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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER 000-10605
ODETICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------------------
DELAWARE 95-2588496
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1515 SOUTH MANCHESTER AVENUE, ANAHEIM, CALIFORNIA 92802
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 774-5000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.10 PAR VALUE
CLASS B COMMON STOCK, $.10 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price on Nasdaq National Market on June 26, 1997,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $66,746,740. 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.
As of June 26, 1997, there were 5,318,978 shares of Class A Common Stock
and 1,064,241 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
registrant's definitive proxy statement (the "Proxy Statement") for the Annual
Meeting of the Stockholders scheduled to be held on September 5, 1997.
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ODETICS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS............................................................. 1
ITEM 2. PROPERTIES........................................................... 12
ITEM 3. LEGAL PROCEEDINGS.................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................. 13
ITEM 6. SELECTED FINANCIAL DATA.............................................. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................. 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 18
ITEM 11. EXECUTIVE COMPENSATION............................................... 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..... 19
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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. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. Odetics, Inc. undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which describe certain factors which affect the Company's business,
including the risk factors set forth at the end of Part I, Item 1 of this Report
and in Part II, Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
GENERAL
Odetics, Inc. (the "Company") was founded in 1969 to supply digital
recorders for use in the United States space program. The Company pioneered new
designs and standards for digital magnetic tape recorders offering enhanced
performance in the adverse environments attendant to space flight, high
reliability and long product life. In the 1970s, the Company broadened its
information automation product line to include time-lapse video cassette
recorders for commercial and industrial security and surveillance applications.
Through the Company's Gyyr Division, it became a leading supplier of time-lapse
videotape cassette recorders, digital image processing modules and related
products used in security and surveillance systems.
In the early 1980s, the Company set out to develop the technical expertise
to apply automation to new commercial applications. As part of its initial
development efforts, the Company built ODEX, a prototype six-legged walking
robot now part of the Smithsonian Institution's permanent collection of
historically significant technology. The Company established the Broadcast
Division which pioneered the use of large library cart machines in broadcast
television stations and satellite uplink operations. The Broadcast Division is a
leading supplier of broadcast automation control systems in the United States
The success of the Company's cart machines led the Company to pursue new
applications for information automation technologies, and in 1990, the Company
teamed with E-Systems, Inc. ("E-Systems") to develop and provide a 19mm
automated tape cartridge handling subsystem for E-Systems' EMASS mainframe
computer tape library for the United States Government. In 1991, in a strategic
move to expand its business into new and potentially larger markets, the Company
introduced an automated tape handling subsystem for integration into tape
libraries designed for midrange computers and client/server networks employing
IBM 3480 and similar industry standard tape cartridges. In January 1993, the
Company formed a separate subsidiary, ATL Products Inc. ("ATL") to pursue the
market for automated tape libraries.
On March 13, 1997, ATL completed an initial public offering of 1,650,000
shares of its Class A Common Stock. Upon completion of this offering, the
Company beneficially owned 82.9% of the outstanding Class A Common Stock of ATL.
The Company has announced that it intends to distribute (the "Distribution") to
its stockholders, prior to December 31, 1997, all of its shares of Class A
Common Stock of ATL, subject to certain conditions (including the receipt of a
favorable letter ruling from the Internal Revenue Service concerning the
tax-free nature of the Distribution).
The Company is a leading supplier of systems and subsystems to automate the
collection, storage, distribution and management of information. The Company's
business strategy is to focus on selected markets in which the Company may
utilize its expertise in electromechanical design, real-time software control
and highly reliable system implementations to produce superior products with a
sustainable competitive advantage, and to capture major market shares. The
Company's data storage products manage the vast amounts of data on computer
systems, automate television and cable station operations, record video
surveillance, store information gathered in space exploration and archive movies
for video on demand systems.
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ATL PRODUCTS, INC.
ATL designs, manufactures, markets and services automated magnetic tape
libraries used to manage, store and transfer data in networked computing
environments. ATL is a leading provider of Digital Linear Tape ("DLT") automated
tape libraries for the high end of the networked computing market (one terabyte
capacity and above). ATL's products provide a high performance, reliable, cost
effective and scalable storage solution for organizations requiring the backup,
archival and recovery of critical computer data.
ATL's products incorporate DLT tape drives as well as ATL's proprietary
IntelliGrip cartridge handling system, providing end users with rapid and
reliable access to computer data across a wide variety of networks. ATL's
proprietary robotics system within each automated tape library provides
additional speed and reliability due to the accurate and timely manner in which
tape cartridges are loaded and unloaded into the DLT drives. ATL's products are
compatible with commonly used network operating systems, protocols and
topologies as well as with a broad range of storage management software. In
addition, these products are highly scalable and permit flexible configuration.
For example, ATL's 2640 Series is capable of storing 9.2 terabytes of data as a
standalone unit or up to 46 terabytes of data with the SystemLink Option, which
links up to five 2640 units together for larger storage requirements.
ATL was established in 1990 as a division of the Company, was incorporated
in California in February 1993 as a wholly-owned subsidiary of the Company and
was reincorporated in Delaware in December 1996. ATL's executive offices are
located at 2801 Kelvin Avenue, Irvine, California 92614, and its telephone
number at that location is (714) 774-6900.
Sales, Marketing and Principal Customers
ATL markets and sells its products through indirect sales channels
comprised primarily of VARs and OEMs pursuant to strategic arrangements and
individual purchase agreements. Sales of new technological advancements are
often initially made through VARs who generally evaluate, integrate and adopt
new technology more quickly than OEMs. As a technology achieves greater market
acceptance, OEM sales generally have represented an increased portion of the
sales of the products incorporating that technology. During the year ended March
31, 1997, direct sales to VARs and OEMs accounted for approximately 67% and 33%,
respectively, of ATL's net sales. No single customer accounted for 10% of the
Company's total net sales and contract revenues.
ATL has entered into agreements with several major OEMs, including, among
others, DEC, EMC and Sun Microsystems, who incorporate ATL's products into
systems sold by the OEMs. ATL has entered into strategic relationships with
certain of these OEMs which has enabled ATL to work with OEMs early in their
product development cycle thereby providing valuable development feedback to
ATL. The sales cycle for OEMs often encompasses a long lead time and generally
involves extensive product and system qualification, evaluation, integration and
verification. ATL believes the OEM channel is also critical to ATL's success
because OEMs have traditionally taken a more active role in the development,
support and servicing of ATL's products.
From 1990 through the third quarter of fiscal 1995, ATL manufactured
certain automation subsystems utilizing 19mm technology exclusively for
E-Systems. In the third quarter of fiscal 1995, ATL announced that its
contractual relationship with E-Systems was deteriorating and it would incur
charges related to the loss of E-Systems business. On November 15, 1994, ATL
initiated an action against E-Systems alleging breach of contract. On May 22,
1996, the Company announced that it and ATL Products settled all pending
litigation with E-Systems, Inc. and EMASS, Inc. See "Item 3. Legal Proceedings"
for a further discussion of this litigation.
Manufacturing and Materials
ATL manufactures all of its tape libraries at its facility in Irvine,
California. ATL recently relocated its corporate headquarters and manufacturing
facilities to a new 120,000 square foot facility, of which
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approximately 50,000 square feet is attributed to manufacturing space. ATL
currently operates four assembly lines during one daily eight hour shift.
ATL manufactures the robotics subassemblies used in its automated tape
libraries and performs final assembly and testing of purchased components. ATL's
manufacturing processes consist primarily of final systems integration and
quality assurance. ATL depends, to a large degree, on outside suppliers to
provide most of the components incorporated in ATL's products including the DLT
drives, circuit boards, moldings and chassis. While many of the parts and
components used in ATL's products are available from a number of fabricators in
California, the DLT drives are available only from a single supplier, Quantum
Corporation. Quantum may terminate its agreement with the Company for any reason
upon 90 days notice. Any disruption in ATL's relationship with such supplier or
any of ATL's other sole source suppliers would have a material adverse effect on
the Company's business, financial condition and results of operations.
BROADCAST DIVISION
The Broadcast Division's video tape libraries automate the storage and
televising of commercials, news spots and other television programming recorded
on videotape cassettes. Automated video libraries increase labor efficiency by
automatically performing tape insertion and other filing tasks previously
performed manually or by machines with limited capacity and utility. The Company
believes that enhanced operational efficiencies are a principal factor
underlying the increased automation of broadcast television stations and
satellite uplink operations.
The Broadcast Division's earliest commercial success in the manufacture of
video tape libraries was with the TCS2000 followed by the TCS90. The recent
market trend toward smaller libraries, coupled with digital hard disk recording
devices was led by the Company with the introduction of highly integrated
caching systems employing the Company's newest cart machine, the TCS45. The
TCS45 can be coupled with hard drive recorders available from several recognized
suppliers to the broadcast community. The Company now offers software to form
powerful integrated systems, including the MicroSpot(TM) and the SpotBank(TM).
Multi-channel presentation systems, which integrate the complete line of
the Company's hardware with commonly available broadcast quality video disk
recorders, are quickly becoming the core business of the Broadcast Division.
Sales, Marketing and Principal Customers
The Broadcast Division sells directly to broadcast television stations,
satellite uplink operations, and other broadcast television and cable television
system operators. Sales and marketing management is located at the Company's
principal facilities in Anaheim, California, with a dedicated field sales force
of four persons operating in four U.S. sales regions plus a sales manager for
Latin America. European sales and marketing activities are conducted and managed
by Odetics Europe, Ltd., a wholly-owned subsidiary of the Company. Asia sales
and marketing activities are conducted by Odetics Asia Pacific Pte Ltd., a
wholly-owned subsidiary of the Company located in Singapore. Additional
representative organizations are utilized to promote the Broadcast Division's
products in various other foreign markets.
Customers include major television networks such as the British
Broadcasting Corporation, Canadian Broadcasting Corporation, CNBC/FNN, Euronews,
Televisa, Measat Broadcast Network Systems, NBC, the PBS Network, Group W
Satellite Communications (for the Arts & Entertainment Network and Discovery
Channel), Asia Broadcast Centre, Univision and over 100 independent and
network-affiliated television stations. The Broadcast Division has systems
installed in over 30 countries.
Manufacturing and Materials
The Broadcast Division maintains a dedicated manufacturing area located
within the Company's Anaheim, California facilities. The Company's SpotBank(TM)
and MicroSpot(TM) products are manufactured primarily on a lot assembly/module
build basis. At the Anaheim facility, the Broadcast Division and Gyyr
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Division 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 cabinets and other fabricated parts and
components. The Broadcast Division purchases video servers from Tektronix, ASC
and Hewlett Packard along with video switching, conversion and monitoring
equipment from Tektronix and Leitch for installation in the Company's automated
video management systems.
GYYR, INC.
During fiscal 1997, the Company formed a wholly-owned subsidiary, Gyyr
Inc., a California corporation ("Gyyr") to operate the business of its former
Gyyr Division. Time-lapse VCRs are employed extensively in area monitoring by
banks, convenience stores, retailers and other businesses. Time-lapse VCRs are
frequently installed at automated teller machine ("ATM") and retail computerized
payment machine locations to record pictures of individuals making transactions
while simultaneously recording transaction information in an effort to deter and
address incidents of theft and other crimes at these locations. Customer demand
for more sophisticated capabilities, such as computer interfaces to record
transaction information simultaneously with video images, electronic processors
to record multiple cameras on one VCR and digital image processing and
enhancement, also have contributed to recent growth of the market for Gyyr's
products. The Company believes that many of the same market forces at work in
the United States exist in certain foreign markets as well and that, generally,
the international markets are growing as fast as in the United States. During
fiscal 1996, the Gyyr Division introduced a new line of time-lapse VCR's and a
new high performance FasTrans product family for communicating video and control
signals over telephone and newer broadband communication channels.
Sales, Marketing and Principal Customers
Gyyr markets and sells its products directly to its private label OEM
accounts. Gyyr personnel located at the Company's principal facilities also
oversee a network of approximately 2,500 security equipment dealers and
distributors throughout the United States and Canada who sell the Gyyr's
products to end users. Gyyr utilizes foreign representatives in South America,
Mexico and Asia and employs a business development and service staff through
Odetics Europe, Ltd., a wholly-owned United Kingdom subsidiary of the Company.
Odetics Europe, Ltd. assists Gyyr in its sales and marketing activities in
European markets. Gyyr also utilizes Odetics Asia Pacific Pte Ltd. to assist in
sales to the Asian markets. Gyyr's principal customers include major security
equipment companies such as Diebold, Inc., ADT Security Systems, Inc.,
Honeywell, Inc., Mosler, Inc., Hamilton Safe and other OEMs.
Manufacturing and Materials
Gyyr maintains a dedicated manufacturing area located within the Company's
principal facilities. Gyyr primarily uses continuous unit flow assembly lines.
Gyyr and the Broadcast Division share common infrastructure support in the areas
of production and inventory control, purchasing, quality assurance and
manufacturing engineering. A single management structure oversees these
operations.
Gyyr purchases VCRs modified to the Company's specifications exclusively
through Nissei Sangyo America, the United States distribution affiliate of
Hitachi, Ltd., into which the Company incorporates certain value-added features.
The Company is vulnerable to changes in Hitachi, Ltd.'s basic VCR model, which
might necessitate changes in the design or manufacturing of Gyyr's products.
There are numerous other suppliers of VCRs suitable for use in Gyyr's products,
although certain changes in product design or manufacturing methods may be
required to accommodate such VCRs, and Gyyr could experience temporary delays or
interruptions in supply while such changes are incorporated or a new supplier is
procured.
COMMUNICATIONS DIVISION
The Communications Division includes both telecommunications related
products and space borne digital data recorders. The telecommunications business
unit supplies products that synchronize telecommuni-
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cation and computer systems and products that provide an interface between the
public (WAN) network and private (LAN) networks.
Odetics telecom synchronization products are sold for new applications in
cellular telephone systems and the new PCS networks being implemented throughout
the world. The principal customer of the Communications Division is LGIC of
Korea. The synchronization products are based on leading edge G.P.S.
technologies. Most product applications are in the latest CDMA networks.
Odetics telecom interface products are sold to local exchange carriers,
interexchange carriers and local area network switch manufacturers. The product
offerings fall into two categories: interface boards and stand alone systems.
The interface boards are ATM and SONET based, and are sold primarily to other
telecom equipment manufacturers.
The space business unit manufactures digital data recorders that are used
in manned and unmanned space vehicles to store data gathered by onboard sensors
prior to transmission of the data to ground receiving stations. These recorders
are employed in satellite programs for space research, earth resource and
environmental observation and weather monitoring, as well as global surveillance
and classified government programs.
Sales, Marketing and Principal Customers
The Communications Division conducts its selling and marketing activities
worldwide directly from the Company's principal facilities. During the fiscal
year ended March 31, 1997 approximately 38% of the Communications Division's
sales were derived from contracts with domestic or foreign governmental agencies
and prime government contractors.
Manufacturing and Materials
The Communications Division production capabilities fall into two
categories: commercial and space. The telecom business unit manufactures to best
commercial practices. The group became ISO certified in February 1997. Most of
the manufacturing operations are final assembly and test. Board assembly and
some preliminary fabrication processes are outsourced.
The space production is designed for low volume, program-managed
manufacture, often with nonrecurring engineering for individual customer needs.
Because of these unique requirements, the space business unit has extensive
machining and electronic assembly capabilities in order to manage cost,
schedule, and quality levels to the unusual and exacting needs of its customers.
ODETICS CUSTOMER SERVICE DIVISION
Prior to fiscal 1997, the Company's Customer Service Division ("OCS")
provided third party, on-site computer maintenance services as well as
maintenance and support services for ATL and Gyyr. The market for third party,
on-site computer maintenance services includes certain United States Government
installations and commercial businesses with large scale automated or electronic
document storage and retrieval systems. Effective December 31, 1996, the Company
reorganized its service operations. As part of this reorganization, OCS'
operations were divided between ATL and Gyyr, and merged into each respective
corporation.
CUSTOMER SUPPORT AND SERVICES
The Company provides warranty service for each of its product lines, as
well as follow-on service and support for which the Company typically charges
separately. The Company also offers separate software maintenance agreements to
its customers. Management views customer support services as a critical
competitive factor as well as a revenue source. The Company maintains its own
service groups and trains its customers, representatives and distributors in the
performance of user level maintenance. Modular product designs with recommended
spare packages are used wherever feasible to minimize mean time to repair.
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BACKLOG
The Company's backlog of unfulfilled firm orders was approximately $23.6
million as of March 31, 1997 and approximately $24.1 million at March 31, 1996.
Approximately 84.9% of the Company's backlog at March 31, 1996 was recognized as
revenues in fiscal 1997 and approximately 95.1% of the Company's backlog at
March 31, 1997 is expected to be recognized as revenues in fiscal 1998. Pursuant
to the customary terms of the Company's agreements with government contractors
and other customers, orders generally may be cancelled or rescheduled by the
customer. Lead times for the release of purchase orders depend upon the
scheduling and forecasting practices of the Company's individual customers,
which also can affect the timing of the conversion of the Company's backlog into
revenues. For these reasons, among others, the Company's backlog at a particular
date may not be indicative of its future revenues.
PRODUCT DEVELOPMENT
The Company's business requires substantial ongoing research and
development expenditures and other product development activities. For fiscal
years 1995, 1996 and 1997, the Company incurred approximately $9.3 million, $7.0
million and $13.4 million, respectively, of Company sponsored research and
development costs and expenses, including reimbursable research and development
expenses of the Company allowed in the Company's negotiated general and
administrative rates on cost contracts with the United States Government. In
addition to the foregoing expenditures, the Company also conducts
customer-sponsored product development, principally for the United States
Government, under long-term contracts. The Company typically retains the right
to utilize resulting technological developments for its commercial markets.
Customer sponsored product development expenditures totalled approximately
$900,000, $0 and $0 during fiscal years ended March 31, 1995, 1996 and 1997,
respectively.
The Company expects to continue to pursue significant product development
programs and incur significant research and development expenditures in all of
its principal product lines and services. These programs are directed toward
developing new products for advanced automated libraries as well as the
processing and distribution of digital images.
COMPETITION
The Company faces significant competition in each of its targeted markets.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and customer service resources than the Company. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The principal
competitive factors in the markets in which the Company participates are product
quality and performance, price, reliability, upgradeability, service and
technical support.
ATL competes directly, both domestically and internationally, with a number
of companies offering data storage products using various technologies,
including Sun Microsystems, Silicon Graphics, Compaq, Hewlett Packard and
others. The Company believes eight tape library manufacturers currently provide
DLT based products, including ATL's principal competitors, ADIC, Breece Hill
Technologies, Hewlett-Packard and StorageTek. ATL competes indirectly with a
large number of manufacturers offering tape storage systems using formats other
than DLT including 8mm, 4mm (DAT), 3480 and QIC that have larger installed bases
and may be expected to continue to provide intense competition for the DLT
format. These competitors include ADIC, Exabyte, Fujitsu, Hitachi, IBM, Spectra
Logic and StorageTek. ATL anticipates these competitors will expand the
functionality and performance of their selected storage technologies to compete
effectively with DLT.
The Broadcast Division's primary competitors include Sony, Panasonic, Avid,
Louth and Pro-bel. Sony and Panasonic are large, international suppliers of
extensive professional quality products, including cart machines, for the
broadcast television market. Avid competes in the area of disk based video
server products, principally against the Broadcast Division's SpotBank products.
Louth and Probel principally provide automation control for video libraries and
disk recorders. The Broadcast Division's products compete primarily
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on the basis of product features, including their capacity to accommodate
broadcast quality VCRs from all manufacturers, which is unique among product
offerings in this market.
Gyyr's principal competitors for time-lapse VCRs are Panasonic, Toshiba,
Sanyo and Sony all of which have far greater name recognition, marketing and
other resources than the Company. Numerous other companies, including Japanese
and other offshore vendors of VCRs, also offer competitive products. Management
believes that Gyyr's products compete primarily on the basis of their
value-added features, including those relating to digital image processing.
The primary competition for the Communications Division's network
synchronization products is Datum, Inc. The Communications Division's space tape
recorder market, the Company competes with General Electric Corporation,
Lockheed Corporation, and Schlumberger, S.A. An additional competitive factor in
this market is space flight experience; however, with the advent of solid state
recorders the Company may face new competitors. The Communications Divisions
emerging network interface products are addressing market niches.
The market for the Company's products is highly competitive and is
characterized by rapidly changing technology and evolving standards. The Company
believes that its ability to compete depends on a number of factors, including
the success and timing of new product development by the Company and its
competitors, compatibility of the Company's products with a broad range of
computing systems, product performance, reliability and price, and customer
support. The Company believes that the principal competitive factors in the
networked computing market are storage capacity, data transfer rate, low cost of
ownership, price, product quality and reliability, timing of new product
introductions and ability to meet customer volume needs.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its technology. The Company's
policy is to obtain appropriate proprietary rights protection for any
potentially significant new technology acquired or developed by the Company. The
Company currently holds a number of United States and foreign patents and
trademarks. The patents will expire at various dates through 2012. The Company
also has pending a number of United States and foreign patent applications
relating to certain of its products; however, there can be no assurance that any
patents will be granted pursuant to these applications.
In addition to patent laws, the Company relies on copyright and trade
secret laws to protect its proprietary rights. The Company attempts to protect
its trade secrets and other proprietary information through agreements with
customers and suppliers, proprietary information agreements with the Company's
Associates (as hereinafter defined) and consultants and other similar measures.
There can be no assurance, however, that the Company will be successful in
protecting its proprietary rights.
While management believes its patents, patent applications, software and
other proprietary know-how have value, changing technology makes the Company's
future success dependent principally upon its Associates' technical competence
and creative skills for continuing innovation. Litigation may be necessary in
the future to enforce the Company's proprietary rights, to determine the
validity and scope of the proprietary rights of others, or to defend the Company
against claims of infringement or invalidity by others. An adverse outcome in
such litigation or similar proceedings could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from others
or require the Company to cease marketing or using certain products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the cost of addressing any
intellectual property litigation claim, both in legal fees and expenses and the
diversion of management resources, regardless of whether the claim is valid,
could be significant and could have a material adverse effect on the Company's
results of operations.
ASSOCIATES
The Company refers to its employees as Associates. As of June 10, 1997, the
Company employed 630 Associates, including 115 Associates in general management,
administration and finance; 67 Associates in
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sales and marketing; 180 Associates in product development; 213 Associates in
operations, manufacturing and quality; and 55 Associates in customer service.
None of the Company's Associates is represented by a labor union and the Company
has not experienced a work stoppage.
GOVERNMENT REGULATION
The Company's manufacturing operations are subject to various federal,
state and local laws, including those restricting the discharge of materials
into the environment. The Company is not involved in any pending or threatened
proceedings which would require curtailment of its operations because of such
regulations. The Company continually expends funds to assure that its facilities
are in compliance with applicable environmental regulations. However, such
expenditures have not been significant in the past and no significant future
expenditures are expected.
From time to time, a portion of the Company's work relating to the Odetics'
digital data recorders may constitute classified United States government
information or may be used in classified programs of the United States
Government. For this purpose, the Company and certain Associates possess
relevant security clearances. The Company's affected facilities and operations
are subject to security regulations of the United States Government. The Company
believes it is in full compliance with these regulations.
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RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. Other risks are presented elsewhere in this Report. The
following risks should be considered carefully in addition to the other
information contained in this Report in evaluating the Company and its business
before purchasing the shares of the Company's Common Stock.
Fluctuations in Quarterly Operating Results. The Company has experienced
wide fluctuations in quarterly and annual operating results in the past and may
continue to experience fluctuations in the future based on a number of factors,
not all of which are in the Company's control. These factors include, without
limitation, the size and timing of significant customer orders; the introduction
of new products by competitors; the availability of components used in the
manufacture of the Company's products; the expenditure of substantial funds for
research and development for its subsidiaries and divisions; changes in pricing
policies by the Company, its suppliers or its competitors and increased price
competition; the ability of the Company to develop, introduce, market and gain
market acceptance of new products, applications and product enhancements in a
timely manner and to control costs; the Company's success in expanding and
implementing its sales and marketing programs; technological changes in the
networked computing market and the other markets in which the Company operates;
the reduction in revenues from government programs; the relatively thin level of
backlog at any given time; the mix of sales among the Company's channels;
deferrals of customer orders in anticipation of new products, applications or
product enhancements; currency fluctuations; and general economic and market
conditions. Moreover, the Company's sales in any quarter typically consist of a
relatively small number of large customer orders, and the timing of a small
number of orders can impact quarter to quarter results. The loss of or a
substantial reduction in orders from any significant customer could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's growth in revenues in recent periods may
not be sustainable and may not be indicative of future operating results, and
there can be no assurance that the Company will continue to achieve
profitability on a quarterly or annual basis in the future. Due to all of the
foregoing factors and other risks discussed below, it is possible that in some
future period the Company's operating results may be below the expectations of
analysts and investors. In such event, the market price of the Company's
securities would probably be materially and adversely affected.
Dependence on Sole Source Suppliers. The Company purchases numerous parts,
supplies and other components used in its products from various independent
suppliers, some of whom are the sole supplier for certain parts and components.
ATL currently derives substantially all of its revenues from the sale of its DLT
based products and related services. Quantum Corporation, which has the
exclusive worldwide manufacturing rights for the DLT technology, is the sole
supplier of the DLT tape drives used in ATL's products. Quantum has informed ATL
that the growth in the demand for the DLT7000 drives will result in continued
limitations in the availability of these drives. ATL does not expect that its
indicated allocation of DLT7000 drives will have a material adverse effect on
its results of operations in the near future. The foregoing statement is
intended to be a forward-looking statement and actual results may differ as a
result of the factors set forth in this paragraph. There can be no assurance
that Quantum will not revise its allocation to ATL or that Quantum will
otherwise continue to provide an adequate supply of the DLT7000 drives. The
Company also currently relies on single supplier for the principal component of
the GYYR's time-lapse videotape cassette recorders. The Company has not been
able to secure any guarantee of the future supply of its sole sourced
components. The disruption or termination of the supply of any of the Company's
source sourced components for any reason would have a material adverse effect on
the Company's business, financial condition and results of operations.
Rapid Technological Change; Effect of New Product Introductions. The
markets served by the Company are characterized by rapid technological advances,
downward price pressure in the marketplace as technologies mature, changes in
customer requirements, frequent new product introductions and enhancements, and
evolving industry standards. The Company's business requires substantial ongoing
research and development efforts and expenditures, and its future success will
depend on its ability to enhance its current products, reduce product costs and
develop and introduce new products which incorporate the latest technological
advancements in hardware, storage media, operating system software and
applications software in response to
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evolving customer requirements. The Company's failure to anticipate or respond
adequately to technological developments and changing customer requirements, the
occurrence of significant delays in new product development or introduction or
the failure of any new products to gain market acceptance could impair the
Company's competitiveness and could materially and adversely affect the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to introduce new products or
enhancements to existing products on a timely basis, if at all, or the effect to
which such introductions will have on sales of existing products. To the extent
new products are introduced, they may contain undetected design faults and
software errors, or "bugs," when first released by the Company that, despite
testing by the Company, are discovered only after a product has been installed
and used by customers. Although the Company has not experienced any material
adverse effect resulting from any such faults or errors to date, there can be no
assurance that faults or errors in the Company's existing products or in new
products introduced by the Company will not be discovered in the future, causing
delays in product introduction and shipments or requiring design modifications
that could adversely affect the Company's competitive position and results of
operations.
Competition. The Company competes in each of its markets with numerous
other companies, many of which have far greater name recognition and financial,
technological, marketing and customer service resources than the Company and may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development,
promotion, sale and support of their products than the Company. The principal
competitive factors in the markets in which the Company participates are product
quality and performance, price, reliability, upgradeability, service and
technical support. There can be no assurance that the Company will be able to
compete effectively in the markets for its products. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any of which could have a material adverse affect upon the Company's
business, operating results and financial condition.
Risks Associated with International Sales. International product sales
represented approximately 12% and 17% of the Company's total net sales and
contract revenues during fiscal 1996 and 1997, respectively. The Company
believes that international sales will continue to represent a significant
portion of its revenues, and that continued growth and profitability will
require further expansion of its international operations. The Company's
international sales are currently denominated primarily in U.S. dollars, and an
increase in the relative value of the dollar could make the Company's products
more expensive and, therefore, potentially less price competitive in
international markets. Additional risks inherent in international business
activities generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, longer accounts receivable payment cycles,
difficulties in managing and staffing international operations, potentially
adverse tax consequences including restrictions on the repatriation of earnings,
the burdens of compliance with a wide variety of foreign laws, currency
fluctuations and political and economical instability. The Company does not
engage in any transactions as a hedge against risks of loss due to foreign
currency fluctuations. There can be no assurance that such factors will not have
a material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results and financial condition.
Furthermore, as the Company increases its international sales, its total
revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
Dependence on Key Personnel. The Company's future performance depends to a
significant extent on its senior management and other key employees, in
particular Joel Slutzky, the Company's Chief Executive Officer, and Kevin C.
Daly, Ph.D., the Chief Executive Officer of ATL. The loss of the services of
either Mr. Slutzky or Dr. Daly would have a material adverse effect on the
Company's development and marketing efforts. The Company's future success will
also depend in large part upon its ability to attract, retain and motivate
highly skilled employees. In addition, the Company is actively seeking to retain
a successor chief financial officer for ATL. Competition for such employees,
particularly development engineers and an experienced chief financial officer,
is intense, and there can be no assurance that the Company will be able to
continue to attract and retain sufficient numbers of such highly skilled
employees. The Company's inability to
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attract and retain additional key employees or the loss of one or more of its
current key employees could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
ability to compete effectively depends in part on its ability to develop and
maintain proprietary aspects of its technology which the Company attempts to
protect with a combination of patent, copyright, trademark and trade secret
laws, employee and third party nondisclosure agreements and similar means. Such
rights may not preclude competitors from developing substantially equivalent or
superior products to the Company's products. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights in the United States or abroad will
be adequate, that future patents will be issued, or that competitors will not
independently develop technologies that are similar or superior to the Company's
technology, duplicate the Company's technology, or design around any patent of
the Company. Moreover, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to determine the validity and scope of
the proprietary rights of others, or to defend the Company against claims of
infringement or invalidity by others. An adverse outcome in such litigation or
similar proceedings could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from others or require the
Company to cease marketing or using certain products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company is required to obtain licenses under
patents or proprietary rights of others, there can be no assurance that any
required licenses would be made available on terms acceptable to the Company, if
at all. In addition, the cost of addressing any intellectual property litigation
claim, both in legal fees and expenses and the diversion of management
resources, regardless of whether the claim is valid, could be significant and
could have a material adverse effect on the Company's results of operations.
Volatility of Stock Price. The trading price of the Company's Common Stock
could be subject to wide fluctuations in response to quarterly variations in
operating results, shortages announced by suppliers, announcements of
technological innovations or new products, applications or product enhancements
by the Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. In addition, the stock market has
experienced volatility which has particularly affected the market prices of
equity securities of many high technology companies and which often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Company's securities.
Concentration of Ownership. As of June 26, 1997, the Company's officers and
directors beneficially owned a majority of the total combined voting power of
the outstanding shares of Class A Common Stock and Class B Common Stock. As a
result of their stock ownership, management will be able to significantly
influence the election of the Company's directors and the outcome of corporate
actions requiring stockholder approval, such as mergers and acquisitions,
regardless of how other stockholders of the Company may vote. This concentration
of voting control may have a significant effect in delaying, deferring or
preventing a change in management or change in control of the Company and may
adversely affect the voting or other rights of other holders of Common Stock.
Pending Distribution. The Company has announced its intention to distribute
to its stockholders all of its shares of ATL Class A Common Stock prior to
December 31, 1997, subject to the satisfaction or waiver of certain conditions
(including the receipt by the Company of a favorable tax ruling from the
Internal Revenue Service confirming the tax-free nature of the Distribution). No
assurance can be given, however, that such conditions will be satisfied or
waived, or that the Distribution will occur. For the Distribution to occur, the
Board of Directors of the Company must conclude, at the time of the
Distribution, that the Distribution is in the best interest of the stockholders
of the Company. Failure to undertake the Distribution could materially and
adversely affect the market price of the Company's securities.
Anti-Takeover Effect of Charter Provisions, Bylaws and Stock Structure. The
Company has two classes of Common Stock which are substantially identical other
than with respect to voting power. The Class A Common Stock offered hereby
entitles the holder to 1/10th vote per share and Class B Common Stock
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entitles the holder to one vote per share, with concentration of ownership of
the Class B Common Stock in the Company's officers and directors and their
affiliates. In addition, the Company's Board of Directors is elected annually on
a split vote basis, with the holders of Class A Common Stock currently being
entitled to elect two of the directors and holders of the Class B Common Stock
currently being entitled to elect the remaining six directors. These provisions
could have the effect of discouraging a proxy contest or making it more
difficult for a third party acquiring a substantial block of the Company's
Common Stock to effect a change in management and control of the Company. Such
provisions also could limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.
The Board of Directors of the Company is authorized to issue, without
stockholder approval, up to 2,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences, as well as additional shares of
Common Stock, which could adversely affect the voting power or other rights of
the holders of Class A Common Stock. Although the Company has no current plans
to issue any shares of Preferred Stock or additional shares of Common Stock
other than the Class A Common Stock offered hereby, the future issuance of
Preferred Stock or Common Stock or of rights to purchase Preferred Stock or
Common Stock could be used to discourage an unsolicited acquisition proposal.
ITEM 2. PROPERTIES.
The Company's headquarters and principal operations are located in Anaheim,
California. In 1984, the Company purchased and renovated a three building
complex containing approximately 250,000 square feet situated on approximately
14.1 acres adjacent to the Interstate 5 freeway one block from Disneyland. These
Company-owned facilities house the Company's corporate and administrative
offices (approximately 43,000 dedicated square feet), as well as Gyyr and the
Broadcast Division, (approximately 87,000 dedicated square feet), the
Communications Division (approximately 67,000 dedicated square feet), OCS
Division (approximately 15,000 dedicated square feet), until March 1997 ATL
(approximately 50,000 dedicated square feet). Commencing in March 1997, ATL
leased an additional 120,000 square foot facility in Irvine, California under a
lease which expires in October 2003. ATL has an option to extend the lease for
an additional five year period. The base rent for ATL's new facility is $65,000
per month.
The Communications Division leases approximately 4,500 square feet of space
in a manufacturing facility located on 0.62 acre in El Paso, Texas. The
Broadcast Division leases approximately 5,000 square feet in Austin, Texas to
manufacture certain product families. Odetics Europe Limited's offices are
located in leased space near London, England. Odetics Asia Pacific Pte. Ltd.
offices are located in leased space in Singapore.
The Company currently is operating a single shift in its manufacturing and
assembly facilities and it believes that its facilities are adequate for its
current needs and for possible future growth. However, the Company may elect to
expand or relocate its offices and facilities in the future.
ITEM 3. LEGAL PROCEEDINGS.
On May 22, 1996, the Company announced that it and ATL Products settled all
pending litigation with E-Systems, Inc. and EMASS, Inc. (collectively,
"E-Systems"). The settlement was effected pursuant to a written Settlement
Agreement and General Release between the parties, under which E-Systems paid
the Company approximately $6.1 million, including an amount designated as a
royalty payment on library systems sold by E-Systems which the Company alleged
infringed on its patented technology. See "Management's Discussion of Financial
Condition and Results of Operations." For its part, the Company agreed for a
period of five years to provide spare parts and certain other customer support
services for the installed base of DataTowers that the Company previously sold
to E-Systems. The parts and services generally will be provided in accordance
with Odetics' general terms and conditions, less a specified discount. The
Company also has agreed to refurbish nine ATL 2640 Series in E-Systems'
possession and to pay to E-Systems any profits (net of refurbishment and sales
costs) realized by the Company from the sale of the refurbished units and to
deliver to E-Systems certain inventories of parts and supplies.
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
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cassette handling systems (United States Patent No. 4,779,151). StorageTek
counterclaimed alleging that the Company infringed several of StorageTek's
patents. Prior to trial, the court dismissed two of the infringement claims
against the Company and the third clam was resolved between the parties. In
January 1996, the 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. The jury also concluded that the Company's patent was
not invalid. In June 1997, the United States Court of Appeals for the Federal
Circuit vacated the lower court's claim construction and findings of
noninfringement of the Company's patent. The appellate court remanded the case
for consideration of infringement under a proper claim construction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock and Class B Common Stock are traded on
the Nasdaq National Market under the symbols "ODETA" and "ODETB," respectively.
The following table sets forth for the fiscal periods indicated the high and low
sale prices for the Class A Common Stock and Class B Common Stock as reported by
the Nasdaq National Market:
CLASS A CLASS B
COMMON STOCK COMMON STOCK
-------------- ---------------
HIGH LOW HIGH LOW
----- ---- ----- -----
Fiscal Year Ended March 31, 1996
First Quarter.............................. $ 5 1/2 $ 4 $ 5 3/4 $ 4 3/4
Second Quarter............................. 6 7/8 4 1/2 6 1/2 5
Third Quarter.............................. 10 6 1/2 10 1/4 6 1/2
Fourth Quarter............................. 10 1/8 6 3/4 10 6 3/8
Fiscal Year Ended March 31, 1997
First Quarter.............................. $21 6 1/4 20 6 5/8
Second Quarter............................. 16 1/4 6 3/4 16 1/2 8 1/4
Third Quarter.............................. 17 3/4 11 1/2 17 1/2 12
Fourth Quarter............................. 23 1/4 11 3/4 22 1/4 13 3/4
As of June 26, 1997, the Company had 670 holders of record of Class A
Common Stock and 195 holders of record of Class B Common Stock according to
information furnished by the Company's transfer agent.
DIVIDEND POLICY
Pursuant to the terms of the Company's Loan and Security Agreement with its
banks, the Company is restricted in declaring cash dividends on its Common Stock
in an amount not to exceed in any fiscal year 10% of the Company's consolidated
net income for the prior fiscal year. The Company never paid or declared cash
dividends on its Common Stock, and has no current plans to pay such dividends in
the foreseeable future. The Company currently intends to retain any earnings for
working capital and general corporate purposes. The payment of any future
dividends will be at the discretion of the Company's Board of directors, and
will depend upon a number of factors, including, but not limited to, future
earnings, the success of the Company's business, activities, its capital
requirements, the general financial condition and future prospects of the
Company, general business conditions, the consent of the Company's principal
lender and such other factors as the Board may deem relevant.
RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 1994, the Company has not sold any unregistered securities.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data with respect to the
Company's consolidated statement of operations for each of the five fiscal years
in the period ended March 31, 1997 and the consolidated balance sheet data at
March 31, 1993, 1994, 1995, 1996 and 1997 are derived from the audited
consolidated financial statements of the Company. The consolidated financial
statements and the related report of independent auditors for the fiscal years
ended March 31, 1993 and 1994 and the Company's consolidated balance sheet at
March 31, 1995 are not included in this Report. The following information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Consolidated Financial
Statements of the Company and the related notes thereto included elsewhere in
this Report.
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $48,487 $66,063 $74,465 $ 94,466 $131,776
Contract revenues.............................. 20,825 18,099 13,280 10,161 9,032
------- ------- ------- -------- --------
Total net sales and contract revenues.......... 69,312 84,162 87,745 104,627 140,808
Cost of sales.................................. 33,668 44,281 51,148 63,398 84,096
Cost of contract revenues...................... 13,967 11,114 6,633 4,374 4,907
Selling, general and administrative expense.... 14,169 17,162 20,899 23,678 30,293
Research and development expense............... 5,187 7,268 9,309 6,973 13,420
Nonrecurring charge............................ -- -- 4,809 -- --
Interest expense............................... 2,125 1,772 1,925 2,247 1,890
Minority interest.............................. -- -- -- -- 53
------- ------- ------- -------- --------
Income (loss) before income taxes.............. 196 2,565 (6,978) 3,957 6,149
Income tax expense (benefit)................... 55 743 $(2,300) 1,504 2,419
------- ------- ------- -------- --------
New income (loss).............................. $ 141 $ 1,822 $(4,678) $ 2,453 $ 3,730
======= ======= ======= ======== ========
Net income (loss) per common share............. $ .03 $ .34 $ (.80) $ .40 $ .55
======= ======= ======= ======== ========
Weighted average number of common shares....... 4,529 5,326 5,872 6,179 6,627
======= ======= ======= ======== ========
AS OF MARCH 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................ $23,636 $29,062 $32,733 $ 30,390 $ 39,176
Total assets................................... 55,124 65,928 72,358 78,811 100,938
Long term debt (less current portion).......... 24,413 16,723 25,757 22,019 11,860
Retained earnings.............................. 8,884 10,706 6,027 8,481 12,211
Total stockholders' equity..................... 19,213 31,239 27,736 30,985 51,828
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company specializes in the design and manufacture of systems and
subsystems to automate the collection, storage, distribution and management of
information. The Company is organized into separate divisions or subsidiaries,
each having primary responsibility for product development, manufacturing and
marketing of one or more of the Company's principal product lines or services.
The Company has four distinct manufacturing operations each tailored to the
requirements of its principal product divisions.
The following table sets forth certain income statement data as a
percentage of total net sales and contract revenues for the periods indicated
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations:
YEAR ENDED MARCH 31,
-------------------------
1995 1996 1997
----- ----- -----
Net sales........................................... 84.9% 90.3% 93.6%
Contract revenues................................... 15.1 9.7 6.4
----- ----- -----
100.0 100.0 100.0
Gross profit........................................ 34.2 35.2 36.8
Expenses:
Selling, general and administrative............... 23.8 22.6 21.5
Research and development.......................... 10.6 6.7 9.5
Nonrecurring charge............................... 5.5 -- --
Interest expense.................................. 2.2 2.1 1.4
Minority interest................................. -- -- --
----- ----- -----
Total expenses...................................... 42.1 31.4 32.4
----- ----- -----
Income (loss) before income taxes................... (7.9) 3.8 4.4
Income taxes (benefit).............................. (2.6) 1.5 1.7
----- ----- -----
Net income (loss)................................... (5.3)% 2.3% 2.7%
Net Sales and Contract Revenues. Total net sales and contract revenues
increased 34.6% to $140.8 million for the fiscal year ended March 31, 1997
("fiscal 1997") as compared to $104.6 million for the fiscal year ended March
31, 1996 ("fiscal 1996"), and increased 19.3% in fiscal 1996 from $87.7 million
for the fiscal year ended March 31, 1995 ("fiscal 1995"). Net sales increased
39.5% to $131.8 million in fiscal 1997 from $94.5 million in fiscal 1996
primarily due to an increase in ATL's net sales which reflected continued growth
in its DLT based products and included the initial shipments in the fourth
quarter of fiscal 1997 of its new 7100 Series tape libraries. The Company also
experienced growth in sales of its telecommunication products in fiscal 1997
largely due to increased unit sales of its synchronization products for cellular
telephone systems and sales of its LIMO family of products for telecommunication
interfaces. Gyyr experienced a 12.5% increase in net sales in fiscal 1997 as
compared to fiscal 1996 while the Company's Broadcast Division's net sales
decreased 15% as compared to the prior fiscal year.
The Company's net sales in increased 26.9% to $94.5 million in fiscal 1996
from $74.5 million in fiscal 1995 due in large part to sales growth in all
divisions involved in commercial product sales, particularly in the Company's
Broadcast Division. The Broadcast Division's 59.9% increase in net sales from
fiscal 1996 as compared to fiscal 1995 reflected an increase in shipments of its
SpotBank(TM), Cache Machine(TM) and TCS 45(TM) systems, as well as additional
revenue attributable to upgrades for previously sold systems. ATL's 29.9%
increase in net sales in fiscal 1996 as compared to fiscal 1995 was primarily
due to an increase in sales of its 520 Series and 2640 Series product lines in
both the domestic and European markets through Odetics Europe Limited, a
wholly-owned subsidiary of the Company which more than offset the loss of 19mm
tape library products that were discontinued in fiscal 1995.
The Company's contract revenues are comprised of revenues from government
contracts and declined 11.8% to $9.0 million in fiscal 1997 from $10.2 million
in fiscal 1996, and declined 23.5% in fiscal 1996 from
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$13.3 million in fiscal 1995. The declines in fiscal 1997 and fiscal 1996 are
primarily due to changes in government spending patterns and a transition by the
Company from certain government markets to commercial activities.
Gross Profit. Total gross profit increased to 36.8% in fiscal 1997 as
compared to 35.2% in fiscal 1996 and 34.2% in fiscal 1995. The increase in total
gross profit in fiscal 1997 as compared to fiscal 1996 reflects ATL's improved
gross profit margin which was primarily attributable to improved absorption of
manufacturing overhead over continued increases in sales of DLT based products
as well as reductions in materials for ATL's products. The increase in total
gross profit in fiscal 1996 as compared to fiscal 1995 is due in large part to
an increase in ATL's gross profit on product sales to 36.8% in fiscal 1996 from
22.8% in fiscal 1995 as ATL completed its first fiscal year selling primarily
DLT based products which generated improved margins as compared to the margins
on 19mm products which accounted for approximately one-third of ATL's sales
revenues in fiscal 1995. The increase in gross profit in fiscal 1997 was
partially offset by reduced margins on certain large international sales to a
single customer in the Broadcast Division. The Company's increase in gross
profit in fiscal 1996 also reflected an overall commercial products sales mix
that favored new products with higher gross profits.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 27.9% to $30.3 million in fiscal 1997 (or 21.5%
of total net sales and contract revenues) from $23.7 million (or 22.6% of total
net sales and contract revenues) and increased 13.3% in fiscal 1996 as compared
to $20.9 million (or 23.8% of total net sales and contract revenues) in fiscal
1995. The dollar increase in fiscal 1997 primarily reflects the Company's
efforts to expand its sales and marketing capabilities through infrastructure
growth which included higher sales commissions associated with increased sales,
as well as increased expenditures for advertising, promotion and labor costs
associated with the Company's increased commercial sales and marketing
activities. The dollar increase in selling, general and administrative expense
in fiscal 1996 was due in large part to professional fees related to the
E-Systems litigation and increased expenses related to expanding foreign
operations in Odetics Europe, Limited, and Odetics Asia Pacific, Pte., Ltd.
Research and Development Expense. Research and development expense
increased 91.4% to $13.4 million (or 9.5% of total net sales and contract
revenues) in fiscal 1997 as compared to $7.0 million in fiscal 1996 (or 6.7% of
total net sales and contract revenues), and declined 25.1% in fiscal 1996 as
compared to $9.3 million (or 10.6% of total net sales and contract revenues) in
fiscal 1995. The increase in research and development expense in fiscal 1997
primarily reflects additional engineering and labor costs, consulting fees,
prototype materials costs and other costs associated with the development,
testing and preproduction activities for ATL's 7100 Series and Prism products
and the incorporation of the new DLT7000 tape drive into ATL's current products.
The increase in research and development expense in fiscal 1997 also reflected
additional expenditures related to new product development in Gyyr and the
Communications Division. The decline in research and development expense in
fiscal 1996 as compared to fiscal 1995, both in terms of absolute dollars and as
a percentage of total net sales and contract revenues, reflects the effect of
the completion of certain major research and development programs in fiscal 1995
and certain cost reduction measures implemented during the second half of fiscal
1995. The Company expects expenditures for research and development generally to
increase over time and to be higher during periods of new product development
when significant expenditures are incurred in preproduction activities and
increased testing. These expenditures may, therefore, continue to fluctuate as a
percentage of total net sales and contract revenues from period to period.
Minority Interest. On March 13, 1997, the Company completed an initial
public offering of 1,650,000 shares of Class A Common Stock of ATL, which
reduced the Company's beneficial ownership of ATL to 82.9%. The $53,000 minority
interest represents the ATL stockholders' portion of ATL's net income for the
period of time their shares were outstanding during fiscal 1997. The Company
intends to effect the Distribution prior to December 31, 1997, subject to the
satisfaction or waiver of certain conditions (including the receipt of a
favorable letter ruling from the Internal Revenue Service concerning the
tax-free nature of the Distribution).
Interest Expense. Interest expense decreased approximately 15.9% to $1.9
million in fiscal 1997 as compared to $2.2 million in fiscal 1996, and increased
16.7% from $1.9 million in fiscal 1995. The decrease in
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fiscal 1997 as compared to fiscal 1996 was primarily due to overall lower
average borrowings, while the increase in interest expense in fiscal 1996 as
compared to fiscal 1995 reflected an overall higher average borrowings under the
Company's line of credit and increased cost of borrowings.
Income Taxes. The Company's effective income tax rate was 39.3%, 38.0% and
33.0% in fiscal 1997, 1996 and 1995, respectively. The Company's recognition of
general business credits reduced the Company's effective tax rates below the
statutory rates. The increase in the effective tax rate for fiscal 1997 is due
to a reduction in the effect of general business tax credits on total income tax
expense.
The Company entered into a Tax Allocation Agreement with ATL effective
April 1, 1996, pursuant to which ATL will make a payment to the Company, or the
Company will make a payment to ATL, as appropriate, in an amount equal to the
taxes attributable to the operations of the Company on its consolidated federal
income tax returns and consolidated or combined state tax returns. In addition,
the Tax Allocation Agreement provides that members of the Company's consolidated
group generating tax losses after April 1, 1996 will be paid by other members of
the group which utilize such tax losses to reduce such other members' tax
liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net income of $3.7 million in fiscal 1997, as adjusted for
noncash charges of depreciation and amortization and a net reduction in
operating assets and liabilities, contributed to $7.8 million net cash provided
by operating activities during the year. The cash flow provided by operating
activities was primarily used for the purchase of fixed assets and payments for
the reduction of long term borrowings. During fiscal 1997, the Company settled
its litigation with E-Systems (see "Item 3. Legal Proceedings"), pursuant to
which E-Systems paid $6.2 million to the Company.
The Company has a $17.0 million bank line of credit with Imperial Bank and
Comerica Bank-California which provides for borrowings generally at the lessor
of the bank's prime rate (8.5% at March 31, 1997) or the bank's LIBOR rate plus
2.25%. Borrowings are available for general working capital purposes, and at
March 31, 1997, approximately $14.6 million was available for borrowing under
the line. The Company's borrowings under the line of credit are secured by
substantially all of the Company's assets, other than the assets of ATL. At
March 31, 1997, $2.1 million was outstanding under this line of credit.
In March 1997, ATL entered into a separate $5.0 million line of credit with
Imperial Bank which provides for borrowings generally at the lessor of the
bank's prime rate (8.5% at March 31, 1997) or the bank's LIBOR rate plus 2.25%.
No amounts were outstanding under this line of credit as of March 31, 1997.
ATL's borrowings under the line of credit are secured by substantially all of
the ATL's assets.
In April 1997, ATL entered into a promissory note payable to the Company in
the original principal amount of $13.0 million representing the aggregate
balance of ATL's interest bearing advances from the Company. This note bears
interest at a rate equal to the Company's cost of borrowing (8.5% at March 31,
1997). Principal and interest on this note are payable to the Company in sixteen
equal quarterly installments at the end of each calendar quarter commencing June
30, 1997.
ATL entered into a lease for new facilities in Irvine, California during
the first calendar quarter of 1997. ATL began to relocate to its new facility at
the end of fiscal 1997 and completed its move in the first quarter of fiscal
1998. The Company anticipates that ATL will incur expenditures of approximately
$500,000 for relocation costs, leasehold improvements and capital equipment for
this new facility.
The Company anticipates that net cash flow generated by operating
activities, together with the net proceeds of ATL's initial public offering and
funds available under the Company's line of credit will be adequate to enable
the Company to execute its operating plans and meet its obligations on a timely
basis for at least the next twelve months.
17
20
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 caption
"Election of Directors," appearing in the Proxy Statement, is incorporated
herein by reference.
(b) Identification of Executive Officers. The information under the
headings "Executive Officers," appearing in the Proxy Statement, is incorporated
herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
appearing in the Proxy Statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the headings "Executive Compensation," appearing in
the Proxy Statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the headings "Principal Shareholders" and "Common
Stock Ownership of Certain Beneficial Owners and Management," appearing in the
Proxy Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions," appearing in the
Proxy Statement, is incorporated herein by reference.
18
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS. The following financial statements of the Company
are included in a separate section of this Annual Report on Form 10-K commencing
on the pages referenced below:
PAGE
----
Index to Consolidated Financial Statements............................ F-1
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996............. F-3
Consolidated Statements of Operations for the years ended March 31,
1997, 1996 and 1995................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997, 1996 and 1995....................................... F-6
Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1996 and 1995................................................. F-7
Notes to Consolidated Financial Statements............................ F-8
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of the Company is included in a separate section of this Annual Report
on Form 10-K commencing on the pages referenced below. All other schedules have
been omitted because they are not applicable, not required, or the information
is included in the consolidated financial statements or notes thereto.
Page
----
Schedule II -- Consolidated Valuation and Qualifying Accounts......... S-1
3. EXHIBITS.
3.1 Certificate of Incorporation of the Company filed as Exhibit 19.2 to the
September 30, 1987 Form 10-Q and incorporated herein by reference.
3.2 Bylaws of the Company, as amended, filed as Exhibit 4.2 to Form S-1 filed July
6, 1993 and incorporated herein by reference.
4.1 Specimen of Class A Common Stock and Class B Common Stock certificates filed
as Exhibit 4.3 to Amendment No. 1 filed September 30, 1993 to Form S-1 filed
July 6, 1993 and incorporated herein by reference.
10.1 1981 Incentive Stock Option Plan and form of Stock Option Agreement, filed as
Exhibit 4.1 to the Company's Form S-8 filed June 27, 1985 (Reg. No. 2-98656)
(the "1985 Form S-8") and incorporated herein by reference.
10.2 1982 Nonstatutory Stock Option and Stock Appreciation Rights Plan and forms of
Nonstatutory Stock Option and Stock Appreciation Rights Agreement, filed as
Exhibit 4.2 to the 1985 Form S-8 and incorporated herein by reference.
10.3 1992 Incentive Stock Option Plan and forms of Incentive Stock Option Agreement
and Nonstatutory Stock Option Agreement filed as Exhibit 4.1, 4.2 and 4.3,
respectively, to the Company's Form S-8 filed March 10, 1993 (Reg. No.
33-59274) and incorporated herein by reference.
10.4 Profit Sharing Plan and Trust, filed as Exhibit 4.3 to Amendment No. 2 to the
1985 Form S-8 filed May 5, 1988 (Reg No. 2-98656) and incorporated herein by
reference.
10.5 Form of Executive Deferral Plan between the Company and certain employees of
the Company, filed as Exhibit 10.4 to the 1988 Form 10-K and incorporated
herein by reference.
19
22
10.6 Second Amended and Restated Loan Agreement between Bank of the West and the
Company entered into as of September 30, 1992, filed as Exhibit 10.6 to Form
S-1 filed July 6, 1993 and incorporated herein by reference.
10.7 Loan and Security Agreement between ATL Products, Inc. and Bank of the West
entered into as of February 26, 1993, filed as Exhibit 10.6 to Form S-1 filed
July 6, 1993 and incorporated herein by reference.
10.8 Modification Agreement regarding the agreements referenced in Exhibits 10.6
and 10.7, as modified by the First Amendments to Modification Agreement from
Bank of the West dated as of February 26, 1993 and August 9, 1993 filed as
Exhibit 10.6 to Form S-1 filed July 6, 1993 and incorporated herein by
reference.
10.9.1 Form of Indemnity Agreement entered into by the Company, and certain officers
and directors, filed as Exhibit 19.4 to the September 30, 1988 Form 10-Q and
incorporated herein by reference.
10.9.2 Schedule of officers and directors covered by Indemnity Agreement filed as
Exhibit 10.9.2 to Amendment No. 1 filed September 30, 1993 to Form S-1 filed
July 6, 1993 and incorporated herein by reference.
10.10 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust, filed as Exhibits
4.3.1 and 4.3.2 respectively, to Amendment No. 3 to the 1983 Form S-8 (Reg.
No. 2-86220) filed June 13, 1990 and incorporated herein by reference.
10.11 Lease between the Company and Roths Properties entered into as of November 1,
1990 filed as Exhibit 10.11 to Form S-1 filed July 6, 1993 and incorporated
herein by reference.
10.12 Promissory Note in the original principal amount of $15,000,000 payable to The
Northwestern Mutual Life Insurance Company ("NMLI") dated October 31, 1989 and
related Deed of Trust, Security Agreement and Financing Statement between
Odetics, Inc. and NMLI dated October 31, 1989 filed as Exhibit 10.12 to Form
S-1 filed July 6, 1993 and incorporated herein by reference.
10.13 Separation and Distribution Agreement between the Company and ATL dated March
1, 1997.
10.14 Tax Allocation Agreement between the Company and ATL dated March 1, 1997.
10.15 Services Agreement between the Company and ATL dated March 21, 1997.
10.16 Promissory Note between the Company and ATL dated April 1, 1997.
10.17 Amendment Number Six to Loan and Security Agreement dated March 31, 1997
between the Company, Gyyr, Imperial Bank and Comerica Bank-California.
10.18 Note, Security Agreement and Letter Agreement between ATL and Imperial Bank
dated March 15, 1997.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
20
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on June 27, 1997.
ODETICS, INC.
By: /s/ JOEL SLUTZKY
------------------------------------
Joel Slutzky
Chief Executive Officer, President
and Chairman of the Board
POWER OF ATTORNEY
We, the undersigned officers and directors of ATL Products, Inc., do hereby
constitute and appoint Joel Slutzky and Gregory A. Miner, and each of them, our
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------ --------------
/s/ JOEL SLUTZKY Chief Executive Officer, President June 27, 1997
- ------------------------------------ and Chairman of the Board (principal
Joel Slutzky executive officer)
/s/ CRANDALL GUDMUNDSON President and Director June 27, 1997
- ------------------------------------
Crandall Gudmundson
/s/ JERRY MUENCH Vice President and Director June 27, 1997
- ------------------------------------
Jerry Muench
/s/ KEVIN C. DALY Director of the Registrant Chief June 27, 1997
- ------------------------------------ Executive Officer, President and
Kevin C. Daly, Ph.D. Chairman of the Board of ATL
Products, Inc.
/s/ GARY SMITH Vice President and Controller June 27, 1997
- ------------------------------------
Gary Smith
/s/ RALPH R. MICKELSON Director June 27, 1997
- ------------------------------------
Ralph R. Mickelson
21
24
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------ --------------
/s/ STANLEY MOLASKY Director June 27, 1997
- ------------------------------------
Stanley Molasky
/s/ LEO WEXLER Director June 27, 1997
- ------------------------------------
Leo Wexler
/s/ PAUL E. WRIGHT Director June 27, 1997
- ------------------------------------
Paul E. Wright
/s/ GREGORY A. MINER Vice President and Chief Financial June 27, 1997
- ------------------------------------ Officer of the Registrant and Chief
Gregory A. Miner Financial Officer of ATL Products,
Inc. (principal accounting officer)
22
25
ODETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997............................. F-3
Consolidated Statements of Operations for the years ended March 31, 1995, 1996 and
1997................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1995,
1996 and 1997....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1995, 1996 and
1997................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
F-1
26
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, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1997. Our audits also included the financial
statement schedule listed in Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Odetics, Inc. at March 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, 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
April 29, 1997
F-2
27
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
---------------------
1996 1997
-------- --------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents............................................ $ 1,142 $ 11,359
Trade accounts receivable, net of allowance for doubtful accounts of
$988,000 in 1996 and $669,000 in 1997............................. 24,772 29,424
Costs and estimated earnings in excess of billings on uncompleted
contracts (Note 3)................................................ 3,428 1,922
Inventories:
Finished goods.................................................... 3,717 3,435
Work in process................................................... 2,927 3,987
Materials and supplies............................................ 16,076 20,855
Prepaid expenses and other........................................... 1,122 1,333
Deferred income taxes................................................ 2,516 2,056
-------- --------
Total current assets......................................... 55,700 74,371
Property, plant and equipment:
Land................................................................. 2,090 2,090
Buildings and improvements........................................... 17,553 18,238
Equipment............................................................ 23,964 28,201
Furniture and fixtures............................................... 950 968
Allowances for depreciation.......................................... (22,950) (25,668)
-------- --------
21,607 23,829
Other assets........................................................... 1,504 2,738
-------- --------
Total assets................................................. $ 78,811 $100,938
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable............................................... $ 11,519 $ 18,478
Accrued payroll and related.......................................... 4,611 6,851
Accrued expenses..................................................... 563 4,179
Income taxes payable................................................. 1,412 1,276
Billings in excess of costs and estimated earnings on uncompleted
contracts (Note 3)................................................ 5,414 2,690
Current portion of long-term debt (Note 4)........................... 1,791 1,721
-------- --------
Total current liabilities.................................... 25,310 35,195
Long-term debt, less current portion (Note 4).......................... 22,019 11,860
Deferred income taxes (Note 6)......................................... 497 540
Minority interest...................................................... -- 1,515
Commitments and contingencies (Notes 4 and 9)
Stockholders' equity (Notes 7 and 8):
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 -- 4,935,359 of Class A and
1,160,931 of Class B at March 31, 1996; 5,315,653 of Class A and
1,064,241 of Class B at March 31, 1997........................... 610 638
Paid-in capital...................................................... 21,904 38,927
Foreign currency translation......................................... (10) 52
Retained earnings.................................................... 8,481 12,211
-------- --------
Total stockholders' equity................................... 30,985 51,828
-------- --------
Total liabilities and stockholders' equity................... $ 78,811 $100,938
======== ========
See accompanying notes.
F-3
28
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
------------------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net sales and contract revenues:
Net sales.............................................. $74,465 $94,466 $131,776
Contract revenues...................................... 13,280 10,161 9,032
------- -------- --------
87,745 104,627 140,808
Costs and expenses:
Cost of sales.......................................... 51,148 63,398 84,096
Cost of contract revenues.............................. 6,633 4,374 4,907
Selling, general and administrative expenses........... 20,899 23,678 30,293
Research and development expenses...................... 9,309 6,973 13,420
Nonrecurring charge (Note 5)........................... 4,809 -- --
Interest expense....................................... 1,925 2,247 1,890
Minority interest in earnings of subsidiary............ -- -- 53
------- -------- --------
94,723 100,670 134,659
------- -------- --------
Income (loss) before income taxes........................ (6,978) 3,957 6,149
Income taxes (benefit) (Note 6).......................... (2,300) 1,504 2,419
------- -------- --------
Net income (loss)........................................ $(4,678) $ 2,453 $ 3,730
======= ======== ========
Net income (loss) per share of common stock.............. $ (.80) $ .40 $ .55
======= ======== ========
See accompanying notes.
F-4
29
ODETICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------
SHARES
OUTSTANDING
---------------
CLASS CLASS
A B FOREIGN
COMMON COMMON PAID-IN CURRENCY RETAINED
STOCK STOCK AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL
------ ------ ------ ------- ----------- -------- -------
(IN THOUSANDS)
Balance at March 31, 1994......... 4,585 1,193 $578 $19,922 $33 $ 10,706 $31,239
Issuances of common stock (Notes
7 and 8)..................... 170 -- 17 1,145 -- -- 1,162
Conversion of Class B common
stock........................ 32 (32) -- -- -- -- --
Foreign currency translation
adjustments.................. -- -- -- -- 13 -- 13
Net loss........................ -- -- -- -- -- (4,678) (4,678)
----- ----- ---- ------- --- ------- -------
Balance at March 31, 1995......... 4,787 1,161 595 21,067 46 6,028 27,736
Issuances of common stock (Notes
7 and 8)..................... 148 -- 15 837 -- -- 852
Foreign currency translation
adjustments.................. -- -- -- -- (56) -- (56)
Net income...................... -- -- -- -- -- 2,453 2,453
----- ----- ---- ------- --- ------- -------
Balance at March 31, 1996......... 4,935 1,161 610 21,904 (10) 8,481 30,985
Issuances of common stock (Notes
7 and 8)..................... 284 -- 28 2,567 -- -- 2,595
Conversion of Class B common
stock........................ 97 (97) -- -- -- -- --
Issuance of ATL Products, Inc.
common stock (Note 2)........ -- -- -- 14,456 -- -- 14,456
Foreign currency translation
adjustments.................. -- -- -- -- 62 -- 62
Net income...................... -- -- -- -- -- 3,730 3,730
----- ----- ---- ------- --- ------- -------
Balance at March 31, 1997......... 5,316 1,064 $638 $38,927 $52 $ 12,211 $51,828
===== ===== ==== ======= === ======= =======
F-5
30
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31
----------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss).......................................... $ (4,678) $ 2,453 $ 3,730
Adjustments to reconcile net income (loss) to net cash
provided
by (used in) operating activities:
Depreciation and amortization............................ 2,442 2,694 3,622
Minority interest in earnings of subsidiary.............. -- -- 53
Provision for losses on accounts receivable.............. 827 170 277
Provision for deferred income taxes...................... (2,337) 76 503
Gain on sale of assets................................... (37) (28) (177)
Net proceeds from settlement of litigation (Note 9)...... -- -- 5,860
Changes in operating assets and liabilities (Note 11).... (2,606) 1,395 (6,065)
-------- -------- --------
Net cash provided by (used in) operating activities........ (6,389) 6,760 7,803
INVESTING ACTIVITIES
Purchases of property, plant and equipment................. (3,670) (3,536) (5,329)
Proceeds from sale of equipment............................ 73 74 12
-------- -------- --------
Net cash used in investing activities...................... (3,597) (3,462) (5,317)
FINANCING ACTIVITIES
Proceeds from line of credit and long-term borrowings...... 40,263 36,152 54,840
Principal payments on line of credit, long-term debt, and
capital lease obligations................................ (31,222) (39,395) (65,069)
Net proceeds from issuance of ATL Products, Inc. common
stock.................................................... -- -- 15,918
Proceeds from issuance of common stock..................... 1,151 709 2,042
-------- -------- --------
Net cash provided by (used in) financing activities........ 10,192 (2,534) 7,731
-------- -------- --------
Increase in cash........................................... 206 764 10,217
Cash and cash equivalents at beginning of year............. 172 378 1,142
-------- -------- --------
Cash and cash equivalents at end of year................... $ 378 $ 1,142 $ 11,359
======== ======== ========
See accompanying notes.
F-6
31
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
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 active subsidiaries Odetics Europe,
Ltd., Odetics Asia Pacific Pte Ltd. and ATL Products, Inc. During fiscal 1990,
the Company incorporated Odetics Europe, Ltd. to develop European commercial
sales. During fiscal 1993, the ATL Division was incorporated as ATL Products,
Inc. During fiscal 1995, the 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowances for doubtful accounts and deferred tax assets, inventory
reserves and costs to complete long-term contracts.
Revenue Recognition
Contract revenues and earnings on long-term cost-reimbursement and
fixed-price contracts of the Company's Communication 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
which provide for increased or decreased revenues based upon performance in
relation to established targets. Incentive fees are recorded when earned and
penalty provisions are recorded when incurred, as long as the amounts can
reasonably be determined.
For all other divisions, sales and related cost of sales are recognized on
the date of shipment or, if required, upon acceptance by the customer.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities of less than ninety days.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, and the current portion of
long-term debt approximate the carrying value because of the short period of
time to maturity. The fair value of long-term debt approximates its carrying
value because the portion of fixed rates of interest approximate current market
rates and the remaining portion has variable rates of interest.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.
Long-Lived Assets
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of
F-7
32
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
1. Summary of Significant Accounting Policies (continued)
(SFAS No. 121), in March 1995. In accordance with SFAS No. 121, long-lived
assets and certain intangibles held and used by the Company will be 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
to be performed at the lowest level at which undiscounted net cash flows can be
directly attributable to long-lived assets. SFAS No. 121 is effective for fiscal
years beginning after December 15, 1995. The Company adopted SFAS No. 121 in
fiscal 1997 and has determined that there is no material effect on the Company's
financial statements upon adoption.
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.
Research and Development Expenditures
Software development costs incurred subsequent to determination of
technical feasibility are capitalized. Amortization of capitalized software
costs is provided on a product-by-product basis at the greater of the amount
computed using (a) the ratio of current gross revenues for the product to the
total of current and anticipated future gross revenues or (b) the straight-line
method over the remaining estimated economic life of the product. Amortization
begins when product is available for general release to customers. Generally, an
original estimated economic life of two years is assigned to capitalized
software development costs.
During fiscal 1995, 1996 and 1997, software development costs were
amortized to cost of sales totaling $42,000, $212,000 and $473,000 respectively.
The net unamortized balances of $1,105,000 and $1,843,000 are classified in
other assets at March 31, 1996 and 1997, respectively.
All other research and development expenditures are charged to research and
development expense in the period incurred.
Foreign Currency Translation
The balance sheet accounts of Odetics Europe, Ltd. are translated at the
current year-end exchange rate and income statement items are translated at the
average exchange rate for the year. Resulting translation adjustments are made
directly to a separate component of stockholders' equity. Gains and losses
resulting from transactions of the Company and its subsidiaries which are made
in currencies different from their own are immaterial and are included in income
as they occur.
Income Taxes
Deferred income tax assets and liabilities are computed for differences
between financial statement and tax basis of assets and liabilities based on
enacted tax laws and rates applicable to the period in which differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more likely than
not to be realized. The provision for income taxes is the taxes payable or
refundable for the period plus or minus the change during the period in deferred
income tax assets and liabilities.
F-8
33
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
1. Summary of Significant Accounting Policies (continued)
Earnings (Loss) Per Share
Earnings (loss) per share were computed using the weighted average number
of Class A and Class B common shares outstanding during the periods. Dilutive
employee stock options (Note 8) were considered in earnings per share
computations for 1996 and 1997. The weighted average number of common shares and
common equivalent shares used in the calculation of earnings per share was
approximately 5,872,000, 6,179,000 and 6,627,000 in 1995, 1996 and 1997,
respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share (Statement No. 128), which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the years ended March
31, 1996 and March 31, 1997 of $.01 and $.03 per share, respectively. The impact
of Statement 128 on the calculation of fully diluted earnings per share for
these years is not expected to be material.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees(APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
To calculate the pro forma information required by Statement 123, the
Company uses the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's option, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expense
totaled $630,000, $578,000 and $1,020,000 in the years ended March 31, 1995,
1996 and 1997, respectively.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform with the 1997 presentation.
2. SALE OF STOCK OF ATL PRODUCTS, INC.
On March 13, 1997, ATL Products, Inc. (ATL), a subsidiary of the Company,
completed an initial public offering of 1,650,000 shares of its common stock, at
an offering price of $11 per share (the Offering).
F-9
34
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
2. SALE OF STOCK OF ATL PRODUCTS, INC. (CONTINUED)
Following the Offering, the Company's beneficial ownership interest in ATL
totals 82.9%. The Company has announced its intention to pursue a tax-free
spinoff of its remaining interest in ATL to the Company's stockholders by
December 31, 1997, subject to approval by the Company's Board of Directors and
to obtaining a letter ruling from the Internal Revenue Service concerning the
tax-free nature of the spinoff.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
MARCH 31
---------------------
1996 1997
-------- --------
(IN THOUSANDS)
Costs incurred on uncompleted contracts................ $ 12,622 $ 17,483
Estimated earnings..................................... 721 1,848
-------- --------
13,343 19,331
Less billings to date.................................. 15,329 20,099
-------- --------
$ (1,986) $ (768)
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. $ 3,428 $ 1,922
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. (5,414) (2,690)
-------- --------
$ (1,986) $ (768)
======== ========
Costs and estimated earnings in excess of billings at March 31, 1996 and
1997 include $557,000 and $279,000, 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, 1997 are expected to be billed and collected during the year ending March
31, 1998.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
MARCH 31
-------------------
1996 1997
------- -------
(IN THOUSANDS)
Note payable, collateralized by deed of trust on land and
buildings with a net book value of approximately
$15,000,000, payable in monthly installments through
the year 2004, including interest at 9.36%............. $11,040 $10,171
Secured revolving credit agreement under which the
Company may borrow up to $17,000,000 with interest at
the prime rate (8.5% as of March 31, 1997). The
agreement expires on August 31, 1998................... 10,700 2,100
Notes payable, collateralized by equipment, payable in
monthly installments through March 1999, including
interest at 6.95% to 9.0%.............................. 2,070 1,310
------- -------
23,810 13,581
Less current portion..................................... 1,791 1,721
------- -------
$22,019 $11,860
======= =======
F-10
35
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
4. LONG-TERM DEBT (CONTINUED)
The revolving credit agreement is collateralized by substantially all of
the Company's assets, excluding the Company's property and plant and ATL's
assets. Under the terms of the agreement, the Company is required to comply with
certain covenants, maintain certain debt to net worth ratios, current ratios and
minimum net worth requirements.
Included within the borrowing limits of the agreement, the Company has
available approximately $14,900,000 in letters of credit and approximately
$300,000 has been reserved for standby letters of credit at March 31, 1997.
In March 1997, ATL entered into a separate $5.0 million line of credit with
Imperial Bank which provides for borrowings generally at the lessor of the
bank's prime rate (8.5% at March 31, 1997) or the bank's LIBOR rate plus 2.25%.
No amounts were outstanding under this line of credit as of March 31, 1997.
ATL's borrowings under the line of credit are secured by substantially all of
ATL's assets.
The annual maturities of long-term debt for the five years ending March 31,
2002 and thereafter are as follows:
(IN THOUSANDS)
--------------
1998........................................... $ 1,721
1999........................................... 3,643
2000........................................... 1,146
2001........................................... 1,261
2002........................................... 1,383
Thereafter..................................... 4,427
-------
$ 13,581
=======
5. NONRECURRING CHARGES
In December 1994, the Company recorded a nonrecurring charge of $4,393,000
related to downsizing and restructuring in response to a deterioration in the
Company's contractual relationship with E-Systems, Inc., a major customer of ATL
Products, Inc. (see Note 9). The charge consisted of a $3,716,000 write-down of
inventories and accounts receivable to net realizable value and $677,000 of
severance costs and other charges associated with the E-Systems dispute. The
Company's restructuring plan also called for the implementation of an early
retirement incentive program effective for the period January 1, 1995 through
March 31, 1995 which resulted in a nonrecurring charge of $416,000 during the
fourth quarter of fiscal 1995. Approximately 100 associates, primarily in
operations, manufacturing, general management and administrative functions,
received severance pay based on the number of years of service plus early
retirees received HMO coverage for one year. All amounts accrued under the early
retirement incentive program were paid by March 31, 1996.
F-11
36
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
6. INCOME TAXES
The reconciliation of the income tax provision (benefit) to taxes computed
at U.S. federal statutory rates is as follows:
YEAR ENDED MARCH 31
-----------------------------
1995 1996 1997
------- ------ ------
(IN THOUSANDS)
Income tax (benefit) at statutory rates......... $(2,442) $1,385 $2,091
State income taxes, net of federal tax
benefit....................................... 27 310 318
Decrease of valuation allowance associated with
federal deferred tax assets................... -- (326) (99)
Foreign losses recorded without benefit......... -- 80 --
Other........................................... 115 55 109
------- ------ ------
$(2,300) $1,504 $2,419
======= ====== ======
United States and foreign income (loss) before income taxes are as follows:
YEAR ENDED MARCH 31
-----------------------------
1995 1996 1997
------- ------ ------
(IN THOUSANDS)
Pretax income (loss):
Domestic...................................... $(7,384) $2,194 $5,930
Foreign....................................... 406 1,763 219
------- ------ ------
$(6,978) $3,957 $6,149
======= ====== ======
Significant components of the provision (benefit) for income taxes are as
follows:
YEAR ENDED MARCH 31
-----------------------------
1995 1996 1997
------- ------ ------
(IN THOUSANDS)
Current:
Federal....................................... $ (139) $ 293 $1,662
State......................................... 40 476 209
Tax benefit from stock option exercises....... (24) (31) (801)
Foreign....................................... 136 659 45
------- ------ ------
13 1,397 1,115
Deferred:
Federal....................................... (2,337) 194 551
State......................................... -- (118) (48)
------- ------ ------
Total deferred.................................. (2,337) 76 503
Charge in lieu:
Credit to additional paid-in capital
attributable to stock option exercises..... 24 31 801
------- ------ ------
$(2,300) $1,504 $2,419
======= ====== ======
F-12
37
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
6. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
1996 1997
------- -------
(In thousands)
Deferred tax assets:
Inventory reserves..................................... $ 1,915 $ 1,521
Deferred compensation and other payroll accruals....... 1,904 2,095
General business tax credit carryforwards.............. 1,035 322
Alternative minimum tax credit carryforwards........... 883 883
Bad debt reserve....................................... 397 286
Other reserves......................................... -- 831
Other, net............................................. 377 123
------- -------
Total deferred tax assets................................ 6,511 6,061
Valuation allowance for deferred tax assets.............. (1,450) (1,351)
------- -------
Net deferred tax assets.................................. 5,061 4,710
------- -------
Deferred tax liabilities:
Tax over book depreciation............................. 2,557 2,696
Capitalized interest and taxes......................... 485 468
Other, net............................................. -- 30
------- -------
Total deferred tax liabilities........................... 3,042 3,194
------- -------
Net deferred tax assets.................................. $ 2,019 $ 1,516
======= =======
At March 31, 1997, the Company had approximately $322,000 in general
business credit carryforwards, and $883,000 of alternative minimum tax credit
carryforwards for federal income tax purposes. For financial reporting purposes,
of the $1,351,000 valuation allowance $1,205,000 has been recorded to offset the
deferred tax asset related to these credits. Any future benefits recognized from
the reduction of the valuation allowance will result in a reduction of income
tax expense. These credit carryforwards expire at various dates beginning in
2005.
7. 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 1995, 1996 or 1997.
In May 1990, the Company adopted a 401(k) Plan as an amendment and
replacement of the former Associate Stock Purchase Plan that was an additional
feature of the Profit Sharing Plan. Under the 401(k) Plan, eligible associates
voluntarily contribute to the plan up to 15% of their salary through payroll
deductions. The Company matches 50% of contributions up to a stated limit. Under
the provisions of the 401(k) Plan, associates have four investment choices, one
of which is the purchase of Odetics, Class A common stock at market price.
Company matching contributions were approximately $376,000, $580,000 and
$525,000 in 1995, 1996 and 1997, 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. No contributions were made in 1995. The Company
contributions to the ASOP were
F-13
38
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
7. ASSOCIATE INCENTIVE PROGRAMS (CONTINUED)
approximately $430,000 and $513,000 in 1996 and 1997, respectively. Shares
distributed through the ASOP Plan were included in total outstanding shares used
in the earnings per share calculation.
8. STOCK OPTION AND DEFERRED COMPENSATION PLANS
The Company has adopted an Associate Stock Option Plan which provides that
options for shares of the Company's unissued Class A common stock may be granted
to directors and associates of the Company. Options granted enable the option
holder to purchase one share of Class A common stock at prices which are equal
to or greater than the fair market value of the shares at the date of grant.
Options for shares have been granted at prices ranging from $4.25 to $9.90 for
one share of Class A common stock. Options expire ten years after date of grant
or 90 days after termination of employment and vest ratably at 33% or 25% on
each of the first three or four anniversaries of the grant date, respectively,
depending on the date of grant. Options for shares of both the Company's
unissued Class A and Class B common stock had been granted to directors and
associates of the Company and such options expired in 1994.
YEAR ENDED MARCH 31
---------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Options outstanding at beginning of year... 655 6.72 627 6.85 691 5.32
Granted.................................. 27 7.12 381 4.72 183 9.17
Exercised................................ (40) 4.34 (70) 4.76 (217) 5.41
Canceled................................. (15) 6.43 (247) 8.43 (17) 4.43
--- ---- --- ---- --- ----
Options outstanding at end of year....... 627 6.85 691 5.32 640 6.41
=== ==== === ==== === ====
Exercisable at end of year................. 357 288 308
=== === ===
Available for grant at end of year......... 437 520 164
=== === ===
Option price range for exercised shares:... $4.38 to $6.13 $4.25 to $6.625 $4.25 to $9.00
Exercise prices for options outstanding as of March 31, 1997 ranged from
$4.00 to $9.90. The weighted-average remaining contractual life and exercise
price of those options is 7.63 years and $5.53, respectively.
In calculating pro forma information regarding net income and earnings per
share, as required by Statement 123, the fair value was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's Class A common
stock: risk-free interest rate of 6.5%; a dividend yield of 0%; volatility of
the expected market price of the Company's common stock of .40; and a
weighted-average expected life of the option of 7 years.
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, 1996 and 1997 follows:
1996 1997
---------- ----------
Pro forma net income................................ $2,252,000 $3,341,000
Pro forma net income per share...................... $ .36 $ .50
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
F-14
39
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
8. STOCK OPTION AND DEFERRED COMPENSATION PLANS (CONTINUED)
rate of return. Compensation charged to operations and deferred under the plan
totaled $364,000, $302,000 and $410,000 for 1995, 1996 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
In November 1994 and February 1995, the Company and E-Systems, Inc.
(E-Systems), respectively filed legal actions related to E-Systems' cancellation
of purchase orders for ATL Products' DataLibrary and DataTower products. In May
1996, the parties entered into a settlement agreement under which, among other
things, E-Systems agreed to pay the Company $6,160,000, all claims asserted by
the parties were released and the litigation dismissed. In addition, the parties
agreed to an equitable disposition of disputed inventory and entered into a five
year service agreement for Odetics to service units that had been sold to
E-Systems at agreed upon prices. The Company has not recorded any material gain
or loss based on the terms of the settlement agreement.
ATL has leased and began to relocate to a new facility in Irvine,
California during the first calendar quarter of 1997. The annual commitment
under this noncancelable operation lease at March 31, 1997 is as follows (in
thousands):
FISCAL YEAR
-----------------------------------------------------
1998................................................. $ 800
1999................................................. 844
2000................................................. 889
2001................................................. 933
2002................................................. 977
Thereafter........................................... 1,723
10. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in one industry segment whereby it focuses on
information automation through its design, development, manufacturing and
marketing of subsystems and other products for specialized information
automation applications. The Company's principal products include magnetic tape
cartridge and cassette handling subsystems for automated tape library systems
used in computer mass data storage applications; large library cart machines
used in broadcast and cable television station operations; time-lapse VCRs and
related products used in commercial and industrial closed circuit television
security and surveillance applications; and space-qualified digital data
recorders used in manned and unmanned space vehicles.
The Company manufactures and sells its products to commercial customers in
diversified industries as well as to prime government contractors under
long-term contracts. The percentage of the Company's total net sales and
contract revenues contributed by direct and indirect sales to the United States
and foreign governments were approximately 19%, 10% and 11% during 1995, 1996
and 1997, respectively.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and within amounts provided through
the allowances for doubtful accounts. At March 31, 1996 and 1997, accounts
receivable from governmental agencies and prime government contractors were
approximately $970,000 and $1,034,000, respectively.
F-15
40
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
10. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION (CONTINUED)
Information concerning the Company's operations by geographic segment is as
follows:
YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997
-------- -------- --------
Sales to unaffiliated customers:
United States(a)......................... $ 77,955 $ 87,007 $123,428
Europe -- Odetics Europe, Ltd. .......... 5,627 14,553 13,874
Asia Pacific -- Odetics Asia Pacific Pte
Ltd. ................................. 4,163 3,067 3,506
-------- -------- --------
$ 87,745 $104,627 $140,808
======== ======== ========
Sales between geographic areas (based on
invoiced prices):
United States............................ $ 10,452 $ 9,563 $ 4,418
Europe................................... -- -- --
Asia Pacific............................. -- -- --
Intercompany eliminations................ (10,452) (9,563) (4,418)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Income (loss) before taxes:
United States............................ $ (7,019) $ 2,744 $ 5,930
Europe................................... 29 1,998 (215)
Asia Pacific............................. 377 (235) 434
Intercompany eliminations................ (365) (550) --
-------- -------- --------
$ (6,978) $ 3,957 $ 6,149
======== ======== ========
Assets:
United States............................ $ 76,620 $ 78,543 $110,170
Europe................................... 3,367 5,002 5,092
Asia Pacific............................. 1,934 740 1,976
Intercompany eliminations................ (9,563) (5,474) (16,300)
-------- -------- --------
$ 72,358 $ 78,811 $100,938
======== ======== ========
- ---------------
(a) Export sales from the United States to all unaffiliated foreign customers
(which excludes sales to and by Odetics Europe, Ltd. and Odetics Asia
Pacific Pte Ltd.) were approximately $10,000,000, $13,000,000 and
$24,000,000 during 1995, 1996 and 1997, respectively. These sales were
principally made to customers in Europe and the Pacific Rim.
F-16
41
ODETICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
11. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
Net cash used in changes in operating assets
and liabilities, net of litigation
settlement:
Increase in accounts receivable............. $ (435) $(7,129) $(6,649)
(Increase) decrease in net costs and
estimated earnings in excess of
billings................................. 2,064 1,167 (1,217)
(Increase) decrease in inventories.......... (3,102) 2,747 (6,909)
Increase in prepaids and other assets....... (1,109) (556) (1,996)
Increase (decrease) in accounts payable and
accrued expenses......................... (24) 5,166 10,706
------- ------- -------
Net cash used in changes in operating assets
and liabilities............................. $(2,606) $ 1,395 $(6,065)
======= ======= =======
Cash paid during the year:
Interest.................................... $ 2,006 $ 2,415 $ 1,888
Income taxes paid (refunded)................ 292 (133) 975
Noncash transactions during the year:
Issuances of common stock to satisfy
associate incentive program obligation... 140 143 615
Equity of subsidiary allocable to minority
interest................................. $ -- $ -- $ 1,462
F-17
42
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ODETICS, INC.
COLUMN B
------------ COLUMN C COLUMN D COLUMN E
COLUMN A BALANCE AT ------------------------------------------ -------------- --------------
- ------------------------------- BEGINNING OF CHARGED TO COSTS CHARGED TO ACCOUNTS -- DEDUCTIONS -- BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ------------------------------- ------------ ----------------- ----------------------- -------------- --------------
Year ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts................ $ 337,000 $ 827,000 $ -- $ (210,000)(1) $ 954,000
Reserve for inventory
obsolescence............ 861,000 5,381,000 $ -- (161,000) 6,081,000
---------- ---------- --- ------------ ----------
Total................ $ 1,198,000 $ 6,208,000 $ -- $ (371,000) $7,035,000
========== ========== === ============ ==========
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts................ $ 954,000 $ 170,000 $ -- $ (136,000)(1) $ 988,000
Reserve for inventory
obsolescence............ 6,081,000 462,000 -- -- 6,543,000
---------- ---------- --- ------------ ----------
Total................ $ 7,035,000 $ 632,000 $ -- $ (136,000) $7,531,000
========== ========== === ============ ==========
Year ended March 31, 1997:
Deducted from asset accounts:
Allowance for doubtful
accounts................ $ 988,000 $ 277,000 $ -- $ (596,000)(2) $ 669,000
Reserve for inventory
obsolescence............ 6,543,000 2,076,000 -- (2,546,000)(2) 6,073,000
---------- ---------- --- ------------ ----------
Total................ $ 7,531,000 2,353,000 $ -- $ (3,142,000) $6,742,000
========== ========== === ============ ==========
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Consists of additional write-offs in connection with settlement of
litigation with E-Systems, Inc. See Note 9 of Notes to Consolidated
Financial Statements.
F-18
43
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company filed as Exhibit 19.2
to the September 30, 1987 Form 10-Q and incorporated herein by
reference..........................................................
3.2 Bylaws of the Company, as amended, filed as Exhibit 4.2 to Form S-1
filed July 6, 1993 and incorporated herein by reference............
4.1 Specimen of Class A Common Stock and Class B Common Stock
certificates filed as Exhibit 4.3 to Amendment No. 1 filed
September 30, 1993 to Form S-1 filed July 6, 1993 and incorporated
herein by reference................................................
10.1 1981 Incentive Stock Option Plan and form of Stock Option
Agreement, filed as Exhibit 4.1 to the Company's Form S-8 filed
June 27, 1985 (No. 2-98656) (the "1985 Form S-8") and incorporated
herein by reference................................................
10.2 1982 Nonstatutory Stock Option and Stock Appreciation Rights Plan
and forms of Nonstatutory Stock Option and Stock Appreciation
Rights Agreement, filed as Exhibit 4.2 to the 1985 Form S-8 and
incorporated herein by reference...................................
10.3 1992 Incentive Stock Option Plan and forms of Incentive Stock
Option Agreement and Nonstatutory Stock Option Agreement filed as
Exhibit 4.1, 4.2 and 4.3, respectively, to the Company's Form S-8
filed March 10, 1993 (Reg. No. 33-59274) and incorporated herein by
reference..........................................................
10.4 Profit Sharing Plan and Trust, filed as Exhibit 4.3 to Amendment
No. 2 to the 1985 Form S-8 filed May 5, 1988 (Reg. No. 2-98656) and
incorporated herein by reference...................................
10.5 Form of Executive Deferral Plan between the Company and certain
employees of the Company, filed as Exhibit 10.4 to the 1988 Form
10-K and incorporated herein by reference..........................
10.6 Second Amended and Restated Loan Agreement between Bank of the West
and the Company entered into as of September 30, 1992, filed as
Exhibit 10.6 to Form S-1 filed July 6, 1993 and incorporated herein
by reference.......................................................
10.7 Loan and Security Agreement between ATL Products, Inc. and Bank of
the West entered into as of February 26, 1993, filed as Exhibit
10.6 to Form S-1 filed July 6, 1993 and incorporated herein by
reference..........................................................
10.8 Modification Agreement regarding the agreements referenced in
Exhibits 10.6 and 10.7, as modified by the First Amendments to
Modification Agreement from Bank of the West dated as of February
26, 1993 and August 9, 1993 filed as Exhibit 10.6 to Form S-1 filed
July 6, 1993 and incorporated herein by reference..................
10.9.1 Form of Indemnity Agreement entered into by the Company, and
certain officers and directors, filed as Exhibit 19.4 to the
September 30, 1988 Form 10-Q and incorporated herein by
reference..........................................................
10.9.2 Schedule of officers and directors covered by Indemnity Agreement
filed as Exhibit 10.9.2 to Amendment No. 1 filed September 30, 1993
to Form S-1 filed July 6, 1993 and incorporated herein by
reference..........................................................
44
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- --------------------------------------------------------------------------------
10.10 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust, filed
as Exhibits 4.3.1 and 4.3.2 respectively, to Amendment No. 3 to the
1983 Form S-8 (Reg. No. 2-86220) filed June 13, 1990 and
incorporated herein by reference...................................
10.11 Lease between the Company and Roths Properties entered into as of
November 1, 1990 filed as Exhibit 10.11 to Form S-1 filed July 6,
1993 and incorporated herein by reference..........................
10.12 Promissory Note in the original principal amount of $15,000,000
payable to The Northwestern Mutual Life Insurance Company ("NMLI")
dated October 31, 1989 and related Deed of Trust, Security
Agreement and Financing Statement between Odetics, Inc. and NMLI
dated October 31, 1989 filed as Exhibit 10.12 to Form S-1 filed
July 6, 1993 and incorporated herein by reference..................
10.13 Separation and Distribution Agreement between the Company and ATL
dated March 1, 1997................................................
10.14 Tax Allocation Agreement between the Company and ATL dated March 1,
1997...............................................................
10.15 Services Agreement between the Company and ATL dated March 21,
1997...............................................................
10.16 Promissory Note between the Company and ATL dated April 1, 1997....
10.17 Amendment Number Six to Loan and Security Agreement dated March 31,
1997 between the Company, Gyyr, Imperial Bank and Comerica Bank-
California.........................................................
10.18 Note, Security Agreement and Letter Agreement between ATL and
Imperial Bank dated March 15, 1997.
21 Subsidiaries of the Company........................................
23.1 Consent of Ernst & Young LLP.......................................
27 Financial Data Schedule............................................