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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-10605
ODETICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 95-2588496
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1515 South Manchester Avenue, Anaheim, California 92802
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (714) 774-5000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.10 par value
Class B common stock, $.10 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sale price on Nasdaq National Market on June 24, 1999,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $63,577,358. For the purposes of this calculation, shares owned
by officers, directors and 10% stockholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
Odetics has two classes of common stock outstanding, the Class A common
stock and the Class B common stock. The rights, preferences and privileges of
each class of common stock are identical in all respects, except for voting
rights. Each share of Class A common stock entitles its holder to one-tenth of
one vote per share and each share of Class B common stock entitles its holder
to one vote per share. As of June 24, 1999, there were 7,947,445 shares of
Class A common stock and 1,060,041 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 for the annual meeting of the stockholders
scheduled to be held on September 30, 1999.
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ODETICS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS. .................................................... 1
ITEM 2. PROPERTIES. .................................................. 15
ITEM 3. LEGAL PROCEEDINGS. ........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ......... 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. ........................................ 16
ITEM 6. SELECTED FINANCIAL DATA. ..................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. .................................. 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ................. 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. ................................... 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. .......... 24
ITEM 11. EXECUTIVE COMPENSATION. ...................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. ................................................. 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. .............. 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K. ................................................... 25
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Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s),"
"believe(s)," "will," "may," "anticipate(s)," and similar expressions are
intended to identify forward-looking statement. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. You should not place undue reliance on these
forward-looking statements which speak only as of the date hereof. We
undertake no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. We encourage you to carefully review and
consider the various disclosures made by us which describe certain factors
which affect our business, including the risk factors set forth at the end of
Part I, Item 1 of this report and in Part II, Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
General
Odetics, Inc. was founded in 1969 to supply digital recorders for use in the
United States space program. We pioneered new designs and standards for
digital magnetic tape recorders offering high reliability and enhanced
performance in the adverse environment attendant to space flight. In the
1970s, we broadened our information automation product line to include time-
lapse videocassette recorders for commercial and industrial security and
surveillance applications. Through our Gyyr division, we became a leading
supplier of time-lapse videotape cassette recorders, digital image processing
modules and related products used in security and surveillance systems. We
incorporated our Gyyr division in 1997, forming a wholly-owned subsidiary,
Gyyr, Inc. In October 1997, we expanded Gyyr by acquiring Intelligent Controls
Inc., a manufacturer of access control products specializing in PC based,
remote site and fiber optic communications.
Leveraging our expertise in video image processing, we entered into the
intelligent transportation system business with the introduction of a video
vehicle detection system in 1993. In June 1997, we acquired certain assets
comprising the Transportation Systems business from Rockwell International,
creating our ITS division, which expanded our offerings to include advanced
traffic management systems and advanced traveler information systems. We
incorporated our ITS division in 1998 as Odetics ITS, Inc. In October 1998, we
broadened our systems offerings by acquiring Meyer, Mohaddes Associates, Inc.,
which currently operates as a subsidiary of Odetics ITS.
In the early 1980s, we set out to develop the technical expertise to apply
automation to new commercial applications and established our Broadcast
division. The Broadcast division develops and manufactures broadcast
automation control systems and pioneered the use of video tape libraries in
broadcast television stations and satellite uplink operations. The success of
our video tape libraries led us to pursue new applications for information
automation technologies. In 1991, we introduced an automated tape handling
subsystem for integration into tape libraries designed for midrange computers
and client/server networks. In January 1993, we formed a separate subsidiary,
ATL Products, Inc., to pursue the market for automated tape libraries. In
March 1997, ATL completed an initial public offering of 1,650,000 shares of
its Class A common stock. We distributed our remaining 82.9% interest in ATL
to our stockholders in a tax-free distribution in October 1997.
Today, Odetics is a collection of high technology companies and operating
divisions, each with its own marketplace, customers and products. These
operations share a common corporate overhead for support for facilities, human
resources, benefits, accounting and finance, and some executive management
services. We are pursuing our incubator business strategy to nurture and
develop each of these operations with the ultimate goal of achieving a tax-
free spin-off of each entity to our stockholders. In April 1999, we applied
for a determination letter from the Internal Revenue Service to confirm the
tax-free status of our proposed spin-off of Gyyr, Broadcast and Odetics ITS.
We currently define our business segments as video products, telecom products
and ITS. Our video products segment includes our Broadcast division and our
Gyyr subsidiary. Our telecom products segment includes our Communications
division and our Mariner Networks subsidiary. Our ITS segment consists of our
Odetics ITS subsidiary. For financial information concerning our business
segments, please see Note 12 of Notes to Consolidated Financial Statements.
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Video Products
Broadcast Division
The Broadcast division delivers systems to automate the storage and
scheduling of commercials, news stories and other television programming
recorded on videotape and video server storage systems. We believe that
enhanced operational efficiencies will be a principal factor underlying the
increased automation of broadcast television stations and satellite uplink
operations as the industry transitions to digital television.
The Broadcast division's earliest commercial success came from the
manufacture of video tape libraries. The video tape library market has
experienced a trend toward smaller libraries, coupled with digital hard disk
recording devices. To address this market, we introduced the TCS45 tape
library, which incorporates highly integrated caching systems. The TCS45 can
be coupled with hard drive recorders available from several recognized
suppliers to the broadcast community. We now offer software to form powerful
integrated systems, including our SpotBank and AiroTM automation. In fiscal
1999, we began shipping the Roswell facility management system, which is
designed for enterprise automation of operations at television broadcast
facilities. Multi-channel presentation systems, which integrate the complete
line of our hardware with commonly available broadcast quality video disk
recorders, are quickly becoming the core business of the Broadcast division.
The Broadcast division is focused on video asset management including desktop
video browsing using a network PC architecture, which can be extended to wide
area network applications and Internet applications.
Sales, Marketing and Principal Customers. The Broadcast division sells
directly to broadcast television stations, satellite uplink operations, and
other broadcast television and cable television system operators. The sales
and marketing management for our Broadcast division is located at our
principal facilities in Anaheim, California. The Broadcast division maintains
a dedicated field sales force of four persons operating in four U.S. sales
regions and Canada, and a sales manager for Latin America. The European sales
and marketing activities for the Broadcast division are conducted and managed
by Odetics Europe Limited, a wholly-owned United Kingdom subsidiary of
Odetics. Odetics Asia Pacific Pte. Ltd., Odetics' wholly-owned subsidiary
located in Singapore, conducts Asian sales and marketing activities for the
Broadcast division. The Broadcast division also utilizes additional
independent representative organizations to promote its products in various
other foreign markets.
The Broadcast division's customers include major television networks such as
Fox, the 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 the Discovery
Channel), Asia Broadcast Centre, Univision and over 100 independent and
network-affiliated television stations. The Broadcast division currently has
systems installed in over 30 countries.
Manufacturing and Materials. The Broadcast division maintains a dedicated
manufacturing operation located within our Anaheim, California facilities. Our
SpotBank and Airo 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 and video switching, conversion and monitoring equipment from
Tektronix and Leitch for installation in our automated video management
systems. The Broadcast division also purchases cabinets and other fabricated
parts and components from other third party suppliers.
Gyyr, Inc.
Gyyr produces analog and digital video products and access control systems
that meet the security and surveillance needs for a variety of markets
including banking, commercial/industrial and retail. Gyyr's timelapse
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VCRs, for example, are installed in automated teller machines and retail point
of sale systems to record transaction information in an effort to deter and
address incidents of theft and other crimes. Gyyr's access control systems
offer managed access and monitoring of public, private and high security
facilities. Customer demand for more sophisticated capabilities and
integration due to digital technology has also contributed to the recent
growth in the market for Gyyr's products. Recent additions to Gyyr's product
offerings include network video and device control, intelligent dome cameras,
video multiplexing and digital recording. We sell these products as individual
box products as well as components of fully-integrated network security
control systems.
Sales, Marketing and Principal Customers. Gyyr markets and sells its
products through three established channels: OEMs, independent distributors
and system integrators. Gyyr personnel located at our principal facilities and
sales offices throughout the world oversee approximately 2,000 of these
channel partners. Gyyr has a business development and service organization
located at our Odetics Europe Limited subsidiary. In addition, Odetics Europe
Limited assists Gyyr with management in the development of European, Middle
East and African 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 ADI.
Manufacturing and Materials. Gyyr maintains a dedicated manufacturing area
located within our principal facilities in Anaheim, California. Gyyr primarily
uses continuous demand flow techniques in its assembly lines. Gyyr 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 our specifications exclusively through
Nissei Sangyo America, the United States distribution affiliate of Hitachi,
Ltd., into which we incorporate certain value-added features. As a result of
its exclusive relationship with Hitachi, Ltd, Gyyr is vulnerable to Hitachi's
actions, which might necessitate changes in the design or manufacturing of
Gyyr's products. While other suppliers are available who can manufacture VCRs
suitable for use in Gyyr's products, we would be required to make changes in
our product design or manufacturing methods to accommodate other VCRs, and
Gyyr could experience delays or interruptions in supply while these changes
are incorporated or a new supplier is procured.
Telecom Products
Communications Division
The Communications division includes telecom network synchronization
products and space borne digital data recorders. Our telecom network
synchronization products synchronize communications for data security, local
timing networks and wireless communications systems. These products are based
on G.P.S. technologies and are sold for new applications in cellular telephone
systems, PCS networks and satellite communications. A significant customer of
the Communications division is LGIC of Korea. See "Risk Factors--Our Operating
Results Have Been Adversely Affected by the Asian Economic Crisis."
The Communications division's space borne digital data recorders 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 our
principal facilities in Anaheim, California. We sell our telecom
synchronization products primarily through manufacturers' representatives.
During the fiscal year ended March 31, 1999, approximately 49% of the
Communication division's sales were derived from contracts with domestic or
foreign governmental agencies and prime government contractors.
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Manufacturing and Materials. The Communications division manufactures its
telecom synchronization products to best commercial practices and became ISO
certified in February 1997. Most of the manufacturing processes consist of
final assembly and test. We outsource board assembly and some preliminary
fabrication processes.
The manufacture of space borne digital recorders consists primarily of low
volume, program-managed manufacture, often with nonrecurring engineering for
individual customer needs. Because of these unique requirements, we have
extensive machining and electronic assembly capabilities in order to manage
cost, schedule and quality levels to the unusual and exacting needs of our
customers.
Mariner Networks, Inc.
We formed our wholly-owned subsidiary, Mariner Networks, Inc., during the
fiscal year ended March 31, 1998, to pursue certain aspects of our network
interface and communications business. Mariner Networks manufactures
components and complete solutions for branch office access applications.
Mariner Networks' products include ATM subsystems, Frame Relay-to-ATM
networking components and systems, and ATM wide area network access
concentrators for handling intranet, data, voice and video traffic.
Sales, Marketing and Principal Customers. Mariner Networks supplies
equipment to OEMs and end users through our offices in the United States,
through Odetics Europe Limited in Europe and through Odetics Asia Pacific Pte.
Ltd. in Asia. Mariner Networks sells its ATM interface module products through
manufacturers representatives, both domestically and internationally. Mariner
Network sells its Frame Relay and ATM access concentrator products through
resellers, OEMs and direct to large end users. Mariner Networks' significant
customers include IBM and other network equipment manufacturers.
Manufacturing and Materials. Mariner Networks' manufacturing processes
consist primarily of final assembly and test, and became ISO certified in
February 1997. Mariner Networks currently outsources circuit board assembly
and some fabrication processes.
ITS Products--Odetics ITS, Inc.
Odetics ITS, our 93% owned subsidiary, provides advanced information,
software and sensor technologies to public agencies, vehicle manufacturers and
consumers that improve the efficiency and safety of surface transportation. By
combining diverse expertise in transportation systems, software and
information technology, Odetics ITS has developed the core competencies
necessary to design and implement innovative advanced transportation
management systems utilizing proprietary technology. As one of the two
companies developing and maintaining the National ITS Architecture, Odetics
ITS is well positioned to influence the future direction of the deployment of
intelligent transportation systems in the United States.
Odetics ITS 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 controlling intersections. Our Auto VueTM
product family provides an audible warning of lane departures and was jointly
developed with Daimler-Chrysler, using proprietary technologies of both
companies. We believe our initial Auto Vue product will be the first
commercially available, image processing based lane departure warning system.
Sales, Marketing and Principal Customers. Odetics ITS markets and sells its
transportation management systems and services directly to end user government
agencies pursuant to negotiated contracts and individual purchase agreements.
Sales of Odetics ITS' systems generally involve long lead times and require
extensive specification development, evaluation and price negotiations.
Odetics ITS sells its Vantage vehicle detection systems primarily through
indirect sales channels comprised of approximately thirty independent dealers
in the United States and Canada who sell integrated solutions and related
products to the traffic intersection market. Odetics ITS' agreements with
these independent dealers
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typically prohibit these dealers from distributing competitive video detection
systems. Certain of these dealers 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 system and sell directly to government agencies
and installation contractors. These 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 three Regional Sales Managers to support the dealer sales
channel and one District Sales Manager who sells directly to end user agencies
and contractors.
Odetics ITS intends to sell its Auto Vue products initially to heavy truck
manufacturers through direct OEM sales. Sales of products to vehicle
manufacturers generally require lengthy design, testing and qualification
processes, which could take up to four years. We anticipate 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
also currently maintains an independent sales agent to assist its marketing
and sales activities to OEMs in Europe.
Manufacturing and Materials. Odetics ITS maintains a manufacturing facility
in our principal facilities located in Anaheim, California for the manufacture
of its Vantage products. The manufacturing activities of Odetics ITS consist
primarily of testing and assembly. We intend to outsource the manufacture of
our Auto Vue products and currently rely on one manufacturer for this product.
This manufacturer has not, to date, commenced volume production of the Auto
Vue product line.
Customer Support and Services
Each of our business units is responsible for its own customer support and
service organizations. We provide warranty service for each of our product
lines, as well as follow-up service and support, for which we typically charge
separately. We also offer separate software maintenance agreements to our
customers. We view customer support services as a critical competitive factor
as well as a revenue source.
Backlog
Our backlog of unfulfilled firm orders was approximately $22.0 million as of
March 31, 1999 and approximately $21.6 million as of March 31, 1998.
Approximately 85% of our backlog at March 31, 1998 was recognized as revenues
in fiscal 1999, and approximately 82% of our backlog at March 31, 1999 is
expected to be recognized as revenues in fiscal 2000. Pursuant to the
customary terms of our agreements with government contractors and other
customers, customers can generally cancel or reschedule orders with little or
no penalties. Lead times for the release of purchase orders depend upon the
scheduling and forecasting practices of our individual customers, which also
can affect the timing of the conversion of our backlog into revenues. For
these reasons, among others, our backlog at a particular date may not be
indicative of our future revenues.
Product Development
Each of our business units directs and staffs its own product development
activities. Our businesses require substantial ongoing research and
development expenditures and other product development activities. Our
company-sponsored research and development costs and expenses were
approximately $7.7 million in fiscal 1997, $9.3 million in fiscal 1998 and
$11.2 million in fiscal 1999.
We expect to continue to pursue significant product development programs and
incur significant research and development expenditures in each of our
business units.
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Competition
Our business units face significant competition in each of their respective
targeted markets. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
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 video tape libraries, for
the broadcast television market. Louth and Probel principally provide
automation control for video libraries and disk recorders. The Broadcast
division's systems compete primarily in the arena of facility management and
enterprise wide automation. We believe that the capability of our systems to
integrate the broadcast station business systems acquisition processes,
storage devices and presentation devices under a relational data base
management system represents a unique and differentiable capability.
As Gyyr expands its product base from time-lapse VCRs to providing
integrated security systems in CCTV and electronic access control, it will
compete with a broader set of companies. Major Japanese competitors in Gyyr's
legacy time-lapse VCR business include Panasonic, Toshiba, Sony, Sanyo,
Mitsubishi and JVC. Gyyr also competes with large systems suppliers including
Sensormatic, Honeywell, Pelco, Ultrak, Ademco and Vicon. In the sale of access
control systems, Gyyr competes with Casi-Rusco, Checkpoint, Cardkey and Lenel.
Gyyr competes based upon its strength in the integration of its various
component products into systems that provide complete solutions through the
use of advanced software and networking technologies.
The primary competition for the Communications division's network
synchronization products is Datum, Inc. In the Communications division's space
data recorder market, our principal competitors include Seakr, L-3
Communications and TRW. An additional competitive factor in this market is
space flight experience; however, with the advent of solid state recorders, we
may face new competitors in this market.
We believe that Mariner Networks does not currently face significant
competition in the sale of its ATM interface module products. For its access
concentrator products, Mariner Networks' principal competition includes both
established networking vendors such as Cisco Systems and Nortel Networks, as
well as numerous small market entrants.
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. We believe 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. In the market for vehicle detection, we compete 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. We are not aware of any other company that currently sells
a vision based lane tracking safety device for in-vehicle applications.
The markets for our products and services are highly competitive and are
characterized by rapidly changing technology and evolving standards. We
believe that our ability to compete effectively depends on a number of
factors, including the success and timing of our new product development, the
compatibility of our products with a broad range of computing systems, product
quality and performance, reliability, functionality, price, and service and
technical support. Many of our current and prospective competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical, manufacturing, distribution
and marketing resources than us. As a result, they may be able to adapt more
quickly to new or emerging standards or technologies or to devote greater
resources to the promotion and sale of their products.
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Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. Our
failure to provide services and develop and market products that compete
successfully with those of other suppliers and consultants in the market would
have a material adverse effect on our business, financial condition and
results of operations.
Intellectual Property and Proprietary Rights
Our ability to compete effectively depends in part on our ability to develop
and maintain the proprietary aspects of our technology. Our policy is to
obtain appropriate proprietary rights protection for any potentially
significant new technology acquired or developed each of our business units.
We currently hold a number of United States and foreign patents and
trademarks, which will expire at various dates through 2015. We also have
pending a number of United States and foreign patent applications relating to
certain of our products; however, we cannot be certain that any patents will
be granted pursuant to these applications.
In addition to patent laws, we rely on copyright and trade secret laws to
protect our proprietary rights. We attempt to protect our trade secrets and
other proprietary information through agreements with customers and suppliers,
proprietary information agreements with our employees and consultants, and
other similar measures. We cannot be certain that we will be successful in
protecting our proprietary rights. While we believe our patents, patent
applications, software and other proprietary know-how have value, changing
technology makes our future success dependent principally upon our employees'
technical competence and creative skills for continuing innovation.
Litigation has been necessary in the past and may be necessary in the future
to enforce our proprietary rights, to determine the validity and scope of the
proprietary rights of others, or to defend us against claims of infringement
or invalidity by others. An adverse outcome in such litigation or similar
proceedings could subject us to significant liabilities to third parties,
require disputed rights to be licensed from others or require us to cease
marketing or using certain products, any of which could have a material
adverse effect on our business, financial condition and results of operations.
In addition, the cost of addressing any intellectual property litigation
claim, both in legal fees and expenses, and the diversion of management's
resources, regardless of whether the claim is valid, could be significant and
could have a material adverse effect on our business, financial condition and
results of operations.
Employees
We refer to our employees as associates. As of June 15, 1999, we employed
546 associates, including 110 associates in general management, administration
and finance; 73 associates in sales and marketing; 185 associates in product
development; 129 associates in operations, manufacturing and quality; and 49
associates in customer service. None of our associates are represented by a
labor union and we have not experienced a work stoppage.
We provide centralized support for human resources management for each of
our operating divisions and subsidiaries. These services include recruiting,
administration and outplacement.
Government Regulation
Our manufacturing operations are subject to various federal, state and local
laws, including those restricting the discharge of materials into the
environment. We are not involved in any pending or threatened proceedings
which would require curtailment of our operations because of such regulations.
We continually expend funds to assure that our facilities are in compliance
with applicable environmental regulations. These expenditures have not,
however, been significant in the past, and we do not expect any significant
expenditures in the near future.
From time to time, a portion of our work relating to digital data recorders
may constitute classified United States government information or may be used
in classified programs of the United States Government. For this purpose, we
possess relevant security clearances. Our affected facilities and operations
are also subject to security regulations of the United States Government. We
believe we are currently in full compliance with these regulations.
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RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained
in this report before purchasing the shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.
Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Our
quarterly operating results have fluctuated and are likely to continue to
fluctuate due to a number of factors, many of which are not within our
control. Factors that could affect our revenues include the following:
. our significant investment in research and development for our
subsidiaries and divisions;
. our ability to develop, introduce, market and gain market acceptance of
new products applications and product enhancements in a timely manner;
. the size and timing of significant customer orders;
. the introduction of new products by competitors;
. the availability of components used in the manufacture of our products;
. our ability to control costs;
. changes in our pricing policies and the pricing policies by our suppliers
and competitors, as well as increased price competition in general;
. the long lead times associated with government contracts or required by
vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our divisions;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the Asian economic crisis and instability;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and market conditions.
In addition, our sales in any quarter typically consist of a relatively
small number of large customer orders. As a result, the timing of a small
number of orders can impact our quarter to quarter results. The loss of or a
substantial reduction in orders from any significant customer could seriously
harm our business, financial condition and results of operations.
Because of the factors listed above and other risks discussed in this
report, our future operating results could be below the expectations of
securities analysts and/or investors. If that happens, the trading price of
our common stock could be adversely affected.
We Have Experienced Substantial Losses and Expect Future Losses. We have
experienced net losses of $20.1 million for the year ended March 31, 1999 and
$6.6 million for the year ended March 31, 1998. We may not be able to achieve
profitability on a quarterly or annual basis in the future. Most of our
expenses are fixed in advance, and we generally are unable to reduce our
expenses significantly in the short term to compensate for any unexpected
delay or decrease in anticipated revenues. In addition, in order to implement
our incubator strategy successfully, we expect to continue to make significant
investments in each of our business units. As a result, we may continue to
experience losses which could cause the market price of our common stock to
decline.
8
<PAGE>
Our Incubator Strategy is Expensive and May Not Be Successful. We have
initiated a business strategy called our incubator strategy which is expensive
and highly risky. The goal of this strategy is to nurture and develop
companies that can be spun-off to our stockholders. This strategy has in the
past required us to make significant investments in our business units, both
for research and development, and also to develop a separate infrastructure
for each of our divisions, sufficient to allow the division to function as an
independent public company. We expect to continue to invest heavily in the
development of our divisions with the goal of conducting additional public
offerings. We may not recognize the benefits of this investment for a
significant period of time, if at all. Our ability to complete an initial
public offering of any of our divisions and/or spin-off our interest to our
stockholders will depend upon many factors, including:
. the overall performance and results of operations of the particular
business unit;
. the potential market for our business unit;
. our ability to assemble and retain a broad, qualified management team for
the business unit;
. our financial position and cash requirements;
. the business unit's customer base and product line;
. the current tax treatment of spin-off transactions and our ability to
obtain favorable determination letters from the Internal Revenue Service;
and
. general economic and market conditions.
We may not be able to complete a successful initial public offering or spin-
off of any of our divisions in the near future, or at all. Even if we do
complete additional public offerings, we may decide not to spin-off a
particular division, or to delay the spin-off until a later date.
We Must Keep Pace with Rapid Technological Change to Remain Competitive. Our
target markets are in general characterized by the following factors:
. rapid technological advances;
. downward price pressure in the marketplace as technologies mature;
. changes in customer requirements;
. frequent new product introductions and enhancements; and
. evolving industry standards and changes in the regulatory environment.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. In
particular, we will need to modify certain of our products to accommodate the
anticipated deployment of digital television and the corresponding phase-out
of analog transmissions. We will also have to continue to develop and
introduce new products that incorporate the latest technological advancements
in hardware, storage media, operating system software and applications
software in response to evolving customer requirements. Our recent shift
towards providing more software solutions may create additional challenges for
us, particularly in our Broadcast division. Our business and results of
operations could be adversely affected if we do not anticipate or respond
adequately to technological developments or changing customer requirements.
Our Future Success Depends on the Successful Development and Market
Acceptance of New Products. We believe our revenue growth and future operating
results will depend on our ability to complete development of new products and
enhancements, achieve broad market acceptance of these products and
enhancements, and reduce our product costs. We may not be able to introduce
any new products or any enhancements to our existing products on a timely
basis, or at all. In addition, the introduction of any new products could
adversely affect the sales of our certain of our existing products.
9
<PAGE>
Our future success will also depend in part on the success of several
recently introduced products including:
. Roswell, our automated facility management system for broadcast
television stations;
. Bowser, our visual asset manager;
. Vortex, our high performance dome product;
. Digi Scan Pro, our advanced digital multiplexer;
. Vantage One, our single camera traffic detection system;
. Auto Vue, our lane departure warning system; and
. Dexter, our networking access device.
Market acceptance of our new products depends upon many factors, including
our ability to resolve technical challenges in a timely and cost-effective
manner, the perceived advantages of our new products over traditional products
and the marketing capabilities of our independent distributors and strategic
partners. Our business and results of operations could be seriously harmed by
any significant delays in our new product development. We have experienced
delays in the past in the introduction of new products, particularly with our
Roswell system. Certain of our new products could contain undetected design
faults and software errors or "bugs" when first released by us, despite our
testing. We may not discover these faults or errors until after a product has
been installed and used by our customers. Any faults or errors in our existing
products or in our new products may cause delays in product introduction and
shipments, require design modifications or harm customer relationships, any of
which could adversely affect our business and competitive position.
We currently anticipate that we will outsource the manufacture of our Auto
Vue product line to a single manufacturer. This manufacturer may not be able
to produce sufficient quantities of this product in a timely manner or at a
reasonable cost, which could materially and adversely affect our ability to
launch or gain market acceptance of Auto Vue.
We May Need Additional Capital in the Future and May Not Be Able to Secure
Adequate Funds on Terms Acceptable to Us. We recently raised approximately
$7.3 million in a private placement in December 1998 and approximately $2.0
million in March 1999. We may need to raise additional capital in the near
future, either through additional bank borrowings or other debt or equity
financings. Our capital requirements will depend on many factors, including:
. market acceptance of our products;
. increased research and development funding, and required investments in
our divisions;
. increased sales and marketing expenses;
. potential acquisitions of businesses and product lines; and
. additional working capital needs.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced and such securities may have
rights, preferences and privileges senior to our common stock. Additional
financing may not be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable
to develop or enhance our products, expand our sales and marketing programs,
take advantage of future opportunities or respond to competitive pressures.
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets. International product sales
represented approximately 27% of our total net sales and contract revenues for
the fiscal year ended March 31, 1999, approximately 34% for the fiscal year
ended
10
<PAGE>
March 31, 1998 and approximately 36% for the fiscal year ended March 31, 1997.
International business operations are subject to inherent risks, including:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. longer accounts receivable payment cycles;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. reduced protection for intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political and economic instability.
We believe that international sales will continue to represent a significant
portion of our revenues, and that continued growth and profitability may
require further expansion of our international operations. Our international
sales are currently denominated primarily in U.S. dollars. As a result, an
increase in the relative value of the dollar could make our products more
expensive and potentially less price competitive in international markets. We
do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations.
Any of these factors may adversely effect our future international sales
and, consequently, on our business and operating results. Furthermore, as we
increase our international sales, our total revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the
world.
Our Operating Results Have Been Adversely Affected by the Asian Economic
Crisis. Our telecommunications products are sold principally to LGIC of Korea.
As a result of economic instability in Asia, particularly in Korea, our sales
in this region have declined over 60% in the current fiscal year and may
continue to decline in the future. It is possible that these sales could be
further impacted by the currency devaluations and related economic problems in
this region.
We Need to Manage Growth and the Integration of Our Acquisitions. Over the
past two years, we have significantly expanded our operations and made several
substantial acquisitions of diverse businesses, including Intelligent
Controls, Inc., International Media Integration Services, Ltd., Meyer Mohaddes
Associates, Inc., Viggen Corporation and certain assets of the Transportation
Systems business of Rockwell International. A key element of our business
strategy involves expansion through the acquisition of complementary
businesses, products and technologies. Acquisitions may require significant
capital infusions and, in general, acquisitions also involve a number of
special risks, including:
. potential disruption of our ongoing business and the diversion of our
resources and management's attention;
. the failure to retain or integrate key acquired personnel;
. the challenge of assimilating diverse business cultures;
. increased costs to improve managerial, operational, financial and
administrative systems and to eliminate duplicative services;
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
result of changes in management; and
. increased interest expense and amortization of acquired intangible
assets.
Our competitors are also soliciting potential acquisition candidates, which
could both increase the price of any acquisition targets and decrease the
number of attractive companies available for acquisition.
11
<PAGE>
Acquisitions, combined with the expansion of our business divisions and
recent growth has placed and is expected to continue to place a significant
strain on our resources. To accommodate this growth, we anticipate that we
will be required to implement a variety of new and upgraded operational and
financial systems, procedures and controls, including the improvement of our
accounting and other internal management systems. All of these updates will
require substantial management effort. Our failure to manage growth and
integrate our acquisitions successfully could adversely affect our business,
financial condition and results of operations.
We Depend on Government Contracts and Subcontracts and Face Additional Risks
Related to Fixed Price Contracts. Substantially all of the sales by our
subsidiary, Odetics ITS, Inc., and a portion of our sales by our
Communications division were derived from contracts with governmental
agencies, either as a general contractor, subcontractor or supplier.
Government contracts represented approximately 16% of our total net sales and
contract revenues for the year ended March 31, 1999. We expect revenue from
government contracts will continue to increase in the near future. Government
business is, in general, subject to special risks and challenges, including:
.long purchase cycles;
.competitive bidding and qualification requirements;
.performance bond requirements;
.delays in funding, budgetary constraints and cut-backs;
.milestone requirements, and liquidated damage provisions for failure to
meet contract milestones.
In addition, a large number of our government contracts are fixed price
contracts. As a result, we may not be able to recover for any cost overruns.
These fixed price contracts require us to estimate the total project cost
based on preliminary projections of the project's requirements. The financial
viability of any given project depends in large part on our ability to
estimate these costs accurately and complete the project on a timely basis. In
the event our costs on these projects exceed the fixed contractual amount, we
will be required to bear the excess costs. These additional costs adversely
affect our financial condition and results of operations. Moreover, certain of
our government contracts are subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in our
net sales in any given quarter. Our inability to address any of the foregoing
concerns or the loss or renegotiation of any material government contract
could seriously harm our business, financial condition and results of
operations.
The Markets in Which We Operate Are Highly Competitive and Have Many More
Established Competitors. We compete with numerous other companies in our
target markets and we expect such competition to increase due to technological
advancements, industry consolidations and reduced barriers to entry. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our business,
financial condition and results of operations. Many of our competitors have
far greater name recognition and greater financial, technological, marketing
and customer service resources than we do. This may allow them to respond more
quickly to new or emerging technologies and changes in customer requirements.
It may also allow them to devote greater resources to the development,
promotion, sale and support of their products than we can. Recent
consolidations of end users, distributors and manufacturers in our target
markets have exacerbated this problem. As a result of the foregoing factors,
we may not be able to compete effectively in our target markets and
competitive pressures could adversely affect our business, financial condition
and results of operations.
We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel and
We Do Not Have Employment Agreements with Any Key Personnel. Due to the
specialized nature of our business, we are highly dependent on the continued
service of our executive officers and other key management, engineering and
technical personnel, particularly Joel Slutzky, our Chief Executive Officer
and Chairman of the Board, and Gregory A. Miner, our Chief Operating Officer
and Chief Financial Officer. We do not have any employment contracts with any
of our officers or key employees. The loss of any of these persons would
seriously harm our development and marketing efforts, and would adversely
affect our business. Our success will also depend in
12
<PAGE>
large part upon our ability to continue to attract, retain and motivate
qualified engineering and other highly skilled technical personnel.
Competition for employees, particularly development engineers, is intense. We
may not be able to continue to attract and retain sufficient numbers of such
highly skilled employees. Our inability to attract and retain additional key
employees or the loss of one or more of our current key employees could
adversely affect upon our business, financial condition and results of
operations.
We May Not be Able to Adequately Protect or Enforce Our Intellectual
Property Rights. If we are not able to adequately protect or enforce the
proprietary aspects of our technology, competitors could be able to access our
proprietary technology and our business, financial condition and results of
operations will likely be seriously harmed. We currently attempt to protect
our technology through a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements and similar
means. Despite our efforts, other parties may attempt to disclose, obtain or
use our technologies or solutions. Our competitors may also be able to
independently develop products that are substantially equivalent or superior
to our products or design around our patents. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the
laws of the United States. As a result, we may not be able to protect our
proprietary rights adequately in the United States or abroad.
We have engaged in litigation in the past and litigation may be necessary in
the future to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation may also be
necessary to defend against claims of infringement or invalidity by others. An
adverse outcome in litigation or any similar proceedings could subject us to
significant liabilities to third parties, require us to license disputed
rights from others or require us to cease marketing or using certain products
or technologies. We may not be able to obtain any licenses on terms acceptable
to us, or at all. Any of these results could adversely affect on our business,
financial condition and results of operations. In addition, the cost of
addressing any intellectual property litigation claim, both in legal fees and
expenses, and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could seriously harm our business,
financial condition and results of operations.
The Trading Price of Our Common Stock Is Volatile. The trading price of our
common stock has been subject to wide fluctuations in the past, decreasing
from $20.375 in October 1997 to $4.25 in October 1998. We may not be able to
increase or sustain the current market price of our common stock in the
future. The market price of our common stock could continue to fluctuate in
the future in response to various factors, including, but not limited to:
. quarterly variations in operating results;
. shortages announced by suppliers
. announcements of technological innovations or new products;
. acquisitions or businesses, products or technologies;
. changes in pending litigation;
. our ability to spin-off any division;
. applications or product enhancements by us or by our competitors; and
. changes in financial estimates by securities analysts.
The stock market in general has recently experienced volatility which has
particularly affected the market prices of equity securities of many high
technology companies. This volatility has often been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of our common stock.
We Are Controlled by Certain of Our Officers and Directors. As of March 31,
1999, our officers and directors beneficially owned approximately 30.5% of the
total combined voting power of the outstanding shares of our Class A common
stock and Class B common stock. As a result of their stock ownership, our
management
13
<PAGE>
will be able to significantly influence the election of our directors and the
outcome of corporate actions requiring stockholder approval, such as mergers
and acquisitions, regardless of how our other stockholders may vote. This
concentration of voting control may have a significant effect in delaying,
deferring or preventing a change in our management or change in control and
may adversely affect the voting or other rights of other holders of common
stock.
Our Stock Structure and Certain Anti-Takeover Provisions May Effect the
Price of Our Common Stock. Certain provisions of our certificate of
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to
our stockholders. These provisions could limit the price that investors might
be willing to pay in the future for shares of our common stock. Our Class A
common stock entitles the holder to one-tenth of one vote per share and our
Class B common stock entitles the holder to one vote per share. In addition,
holders of the Class B common stock are presently entitled to elect six of our
nine directors. The disparity in the voting rights between our common stock,
as well as our insiders' significant ownership of the Class B common stock,
could discourage a proxy contest or make it more difficult for a third party
to effect a change in our management and control. In addition, our Board of
Directors is authorized to issue, without stockholder approval, up to
2,000,000 shares of preferred stock with voting, conversion and other rights
and preferences superior to those of our common stock, as well as additional
shares of Class B common stock. Our future issuance of preferred stock or
Class B common stock could be used to discourage an unsolicited acquisition
proposal.
In March 1998, we adopted a stockholder rights plan and declared a dividend
of preferred stock purchase rights to our stockholders. In the event a third
party acquires more than 15% of the outstanding voting control of our company
or 15% of our outstanding common stock, the holders of these rights will be
able to purchase the junior participating preferred stock at a substantial
discount off of the then current market price. The exercise of these rights
and purchase of a significant amount of stock at below market prices could
cause substantial dilution to a particular acquiror and discourage the
acquiror from pursuing our company. The mere existence of the stockholder
rights plan often delays or makes a merger, tender offer or proxy contest more
difficult.
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 systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to
comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Although
our core products are designed to be Year 2000 compliant, it is difficult to
ensure that our products contain all necessary date code changes. We are in
the process of updating our existing information systems to become Year 2000
compliant. We have established an internal task force to evaluate our current
status and state of readiness for the Year 2000. We believe the most
significant impact of the Year 2000 issues will be the readiness of our
suppliers, distributors, customers and lenders with whom we must interact.
This evaluation is still at an early stage. We do not yet have any contingency
plans to address our inability to remedy these issues and we may not have
fully identified the Year 2000 impact. As such, we may not be able to update
our systems and products or resolve the other Year 2000 issues without
disrupting our business or without incurring significant expense. Our failure
to address these issues on a timely basis or at all could result in lost
revenues, increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, financial condition and results of operations.
We Do Not Pay Cash Dividends. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends on either class
of our common stock in the foreseeable future.
We May Be Subject to Additional Risks. The risks and uncertainties described
above are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may also adversely affect our business operations.
14
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ITEM 2. PROPERTIES.
Our headquarters and principal operations are located in Anaheim,
California. In 1984, we purchased and renovated a three building complex
containing approximately 250,000 square feet situated on approximately 14
acres adjacent to the Interstate 5 freeway, one block from Disneyland. Our
facilities house our corporate and administrative offices (approximately
43,000 dedicated square feet), as well as the operations of Gyyr and the
Broadcast division, (approximately 87,000 dedicated square feet), the
Communications division (approximately 67,000 dedicated square feet), Mariner
Networks (approximately 8,000 dedicated square feet) and Odetics ITS
(approximately 25,000 dedicated square feet).
Our Communications division leases approximately 4,500 square feet of space
in a manufacturing facility located on 0.62 acre in El Paso, Texas. Our
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.
We currently operate a single shift in each of our manufacturing and
assembly facilities, and we believe that our facilities are adequate for our
current needs and for possible future growth. We may, however, elect to expand
or relocate its offices and facilities in the future.
ITEM 3. LEGAL PROCEEDINGS.
We brought an action against Storage Technology Corporation, commonly known
as StorageTek, in the Eastern District Court of Virginia alleging that
StorageTek had infringed our patent covering robotics tape cassette handling
systems (United States Patent No. 4,779,151). StorageTek counterclaimed
alleging that we infringed several of StorageTek's patents. Prior to trial,
the court dismissed two of the infringement claims against us and the third
claim was dismissed upon resolution between the parties. In January 1996, a
jury determined that the patent claims were not infringed under the doctrine
of equivalents based upon a claim construction defined by the court prior to
the trial. That jury also concluded that our 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 non-infringement of our
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, a jury
awarded us 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 ordered by the court
against StorageTek should be stayed pending appeal. After filing hearings, the
trial court vacated its own injunction and granted StorageTek's motion for
judgment as a matter of law to vacate the jury trial result and to find
StorageTek not infringing. We have appealed these and other court rulings. The
defendants also cross-appealed certain other court rulings. The U.S. Court of
Appeals for the Federal Circuit heard final arguments on April 12, 1999. A
decision from the U.S. Court of Appeals is pending.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In connection with our special meeting of stockholders held on March 11,
1999, the following proxies were tabulated representing 4,268,575 shares of
our Class A common stock or approximately 56% of total Class A shares
outstanding, and 833,329 of Class B common stock, or approximately 79% of the
total outstanding Class B shares outstanding, voted in the following manner:
Proposal I: To approve the private placement and issuance of 308,528 shares
of our Class A common stock to certain of our officers and
directors at a purchase price per share of $6.625, as required by
the rules of the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
(1/10 vote/share) (one vote/share)
----------------- ----------------
<S> <C> <C>
Total Represented............................ 4,268,575 833,329
For.......................................... 3,349,681 507,852
Against...................................... 378,225 17,989
Total Voting................................. 3,727,906 525,841
Abstain/Non-Vote............................. 540,669 307,488
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A common stock and Class B common stock are traded on the Nasdaq
National Market under the symbols "ODETA" and "ODETB," respectively. The
following table sets forth for the fiscal periods indicated the high and low
sales prices for the Class A common stock and Class B common stock as reported
by the Nasdaq National Market:
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
--------------- ----------------
High Low High Low
------- ------- -------- -------
<S> <C> <C> <C> <C>
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............................... 21 3/4 4 5/8 21 4 1/2
Fourth Quarter.............................. 9 1/4 4 10 1/16 4 1/4
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1999
First Quarter................................ 17 1/8 8 3/8 17 9
Second Quarter............................... 13 5/8 4 5/8 14 1/4 5
Third Quarter................................ 8 1/4 4 1/16 9 5/8 4
Fourth Quarter............................... 10 5/8 7 1/16 10 3/4 7 3/8
</TABLE>
As of June 24, 1999, we had 714 holders of record of Class A common stock
and 155 holders of record of Class B common stock according to information
furnished by our transfer agent.
Dividend Policy
Pursuant to the terms of our Loan and Security Agreement with our bank, we
are prohibited from paying any dividends on our common stock without the
bank's consent. We have never paid or declared cash dividends on either class
of our common stock, and have no current plans to pay such dividends in the
foreseeable future. We currently intend to retain any earnings for working
capital and general corporate purposes. The payment of any future dividends
will be at the discretion of our Board of Directors, and will depend upon a
number of factors, including, but not limited to, future earnings, the success
of our business, activities, its capital requirements, our general financial
condition and future prospects, general business conditions, the consent of
our principal lender and such other factors as the Board may deem relevant.
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<PAGE>
Recent Sales of Unregistered Securities
During the last fiscal year, we have sold and issued the following
unregistered securities:
1. In September 1998, in connection with our acquisition of International
Media Integration Systems Limited, we issued an aggregate of 173,214 shares
of our Class A common stock to the four former shareholders of
International Media in exchange for their holdings in International Media.
2. In October 1998, in connection with the acquisition by Odetics ITS of
Meyer, Mohaddes Associates, Inc., we issued an aggregate of 55,245 shares
of our Class A common stock to the four former shareholders of Meyer,
Mohaddes in exchange for their shares of common stock of Meyer, Mohaddes.
We also issued to these shareholders an aggregate of 457,000 shares of
common stock of Odetics ITS, which was later reduced to 432,100 shares
after giving effect to the purchase price adjustments set forth in the
merger agreement. Pursuant to the terms of the merger agreement, in April
1999, we also issued an aggregate of 25,740 additional shares to these
shareholders as a penalty for not completing the initial public offering of
Odetics ITS.
3. In December 1998, we issued an aggregate of 1,191,323 shares of our
Class A common stock to 17 accredited investors at a purchase price of
$6.625 per share in a private placement. In March 1999, we issued an
aggregate of 308,528 shares of our Class A common stock to eight of our
officers and directors in a private placement at a purchase price of $6.625
per share. Cruttenden Roth Incorporated acted as placement agent in
connection with both of these offerings.
4. In April 1999, we issued an aggregate of 27,603 shares of our Class A
common stock to Viggen Corporation, in connection with our acquisition of
certain assets of Viggen Corporation.
The sale and issuance of securities set forth above were deemed to be exempt
from registration under the Securities Act by virtue of Section 4(2) thereof.
The recipients of the securities in each of the transactions set forth in
above represented their intention to acquire such securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments used in such transactions. Except as indicated above, there were
no underwriters, brokers or finders employed in connection with any of the
foregoing transactions.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data with respect to our
consolidated statement of operations for each of the five fiscal years in the
period ended March 31, 1999 and the consolidated balance sheet data at March
31, 1995, 1996, 1997, 1998 and 1999 are derived from the audited consolidated
financial statements of Odetics. The consolidated financial statements for the
fiscal years ended March 31, 1995 and 1996 and our consolidated balance sheet
at March 31, 1997 are not included in this report. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with our Consolidated
Financial Statements and the related notes thereto included elsewhere in this
report.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales...................... $51,824 $65,056 $71,748 $ 79,552 $ 70,042
Contract revenues.............. 13,280 10,161 9,032 10,284 13,331
------- ------- ------- -------- --------
Total net sales and contract
revenues...................... 65,104 75,217 80,780 89,836 83,373
Cost of sales.................. 34,225 44,535 48,507 55,227 49,816
Cost of contract revenues...... 6,633 4,374 4,907 6,430 9,007
Selling, general and
administrative expense........ 16,199 15,620 19,831 26,010 31,670
Research and development
expenses...................... 6,061 5,242 7,734 9,271 11,191
In process research and
development................... -- -- -- 2,106 --
Nonrecurring charge............ 767 -- -- 1,716 --
Interest expense, net.......... 682 386 183 617 1,807
------- ------- ------- -------- --------
Income (loss) from continuing
operations before income
taxes......................... 537 5,060 (382) (11,541) (20,118)
Income taxes (benefit)......... 177 1,418 (181) (2,858) --
------- ------- ------- -------- --------
Income (loss) from continuing
operations.................... 360 3,642 (201) (8,683) (20,118)
Income (loss) from discontinued
operations, net of income
taxes......................... (5,038) (1,189) 3,931 2,089 --
------- ------- ------- -------- --------
Net income (loss).............. $(4,678) $ 2,453 $ 3,730 $ (6,594) $(20,118)
======= ======= ======= ======== ========
Diluted earnings (loss) per
share(1):
Continuing operations.......... $ 0.06 $ 0.59 $ (0.03) $ (1.26) $ (2.57)
Discontinued operations........ (0.86) (0.19) 0.62 0.31 --
------- ------- ------- -------- --------
Earnings (loss) per share...... $ (0.80) $ 0.40 $ 0.59 $ (0.95) $ (2.57)
======= ======= ======= ======== ========
Shares used in calculating di-
luted earnings (loss) per
share......................... 5,872 6,179 6,299 6,912 7,820
</TABLE>
- --------
(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.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital.................... $24,892 $20,610 $21,903 $19,996 $ 15,216
Total assets....................... 70,098 73,013 85,805 88,790 81,355
Long-term debt (less current
portion).......................... 25,757 22,019 11,860 21,000 19,962
Retained earnings (deficit)........ 6,027 8,481 12,211 (3,795) (23,913)
Total stockholders' equity......... 27,736 30,985 51,828 38,580 36,323
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
The following table sets forth certain income statement data as a percentage
of total net sales and contract revenues for the periods indicated and should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations:
<TABLE>
<CAPTION>
As of March 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales.............................................. 88.8% 88.6% 84.0%
Contract revenues...................................... 11.2 11.4 16.0
----- ----- -----
Total net sales and contract revenues.................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 60.0 61.4 59.7
Cost of contract revenues.............................. 6.1 7.2 10.8
Selling, general and administrative expenses........... 24.5 29.0 38.0
Research and development expenses...................... 9.6 10.3 13.4
In process research and development.................... -- 2.3 --
Nonrecurring charge.................................... -- 1.9 --
Interest expense, net.................................. 0.2 0.7 2.2
----- ----- -----
Income (loss) from continuing operations before income
taxes................................................. (0.4) (12.8) (24.1)
Income taxes (benefit)................................. (0.2) (3.2) --
----- ----- -----
Income (loss) from continuing operations............... (0.2) (9.6) (24.1)
Income (loss) from discontinued operations, net of
income taxes.......................................... 4.8 2.3 --
----- ----- -----
Net income (loss)...................................... 4.6% (7.3)% (24.1)%
===== ===== =====
</TABLE>
General. On October 31, 1997, we completed the spin-off of our 82.9%
interest in ATL by distributing our 8,005,000 shares of Class A common stock
to our stockholders of record on October 31, 1997. In connection with the
spin-off, we have restated our financial statements to reflect continuing and
discontinued operations. Discontinued operations reflect our interest in the
operations of ATL for all periods presented.
Net Sales and Contract Revenues. Net sales consist of sales of products and
services to commercial customers. Contract revenues consist of 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. Total net sales and contract revenues
decreased 7.2% to $83.4 million for the fiscal year ended March 31, 1999
("fiscal 1999") compared to $89.8 million for the fiscal year ended March 31,
1998 ("fiscal 1998"), and increased 11.2% in fiscal 1998 from $80.8 million
for the fiscal year ended March 31, 1997 ("fiscal 1997").
Net Sales. Net sales decreased 12.0% to $70.0 million in fiscal 1999
compared to $79.6 million in fiscal 1998 as a result of a 10.2% decrease in
Gyyr sales and a 58.6% decrease in sales in the Communications division. The
decrease in Gyyr sales reflects reduced purchases by certain of its OEM
customers who sell to the banking industry segment of the electronic security
market. This market segment has undergone substantial consolidation in the
current fiscal year that has negatively impacted demand for certain of our
products including video multiplexers and time lapse video tape decks. The
decrease in sales in the Communications division reflects a decrease in sales
of timing and sychronization products to LGIC of Korea, a significant
customer. The decline in sales to this customer largely reflects adverse
economic conditions in Asia.
Sales by Odetics ITS partially offset the decline in sales of Gyyr and the
Communications division, reflecting an increase of approximately 360.0% in
fiscal 1999 compared to the previous year. This increase was primarily the
result of increasing market acceptance of our Vantage line of video based
traffic intersection control
19
<PAGE>
systems. We also experienced a 140% increase in Mariner Networks' sales in
fiscal 1999 compared to fiscal 1998 primarily due to increased sales of
network interface products. Sales of Mariner Networks products represented
2.0% of our total net sales and contract revenues in fiscal 1998 compared to
6.0% in fiscal 1999. During fiscal 1999, Broadcast sales were relatively flat
compared to fiscal 1998.
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 our timing and synchronization products
sold by the Communications division to LGIC of Korea, a major
telecommunications customer. While sales in fiscal 1998 to this customer
increased as compared to fiscal 1997, we 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. We completed the acquisition of Intelligent
Controls in fiscal 1998, which also contributed to the increased sales. The
sales increases in Gyyr and in the Communications division were offset by
declines in sales in our Broadcast division, which was largely due to delays
in delivery of our Roswell facility management system.
Contract Revenues. Contract revenues increased 29.6% to $13.3 million in
fiscal 1999 compared to $10.3 million in fiscal 1998, and increased 13.9% in
fiscal 1998 from $9.0 million in fiscal 1997. In October 1998, we acquired
Meyer, Mohaddes Associates, Inc. in exchange for an aggregate of 432,100
shares of the common stock of Odetics ITS and an aggregate of 80,985 shares of
Class A common stock of Odetics. Approximately one-half of the increase in
contract revenues in fiscal 1999 resulted from the acquisition of Meyer
Mohaddes. The balance of the increase in contract revenues in fiscal 1999
represents increased contract volume in our intelligent transportation systems
business. In the first quarter of fiscal 1998, we acquired certain assets of
the Transportation Systems business of Rockwell International, which were
consolidated into our Odetics ITS business. The increase in contract revenues
in fiscal 1998 reflects the revenue contribution from Odetics ITS. The
increases in Odetics ITS' contract revenues in both fiscal 1999 and fiscal
1998 were offset by continued declines in contract revenues derived from the
sale of space recorders and related service and equipment to agencies of the
United States Government. We have focused our recent contract procurement
efforts on commercial markets and the markets for ITS products and services.
Gross Profit. Total gross profit as a percent of net sales and contract
revenues decreased to 29.5% in fiscal 1999, compared to 31.4% in fiscal 1998,
and 33.9% in fiscal 1997. The decrease in our fiscal 1999 compared to fiscal
1998 reflects decreased gross profit performance in our Broadcast division and
in our Communications division. The decrease in gross profit in our Broadcast
division resulted from an unfavorable sales mix of low margin product sales in
the fourth quarter of fiscal 1999, in addition to an increase in charges for
warranty liabilities that are included in cost of sales. Gross profit in the
Communications division decreased from 46.5% of sales in fiscal 1998 to 36.7%
of sales in fiscal 1999, as a result of the decline in sales to LGIC of Korea.
The decrease in fiscal 1998 compared to fiscal 1997 reflects decreased gross
profit performance in our Broadcast division 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 Intelligent Controls in October 1997. The
decrease in fiscal 1998 also reflects a lower gross profit contribution on
contract revenues from Odetics ITS compared to other contract revenues during
fiscal 1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 21.8% to $31.7 million (or 38.0% of total net
sales and contract revenues) in fiscal 1999 compared to $26.0 million (or
29.0% of total net sales and contract revenues) in fiscal 1998, and increased
31.2% in fiscal 1998 compared to $19.8 million (or 24.5% of total net sales
and contract revenues) in fiscal 1997. During fiscal 1999, we increased sales
and marketing expenditures $3.9 million or 20.7% over fiscal 1998 levels.
Sales and marketing expense increased in our Odetics ITS, Gyyr, Broadcast and
Mariner Networks businesses in fiscal 1999. Approximately $514,000 of the
increase in fiscal 1999 was attributable to Meyer Mohaddes, which was acquired
by Odetics ITS in October 1998. The other increases in spending were incurred
to support planned growth in sales and market
20
<PAGE>
share and were incurred principally in the areas of labor and benefits, sales
commissions, advertising and promotions, and charges related to support
increased presence in international markets, particularly Europe. These
increases were partially offset by decreased spending in our Communications
division, which enforced general spending cutbacks in response to the sharp
reduction in sales in fiscal 1999 accompanying the Asian economic crisis.
General and administrative expense increased $1.2 million in fiscal 1999
compared to fiscal 1998 primarily as a result of the write off of deferred
costs associated with our delay in the initial public offering of Odetics ITS,
an increase in goodwill amortization as a result of the acquisitions of Meyer
Mohaddes Associates and International Media Integration Services, and the
administrative infrastructure that accompanied the acquisition of Meyer
Mohaddes Associates.
In fiscal 1998, we experienced increased costs across all of our business
units for sales, marketing and administrative activities as a function or our
planned growth compared to fiscal 1997. These expenses included 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 acquisition of Intelligent Controls and the acquisition of certain assets
of the Transportation Systems business of Rockwell International.
Research and Development Expense. Research and development expense increased
20.7% to $11.2 million (or 13.4% of total net sales and contract revenues) in
fiscal 1999 compared to $9.3 million (or 10.3% of total net sales and contract
revenues) in fiscal 1998, and increased 19.9% in fiscal 1998 compared to $7.7
million (or 9.6% of total net sales and contract revenues) in fiscal 1997. For
competitive reasons, we closely guard the confidentiality of specific
development projects. The increase in research and development expense in
fiscal 1999 compared to fiscal 1998 principally reflects increased product
development activity in Gyyr, Mariner Networks and our Communications
division. Most of these increases represent engineering labor and related
benefits, prototype material and consulting fees. Gyyr completed an aggressive
product development schedule during fiscal 1999 intended to broaden its
product family beyond time-lapse video recorders. During fiscal 1999, Gyyr
introduced its Vortex family of domes for facility monitoring, expanded its
video multiplexer product line, and launched a new Internet based security
product called Tango. Mariner Networks added substantial investment in the
development of Dexter, a broadband communications interface product expected
to be in beta test in the first quarter of fiscal 2000. Mariner Networks also
invested development resources in FRAIM, an extension to its family of
products offering Frame Relay to ATM communications. The Communications
division also experienced increased development costs related to its high
performance G.P.S. based synchronization product.
Nonrecurring Charge. In March 1998, we recorded a nonrecurring charge of
$1.7 million. This charge reflects severance costs related to retirement of
certain of our founders and officers, and to a lesser extent, costs incurred
to terminate a joint venture relationship in China.
Interest Expense, Net. Interest expense, net reflects the net of interest
expense and interest income as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Interest Expense........................................... $1,890 $1,609 $1,928
Interest Income............................................ 1,707 992 121
------ ------ ------
Interest Expense, Net...................................... $ 183 $ 617 $1,807
------ ------ ------
</TABLE>
Interest expense increased 19.8% in fiscal 1999 compared to fiscal 1998, and
decreased 14.9% in fiscal 1998 compared to fiscal 1997. The increase in fiscal
1999 represents increased average outstanding borrowings on our line of credit
to fund negative operating cash flow. Interest income was derived primarily
from a note receivable due from ATL, our 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 was payable in sixteen
quarterly installments by ATL. ATL repaid in full the outstanding balance of
its note receivable in July 1998.
21
<PAGE>
In-Process Research and Development. In the fourth quarter of fiscal 1998,
we completed the purchase price allocation related to our acquisition of
Intelligent Controls and determined that $2.1 million of the purchase price
was attributable to the value of research and development activities in
process at the date of acquisition, constituting the development of an
integrated building access and security system that Gyyr began selling in the
latter part of fiscal 1999 as the Access 202 product family. In accordance
with the provisions of FASB Statement No. 2, "Accounting for Research and
Development Costs," we recorded a charge in fiscal 1998 for this in-process
research and development. Subsequent to this acquisition, we incurred an
additional $94,000 and $469,000 of research and development expense in fiscal
1998 and 1999, respectively, related to this product development effort.
Income Taxes. We have not provided income tax benefit for the losses
incurred in fiscal 1999 due to the uncertainty as to the ultimate realization
of the benefit. We provided for a tax benefit from continuing operations at an
effective rate of (24.8)% in fiscal 1998 and (47.4%) in fiscal 1997. The tax
benefit recorded in 1998 was less than the statutory rate because no benefit
was recorded in connection with $2.1 million write-off of purchased research
and development expenses associated with the acquisition of Intelligent
Controls, a reduction in the benefit of general business credits on total
expense, and foreign losses recorded in Singapore for which no tax benefit was
recognized.
In 1997, we entered into a Tax Allocation Agreement with ATL effective April
1, 1996 pursuant to which ATL made payments to us, or we made payments to ATL,
as appropriate, in an amount equal to the taxes attributable to the operations
of Odetics on its consolidated federal, and consolidated or combined state
income tax returns. In addition, the Tax Allocation Agreement provided that
members of our 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.
Income (Loss) from Continuing Operations. In connection with the spin-off of
our 82.9% ownership interest in ATL on October 31, 1997, we restated our
financial statements to present the results of operations of ATL as
discontinued operations for all periods presented. Income (loss) from
continuing operations reflects our continuing operations, including Gyyr and
the Broadcast division; the Communications division and Mariner Networks; and
Odetics ITS.
Liquidity and Capital Resources
Our incubator strategy is characterized by high levels of investment of
operating cash flow to support the development of our businesses as potential
spin-off opportunities. During fiscal 1999, we financed our cash requirements
primarily through equity offerings, repayment of amounts due from ATL,
equipment financings and decreases in net working capital items excluding
cash. We incurred negative cash flow from operating activities of $12.1
million in fiscal 1999, principally as a result of financing net operating
losses of $20.1 million incurred during the year. The impact of the net
operating loses on operating cash flow during the year was partially mitigated
by inventory reductions of $4.8 million and noncash expenses for depreciation
and amortization of $5.2 million. A portion of the negative cash flow from
operating activities was also financed by the receipt of $10.0 million on a
note receivable due us from ATL, our former subsidiary, which note was paid in
full in July 1998. In May 1999, we entered into an agreement with CIBC World
Markets to provide for general investment banking advisory services.
We currently have a $17.0 line of credit with Transamerica Business Credit
providing for borrowings at their prime rate plus 2.0% (9.75% at March 31,
1999). This relationship succeeded our previous relationship with Imperial
Bank. Our borrowings under our line of credit with Transamerica Business
Credit are secured by substantially all of our assets.
22
<PAGE>
On December 18, 1998, we completed a private placement of 1,191,323 of our
Class A common stock to raise $7.3 million in net proceeds. On March 12, 1997,
following stockholder approval, we sold an additional 308,528 shares of our
Class A common stock in a private placement for approximately $2.0 million in
net proceeds. We used the net proceeds from these offerings for general
working capital purposes.
We anticipate that the cash flow available from our line of credit, and
proceeds from the equity offerings of our common stock, in addition to the
common stock of any companies that are ultimately spun-off from Odetics, will
be sufficient for us to execute our current operating plans and meet our
obligations on a timely basis for at least the next twelve months.
Year 2000 Compliance
We are currently addressing problems associated with our computer systems as
the year 2000 approaches. Many existing computer systems and applications, and
other control devices use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
Others do not correctly process "leap year" dates. As a result, such systems
and applications could fail or create erroneous results unless corrected so
that they can correctly process data related to the year 2000 and beyond.
These problems are expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the year 2000 problem.
We have evaluated each of our products and believe that each is
substantially year 2000 compliant. We have adopted the British Standards
Institute standard for its statements of compliance regarding the year 2000.
We believe that it is not possible to determine whether all of our customers'
products into which our products are incorporated will be year 2000 compliant
because we have little or no control over the design, production and testing
of our customers' products.
The year 2000 problem could affect the systems, transaction processing
computer applications and devices that we use to operate and monitor all major
aspects of our business, including financial systems (such as general ledger,
accounts payable, and payroll), customer services, infrastructure, master
production scheduling, materials requirement planning, networks and
telecommunications systems. We believe that we have identified substantially
all of the major systems, software applications and related equipment used in
connection with our internal operations that must be modified or upgraded in
order to minimize the possibility of a material disruption to our business. We
are currently in the process of modifying and upgrading all affected systems
and expect to complete this process during the calendar year 1999. Because
most of our software applications are recent versions of vendor supported,
commercially available products, we have not incurred, and do not expect in
the future to incur, significant costs to upgrade these applications as year
2000 compliant versions are released by the respective vendors. Systems such
as telephone, networking, test equipment, and security systems at our
facilities may also be affected by the year 2000 problem. We are currently
assessing the potential effect of and costs of remediating the year 2000
problem on our facility systems. We estimate that our total cost of completing
any required modifications, upgrades or replacements of these systems will not
have a material adverse effect on our business, financial condition or result
of operations.
We presently estimate that the total cost of addressing our year 2000 issues
will be approximately $500,000. We based this estimate using numerous
assumptions, including the assumption that we have already identified our most
significant year 2000 issues and that the plans of our third party suppliers
will be fulfilled in a timely manner without cost to us. We cannot be sure
that these assumptions are accurate, and actual results could differ
materially from those we anticipate.
We are currently developing contingency plans to address the year 2000
issues that may pose a significant risk to our on-going operations. These
plans could include accelerated replacement of affected equipment or software,
temporary use of back-up equipment or software or the implementation of manual
procedures to compensate for system deficiencies. We cannot be certain that
any contingency plans implemented by us would be adequate to meet our needs
without materially impacting our operations, that any such plan would be
23
<PAGE>
successful or that our results of operations would not be materially and
adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to changes in interest rates primarily from our long-term
debt arrangements. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate changes.
The following table provides information about our debt obligations that are
sensative to changes in interest rates.
<TABLE>
<CAPTION>
March 31,
Expected maturity date
---------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total value
------ ------- ------ ------ ------ ---------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed Rate............ $2,074 $ 2,066 $2,221 $1,813 $1,666 $1,199 $11,039 $ 11,039
Average interest
rate................. 8.95% 9.02% 9.14% 9.29% 9.36% 9.36% 9.09%
Variable Rate......... -- $10,997 -- -- -- -- $10,997 $ 10,997
Average interest
rate................. 9.75% 9.75%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. The information under the heading "Election
of Directors," appearing in our proxy statement, is incorporated herein by
reference.
(b) Identification of Executive Officers. The information under the heading
"Executive Compensation and Other Information," appearing in our proxy
statement, is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information under
the heading "Executive Compensation and Other Information," appearing in our
proxy statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation," appearing in our
proxy statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Principal Stockholders and Common Stock
Ownership of Certain Beneficial Owners and Management," appearing in our proxy
statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions," appearing in our
proxy statement, is incorporated herein by reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following financial statements of Odetics are
included in a separate section of this Annual Report on Form 10-K commencing
on the pages referenced below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Consolidated Financial Statements............................... F-1
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998................ F-3
Consolidated Statements of Operations for the Years ended March 31, 1999,
1998 and 1997........................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended March
31, 1999, 1998 and 1997................................................. F-6
Consolidated Statements of Cash Flows for the Years ended March 31, 1999,
1998 and 1997........................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
2. Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts......................... S-1
</TABLE>
All other schedules have been omitted because they are not required or the
required information is included in Odetics' Consolidated Financial Statements
and Notes thereto.
3. Exhibits.
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Odetics, as amended (incorporated by
reference to Exhibit 19.2 to Odetics' Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987).
3.2 Bylaws of Odetics, as amended (incorporated by reference to Exhibit
4.2 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-
67932) as filed with the SEC on July 6, 1993).
4.1 Specimen of Class A Common Stock and Class B Common Stock
certificates (incorporated by reference to Exhibit 4.3 to Amendment
No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-
67932) as filed with the SEC on September 30, 1993).
4.2 Form of rights certificate for Odetics' preferred stock purchase
rights (incorporated by reference to Exhibit A of Exhibit 4 to
Odetics' Current Report on Form 8-K as filed with the SEC on May 1,
1998).
10.1 Profit Sharing Plan and Trust (incorporated by reference to Exhibit
10.3 to Odetics' Amendment No. 2 to the Registration Statement on
Form S-8 (Reg. No. 002-98656) as filed with the SEC on May 5, 1988).
10.2 Form of Executive Deferral Plan between Odetics and certain employees
of Odetics (incorporated by reference to Exhibit 10.4 to Odetics'
Annual Report on Form 10-K for the year ended March 31, 1988).
10.3* Loan and Security Agreement dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics, and Schedule to Loan Agreement.
10.4* Amendment to Loan Agreement dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics, and related Schedule to Loan Agreement dated
December 28, 1998.
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.5* Revolving Credit Note dated December 28, 1998 payable to Transamerica
Business Credit Corporation in the original principal amount of
$17,000,000.
10.6* Letter of Credit Agreement dated December 28, 1998 among Transamerica
Business Credit Corporation, Odetics and the subsidiaries of Odetics.
10.7* Security Agreement in Copyrighted Works dated December 28, 1998
between Transamerica Business Credit Corporation and Odetics.
10.8* Patent and Trademark Security Agreement dated December 28, 1998
between Transamerica Business Credit Corporation and Odetics.
10.9* Cross-Corporate Continuing Guaranty dated December 28, 1998 among
Transamerica Business Credit Corporation, Odetics and the
subsidiaries of Odetics.
10.10 Form of Indemnity Agreement entered into by Odetics and certain of
its officers and directors (incorporated by reference to Exhibit 19.4
to Odetics' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988).
10.11 Schedule of officers and directors covered by Indemnity Agreement
(incorporated by reference to Exhibit 10.9.2 to Amendment No. 1 to
Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as
filed with the SEC on July 6, 1993).
10.12 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust
(incorporated by reference to Exhibits 4.3.1 and 4.3.2, respectively,
to Amendment No. 3 to Odetics' Registration Statement on Form S-3
(Reg.No. 002-86220) as filed with the SEC on June 13, 1990).
10.13 Separation and Distribution Agreement dated March 1, 1997 between
Odetics and ATL (incorporated by reference to Exhibit 10.13 to
Odetics' Annual Report on Form 10-K for the year ended March 31,
1997).
10.14 Tax Allocation Agreement dated March 1, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.14 to Odetics' Annual Report
on Form 10-K for the year ended March 31, 1997).
10.15 Services Agreement dated March 21, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.15 to Odetics' Annual Report
on Form 10-K for the year ended March 31, 1997).
10.16 Promissory Note dated April 1, 1997 between Odetics and ATL
(incorporated by reference to Exhibit 10.16 to Odetics' Annual Report
on Form 10-K for the year ended March 31, 1997).
10.17 1997 Stock Incentive Plan of Odetics (incorporated by reference to
Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File No.
333-44907) as filed with the SEC on January 26, 1998).
10.18 Form of Notice of Grant of Stock Option (incorporated by reference to
Exhibit 99.2 to Odetics' Registration Statement on Form S-8 (File No.
333-44907) as filed with the SEC on January 26, 1998).
10.19 Form of Stock Option Agreement (incorporated by reference to Exhibit
99.3 to Odetics' Registration Statement on Form S-8 (File No. 333-
44907) as filed with the SEC on January 26, 1998).
10.20 Form of Addendum to Stock Option Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control (incorporated by
reference to Exhibit 99.4 to Odetics' Registration Statement on Form
S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998).
10.21 Form of Addendum to Stock Option Agreement--Limited Stock
Appreciation Rights (incorporated by reference to Exhibit 99.5 to
Odetics' Registration Statement on Form S-8 (File No. 333-44907) as
filed with the SEC on January 26, 1998).
</TABLE>
26
<PAGE>
<TABLE>
<C> <S>
10.23 Form of Stock Issuance Agreement (incorporated by reference to
Exhibit 99.6 to Odetics' Registration Statement on Form S-8 (File No.
333-44907) as filed with the SEC on January 26, 1998).
10.24 Form of Addendum to Stock Issuance Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control (incorporated by
reference to Exhibit 99.7 to Odetics' Registration Statement on Form
S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998).
10.25 Form of Notice of Grant of Automatic Stock Option--Initial Grant
filed as Exhibit 99.8 filed as Exhibit (incorporated by reference to
Exhibit 99.8 to Odetics' Registration Statement on Form S-8 (File No.
333-44907) as filed with the SEC on January 26, 1998).
10.26 Form of Notice of Grant of Automatic Stock Option--Annual Grant
(incorporated by reference to Exhibit 99.9 to Odetics' Registration
Statement on Form S-8 (File No. 333-44907) as filed with the SEC on
January 26, 1998).
10.27 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to
the (incorporated by reference to Exhibit 99.10 to Odetics'
Registration Statement on Form S-8 (File No. 333-44907) as filed with
the SEC on January 26, 1998).
10.28 Rights Agreement dated April 24, 1998 between Odetics and BankBoston,
N.A., which includes the form of Certificate of Designation for the
junior participating preferred stock as Exhibit A, the form of rights
certificate as Exhibit B and the summary of rights to purchase Series
A preferred shares as Exhibit C (incorporated by reference to Exhibit
4 to Odetics' Current Report on Form 8-K as filed with the SEC on May
1, 1998).
10.29 Promissory Note in the original principal amount of $15,000,000
payable to The Northwestern Mutual Life Insurance Company dated
October 31, 1989 and related Deed of Trust, Security Agreement and
Financing Statement between Odetics, Inc. and Northwestern Mutual
dated October 31, 1989 (incorporated by reference to Exhibit 10.12 to
Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as
filed with the SEC July 6, 1993).
10.30 1994 Long-Term Equity Plan of Odetics (incorporated by reference to
Exhibit 4.3 to Odetics' Registration Statement on Form S-8 (File No.
333-05735) as filed with the SEC on June 11, 1996).
21* Subsidiaries of Odetics.
23.1 Consent of Independent Auditors.
27* Financial Data Schedule.
</TABLE>
- --------
*previously filed
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Anaheim, State of California, on August 2, 1999.
Odetics, Inc.
/s/ Joel Slutzky
By: _________________________________
Joel Slutzky
Chief Executive Officer,
President
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Joel Slutzky Chief Executive Officer, August 2, 1999
______________________________________ President and Chairman of
Joel Slutzky the Board (principal
executive officer)
* Director August 2, 1999
______________________________________
Crandall Gudmundson
* Director August 2, 1999
______________________________________
Jerry Muench
* Director August 2, 1999
______________________________________
Kevin C. Daly
* Vice President and August 2, 1999
______________________________________ Controller (principal
Gary Smith accounting officer)
* Director August 2, 1999
______________________________________
Ralph R. Mickelson
* Director August 2, 1999
______________________________________
Leo Wexler
* Director August 2, 1999
______________________________________
John Seazholtz
* Director August 2, 1999
______________________________________
Paul E. Wright
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Gregory A. Miner Vice President, Director, August 2, 1999
______________________________________ Chief Operating Officer
Gregory A. Miner and Chief Financial
Officer (principal
financial officer)
</TABLE>
/s/ Gregory A. Miner
*By: ____________________________
Gregory A. Miner,
Attorney-in-Fact
29
<PAGE>
ODETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999................ F-3
Consolidated Statements of Operations for the Years ended March 31, 1997,
1998 and 1999........................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years ended March
31, 1997, 1998 and 1999................................................. F-5
Consolidated Statements of Cash Flows for the Years ended March 31, 1997,
1998 and 1999........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended March 31, 1999. 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 and
schedule 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, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, 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 11, 1999, except for Note 1,
as to which the date is
June 24, 1999
F-2
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
----------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,131 $ 787
Trade accounts receivable, net of allowance for doubtful
accounts of $432,000 in 1998 and $839,000 in 1999.......... 15,048 18,889
Receivables from ATL (Note 4)............................... 4,802 --
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5)............................. 2,583 2,423
Inventories:
Finished goods.............................................. 569 1,101
Work in process............................................. 2,176 749
Materials and supplies...................................... 18,065 14,135
Prepaid expenses and other.................................. 4,189 2,202
------- -------
Total current assets......................................... 48,563 40,286
Property, plant and equipment:
Land........................................................ 2,090 2,060
Buildings and improvements.................................. 18,481 18,674
Equipment................................................... 28,006 28,618
Furniture and fixtures...................................... 1,312 2,685
Allowances for depreciation................................. (26,550) (29,561)
------- -------
23,339 22,476
Long-term ATL note receivable less current portion (Note 4).. 6,770 --
Capitalized software costs, net (Note 1)..................... 3,785 7,667
Goodwill, net of accumulated amortization of $571,000 in 1998
and $1,046,000 in 1999...................................... 5,850 9,563
Other assets................................................. 483 1,363
------- -------
Total assets................................................. $88,790 $81,355
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................... $13,672 $10,454
Accrued payroll and related................................. 5,093 5,441
Accrued expenses............................................ 2,083 1,933
Contract reserve............................................ 4,541 3,892
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5)............................. 1,580 1,276
Current portion of long-term debt (Note 6).................. 1,598 2,074
------- -------
Total current liabilities.................................... 28,567 25,070
Revolving line of credit (Notes 1 and 6)..................... 12,800 10,997
Long-term debt, less current portion (Note 6)................ 8,200 8,965
Deferred income taxes (Note 8)............................... 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--6,202,778 of Class A and
1,062,041 of Class B at March 31, 1998; 7,941,271 of Class
A and 1,060,041 of Class B at March 31, 1999............... 726 901
Paid-in capital............................................. 45,240 59,579
Treasury stock, 50,000 and 50,093 shares in 1998 and 1999,
respectively............................................... (239) (240)
Notes receivable from employees (Note 10)................... (3,377) (96)
Accumulated other comprehensive income...................... 25 92
Retained earnings........................................... (3,795) (23,913)
------- -------
Total stockholders' equity................................... 38,580 36,323
------- -------
Total liabilities and stockholders' equity................... $88,790 $81,355
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31
---------------------------------------
1997 1998 1999
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales and contract revenues:
Net sales.......................... $ 71,748 $ 79,552 $ 70,042
Contract revenues.................. 9,032 10,284 13,331
----------- ------------ ------------
80,780 89,836 83,373
Costs and expenses:
Cost of sales...................... 48,507 55,227 49,816
Cost of contract revenues.......... 4,907 6,430 9,007
Selling, general and administrative
expense........................... 19,831 26,010 31,670
Research and development expense... 7,734 9,271 11,191
In process research and
development....................... -- 2,106 --
Restructuring charge (Note 7)...... -- 1,716 --
Interest expense, net.............. 183 617 1,807
----------- ------------ ------------
81,162 101,377 103,491
----------- ------------ ------------
Loss from continuing operations
before income taxes................. (382) (11,541) (20,118)
Income tax benefit (Note 8).......... (181) (2,858) --
----------- ------------ ------------
Loss from continuing operations...... (201) (8,683) (20,118)
Income from discontinued operations,
net of income taxes................. 3,931 2,089 --
----------- ------------ ------------
Net income (loss).................... $ 3,730 $ (6,594) $ (20,118)
=========== ============ ============
Basic and diluted earnings (loss) per
share:
Continuing operations.............. $ (.03) $ (1.26) $ (2.57)
Discontinued operations............ .62 .31 --
----------- ------------ ------------
Earnings (loss) per share.......... $ .59 $ (.95) $ (2.57)
=========== ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock
-----------------------------
Shares outstanding
--------------------
Notes Accumulative
Class A Class B receivable other Compre-
common common Paid-in Treasury from Comprehensive Retained hensive
stock stock Amount capital stock employees income earnings Total income
--------- --------- ------ ------- -------- ---------- ------------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
3)................ -- -- -- 14,455 -- -- -- -- 14,455
Purchase of
treasury stock.... -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustments....... -- -- -- -- -- -- 62 -- 62 $ 62
Net income......... -- -- -- -- -- -- -- 3,730 3,730 3,730
--------- --------- ---- ------- ----- ------- ---- -------- -------- --------
Balance at March 31,
1997............... 5,316 1,064 638 38,927 -- -- 52 12,211 51,828 $ 3,792
========
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
3)................ -- -- -- (1,655) -- -- -- (9,412) (11,067)
Purchase of
treasury stock.... -- -- -- -- (239) -- -- -- (239)
Foreign currency
translation
adjustments....... -- -- -- -- -- -- (27) -- (27) $ (27)
Net loss........... -- -- -- -- -- -- -- (6,594) (6,594) (6,594)
--------- --------- ---- ------- ----- ------- ---- -------- -------- --------
Balance at March 31,
1998............... 6,203 1,062 726 45,240 (239) (3,377) 25 (3,795) 38,580 $ (6,621)
========
Issuances of common
stock (Notes 2, 9
and 10), net of
offering costs of
$774,000.......... 1,736 -- 175 14,339 -- -- -- -- 14,514
Conversion of Class
B common stock.... 2 (2) -- -- -- -- -- -- --
Purchase of
treasury stock.... -- -- -- -- (1) -- -- -- (1)
Payments on notes
receivable........ -- -- -- -- -- 3,281 -- -- 3,281
Foreign currency
translation
adjustments....... -- -- -- -- -- -- 67 -- 67 $ 67
Net loss........... -- -- -- -- -- -- -- (20,118) (20,118) (20,118)
--------- --------- ---- ------- ----- ------- ---- -------- -------- --------
Balance at March 31,
1999............... 7,941 1,060 $901 $59,579 $(240) $ (96) $ 92 $(23,913) $ 36,323 $(20,051)
========= ========= ==== ======= ===== ======= ==== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss)............................... $ 3,730 $ (6,594) $(20,118)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Income from discontinued operations........... (3,931) (2,089) --
Depreciation and amortization................. 3,119 2,912 5,205
Write-off of in process research and
development.................................. -- 2,106 --
Contribution to ASOP.......................... 517 511 --
Provision for losses on accounts receivable... 277 155 332
Provision (benefit) for deferred income
taxes........................................ 266 (902) 915
Net proceeds from settlement of litigation.... 5,860 -- --
Other......................................... 492 (11) --
Changes in net assets of discontinued
operations................................... 1,238 -- --
Changes in operating assets and liabilities
(Note 13).................................... (6,773) (1,462) 1,560
-------- -------- --------
Net cash used in operating activities........... 4,795 (5,374) (12,106)
Investing activities
Purchases of property, plant and equipment...... (3,295) (3,829) (2,747)
Software development costs...................... (691) (2,527) (4,944)
Purchase of net assets of acquired business..... -- (2,171) --
Net cash received from ATL...................... 8,066 2,978 10,019
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 4,080 (5,549) 2,328
Financing activities
Proceeds from line of credit and long-term
borrowings..................................... 54,840 49,176 44,527
Principal payments on line of credit, long-term
debt, and capital lease obligations............ (65,069) (40,159) (45,089)
Proceeds from issuance of common stock.......... 2,078 1,172 9,996
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (8,151) 10,189 9,434
-------- -------- --------
Increase (decrease) in cash..................... 724 (734) (344)
Cash and cash equivalents at beginning of year.. 1,141 1,865 1,131
-------- -------- --------
Cash and cash equivalents at end of year........ $ 1,865 $ 1,131 $ 787
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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 Limited,
Odetics Asia Pacific Pte. Ltd. During fiscal 1990, the Company incorporated
Odetics Europe Limited 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.
Operations
Odetics has initiated a business strategy known as its incubator strategy
whereby its goal is to nurture and develop companies that can be spun-off to
Odetics stockholders. In pursuing this strategy Odetics has incurred losses
from continuing operations of $8.7 million and $20.1 million in fiscal 1998
and 1999, respectively, due in part to making investments in its business for
research and development as well as developing a separate infrastructure for
certain business units sufficient for these business units to function
ultimately as independent public companies. In addition, during fiscal 1998
and 1999, the Company has invested $7.5 million in capitalized software
development costs.
The Company has obtained funds to pursue this strategy in fiscal 1998 and
1999 from repayments of amounts due from ATL (see Note 4), revolving line of
credit borrowings, equity offerings, equipment financing, and decreases in net
working capital items, excluding cash. In fiscal 2000, it will be necessary
either to obtain sufficient additional funding to continue this strategy or
the Company will be required to curtail the incubator strategy in order to
reduce operating losses. Management believes cash flow available from the
revolving line of credit, possible proceeds from additional equity offerings
of common stock, and from repayments of amounts due Odetics by any companies
that are spun-out of Odetics should be sufficient to allow the Company to
execute its current operating plans and meet its obligations on a timely basis
for at least the next twelve months. Additionally, management believes it is
possible to obtain additional funds, if required, through the sale or placing
of additional financing on its facilities in Anaheim, California.
In June 1999, the Company learned it had exceeded the borrowing availability
under its revolving line of credit (see Note 6) due to having insufficient
eligible collateral as of May 31, 1999. The Company is in discussions with the
lender to amend the definition of eligible collateral in the revolving credit
agreement and permit continued borrowings. Management believes the Company
will obtain a waiver with respect to its current noncompliance with the
collateral requirements of the revolving credit agreement and that the
agreement will be amended to provide for a greater proportion of the Company's
assets being considered eligible collateral.
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,
F-7
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
inventory reserves, certain accrued liabilities and costs to complete long-
term contracts and estimates of future cash flows used to determine whether
asset impairments exist.
Revenue Recognition
Contract revenues and earnings on long-term cost-reimbursement and fixed-
price contracts of the Company's subsidiary, Odetics ITS, Inc., and the
Communications division 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.
Certain products sold by the Company include software which is integral to
the functionality of the product. When such products do not require
significant production, modification or customization of the software, revenue
is recognized upon delivery, assuming the fee is fixed and collectibility is
probable. If an arrangement requires significant production, modification or
customization of the software, the arrangement is accounted for on the
percentage of completion method of accounting as costs are incurred.
Revenues from follow-on service and support for which the Company typically
charges separately are recognized when earned. Revenues from computer software
maintenance agreements are recognized ratably over the term of the agreements.
When computer software maintenance is included in a software license
agreement, an appropriate portion of the license fee is deferred and
recognized over the maintenance period.
For all other products, 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.
Concentration of Credit Risk
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, 1998 and 1999, accounts
receivable from governmental agencies and prime government contractors were
approximately $2,801,000 and $3,616,000, respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, and the current portion of long-
term debt approximate the carrying value because of the short period of 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-8
<PAGE>
ODETICS, INC.
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.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed 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 based on
undiscounted net cash flows. Based on its analysis, the Company believes that
no impairment of the carrying value of its long-lived assets, inclusive of
goodwill, existed at March 31, 1999. The Company's analysis was based on an
estimate of future undiscounted cash flows using forecasts contained in the
Company strategic plan. It is at least reasonably possible that the Company's
estimate of future undiscounted cash flows may change during fiscal 2000. If
the Company's estimate of future undiscounted cash flow should change or if
the strategic plan is not achieved, future analyses may indicate insufficient
future undiscounted cash flows to recover the carrying value of the Company's
long-lived assets, in which case such assets would be written down to
estimated fair value.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value
of the net assets of acquired entities, 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 to five years is assigned to
capitalized software development costs.
During fiscal 1997, 1998 and 1999, software development costs were amortized
to cost of sales totaling $473,000, $585,000, and $1,063,000, respectively.
All other research and development expenditures are charged to research and
development expense in the period incurred.
Warranty
The Company provides a one-year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The
estimated warranty liability at March 31, 1999 and 1998 was $411,000 and
$250,000, respectively.
F-9
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
The balance sheet accounts of Odetics Europe Limited and Odetics Asia
Pacific Pte. 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.
Earnings (Loss) Per Share
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 (Loss) Per Share
The following table sets forth the computation of net income (loss) per
share:
<TABLE>
<CAPTION>
Years ended March 31
-------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands, except share
data)
<S> <C> <C> <C>
Numerator:
Loss from continuing operation.......... $ (201) $(8,683) $(20,118)
Income from discontinued operations..... 3,931 2,089 --
--------- --------- ---------
Net income (loss)....................... $3,730 $(6,594) $(20,118)
========= ========= =========
Denominator:
Weighted-average shares outstanding..... 6,299,000 6,912,000 7,820,000
========= ========= =========
Basic and diluted earnings (loss) per
share:
Continuing operations................... $ (.03) $ (1.26) $ (2.57)
Discontinued operations................. .62 .31 --
--------- --------- ---------
Earnings (loss) per share............... $ .59 $ (.95) $ (2.57)
========= ========= =========
</TABLE>
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.
F-10
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1,020,000, $2,226,000 and $2,622,000 in the years ended March 31,
1997, 1998 and 1999, respectively.
Adoption of Statement of Financial Accounting Standards No. 130
Effective April 1, 1998, the Company adopted FASB Statement No. 130,
Reporting Comprehensive (Statement 130). Statement 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no material impact on the
Company's net income or stockholders' equity. Statement 130 requires
unrealized gains or losses on foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
Reclassifications
Certain amounts in the 1997 and 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation.
2. Acquisitions
On June 20, 1997, the Company acquired certain assets and assumed certain
contracts from Rockwell Collins, Inc. (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. A total of $1.3 million of assets were
acquired and $5.0 million of liabilities were assumed. These liabilities
include a $3.8 million provision for anticipated losses on a major contract
with the Michigan Department of Transportation that the Company assumed in
this acquisition. The $3.8 million provision relates to anticipated related
costs in excess of contract values which the Company expects to incur over the
next five years. The acquisition has been accounted for as a purchase and,
accordingly, 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, 1997, 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, primarily consisting of accounts receivable,
inventories, and property and equipment that were recorded by the Company at
their historical carrying values, 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, primarily related to software and hardware
under development for an integrated building access and security system that
Gyyr began selling the latter part of fiscal 1999 as the Access 202 product
family. Subsequent to this acquisition, we incurred an additional $94,000 and
$469,000 of research and development expense in fiscal 1998 and 1999,
respectively, related to this product development effort.
On September 12, 1998, the Company acquired International Media Integration
Services Limited, a United Kingdom corporation (IMIS), pursuant to the terms
of a Sale and Purchase of Shares Agreement whereby the Company purchased all
of the issued and outstanding shares of stock of IMIS for an aggregate
purchase price of $970,000 which was paid in 173,214 shares of the Company's
Class A common stock. The acquisition has been accounted for as a purchase,
and the purchase price has been allocated to the fair value of the net assets
acquired with the excess approximating $10,000 allocated to goodwill.
F-11
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 16, 1998, the Company, through its subsidiary, Odetics ITS Inc.,
a California corporation, acquired Meyer, Mohaddes Associates Inc., a
California corporation (MMA). Pursuant to the terms of the merger agreement,
the Company purchased all of the issued and outstanding shares of stock of MMA
for $4.6 million, by issuing 55,245 shares of the Company's Class A common
stock and 432,100 shares of Odetics ITS, Inc.'s common stock after giving
effect to the purchase price adjustment required by the merger agreement. A
total of $2.0 million of assets were acquired and $1.2 million of liabilities
were assumed. The acquisition was accounted for as a purchase and,
accordingly, the excess of cost over the fair value of net assets acquired of
$3.8 million has been recorded as goodwill, and is being amortized over its
expected benefit period of 15 years. In April 1999, the Company issued an
additional 25,740 shares of Class A common stock valued at $250,000 to the MMA
shareholders upon resolution of a contingency specified in the merger
agreement. Additional shares with a value of $1 million may be issued at
various dates through April 2001 in the event the Company does not consummate
an initial public offering of the common stock of Odetics ITS by those dates.
In addition, if Odetics ITS does not complete its initial public offering by
October 2001, then the holders of the Odetics ITS common stock issued in this
transaction will have the right to require Odetics to repurchase the Odetics
ITS common stock for a purchase price of $10 per share of Odetics ITS. At any
time prior to the initial public offering of Odetics ITS, Odetics has the
right to require these shareholders to sell all of their shares of Odetics ITS
common stock at a purchase price of $10 per share. Odetics has the option to
pay the purchase price for these shares in cash or in Odetics' Class A common
stock valued as of five business days prior to the date of the event
triggering the payment.
On November 11, 1998, the Company, through its subsidiary, Odetics ITS,
Inc., acquired certain assets and assumed certain liabilities of Viggen
Corporation, a Virginia corporation, pursuant to the terms of an Agreement of
Purchase and Sale of Assets for an aggregate purchase price of $275,000
evidenced by the issuance of 27,603 shares of the Company's Class A common
stock which were issued in April 1999. The acquisition has been accounted for
as a purchase and the purchase price, including direct costs of the
acquisition, has been allocated to the fair value of the net assets acquired
with the excess approximating $746,000 allocated to goodwill. The recorded
goodwill is being amortized over its expected benefit period of 15 years.
Pro forma information related to these acquisitions is not material to the
Company's historical consolidated results of operations.
3. Sale of Stock of 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 Class A 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 stock 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.
4. Receivables from 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 was paid in full in July 1998.
F-12
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 fiscal 1997 and $1.6 million in
fiscal 1998. The tax sharing agreement was terminated upon the spin-out of the
Company's remaining interest in ATL in October 1997.
5. Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
<TABLE>
<CAPTION>
March 31
----------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Costs incurred on uncompleted contracts................... $22,861 $19,204
Estimated earnings...................................... 1,903 1,557
------- -------
24,764 20,761
Less billings to date................................... 23,761 19,614
------- -------
$ 1,003 $ 1,147
======= =======
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 2,583 $ 2,423
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (1,580) 1,276
------- -------
$ 1,003 $ 1,147
======= =======
</TABLE>
Costs and estimated earnings in excess of billings at March 31, 1998 and
1999 include $740,000 and $320,000, 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 which provides for
borrowings at the prime rate plus 2.0% (9.75% at March 31, 1999). Borrowings
are available for general working capital purposes, and at March 31, 1999,
approximately $6.0 million was available for borrowing under the line. The
line expires December 31, 2000. (See Note 1--Operations.)
The revolving line of credit is collateralized by substantially all of the
Company's assets. Under the terms of the loan and security agreement, the
Company is required to comply with certain covenants, maintain certain debt to
net worth ratios, working capital current ratios and minimum net worth
requirements, and prohibits the payment of dividends without the lender's
consent.
Included within the borrowing limits of the loan and security agreement, the
Company has available approximately $2,000,000 in letters of credit at March
31, 1999.
F-13
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31
---------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Note payable, accruing interest at 9.36%, collateralized
by deed of trust on land and buildings with a net book
value of approximately $11,000,000, payable in monthly
installments through December 2004....................... $ 9,218 $ 8,173
Notes payable, accruing interest at 7.08% to 9.21%,
collateralized by equipment, payable in monthly
installments through 2003................................ 580 2,866
------- -------
9,798 11,039
Less current portion...................................... 1,598 2,074
------- -------
$ 8,200 $ 8,965
======= =======
</TABLE>
The annual maturities of long-term debt for the five years ending March 31,
2003 and thereafter are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000.......................................................... $ 2,074
2001.......................................................... 2,066
2002.......................................................... 2,221
2003.......................................................... 1,813
2004.......................................................... 1,666
Thereafter.................................................... 1,199
-------
$11,039
=======
</TABLE>
7. Restructuring Charge
In the fourth quarter of fiscal 1998, the Board of Directors approved an
early retirement plan for certain founders, senior officers and employees of
the Company. The Company recorded a charge of approximately $1.5 million
related to this plan that is expected to be paid out over a four year period.
In addition, the Company recorded a charge of approximately $200,000 to write-
down its investment in connection with the termination of its ITS joint
venture in China.
8. Income Taxes
The reconciliation of the income tax benefit from continuing operations to
taxes computed at U.S. federal statutory rates is as follows:
<TABLE>
<CAPTION>
Year ended March 31
-----------------------
1997 1998 1999
----- ------- -------
(In thousands)
<S> <C> <C> <C>
Income tax benefit at statutory rates............. $(130) $(3,915) $(6,840)
Acquired in process research and development...... -- 715 --
State income taxes, net of federal tax benefit.... (22) 189 --
Increase (decrease) of valuation allowance
associated with federal deferred tax assets...... (99) (175) 5,373
Foreign losses recorded without benefit........... -- 118 1,061
Foreign income at lower tax rate.................. -- 15 --
Nondeductible goodwill amortization............... 7 11 31
Other............................................. 63 184 375
----- ------- -------
$(181) $(2,858) $ --
===== ======= =======
</TABLE>
F-14
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
United States and foreign loss from continuing operations before income taxes
are as follows:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------
1997 1998 1999
----- -------- --------
(In thousands)
<S> <C> <C> <C>
Pretax loss:
Domestic........................................ $(372) $ (9,726) $(16,997)
Foreign......................................... (10) (1,815) (3,121)
----- -------- --------
$(382) $(11,541) $(20,118)
===== ======== ========
</TABLE>
Significant components of the income tax benefit from continuing operations
are as follows:
<TABLE>
<CAPTION>
Year ended March 31
----------------------
1997 1998 1999
------ ------- -----
(In thousands)
<S> <C> <C> <C>
Current:
Federal.......................................... $ (347) $(1,143) $(915)
State............................................ (145) (328) --
Tax benefit from stock option exercises.......... (801) (300) --
Foreign.......................................... 45 (485) --
------ ------- -----
Total current...................................... (1,248) (2,256) (915)
Deferred:
Federal.......................................... 350 (1,516) 915
State............................................ (84) 614 --
------ ------- -----
Total deferred..................................... 266 (902) 915
Charge in lieu:
Credit to additional paid-in capital attributable
to stock option exercises....................... 801 300 --
------ ------- -----
$ (181) $(2,858) $ --
====== ======= =====
</TABLE>
F-15
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory reserves....................................... $ 979 $ 780
Deferred compensation and other payroll accruals......... 2,077 1,133
Acquired net operating loss carryforwards................ 217 217
Net operating loss carryover............................. -- 6,120
General business tax credit carryforwards................ 951 958
Alternative minimum tax credit carryforwards............. 404 404
Bad debt reserve......................................... 185 307
Other reserves........................................... 328 178
Other, net............................................... 338 314
------- -------
Total deferred tax assets.................................. 5,479 10,411
Valuation allowance for deferred tax assets................ (1,490) (6,575)
------- -------
Net deferred tax assets.................................... 3,989 3,836
------- -------
Deferred tax liabilities:
Tax over book depreciation............................... 2,576 2,777
Capitalized interest and taxes........................... 468 468
Cash to accrual adjustment............................... -- 556
Other, net............................................... 30 35
------- -------
Total deferred tax liabilities............................. 3,074 3,836
------- -------
Net deferred tax assets.................................... $ 915 $ --
======= =======
</TABLE>
At March 31, 1999, for federal income tax purposes, the Company had
approximately $958,000 in general business credit carryforwards, $404,000 of
alternative minimum tax credit carryforwards. The Company also has $14,600,000
of net operating loss carryforwards for federal income tax purposes which
begin to expire in 2019, and $640,000 of net operating loss carryforwards
which were acquired as part of the ICI acquisition. For financial reporting
purposes, a valuation allowance has been recorded to offset the deferred tax
asset related to these credits and 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, other then the
ICI operating loss carryforwards whose realization will result in an
adjustment of assets acquired in this acquisition. The credit carryforwards
expire at various dates beginning in 2005 and the acquired net operating
losses begin to expire in 2002.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryforwards may be
subject to an annual limitation against taxable income in future periods. As a
result of the annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax liabilities.
9. Associate Incentive Programs
Under the terms of a Profit Sharing Plan, the Company contributes to a trust
fund such amounts as are determined annually by the Board of Directors. No
contributions were made in 1997, 1998 or 1999.
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,
F-16
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $525,000, $548,000 and $644,000 in 1997, 1998 and 1999,
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 Company stock. The Company contributions to the ASOP were
approximately $517,000, $511,000 and $55,000 in 1997, 1998 and 1999,
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 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.
<TABLE>
<CAPTION>
Year ended March 31
--------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year......... 691 $5.32 640 $6.41 563 $4.67
Granted.................. 183 9.17 502 4.63 149 7.36
Exercised................ (217) 5.41 (578) 4.79 (59) 4.63
Canceled................. (17) 4.43 (1) 5.99 (25) 4.63
----- ----- ----- ----- ----- -----
Options outstanding at end
of year................... 640 $6.41 563 $4.67 628 $5.27
===== ===== ===== ===== ===== =====
Exercisable at end of
year...................... 308 -- 165
===== ===== =====
Available for grant at end
of year................... 164 157 37
===== ===== =====
Weighted average fair value
of options granted........ $4.91 $2.43 $3.81
</TABLE>
The exercise price for options outstanding as of March 31, 1999 is $4.63 to
$8.75. The weighted-average remaining contractual life of those options is
nine years.
In connection with the completed spin-off of the Company's interest in ATL,
the Company made secured loans to option holders in amounts up to the exercise
price of their options, which totaled $3.4 million. These notes are full
recourse, are secured by 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
F-17
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Class A common stock
of .40; and a weighted-average expected life of the option of seven years.
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, 1998 and
1999 follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Pro forma net income.................. $3,441,000 $(7,084,000) $(20,555,000)
Pro forma net income per share........ $ .55 $ (1.03) $ (2.63)
</TABLE>
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
$410,000, $302,000 and $377,000 for 1997, 1998 and 1999, respectively.
11. Commitments and Contingencies
The Company has lease commitments for facilities in various locations
throughout the United States. The annual commitment under these noncancelable
operating leases at March 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000................................................................ $505,000
2001................................................................ 282,000
2002................................................................ 122,000
2003................................................................ 10,000
2004................................................................ --
Thereafter.......................................................... --
--------
$919,000
========
</TABLE>
12. Business Segment and Geographic Information
Effectively January 1, 1998, the Company adopted FASB Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information (Statement
131). Statement 131 establishes standard for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. Operating segments are
components of an enterprise about which separate financial information is
available that is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Statement 131
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of Statement 131
did not affect results of operations or financial position, but did affect the
following disclosure of segment information.
The Company operates in three reportable segments: intelligent
transportation systems, video products, which includes products for the
television broadcast and video security markets, and telecommunications. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that certain
expenses, such as interest, amortization of certain intangibles and certain
corporate expenses are not allocated to the segments. In addition, certain
assets including cash and cash equivalents, deferred taxes and certain long-
lived and intangible assets are not allocated to the segments. Intersegment
sales are recorded at the selling segment's cost plus profit.
F-18
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reportable segments are each managed separately because they manufacture
and distribute distinct products or provide services with different processes.
Selected financial information for the Company's reportable segments as of
and for the years ended March 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
Intelligence Video Telecom
Transportation Products Product Total
-------------- -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Revenue from external
customers..................... $ 538 $51,656 $21,101 $ 73,295
Intersegment revenues.......... -- 4,347 -- 4,347
Depreciation and amortization.. 64 1,088 1,030 2,182
Segment income (loss).......... (3,149) 2,881 3,618 3,350
Segment assets................. 1,675 30,391 10,512 42,578
Expenditure for long-lived
assets........................ 1,035 2,316 647 3,998
Year ended March 31, 1998
Revenue from external
customers..................... $ 5,841 $54,161 $23,613 $ 83,615
Intersegment revenues.......... -- 4,163 53 4,216
Depreciation and amortization.. 514 1,362 589 2,465
Segment income (loss).......... (5,445) (2,240) 3,527 (4,158)
Segment assets................. 11,614 37,913 7,943 57,470
Expenditure for long-lived
assets........................ 7,384 4,003 1,001 12,388
Year ended March 31, 1999
Revenue from external
customers..................... $14,580 $46,755 $13,974 $ 75,309
Intersegment revenues.......... -- 5,351 94 5,445
Depreciation and amortization.. 765 2,282 1,199 4,246
Segment income (loss).......... (3,865) (5,381) (2,617) (11,863)
Segment assets................. 17,943 38,831 8,954 65,728
Expenditure for long-lived
assets........................ 4,924 3,457 3,084 11,465
</TABLE>
F-19
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following reconciles segment income to consolidated income before income
taxes and segment assets and deprecation and amortization to consolidated
assets and consolidated depreciation and amortization:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenue
Total revenues for reportable segments.... $77,642 $ 87,832 $ 80,754
Non reportable segment revenues........... 7,485 6,220 8,064
Other revenues............................ -- -- --
Elimination of intersegment sales......... (4,347) (4,216) (5,445)
------- -------- --------
Total consolidated revenues........... $80,780 $ 89,836 $ 83,373
======= ======== ========
Segment Profit or Loss
Total profit or loss for reportable seg-
ments.................................... $ 3,350 $ (4,158) $(11,863)
Other profit or loss...................... 297 (273) (1,201)
Unallocated amounts:
Corporate and other expenses............ (3,846) (4,777) (5,247)
Special charge.......................... -- (1,716) --
Interest expense........................ (183) (617) (1,807)
------- -------- --------
Loss from continuing operations before
income taxes......................... $ (382) $(11,541) $(20,118)
======= ======== ========
Assets
Total assets for reportable segments...... $42,578 $ 57,470 $ 65,728
Assets held at Corporate.................. 43,227 31,320 15,627
------- -------- --------
Total assets.......................... $85,805 $ 88,790 $ 81,355
======= ======== ========
Depreciation and Amortization
Depreciation and amortization for report-
able segments............................ $ 2,182 $ 2,465 $ 4,246
Other..................................... 937 447 959
------- -------- --------
Total depreciation and amortization... $ 3,119 $ 2,912 $ 5,205
======= ======== ========
</TABLE>
Selected financial information for the Company's operations by geographic
segment is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Geographic Area Revenue
United States....................................... $51,909 $60,502 $61,171
Europe.............................................. 4,980 5,538 7,582
Asia Pacific Rim.................................... 14,234 17,842 6,287
Other............................................... 9,657 5,954 8,333
------- ------- -------
Total net revenue................................. $80,780 $89,836 $83,373
======= ======= =======
Geographic Area Long-Lived Assets
United States....................................... $23,309 $32,929 $39,424
Europe.............................................. 490 504 1,612
Asia Pacific Rim.................................... 49 24 33
Other............................................... -- -- --
------- ------- -------
Total long-lived assets........................... $23,848 $33,457 $41,069
======= ======= =======
</TABLE>
F-20
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended March 31
-------------------------
1997 1998 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net cash used in changes in operating assets and
liabilities, net of litigation settlement and
acquisitions:
(Increase) decrease in accounts receivable....... $(4,511) $ 1,136 $(2,706)
(Increase) decrease in net costs and estimated
earnings in excess of billings.................. (1,217) (1,771) 276
(Increase) decrease in inventories............... 401 (4,604) 4,825
Increase in prepaids and other assets............ (3,369) (951) 111
Increase (decrease) in accounts payable and
accrued expenses................................ 1,923 4,728 (946)
------- ------- -------
Net cash used in changes in operating assets and
liabilities....................................... $(6,773) $(1,462) $ 1,560
======= ======= =======
Cash paid during the year:
Interest......................................... $ 1,888 $ 1,526 $ 1,997
Income taxes paid (refunded)..................... 975 365 (463)
Noncash transactions during the year:
Equity of subsidiary allocable to minority
interest........................................ $ 1,462 $ -- $ --
Purchase of subsidiary for stock................. -- 2,734 5,845
</TABLE>
14. 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 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, a jury concluded that the Company's patent claims were not infringed
under the doctrine 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 Stated 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 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, in March 1998 a 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 ordered by the court
against StorageTek should be stayed pending appeal. After filing hearings, the
trial court vacated its own injunction and granted StorageTek's motion for
judgment as a matter of law to vacate the jury trial result and to find
StorageTek not infringing. The Company has appealed these and other court
rulings. The defendants also cross-appealed certain other court rulings. The
U.S. Court of Appeals for the Federal Circuit heard final arguments on April
12, 1999. A decision from the U.S. Court of Appeals is pending. The
accompanying financial statements do not include any amounts related to the
eventual settlement of this matter.
F-21
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 033-63983, 333-63911, 333-66717, 333-69677, 333-74509 and 333-
40555) of Odetics, Inc. and in the related Prospectuses, and in the Registration
Statements (Form S-8 Nos. 333-05735 and 333-44907) of our report dated May 11,
1999, except for Note 1, as to which the date is June 24, 1999, with respect to
the consolidated financial statements and schedule of Odetics, Inc. included in
this Annual Report (Form 10-K/A File No. 333-74509) for the year ended March 31,
1999.
Orange County, California
August 02, 1999
