interest in ATL by distributing the Company's 8,005,000 shares of Class
A Common Stock to the Company's stockholders of record on October 31, 1997. In
connection with the spin-off, the Company's financial statements have been
restated to reflect continuing and discontinued operations. Discontinued
operations reflect the Company's interest in the operations of ATL for all
periods presented.
Net Sales and Contract Revenues. Net sales and contract revenues consist of:
(i) sales of products and services to commercial customers ("net sales") and
(ii) revenues derived from contracts with state, county, and municipal
agencies for intelligent transportation systems projects and from contracts
with agencies of the United States Government and foreign entities for space
recorders used for geographical information systems ("contract
16
revenues"). Total net sales and contract revenues increased 11.2% to $89.8
million for the fiscal year ended March 31, 1998 ("fiscal 1998") compared to
$80.8 million for the fiscal year ended March 31, 1997 ("fiscal 1997"), and
increased 7.4% in fiscal 1997 from $75.2 million for the year fiscal year
ended March 31, 1996 ("fiscal 1996").
Net sales increased 10.9% to $79.6 million in fiscal 1998 compared to $71.7
million in fiscal 1997 primarily as a result of an 18% increase in sales by
Gyyr and a 79% increase in sales of the Company's timing and synchronization
products sold by the Company's Communications Division to a major Korean
telecommunications customer. While sales in fiscal 1998 to this customer
increased as compared to fiscal 1997, the Company experienced a significant
decline in fourth quarter sales to this customer largely due to the economic
crisis in Asia. During fiscal 1998, Gyyr increased sales of electronic
security equipment and service revenue. The Company completed the acquisition
of ICI which also contributed to the increased sales. The sales
increases in Gyyr and in the Communications Division were offset by declines
in sales in the Company's Broadcast Division which resulted from delays in
delivery of "Roswell."
The Company's net sales increased 10.3% to $71.7 million in fiscal 1997
compared to $65.0 million in fiscal 1996 primarily as a result of increased
sales of timing and synchronization products and increased sales of network
interface devices manufactured by the Communications Division, in addition to
an increase in sales of Gyyr. Increased sales in Gyyr and the Communications
Division were offset by a decrease in sales of the Broadcast Division.
Contract revenues increased 13.9% to $10.3 million in fiscal 1998 compared
to $9.0 million in fiscal 1997. Contract revenues decreased 11.0% to $9.0
million in fiscal 1997 compared to $10.2 million in fiscal 1996. In the first
quarter of fiscal 1998, the Company acquired certain assets of the
Transportation Systems business of Rockwell International, which were
consolidated into the Company's ITS business. The increase in contract
revenues in fiscal 1998 reflects the revenue contribution from ITS. The
increase in contract revenues in ITS in fiscal 1998 was partially offset by
declines in contract revenues from the sale of space recorders and related
service and equipment to agencies of the United States Government. The Company
intends to focus strategically on commercial markets and the markets for ITS
products and services.
Gross Profit. Total gross profit as a percent of net sales and contract
revenues decreased to 31.4% in fiscal 1998, compared to 33.9% in fiscal 1997,
and 35.0% in fiscal 1996. The decrease in fiscal 1998 compared to fiscal 1997
reflects decreased gross profit performance in Broadcast on an unfavorable
sales mix and higher unabsorbed manufacturing overhead, which was partially
offset by improved gross profit performance in Gyyr and the Communications
Division due to changes in product mix toward products with higher margins,
improved efficiencies associated with increased sales volume, and improved
margin contribution from the acquisition of ICI in October 1997. The decrease
in fiscal 1998 also reflects a lower gross profit contribution on contract
revenues from the Company's ITS business compared to other contract revenues
during fiscal 1997.
The decrease in total gross profit in fiscal 1997 compared to fiscal 1996
reflects decreased gross profits on contract revenues, which was partially
offset by increased gross profit performance in Gyyr as a result of improved
sales mix favoring higher margin products and improved absorption of
manufacturing overhead costs. The Company's gross profits on contract revenues
in each accounting period reflect the mix of contracts currently under
development, and can be expected to vary from period to period.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 31.2% to $26.0 million (or 29.0% of total net
sales and contract revenues) in fiscal 1998 compared to $19.8 million (or
24.5% of total net sales and contract revenues) in fiscal 1997, and increased
27.0% in fiscal 1997 compared to $15.6 million (or 20.8% of total net sales
and contract revenues) in fiscal 1996. The Company has experienced increased
costs across all of its operating divisions and subsidiaries for sales,
marketing, and administrative activities as a function of its planned growth.
The expenses include labor costs, sales commissions on increased sales volume,
advertising and promotion to support new product roll-out, and costs related
to international expansion, particularly in Europe and Asia. In addition,
selling, general and administrative expense increased in absolute dollars in
fiscal 1998 related to the Company's acquisitions of ICI and certain assets of
the Transportation Systems business of Rockwell International discussed above.
17
Research and Development Expense. Research and development expense increased
19.9% to $9.3 million (or 10.3% of total net sales and contract revenues) in
fiscal 1998 compared to $7.7 million (or 9.6% of total net sales and contract
revenues) in fiscal 1997, and increased 47.5% in fiscal 1997 compared to $5.2
million (or 7.0% of total net sales and contract revenues) in fiscal 1996. For
competitive reasons, the Company closely guards the confidentiality of
specific development projects. Increased spending for research and development
both in terms of absolute dollars and as a percent of revenues reflects
primarily expenses for engineering labor and related benefits, prototype
material costs and consulting fees. The Company experienced increased expenses
for research and development expense in each of Gyyr, the Broadcast Division
and the Communications Division. The acquisitions of ICI and certain assets of
the Transportation Systems business did not materially impact the increases in
current year research and development expenses.
Nonrecurring Charge. In March 1998, the Company recorded a nonrecurring
charge of $1.7 million. The charge reflects severance costs related to
retirement of certain of the Company's founders and officers, and to a lesser
extent, costs incurred to terminate a joint venture relationship in China.
Interest Expense, Net. Interest Expense, net reflects the net of interest
expense and interest income as follows:
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------- ----------- -----------
Interest Expense......................... $2,247 $1,890 $1,609
Interest Income.......................... 1,861 1,707 992
------ ------ ------
Interest Expense, net.................... $ 386 $ 183 $ 617
====== ====== ======
Interest expense decreased 14.9% in fiscal 1998 compared to fiscal 1997, and
decreased 15.9% in fiscal 1997 compared to fiscal 1996. This decrease
represents reduced average outstanding borrowings on the Company's line of
credit. Interest income was derived primarily from a note receivable due from
ATL, the Company's former subsidiary. The reduction in interest income in each
of the last three fiscal years reflects principal reduction on this note,
which pursuant to its terms is payable in sixteen quarterly installments by
ATL.
In-Process Research and Development. In the fourth quarter of fiscal 1998,
the Company completed the purchase price allocation related to its acquisition
of ICI and determined that $2.1 million of the purchase price was attributable
to the value of research and development activities in process at the date of
acquisition. In accordance with the provisions of FASB Statement No. 2,
"Accounting for Research and Development Cost," the Company recorded a charge
in fiscal 1998 for such in-process research and development.
Income Taxes. The Company's effective tax rate from continuing operations
was 28.0%, (47.4%) and (24.8)% in fiscal 1996, 1997 and 1998, respectively.
The tax benefit recorded in 1998 was less than the statutory rate because no
benefit was recorded in connection with $2.1 million write-off of purchased
research and development expenses associated with the acquisition of ICI, a
reduction in the benefit of general business credits on total expense, and
foreign losses recorded in Singapore for which no tax benefit was recognized.
The recognition of general business credits in 1996 reduced the Company's
effective tax rates below the statutory rates, while such credits increased
the tax benefit recorded in 1997.
In 1997, the Company entered into a Tax Allocation Agreement with ATL
effective April 1, 1996 pursuant to which ATL made payments to the Company, or
the Company made payments to ATL, as appropriate, in an amount equal to the
taxes attributable to the operations of the Company on its consolidated
federal, and consolidated or combined state income tax returns. In addition,
the Tax Allocation Agreement provided that members of the Company's
consolidated group generating tax losses after April 1, 1996 will be paid by
other members of the group that utilize such tax losses to reduce such other
members' tax liability. Accordingly, the tax provisions for ATL was recorded
as a component of the income (loss) from discontinued operations at a 40%
effective tax rate for each fiscal year. The Tax Allocation Agreement was
effectively canceled upon completion of the spin-out of ATL on October 31,
1997.
18
Income (Loss) from Continuing Operations. In connection with the spin-off of
its 82.9% ownership interest in ATL on October 31, 1997, the Company restated
its financial statements to present the results of operations of ATL as
discontinued operations for all periods presented. Income (loss) from
continuing operations reflects the continuing operations of the Company
including Gyyr, the Broadcast Division and the Communications Division.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1997, the Company completed the spin-off of its holdings in
ATL. The effect of the spin-off was to reduce total assets of the Company by
approximately $11.6 million, representing the net assets of the discontinued
operations reported in the Company's Form 10-Q for the second quarter of
fiscal 1998.
The Company's net loss of $6.6 million incurred during fiscal 1998
contributed to negative cash flow from operating activities of $7.9 million.
The losses were funded primarily by increased borrowings on the Company's line
of credit facility with its principal banks and cash received from ATL
discussed below. The Company has a $17.0 million bank line of credit with
Imperial Bank and Comerica Bank-California which provides for borrowings
generally at the lesser of the bank's prime rate (8.5% at March 31, 1998) or
the bank's LIBOR rate plus 2.25%. Borrowings are available for general working
capital purposes, and at March 31, 1998, approximately $3.9 million was
available for borrowing under the line. The Company's borrowing's under the
line are secured by substantially all of the Company's assets. At March 31,
1998, the Company was in violation of certain financial ratio covenants. The
bank has waived compliance with those covenants at March 31, 1998 and the
covenants are expected to be modified to allow the Company to be in compliance
with the requirements of the line of credit facility in future periods.
In April 1997, ATL issued a promissory note payable to Odetics in the
original principal amount of $13.0 million, representing the aggregate balance
of ATL's interest bearing advances from the Company outstanding following
ATL's initial public offering. The note bears interest at a rate equal to the
Company's cost of borrowing (8.5% at March 31, 1998). Principal and interest
on this note are payable to the Company in sixteen quarterly installments at
the end of each calendar quarter. During fiscal 1998, the Company received
$3.0 million in cash from ATL as payments of principal and interest on this
note.
The Company anticipates that the combination of net cash flow from operating
activities, proceeds from its promissory note due from ATL, together with
future borrowings under its line of credit with its principal banks, will
enable it to execute its operating plans and meet its obligations on a timely
basis for at least the next twelve months.
YEAR 2000 COMPLIANCE
Significant uncertainty exists in the hardware and software industry
concerning the potential effects associated with compliance with Year 2000
requirements. Although the Company's core products are designed to be Year
2000 compliant, there can be no assurance that such products contain all
necessary date code changes. The Company is exploring changes to its existing
information systems to become Year 2000 compliant. The Company will be
required to expend additional resources to make such corrections to its
products and information systems, which corrections may not be able to be made
on a timely basis, if at all. The Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues in a variety of ways. Many companies are expending significant
resources to correct or patch their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
such as those offered by the Company. Many potential customers may also choose
to defer purchasing Year 2000 compliant products until they believe it is
absolutely necessary, thus resulting in potentially stalled market sales
within the industry. In addition, Year 2000 issues could cause a significant
number of companies, including current customers of the Company, to reevaluate
their current system needs, and as a result consider switching to other
systems or suppliers. Any of the foregoing could result in a material adverse
effect on the Company's business financial condition and results of operation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Form 10-K commencing on page F-1.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) IDENTIFICATION OF DIRECTORS. The information under the caption "Election
of Directors," appearing in the Proxy Statement, is incorporated herein by
reference.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS. The information under the headings
"Executive Compensation and Other Information," appearing in the Proxy
Statement, is incorporated herein by reference.
(C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
appearing in the Proxy Statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the headings "Executive Compensation and Other
Information," appearing in the Proxy Statement, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the headings "Principal Stockholders and Common Stock
Ownership of Certain Beneficial Owners and Management," appearing in the Proxy
Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions," appearing in the
Proxy Statement, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS. The following financial statements of the
Company are included in a separate section of this Annual Report on Form
10-K commencing on the pages referenced below:
PAGE
----
Index to Consolidated Financial Statements............................. F-1
Report of Ernst & Young LLP, Independent Auditors...................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998.............. F-3
Consolidated Statements of Operations for the years ended March 31,
1996, 1997 and 1998................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1996, 1997 and 1998 ........................................ F-5
Consolidated Statements of Cash Flows for the years ended March 31,
1996, 1997 and 1998................................................... F-6
Notes to Consolidated Financial Statements............................. F-7
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule
of the Company is included in a separate section of this Annual Report on Form
10-K commencing on the pages referenced below. All other schedules have been
omitted because they are not applicable, not required, or the information is
included in the consolidated financial statements of notes thereto.
PAGE
----
Schedule II--Consolidated Valuation and Qualifying Accounts............. S-1
20
3. EXHIBITS.
3.1 Certificate of Incorporation of the Company filed as Exhibit 19.2 to
the Company's Form 10-Q for the quarter ended September 30, 1987 and
incorporated herein by reference.
3.2 Bylaws of the Company, as amended, filed as Exhibit 4.2 to the
Company's Form S-1 filed July 6, 1993 and incorporated herein by
reference.
4.1 Specimen of Class A Common Stock and Class B Common Stock certificates
filed as Exhibit 4.3 to Amendment No. 1 filed September 30, 1993 to
the Company's Form S-1 filed July 6, 1993 and incorporated herein by
reference.
10.1 1981 Incentive Stock Option Plan and form of Stock Option Agreement,
filed as Exhibit 4.1 to the Company's Form S-8 filed June 27, 1985
(Reg. No. 2-98656) (the "1985 Form S-8") and incorporated herein by
reference.
10.2 1982 Nonstatutory Stock Option and Stock Appreciation Rights Plan and
forms of Nonstatutory Stock Option and Stock Appreciation Rights
Agreement, filed as Exhibit 4.2 to the 1985 Form S-8 and incorporated
herein by reference.
10.3 1992 Incentive Stock Option Plan and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement filed as Exhibit
4.1, 4.2 and 4.3, respectively, to the Company's Form S-8 filed March
10, 1993 (Reg. No. 33-59274) and incorporated herein by reference.
10.4 Profit Sharing Plan and Trust, filed as Exhibit 4.3 to Amendment No. 2
to the 1985 Form S-8 filed May 5, 1988 (Reg No. 2-98656) and
incorporated herein by reference.
10.5 Form of Executive Deferral Plan between the Company and certain
employees of the Company, filed as Exhibit 10.4 to the Company's Form
10-K for the year ended March 31, 1988 and incorporated herein by
reference.
10.6 Second Amended and Restated Loan Agreement between Bank of the West and
the Company entered into as of September 30, 1992, filed as Exhibit
10.6 to the Company's Form S-1 filed July 6, 1993 and incorporated
herein by reference.
10.7 Loan and Security Agreement between ATL Products, Inc. and Bank of the
West entered into as of February 26, 1993, filed as Exhibit 10.6 to
the Company's Form S-1 filed July 6, 1993 and incorporated herein by
reference.
10.8 Modification Agreement regarding the agreements referenced in Exhibits
10.6 and 10.7, as modified by the First Amendments to Modification
Agreement from Bank of the West dated as of February 26, 1993 and
August 9, 1993 filed as Exhibit 10.6 to the Company's Form S-1 filed
July 6, 1993 and incorporated herein by reference.
10.9.1 Form of Indemnity Agreement entered into by the Company, and certain
officers and directors, filed as Exhibit 19.4 to the Company's Form
10-Q for the quarter ended September 30, 1988 and incorporated herein
by reference.
10.9.2 Schedule of officers and directors covered by Indemnity Agreement filed
as Exhibit 10.9.2 to Amendment No. 1 filed September 30, 1993 to the
Company's Form S-1 filed July 6, 1993 and incorporated herein by
reference.
10.10 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust, filed as
Exhibits 4.3.1 and 4.3.2 respectively, to Amendment No. 3 to the
Company's 1983 Form S-8 (Reg. No. 2-86220) filed June 13, 1990 and
incorporated herein by reference.
10.11 Lease between the Company and Roths Properties entered into as of
November 1, 1990 filed as Exhibit 10.11 to the Company's Form S-1
filed July 6, 1993 and incorporated herein by reference.
10.12 Promissory Note in the original principal amount of $15,000,000 payable
to The Northwestern Mutual Life Insurance Company ("NMLI") dated
October 31, 1989 and related Deed of Trust, Security Agreement and
Financing Statement between Odetics, Inc. and NMLI dated October 31,
1989 filed as Exhibit 10.12 to the Company's Form S-1 filed July 6,
1993 and incorporated herein by reference.
21
10.13 Separation and Distribution Agreement between the Company and ATL dated
March 1, 1997, filed as Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997 as filed with the
Commission on June 30, 1997 (the "1997 Form 10-K").
10.14 Tax Allocation Agreement between the Company and ATL dated March 1,
1997, filed as Exhibit 10.14 to the Company's 1997 Form 10-K.
10.15 Services Agreement between the Company and ATL dated March 21, 1997,
filed as Exhibit 10.15 to the Company's 1997 Form 10-K.
10.16 Promissory Note between the Company and ATL dated April 1, 1997, filed
as Exhibit 10.16 to the Company's 1997 Form 10-K.
10.17 Amendment Number Six to Loan and Security Agreement dated March 31, 1997
between the Company, Gyyr, Imperial Bank and Comerica Bank-California,
filed as Exhibit 10.17 to the Company's 1997 Form 10-K.
10.18 1997 Stock Incentive Plan filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (File No. 333-44907) as filed with
the Commission on January 26, 1998 (the "1998 Form S-8").
10.19 Form of Notice of Grant of Stock Option filed as Exhibit 99.2 to the
Company's 1998 Form S-8.
10.20 Form of Stock Option Agreement filed as Exhibit 99.3 to the Company's
1998 Form S-8.
10.21 Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control) filed as Exhibit
99.4 to the Company's 1998 Form S-8.
10.22 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Rights) filed as Exhibit 99.5 to the Company's 1998 Form S-8.
10.23 Form of Stock Issuance Agreement filed as Exhibit 99.6 to the Company's
1998 Form S-8.
10.24 Form of Addendum to Stock Issuance Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control) filed as Exhibit
99.7 to the Company's 1998 Form S-8.
10.25 Form of Notice of Grant of Automatic Stock Option (Initial Grant) filed
as Exhibit 99.8 to the Company's 1998 Form S-8
10.26 Form of Notice of Grant of Automatic Stock Option (Annual Grant) filed
as Exhibit 99.9 to the Company's 1998 Form S-8
10.27 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the
Company's 1998 Form S-8
21 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
b. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated October 31, 1997
was filed with the Securities and Exchange Commission reporting the
Distribution of the Company's interest in ATL to the Company's
stockholders, and the restatement of the Company's financial statements
to reflect the operations of ATL as discontinued.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on June 29, 1998.
ODETICS, INC.
/s/ Joel Slutzky
By: _________________________________
Joel Slutzky
Chief Executive Officer,
President and Chairman of the
Board
POWER OF ATTORNEY
We, the undersigned officers and directors of Odetics, Inc., do hereby
constitute and appoint Joel Slutzky and Gregory A. Miner, and each of them,
our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joel Slutzky Chief Executive Officer, June 29, 1998
____________________________________ President and Chairman of
Joel Slutzky the Board (principal
executive officer)
/s/ Crandall Gudmundson Director June 29, 1998
____________________________________
Crandall Gudmundson
/s/ Jerry Muench Director June 29, 1998
____________________________________
Jerry Muench
/s/ Kevin C. Daly Director June 29, 1998
____________________________________
Kevin C. Daly
/s/ Gary Smith Vice President and June 29, 1998
____________________________________ Controller (principal
Gary Smith accounting officer)
/s/ Ralph R. Mickelson Director June 29, 1998
____________________________________
Ralph R. Michelson
23
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Leo Wexler Director June 29, 1998
____________________________________
Leo Wexler
/s/ John Seazholtz Director June 29, 1998
____________________________________
John Seazholtz
/s/ Paul E. Wright Director June 29, 1998
____________________________________
Paul E. Wright
/s/ Gregory A. Miner Vice President, Director, June 29, 1998
____________________________________ Chief Operating Officer and
Gregory A. Miner Chief Financial (principal
financial officer)
24
ODETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998................. F-3
Consolidated Statements of Operations for the years ended March 31, 1996,
1997 and 1998............................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1996, 1997 and 1998.................................................. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1997 and 1998............................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Odetics, Inc.
We have audited the accompanying consolidated balance sheets of Odetics,
Inc. as of March 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended March 31, 1998. Our audits also included the financial
statement schedule listed in Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Odetics, Inc. at March 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Orange County, California
May 4, 1998
F-2
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31 ,
------------------
1997 1998
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,865 $ 1,131
Trade accounts receivable, net of allowance for doubtful
accounts of $350,000 in 1997 and $432,000 in 1998....... 17,127 15,048
Current portion of ATL note receivable (Note 4).......... 3,249 3,249
Receivable from ATL (Note 4)............................. 2,148 1,553
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5).......................... 1,922 2,583
Inventories:
Finished goods......................................... 498 569
Work in process........................................ 2,968 2,176
Materials and supplies................................. 12,184 18,065
Prepaid expenses and other............................... 978 1,592
Income taxes receivable.................................. -- 1,039
Deferred income taxes.................................... 547 1,558
-------- --------
Total current assets....................................... 43,486 48,563
Property, plant and equipment:
Land..................................................... 2,090 2,090
Buildings and improvements............................... 17,642 18,481
Equipment................................................ 24,234 28,006
Furniture and fixtures................................... 968 1,312
Allowances for depreciation.............................. (23,824) (26,550)
-------- --------
21,110 23,339
Net assets of discontinued operations...................... 8,723 --
Long term ATL note receivable less current portion (Note
4)........................................................ 9,748 6,770
Goodwill, net of accumulated amortization of $306,000 in
1997 and $571,000 in 1998................................. 169 5,850
Other assets............................................... 2,569 4,268
-------- --------
Total assets.......................................... $ 85,805 $ 88,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................... $ 8,802 $ 13,672
Accrued payroll and related.............................. 5,306 5,093
Accrued expenses......................................... 1,788 2,083
Income taxes payable..................................... 1,276 --
Contract loss accrual.................................... -- 4,541
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5).......................... 2,690 1,580
Current portion of long-term debt (Note 6)............... 1,721 1,598
-------- --------
Total current liabilities.................................. 21,583 28,567
Revolving line of credit................................... 2,100 12,800
Long-term debt, less current portion (Note 6).............. 9,760 8,200
Deferred income taxes (Note 8)............................. 534 643
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity (Notes 9 and 10):
Preferred stock:
Authorized shares--2,000,000
Issued and outstanding--none........................... -- --
Common stock, $.10 par value:
Authorized shares--10,000,000 of Class A and 2,600,000
of Class B
Issued and outstanding shares--5,315,653 of Class A
and 1,064,241 of Class B at March 31, 1997; 6,202,778
of Class A and 1,062,041 of Class B at March 31, 1998. 638 726
Paid-in capital.......................................... $ 38,927 $ 45,240
Treasury stock, 0 and 50,000 shares in 1997 and 1998,
respectively............................................ -- (239)
Notes receivable from employees (Note 10)................ -- (3,377)
Foreign currency translation............................. 52 25
Retained earnings........................................ 12,211 (3,795)
-------- --------
Total stockholders' equity............................ 51,828 38,580
-------- --------
Total liabilities and stockholders' equity............ $ 85,805 $ 88,790
======== ========
See accompanying notes.
F-3
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------
1996 1997 1998
------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net sales and contract revenues:
Net sales........................................ $65,056 $71,748 $ 79,552
Contract revenues................................ 10,161 9,032 10,284
------- ------- --------
75,217 80,780 89,836
Costs and expenses:
Cost of sales.................................... 44,535 48,507 55,227
Cost of contract revenues........................ 4,374 4,907 6,430
Selling, general and administrative expenses..... 15,620 19,831 26,010
Research and development expenses................ 5,242 7,734 9,271
In process research and development.............. -- -- 2,106
Nonrecurring charge (Note 7)..................... -- -- 1,716
Interest expense, net............................ 386 183 617
------- ------- --------
70,157 81,162 101,377
------- ------- --------
Income (loss) from continuing operations before
income taxes...................................... 5,060 (382) (11,541)
Income taxes (benefit) (Note 8).................... 1,418 (181) (2,858)
------- ------- --------
Income (loss) from continuing operations........... 3,642 (201) (8,683)
Income (loss) from discontinued operations, net of
income taxes...................................... (1,189) 3,931 2,089
------- ------- --------
Net income (loss).................................. $ 2,453 $ 3,730 $ (6,594)
======= ======= ========
Basic earnings (loss) per share:
Continuing operations............................ $ .60 $ (.03) $ (1.26)
Discontinued operations.......................... (.20) .62 .31
------- ------- --------
Earnings (loss) per share........................ $ .40 $ .59 $ (.95)
======= ======= ========
Diluted earnings (loss) per share:
Continuing operations............................ $ .59 $ (.03) $ (1.26)
Discontinued operations.......................... (.19) .62 .31
------- ------- --------
Earnings (loss) per share........................ $ .40 $ .59 $ (.95)
======= ======= ========
See accompanying notes.
F-4
ODETICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------
SHARES
OUTSTANDING
-------------
CLASS CLASS NOTE
A B RECEIVABLE FOREIGN
COMMON COMMON PAID-IN TREASURY FROM CURRENCY RETAINED
STOCK STOCK AMOUNT CAPITAL STOCK EMPLOYEES TRANSLATION EARNINGS TOTAL
------ ------ ------ ------- -------- ---------- ----------- -------- --------
(IN THOUSANDS)
Balance at March 31,
1995................... 4,787 1,161 $595 $21,067 $ -- $ -- $ 46 $ 6,028 $ 27,736
Issuances of common
stock (Notes 9 and
10).................. 148 -- 15 837 -- -- -- -- 852
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (56) -- (56)
Net income............ -- -- -- -- -- -- -- 2,453 2,453
----- ----- ---- ------- ----- ------- ---- ------- --------
Balance at March 31,
1996................... 4,935 1,161 610 21,904 -- -- (10) 8,481 30,985
Issuances of common
stock (Notes 9 and
10).................. 284 -- 28 2,568 -- -- -- -- 2,596
Conversion of Class B
common stock......... 97 (97) -- -- -- -- -- -- --
Issuance of ATL
Products, Inc. common
stock (Note 2) -- -- -- 14,455 -- -- -- -- 14,455
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 62 -- 62
Net income............ -- -- -- -- -- -- -- 3,730 3,730
----- ----- ---- ------- ----- ------- ---- ------- --------
Balance at March 31,
1997................... 5,316 1,064 638 38,927 -- -- 52 12,211 51,828
Issuances of common
stock (Notes 9 and
10).................. 885 -- 88 7,968 -- (3,377) -- -- 4,679
Conversion of Class B
common stock......... 2 (2) -- -- -- -- -- -- --
Spin-off of ATL
Products, Inc. common
stock (Note 2)....... -- -- -- (1,655) -- -- -- (9,412) (11,067)
Purchase of treasury
stock................ -- -- -- -- (239) -- -- -- (239)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (27) -- (27)
Net loss.............. -- -- -- -- -- -- (6,594) (6,594)
----- ----- ---- ------- ----- ------- ---- ------- --------
Balance at March 31,
1998................... 6,203 1,062 $726 $45,240 $(239) $(3,377) $ 25 $(3,795) $ 38,580
===== ===== ==== ======= ===== ======= ==== ======= ========
See accompanying notes.
F-5
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) .............................. $ 2,453 $ 3,730 $ (6,594)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
(Income) loss from discontinued operations.... 1,189 (3,931) (2,089)
Depreciation and amortization................. 2,244 3,119 2,912
Write-off of in process research and
development.................................. -- -- 2,106
Contribution to ASOP.......................... 430 517 511
Provision for losses on accounts receivable... 170 277 155
Provision (benefit) for deferred income taxes. 76 266 (902)
Gain on sale of assets........................ 314 377 16
Net proceeds from settlement of litigation
(Note 11).................................... -- 5,860 --
Foreign currency translation gain............. (56) 62 (27)
Changes in net assets of discontinued
operations................................... 86 1,291 --
Changes in operating assets and liabilities
(Note 13).................................... 2,875 (7,464) (3,989)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 9,781 4,104 (7,901)
INVESTING ACTIVITIES
Purchases of property, plant and equipment...... (3,038) (3,307) (3,834)
Proceeds from sale of equipment................. 74 12 5
Purchase of net assets of acquired business..... -- -- (2,171)
Net cash (paid to) received from ATL............ (3,232) 8,066 2,978
-------- -------- --------
Net cash provided by (used in) investing activi-
ties........................................... (6,196) 4,771 (3,022)
FINANCING ACTIVITIES
Proceeds from line of credit and long-term
borrowings..................................... 36,152 54,840 49,176
Principal payments on line of credit, long-term
debt, and capital lease obligations............ (39,395) (65,069) (40,159)
Proceeds from issuance of common stock.......... 422 2,078 1,172
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (2,821) (8,151) 10,189
-------- -------- --------
Increase in cash................................ 764 724 (734)
Cash and cash equivalents at beginning of year.. 377 1,141 1,865
-------- -------- --------
Cash and cash equivalents at end of year........ $ 1,141 $ 1,865 $ 1,131
======== ======== ========
See accompanying notes.
F-6
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Odetics, Inc. (the Company) include
the accounts of the Company and its subsidiaries Odetics Europe, Ltd., Odetics
Asia and Pacific Pte Ltd. During fiscal 1990, the Company incorporated Odetics
Europe, Ltd. to develop European commercial sales. During fiscal 1995, the
Company incorporated Odetics Asia Pacific Pte Ltd. to develop commercial sales
for the Asian Market. All significant intercompany accounts and transactions
are eliminated in consolidation.
On October 31, 1997, the Company completed the spin-off of its 82.9%
interest in ATL Products, Inc. (ATL) by distributing the Company's 8,005,000
shares of Class A Common Stock to the Company's stockholders of record on
October 31, 1997. As a result of the spin-off, the Company's financial
statements have been restated to reflect the operations of ATL as discontinued
operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowances for doubtful accounts and deferred tax assets,
inventory reserves and costs to complete long-term contracts.
REVENUE RECOGNITION
Contract revenues and earnings on long-term cost-reimbursement and fixed-
price contracts of the Company's Communication and Intelligent Transportation
Divisions are recognized on the percentage-of-completion method of accounting
as costs are incurred (cost-to-cost basis). Contract revenues include costs
incurred plus a portion of estimated fees or profits based on the relationship
of costs incurred to total estimated costs. Any anticipated losses on
contracts are charged to earnings when identified. Certain contracts contain
incentive and/or penalty provisions that provide for increased or decreased
revenues based upon performance in relation to established targets. Incentive
fees are recorded when earned and penalty provisions are recorded when
incurred, as long as the amounts can reasonably be determined.
For all other divisions, sales and related cost of sales are recognized on
the date of shipment or, if required, upon acceptance by the customer.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments with
maturities of less than ninety days.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, and the current portion of long-
term debt approximate the carrying value because of the short period of time
to maturity. The fair value of long-term debt and the note receivable from ATL
approximates carrying value because the related rates of interest approximate
current market rates and have variable rates of interest.
F-7
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORY VALUATION
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Buildings are
depreciated using the straight-line method over their estimated useful lives
up to a period of forty years. Equipment, furniture and fixtures, including
assets recorded under capital lease obligations, are depreciated principally
by the declining balance method over their estimated useful lives ranging from
four to eight years.
The Company reviews, long-lived assets and certain intangibles held and used
by the Company for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
recoverability test is performed at the lowest level at which undiscounted net
cash flows can be directly attributable to long-lived assets.
GOODWILL
Goodwill is being amortized using the straight-line method over the
estimated useful life of 15 years.
RESEARCH AND DEVELOPMENT EXPENDITURES
Software development costs incurred subsequent to determination of technical
feasibility are capitalized. Amortization of capitalized software costs is
provided on a product-by-product basis at the greater of the amount computed
using (a) the ratio of current gross revenues for the product to the total of
current and anticipated future gross revenues or (b) the straight-line method
over the remaining estimated economic life of the product. Amortization begins
when product is available for general release to customers. Generally, an
original estimated economic life of two years is assigned to capitalized
software development costs.
During fiscal 1996, 1997 and 1998, software development costs were amortized
to cost of sales totaling $212,000, $473,000, and $585,000, respectively. The
net unamortized balances of $1,843,000 and $3,785,000 are classified in other
assets at March 31, 1997 and 1998, respectively.
All other research and development expenditures are charged to research and
development expense in the period incurred.
FOREIGN CURRENCY TRANSLATION
The balance sheet accounts of Odetics Europe, Ltd. are translated at the
current year-end exchange rate and income statement items are translated at
the average exchange rate for the year. Resulting translation adjustments are
made directly to a separate component of stockholders' equity. Gains and
losses resulting from transactions of the Company and its subsidiaries which
are made in currencies different from their own are immaterial and are
included in income as they occur.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between financial statement and tax basis of assets and liabilities based on
enacted tax laws and rates applicable to the period in which differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more likely than
not to be realized. The provision for income taxes is the taxes payable or
refundable for the period plus or minus the change during the period in
deferred income tax assets and liabilities.
F-8
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS (LOSS) PER SHARE
During fiscal 1998 the Company adopted the provisions of FASB Statement No.
128, Earnings Per Share (Statement No. 128) and the accounting rules set forth
in staff Accounting Bulletin 98 issued by the Securities and Exchange
Commission on February 3, 1998. Under Statement No. 128, diluted earnings per
share reflects the dilutive effects of options, warrants and convertible
securities while basic earnings per share is calculated solely on the basis of
the Company's net loss divided by weighted average number of common shares
outstanding. Earnings per share for all periods presented have been restated
to conform with the provisions of Statement No. 128.
The following table sets forth the computation of net income (loss) per
share:
YEARS ENDED MARCH 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE
DATA)
Numerator:
Income (loss) from continuing operation. $ 3,642 $ (201) $ (8,683)
Income (loss) from discontinued
operations............................. (1,189) 3,931 2,089
--------- --------- ---------
Net income (loss)....................... $ 2,453 $ 3,730 $ (6,594)
========= ========= =========
Denominator for basic earnings (loss) per
common share............................. 6,020,000 6,299,000 6,912,000
Effect of dilutive securities:
Stock options........................... 159,000 -- --
--------- --------- ---------
Denominator for diluted earnings (loss)
per common share......................... 6,179,000 6,299,000 6,912,000
========= ========= =========
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
To calculate the pro forma information required by Statement 123, the
Company uses the Black-Scholes option pricing model. The Black-Scholes model
was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's option, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising expense
totaled $578,000, $1,020,000 and $2,226,000 in the years ended March 31, 1996,
1997 and 1998, respectively.
F-9
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in shareholders' equity except those
resulting from investments by distributions to shareholders. Statement No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-
held companies to report financial and descriptive information about its
operating segments in financial statements issued to shareholders for interim
and annual periods. The statement also requires additional disclosures with
respect to products and services, geographical areas of operations, and major
customers. Statement No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 consolidated financial statements have
been reclassified to conform with the 1998 presentation.
2. ATL PRODUCTS, INC.
On March 13, 1997, ATL Products, Inc. (ATL), which at that time was a
wholly-owned subsidiary of the Company, completed an initial public offering
of 1,650,000 shares of its common stock, at an offering price of $11 per share
(the Offering). Following the Offering, the Company's beneficial ownership
interest in the ATL totaled 82.9%.
On October 31, 1997, the Company completed a tax-free spin-off of its
remaining 82.9% interest in ATL to the Company's stockholders, pursuant to
which each holder of the Company's Class A and Class B Common as of October
31, 1997, received approximately 1.1 shares of Class A Common Stock of ATL for
each share of the Company's Common Stock then held.
Following the spin-off, the Company has accounted for ATL as a discontinued
operation and has presented its ownership interest in the results of ATL's
operations for all periods as a separate component of the consolidated
statements of operations. Net sales of ATL for fiscal 1996, 1997 and for the
seven month period ending October 31, 1997 are $29.4 million, $60.0 million
and $47.4 million, respectively.
3. ACQUISITIONS
On June 20, 1997, the Company acquired certain assets and assumed certain
liabilities of the Transportation Systems business of Rockwell International
(Rockwell). Revenues and costs related to contracts assumed from Rockwell are
included in the accompanying statement of operations since the date of
acquisition. The total cost of the acquisition was approximately $2.2 million
in cash. Assets with a fair value of $1.3 million were acquired and $5.0
million of liabilities were assumed. The excess of cost over the fair value of
net assets acquired of $5.9 million has been recorded as goodwill, and is
being amortized over its expected benefit period of 15 years.
On October 29, 1998, the Company acquired the net assets of Intelligent
Controls Inc. (ICI). The total cost of the acquisition was approximately $2.7
million which was paid in the Company's Class A common stock. A total of $1.0
million of assets were acquired and $0.4 million of liabilities were assumed.
In connection with the purchase, $2.1 million of in process research and
development was written off.
F-10
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma results of operations combining the results of the Company and ICI
for fiscal 1997 and 1998 are not presented since such amounts are not
materially different from the Company's reported results.
4. TRANSACTIONS WITH ATL
In April 1997, the Company entered into a promissory note receivable with
ATL in the original principal amount of $13.0 million representing the
aggregate balance of ATL's interest bearing advances from the Company. The
note bears interest at a rate equal to the Company's cost of borrowing (8.5%
at March 31, 1998). Principal and interest on the note are payable to the
Company in quarterly installments of $3.3 million through fiscal 2001.
Up to the time its spin-off, the operating results of ATL were included in
the consolidated federal income tax return of the Company. Effective upon the
close of ATL's initial public offering, the companies entered into a tax
sharing agreement, which was effective retroactively to April 1, 1996, whereby
the consolidated federal and state income tax liabilities for a given tax year
were allocated to the companies in Odetics group according to their relative
and separate taxable income for such year. Amounts receivable from ATL under
this arrangement totaled $2.1 million in 1997 and $1.6 million in 1998. The
tax sharing agreement was canceled upon the spin-out of Odetics remaining
interest in ATL in October 1997.
The Company and ATL are parties to an agreement whereby ATL is charged for
certain corporate general and administrative functions performed by the
Company. These charges totaled $1,534,000, $1,551,000 and $506,000 in the
years ended March 31, 1996, 1997 and 1998, respectively, and are netted
against general and administrative expense in the accompanying consolidated
statements of operations. These charges consist of certain accounting,
auditing, income tax, payroll and treasury functions, the administration of
employee incentive programs, marketing support, facilities management, certain
legal services and other support services. Charges were allocated to ATL based
on actual amounts incurred or agreed upon amounts or percentages that
management of the Company believes are reasonable. Amounts due from ATL that
are included in accounts receivable are $509,000 and $49,000 as of March 31,
1997 and 1998, respectively.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
MARCH 31,
----------------
1997 1998
------- -------
(IN THOUSANDS)
Costs incurred on uncompleted contracts.................. $17,483 $22,861
Estimated earnings....................................... 1,848 1,903
------- -------
19,331 24,764
Less billings to date.................................... 20,099 23,761
------- -------
$ (768) $ 1,003
======= =======
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 1,922 $ 2,583
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (2,690) (1,580)
------- -------
$ (768) $ 1,003
======= =======
F-11
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs and estimated earnings in excess of billings at March 31, 1997 and
1998 include $279,000 and $740,000, respectively, that were not billable as
certain milestone objectives specified in the contracts had not been attained.
Substantially all costs and estimated earnings in excess of billings at March
31, 1998 are expected to be billed and collected during the year ending March
31, 1999.
6. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
The Company has a $17.0 million revolving line of credit with a bank which
provides for borrowings generally at the lesser of the bank's prime rate (8.5%
at March 31, 1998) or the bank's LIBOR rate plus 2.25%. Borrowings are
available for general working capital purposes, and at March 31, 1998,
approximately $3.9 million was available for borrowing under the line. The
line expires August 31, 1999.
The revolving credit agreement is collateralized by substantially all of the
Company's assets, excluding the land and buildings. Under the terms of the
agreement, the Company is required to comply with certain covenants, maintain
certain debt to net worth ratios, current ratios and minimum net worth
requirements. At March 31, 1998, the Company was in violation of certain
financial ratio covenants. The bank has waived compliance with those covenants
at March 31, 1998, and the covenants are expected to be modified to allow the
Company to be in compliance with the requirements of the revolving credit
agreement in future periods.
Included within the borrowing limits of the agreement, the Company has
available approximately $14,900,000 in letters of credit and approximately
$300,000 has been reserved for standby letters of credit at March 31, 1998.
Long-term debt consisted of the following:
MARCH 31,
--------------
1997 1998
------- ------
(IN THOUSANDS)
Note payable, collateralized by deed of trust on land and
buildings with a net book value of approximately
$13,000,000, payable in monthly installments through the
year 2004, including interest at 9.36%................... $10,171 $9,218
Notes payable, collateralized by equipment, payable in
monthly installments through March 1999, including
interest at 6.95% to 9.0%................................ 1,310 580
------- ------
11,481 9,798
Less current portion...................................... 1,721 1,598
------- ------
$ 9,760 $8,200
======= ======
The annual maturities of long-term debt for the five years ending March 31,
2003 and thereafter are as follows:
(IN
THOUSANDS)
1999.......................... $1,598
2000.......................... 1,146
2001.......................... 1,261
2002.......................... 1,383
2003.......................... 1,518
Thereafter.................... 2,892
------
$9,798
======
F-12
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. NONRECURRING CHARGE
In March 1998, the Company recorded a nonrecurring charge of $1.7 million.
The charge reflects severance costs related to retirement of certain of the
Company's founders and officers, and to a lesser extent, costs incurred to
terminate a joint venture relationship in China.
8. INCOME TAXES
The reconciliation of the income tax provision (benefit) from continuing
operations to taxes computed at U.S. federal statutory rates is as follows:
YEAR ENDED MARCH 31,
----------------------
1996 1997 1998
------ ----- -------
(IN THOUSANDS)
Income tax (benefit) at statutory rates............. $1,345 $(130) $(3,915)
Acquired in process research and development........ -- -- 715
State income taxes, net of federal tax benefit...... 244 (22) 189
Decrease of valuation allowance associated with fed-
eral deferred tax assets........................... (326) (99) (175)
Foreign losses recorded without benefit............. 80 -- 118
Foreign income at lower tax rate.................... -- -- 15
Nondeductible goodwill amortization................. 7 7 11
Other............................................... 68 63 184
------ ----- -------
$1,418 $(181) $(2,858)
====== ===== =======
United States and foreign income (loss) from continuing operations before
income taxes are as follows:
YEAR ENDED MARCH 31,
----------------------
1996 1997 1998
------ ----- --------
(IN THOUSANDS)
Pretax income (loss):
Domestic........................................... $4,556 $(372) $ (9,726)
Foreign............................................ 504 (10) (1,815)
------ ----- --------
$5,060 $(382) $(11,541)
====== ===== ========
Significant components of the provision (benefit) for income taxes from
continuing operations are as follows:
YEAR ENDED MARCH 31,
------------------------
1996 1997 1998
------ ------- -------
(IN THOUSANDS)
Current:
Federal......................................... $ 220 $ (347) $(1,143)
State........................................... 463 (145) (328)
Tax benefit from stock option exercises......... (31) (801) (300)
Foreign......................................... 659 45 (485)
------ ------- -------
Total current..................................... 1,311 (1,248) (2,256)
Deferred:
Federal......................................... 194 350 (1,516)
State........................................... (118) (84) 614
------ ------- -------
Total deferred.................................... 76 266 (902)
Charge in lieu:
Credit to additional paid-in capital
attributable to stock option exercises......... 31 801 300
------ ------- -------
$1,418 $ (181) $(2,858)
====== ======= =======
F-13
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred tax assets and liabilities are as follows:
1997 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Inventory reserves....................................... $ 530 $ 979
Deferred compensation and other payroll accruals......... 1,848 2,077
Acquired net operating loss carryforwards................ -- 217
General business tax credit carryforwards................ 322 951
Alternative minimum tax credit carryforwards............. 883 404
Bad debt reserve......................................... 149 185
Other reserves........................................... 749 328
Other, net............................................... 71 338
------- -------
Total deferred tax assets.................................. 4,552 5,479
Valuation allowance for deferred tax assets................ (1,351) (1,490)
------- -------
Net deferred tax assets.................................... 3,201 3,989
------- -------
Deferred tax liabilities:
Tax over book depreciation............................... 2,690 2,576
Capitalized interest and taxes........................... 468 468
Other, net............................................... 30 30
------- -------
Total deferred tax liabilities............................. 3,188 3,074
------- -------
Net deferred tax assets.................................... $ 13 $ 915
======= =======
At March 31, 1998, for federal income tax purposes, the Company had
approximately $951,000 in general business credit carryforwards, $404,000 of
alternative minimum tax credit carryforwards, and $640,000 of net operating
loss carryfowards which were acquired as part of the ICI acquisition. For
financial reporting purposes, a valuation allowance has been recorded to
substantially offset the deferred tax asset related to these credits and
acquired net operating losses. Any future benefits recognized from the
reduction of the valuation allowance related to these carryforwards will
result in a reduction of income tax expense. The credit carryforwards expire
at various dates beginning in 2005 and the acquired net operating losses begin
expiring in 2002.
9. ASSOCIATE INCENTIVE PROGRAMS
Under the terms of a Profit Sharing Plan, the Company contributes to a trust
fund such amounts as are determined annually by the Board of Directors. No
contributions were made in 1996, 1997 or 1998.
In May 1990, the Company adopted a 401(k) Plan as an amendment and
replacement of the former Associate Stock Purchase Plan that was an additional
feature of the Profit Sharing Plan. Under the 401(k) Plan, eligible associates
voluntarily contribute to the plan up to 15% of their salary through payroll
deductions. The Company matches 50% of contributions up to a stated limit.
Under the provisions of the 401(k) Plan, associates have four investment
choices, one of which is the purchase of Odetics, Class A common stock at
market price. Company matching contributions were approximately $580,000,
$525,000 and $548,000 in 1996, 1997 and 1998, respectively.
Effective April 1, 1987, the Company established a noncontributory Associate
Stock Ownership Plan (ASOP) for all associates with more than six months of
eligible service. The ASOP provides that Company contributions, which are
determined annually by the Board of Directors, may be in the form of cash or
shares of
F-14
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company stock. The Company contributions to the ASOP were approximately
$430,000, $517,000 and $511,000 in 1996, 1997 and 1998, respectively. Shares
distributed through the ASOP Plan were included in total outstanding shares
used in the earnings per share calculation.
10. STOCK OPTION AND DEFERRED COMPENSATION PLANS
The Company has adopted an Associate Stock Option Plan which provides that
options for shares of the Company's unissued Class A common stock may be
granted to directors and associates of the Company. Options granted enable the
option holder to purchase one share of Class A common stock at prices which
are equal to or greater than the fair market value of the shares at the date
of grant. Options for shares have been granted at prices ranging from $4.25,
to $9.90 for one share of Class A common stock. Options expire ten years after
date of grant or 90 days after termination of employment and vest ratably at
33% on each of the first three anniversaries of the grant date. Options for
shares of both the Company's unissued Class A and Class B common stock had
been granted to directors and associates of the Company and such options
expired in 1994.
YEAR ENDED MARCH 31,
--------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Options outstanding at
beginning of year.......... 627 $6.85 691 $5.32 640 $6.41
Granted................... 381 4.72 183 9.17 502 4.63
Exercised................. (70) 4.76 (217) 5.41 (578) 4.79
Canceled.................. (247) 8.43 (17) 4.43 (1) 5.99
---- ----- ---- ----- ---- -----
Options outstanding at end
of year.................... 691 $5.32 640 $6.41 563 $4.67
==== ===== ==== ===== ==== =====
Exercisable at end of year.. 288 308 --
==== ==== ====
Available for grant at end
of year.................... 520 164 157
==== ==== ====
Option price range for
exercised shares: $4.25 to $6.625 $4.25 to $9.00 $4.88 to $9.90
The range of exercise prices for options outstanding as of March 31, 1998,
was $4.63 to $5.09. The weighted-average remaining contractual life and
exercise price of those options is 9.83 years and $4.67, respectively.
In connection with the completed spin-off of the Company's interest in ATL,
the Company accelerated the exercisability of all stock options then
outstanding and made secured loans to option holders to facilitate the
exercise of the options. Loans were made in amounts up to the exercise price
of their options, which totaled $3.4 million. These notes are full recourse,
are secured by the shares of stock of the Company and ATL, are interest
bearing with a rate of 5.7% and are due five years from the exercise date.
Loans must be repaid upon sale of the underlying shares of stock or upon
termination of employment.
In calculating pro forma information regarding net income and earnings per
share, as required by Statement 123, the fair value was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's Class A common
stock: risk-free interest rate of 6.0%; a dividend yield of 0%; volatility of
the expected market price of the Company's common stock of .40; and a
weighted-average expected life of the option of 7 years.
F-15
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended March 31, 1997 and 1998
follows:
1996 1997 1998
---------- ---------- -----------
Pro forma net income..................... $2,252,000 $3,441,000 $(7,084,000)
Pro forma net income per share........... $ .36 $ .55 $ (1.03)
During 1986, the Company adopted an Executive Deferral Plan under which
certain executives may defer a portion of their annual compensation. All
deferred amounts earn interest, generally with no guaranteed rate of return.
Compensation charged to operations and deferred under the plan totaled
$302,000, $410,000 and $302,000 for 1996, 1997 and 1998, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company brought an action against Storage Technology Corporation
(StorageTek) in the Eastern District Court of Virginia alleging that
StorageTek had infringed the Company's patent covering robotics tape cassette
handling systems (United States Patent No. 4,779,151). StorageTek counter
claimed alleging that the Company infringed several of StorageTek's patents.
Prior to the trial, the court dismissed two of the infringement claims against
the Company and the third claim was resolved between the parties. In January
1996, the jury determined that the patent claims were not infringed under the
doctrines of equivalents based upon a claim construction defined by the court
prior to the trial. The jury also concluded that the Company's patent was not
invalid. In June 1997, the United States Court of Appeals for the Federal
Circuit vacated the lower court's claim construction and findings of
noninfringement of the Company's patent. The appellate court remanded the case
for consideration of infringement under a proper claim construction. In August
1997, the appellate court denied a petition for rehearing requested by
StorageTek. The case was returned to the Federal District court for retrial,
and in March 1998, the jury awarded the Company damages in the amount of $70.6
million. Defendants have indicated they intend to appeal. The accompanying
financial statements do not include any amounts related to the Company's
potential revenues related to the verdict.
In November 1994 and February 1995, the Company and E-Systems, Inc. (E-
Systems), respectively filed legal actions related to E-Systems' cancellation
of purchase orders for ATL Products' DataLibrary and DataTower products. In
May 1996, the parties entered into a settlement agreement under which, among
other things, E-Systems agreed to pay the Company $6,160,000, all claims
asserted by the parties were released and the litigation dismissed. In
addition, the parties agreed to an equitable disposition of disputed inventory
and entered into a five year service agreement for Odetics to service units
that had been sold to E-Systems at agreed upon prices. The Company has not
recorded any material gain or loss based on the terms of the settlement
agreement.
The Company has two lease commitments for facilities in Washington and
Michigan as a result of two acquisitions in the current fiscal year. The
annual commitment under these noncancelable operating leases at March 31, 1998
is as follows (in thousands):
FISCAL YEAR
-----------
1999.................................................................... $229
2000.................................................................... 185
2001.................................................................... 64
----
$478
====
F-16
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in one industry segment whereby it focuses on
information automation through its design, development, manufacturing and
marketing of subsystems and other products for specialized information
automation applications. The Company's principal products include magnetic
tape cartridge and cassette handling subsystems for automated tape library
systems used in computer mass data storage applications; large-library cart
machines used in broadcast and cable television station operations; time-lapse
VCRs and related products used in commercial and industrial closed circuit
television security and surveillance applications; and space-qualified digital
data recorders used in manned and unmanned space vehicles.
The Company manufactures and sells its products to commercial customers in
diversified industries as well as to prime government contractors under long-
term contracts. The percentage of the Company's total net sales and contract
revenues contributed by direct and indirect sales to the United States and
foreign governments were approximately 10%, 11% and 12% during 1996, 1997 and
1998, respectively.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and within amounts provided through the
allowances for doubtful accounts. At March 31, 1997 and 1998, accounts
receivable from governmental agencies and prime government contractors were
approximately $1,034,000 and $2,801,000, respectively.
Information concerning the Company's continuing operations by geographic
segment is as follows:
YEAR ENDED MARCH 31,
--------------------------
1996 1997 1998
------- ------- --------
Sales to unaffiliated customers:
United States (a)............................. $64,317 $72,780 $ 83,615
Europe--Odetics Europe, Ltd................... 7,833 4,494 5,442
Asia Pacific--Odetics Asia Pacific Pte Ltd.... 3,067 3,506 779
------- ------- --------
$75,217 $80,780 $ 89,836
======= ======= ========
Sales between geographic areas (based on
invoiced prices):
United States................................. $ 5,582 $ 4,418 $ 4,197
Europe........................................ -- -- --
Asia Pacific.................................. -- -- --
Intercompany eliminations..................... (5,582) (4,418) (4,197)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
Income (loss) before taxes:
United States................................. $ 4,556 $ (372) $ (9,726)
Europe........................................ 739 (444) (1,469)
Asia Pacific.................................. (235) 434 (346)
Intercompany eliminations..................... -- -- --
------- ------- --------
$5,060 $ (382) $(11,541)
======= ======= ========
Assets:
United States, including net assets of
discontinued operations...................... $67,271 $81,711 $ 85,492
Europe........................................ 5,002 2,118 3,085
Asia Pacific.................................. 740 1,976 213
Intercompany eliminations..................... -- -- --
------- ------- --------
$73,013 $85,805 $ 88,790
======= ======= ========
F-17
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(a) Export sales from the United States to all unaffiliated foreign customers
(which excludes sales to and by Odetics Europe, Ltd. and Odetics Asia
Pacific Pte Ltd.) were approximately $12,000,000, $21,000,000 and
$24,000,000 during 1996, 1997 and 1998, respectively. These sales were
principally made to customers in Europe and the Pacific Rim.
13. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED MARCH 31,
-------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
Net cash used in changes in operating assets
and liabilities, net of litigation settlement
and acquisitions:
Increase in accounts receivable.............. $(1,382) $(4,511) $ 2,689
(Increase) decrease in net costs and
estimated earnings in excess of billings.... 1,167 (1,217) (1,771)
(Increase) decrease in inventories........... 2,485 401 (4,604)
Increase in prepaids and other assets........ (936) (4,060) (2,883)
Increase (decrease) in accounts payable and
accrued expenses............................ 1,541 1,923 2,580
------- ------- -------
Net cash used in changes in operating assets
and liabilities............................... $ 2,875 $(7,464) $(3,989)
======= ======= =======
Cash paid during the year:
Interest..................................... $ 2,415 $ 1,888 $ 1,526
Income taxes paid (refunded)................. (133) 975 365
Noncash transactions during the year:
Spin-off of ATL Products, Inc................ $ -- $ -- $11,067
Purchase of net assets of ICI for stock...... -- -- 628
F-18
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ODETICS, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- ------------ ----------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ---------- ------------ ----------
Year ended March 31,
1996:(1)
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ 327,000 $ 132,000 $-- $133,000(2) $ 326,000
Reserve for
inventory
obsolescence....... 2,099,000 -- $-- 288,000 1,811,000
---------- ---------- ---- -------- ----------
Total............. $2,426,000 $ 132,000 $-- $421,000 $2,137,000
========== ========== ==== ======== ==========
Year ended March 31,
1997:(1)
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ 326,000 $ 24,000 $-- $ -- $ 350,000
Reserve for
inventory
obsolescence....... 1,811,000 626,000 -- -- 2,437,000
---------- ---------- ---- -------- ----------
Total............. $2,137,000 $ 650,000 $-- $ -- $2,787,000
========== ========== ==== ======== ==========
Year ended March 31,
1998:
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ 350,000 $ 155,000 $-- $ 73,000(2) $ 432,000
Reserve for
inventory
obsolescence....... 2,437,000 1,240,000 -- 796,000 2,881,000
---------- ---------- ---- -------- ----------
Total............. $2,787,000 $1,395,000 $-- $869,000 $3,313,000
========== ========== ==== ======== ==========
- --------
(1) Amounts have been restated to reflect the continuing operations of the
Company, excluding the accounts of ATL Products, Inc.
(2) Uncollectible accounts written off, net of recoveries.
S-1