Iteris Annual Report 1997

1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ ] Based on the closing sale price on Nasdaq National Market on June 26, 1997,the aggregate market value of the voting stock held by nonaffiliates of theregistrant was $66,746,740. For the purposes of this calculation, shares ownedby officers, directors and 10% stockholders known to the registrant have beendeemed to be owned by affiliates. This determination of affiliate status is notnecessarily a conclusive determination for other purposes. As of June 26, 1997, there were 5,318,978 shares of Class A Common Stockand 1,064,241 shares of Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from theregistrant's definitive proxy statement (the "Proxy Statement") for the AnnualMeeting of the Stockholders scheduled to be held on September 5, 1997.================================================================================ 2 ODETICS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PAGE ---- 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 i 3 Note: When used in this Annual Report on Form 10-K and the informationincorporated herein by reference, the words "expect(s)," "feel(s),""believe(s)," "will," "may," "anticipate(s)," and similar expressions areintended to identify forward-looking statement. Such statements are subject tocertain risks and uncertainties which could cause actual results to differmaterially from those projected. Readers are cautioned not to place unduereliance on these forward-looking statements which speak only as of the datehereof. Odetics, Inc. undertakes no obligation to republish revisedforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. Readers are alsourged to carefully review and consider the various disclosures made by theCompany 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 Reportand in Part II, Item 7. "Management's Discussion and Analysis of FinancialCondition and Results of Operations." PART IITEM 1. BUSINESS GENERAL Odetics, Inc. (the "Company") was founded in 1969 to supply digitalrecorders for use in the United States space program. The Company pioneered newdesigns and standards for digital magnetic tape recorders offering enhancedperformance in the adverse environments attendant to space flight, highreliability and long product life. In the 1970s, the Company broadened itsinformation automation product line to include time-lapse video cassetterecorders for commercial and industrial security and surveillance applications.Through the Company's Gyyr Division, it became a leading supplier of time-lapsevideotape cassette recorders, digital image processing modules and relatedproducts used in security and surveillance systems. In the early 1980s, the Company set out to develop the technical expertiseto apply automation to new commercial applications. As part of its initialdevelopment efforts, the Company built ODEX, a prototype six-legged walkingrobot now part of the Smithsonian Institution's permanent collection ofhistorically significant technology. The Company established the BroadcastDivision which pioneered the use of large library cart machines in broadcasttelevision stations and satellite uplink operations. The Broadcast Division is aleading supplier of broadcast automation control systems in the United States The success of the Company's cart machines led the Company to pursue newapplications for information automation technologies, and in 1990, the Companyteamed with E-Systems, Inc. ("E-Systems") to develop and provide a 19mmautomated tape cartridge handling subsystem for E-Systems' EMASS mainframecomputer tape library for the United States Government. In 1991, in a strategicmove to expand its business into new and potentially larger markets, the Companyintroduced an automated tape handling subsystem for integration into tapelibraries designed for midrange computers and client/server networks employingIBM 3480 and similar industry standard tape cartridges. In January 1993, theCompany formed a separate subsidiary, ATL Products Inc. ("ATL") to pursue themarket for automated tape libraries. On March 13, 1997, ATL completed an initial public offering of 1,650,000shares of its Class A Common Stock. Upon completion of this offering, theCompany beneficially owned 82.9% of the outstanding Class A Common Stock of ATL.The Company has announced that it intends to distribute (the "Distribution") toits stockholders, prior to December 31, 1997, all of its shares of Class ACommon Stock of ATL, subject to certain conditions (including the receipt of afavorable letter ruling from the Internal Revenue Service concerning thetax-free nature of the Distribution). The Company is a leading supplier of systems and subsystems to automate thecollection, storage, distribution and management of information. The Company'sbusiness strategy is to focus on selected markets in which the Company mayutilize its expertise in electromechanical design, real-time software controland highly reliable system implementations to produce superior products with asustainable competitive advantage, and to capture major market shares. TheCompany's data storage products manage the vast amounts of data on computersystems, automate television and cable station operations, record videosurveillance, store information gathered in space exploration and archive moviesfor video on demand systems. 1 4 ATL PRODUCTS, INC. ATL designs, manufactures, markets and services automated magnetic tapelibraries used to manage, store and transfer data in networked computingenvironments. ATL is a leading provider of Digital Linear Tape ("DLT") automatedtape libraries for the high end of the networked computing market (one terabytecapacity and above). ATL's products provide a high performance, reliable, costeffective 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 proprietaryIntelliGrip cartridge handling system, providing end users with rapid andreliable access to computer data across a wide variety of networks. ATL'sproprietary robotics system within each automated tape library providesadditional speed and reliability due to the accurate and timely manner in whichtape cartridges are loaded and unloaded into the DLT drives. ATL's products arecompatible with commonly used network operating systems, protocols andtopologies as well as with a broad range of storage management software. Inaddition, 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 astandalone unit or up to 46 terabytes of data with the SystemLink Option, whichlinks up to five 2640 units together for larger storage requirements. ATL was established in 1990 as a division of the Company, was incorporatedin California in February 1993 as a wholly-owned subsidiary of the Company andwas reincorporated in Delaware in December 1996. ATL's executive offices arelocated at 2801 Kelvin Avenue, Irvine, California 92614, and its telephonenumber at that location is (714) 774-6900. Sales, Marketing and Principal Customers ATL markets and sells its products through indirect sales channelscomprised primarily of VARs and OEMs pursuant to strategic arrangements andindividual purchase agreements. Sales of new technological advancements areoften initially made through VARs who generally evaluate, integrate and adoptnew technology more quickly than OEMs. As a technology achieves greater marketacceptance, OEM sales generally have represented an increased portion of thesales of the products incorporating that technology. During the year ended March31, 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 theCompany's total net sales and contract revenues. ATL has entered into agreements with several major OEMs, including, amongothers, DEC, EMC and Sun Microsystems, who incorporate ATL's products intosystems sold by the OEMs. ATL has entered into strategic relationships withcertain of these OEMs which has enabled ATL to work with OEMs early in theirproduct development cycle thereby providing valuable development feedback toATL. The sales cycle for OEMs often encompasses a long lead time and generallyinvolves extensive product and system qualification, evaluation, integration andverification. ATL believes the OEM channel is also critical to ATL's successbecause 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 manufacturedcertain automation subsystems utilizing 19mm technology exclusively forE-Systems. In the third quarter of fiscal 1995, ATL announced that itscontractual relationship with E-Systems was deteriorating and it would incurcharges related to the loss of E-Systems business. On November 15, 1994, ATLinitiated an action against E-Systems alleging breach of contract. On May 22,1996, the Company announced that it and ATL Products settled all pendinglitigation 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 manufacturingfacilities to a new 120,000 square foot facility, of which 2 5 approximately 50,000 square feet is attributed to manufacturing space. ATLcurrently operates four assembly lines during one daily eight hour shift. ATL manufactures the robotics subassemblies used in its automated tapelibraries and performs final assembly and testing of purchased components. ATL'smanufacturing processes consist primarily of final systems integration andquality assurance. ATL depends, to a large degree, on outside suppliers toprovide most of the components incorporated in ATL's products including the DLTdrives, circuit boards, moldings and chassis. While many of the parts andcomponents used in ATL's products are available from a number of fabricators inCalifornia, the DLT drives are available only from a single supplier, QuantumCorporation. Quantum may terminate its agreement with the Company for any reasonupon 90 days notice. Any disruption in ATL's relationship with such supplier orany of ATL's other sole source suppliers would have a material adverse effect onthe Company's business, financial condition and results of operations. BROADCAST DIVISION The Broadcast Division's video tape libraries automate the storage andtelevising of commercials, news spots and other television programming recordedon videotape cassettes. Automated video libraries increase labor efficiency byautomatically performing tape insertion and other filing tasks previouslyperformed manually or by machines with limited capacity and utility. The Companybelieves that enhanced operational efficiencies are a principal factorunderlying the increased automation of broadcast television stations andsatellite uplink operations. The Broadcast Division's earliest commercial success in the manufacture ofvideo tape libraries was with the TCS2000 followed by the TCS90. The recentmarket trend toward smaller libraries, coupled with digital hard disk recordingdevices was led by the Company with the introduction of highly integratedcaching systems employing the Company's newest cart machine, the TCS45. TheTCS45 can be coupled with hard drive recorders available from several recognizedsuppliers to the broadcast community. The Company now offers software to formpowerful integrated systems, including the MicroSpot(TM) and the SpotBank(TM). Multi-channel presentation systems, which integrate the complete line ofthe Company's hardware with commonly available broadcast quality video diskrecorders, 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 televisionsystem operators. Sales and marketing management is located at the Company'sprincipal facilities in Anaheim, California, with a dedicated field sales forceof four persons operating in four U.S. sales regions plus a sales manager forLatin America. European sales and marketing activities are conducted and managedby Odetics Europe, Ltd., a wholly-owned subsidiary of the Company. Asia salesand marketing activities are conducted by Odetics Asia Pacific Pte Ltd., awholly-owned subsidiary of the Company located in Singapore. Additionalrepresentative organizations are utilized to promote the Broadcast Division'sproducts in various other foreign markets. Customers include major television networks such as the BritishBroadcasting Corporation, Canadian Broadcasting Corporation, CNBC/FNN, Euronews,Televisa, Measat Broadcast Network Systems, NBC, the PBS Network, Group WSatellite Communications (for the Arts & Entertainment Network and DiscoveryChannel), Asia Broadcast Centre, Univision and over 100 independent andnetwork-affiliated television stations. The Broadcast Division has systemsinstalled in over 30 countries. Manufacturing and Materials The Broadcast Division maintains a dedicated manufacturing area locatedwithin the Company's Anaheim, California facilities. The Company's SpotBank(TM)and MicroSpot(TM) products are manufactured primarily on a lot assembly/modulebuild basis. At the Anaheim facility, the Broadcast Division and Gyyr 3 6 Division share common infrastructure support in the areas of production andinventory control, purchasing, quality assurance, manufacturing and engineering.A single management structure oversees these operations. The Broadcast Division purchases cabinets and other fabricated parts andcomponents. The Broadcast Division purchases video servers from Tektronix, ASCand Hewlett Packard along with video switching, conversion and monitoringequipment from Tektronix and Leitch for installation in the Company's automatedvideo management systems. GYYR, INC. During fiscal 1997, the Company formed a wholly-owned subsidiary, GyyrInc., a California corporation ("Gyyr") to operate the business of its formerGyyr Division. Time-lapse VCRs are employed extensively in area monitoring bybanks, convenience stores, retailers and other businesses. Time-lapse VCRs arefrequently installed at automated teller machine ("ATM") and retail computerizedpayment machine locations to record pictures of individuals making transactionswhile simultaneously recording transaction information in an effort to deter andaddress incidents of theft and other crimes at these locations. Customer demandfor more sophisticated capabilities, such as computer interfaces to recordtransaction information simultaneously with video images, electronic processorsto record multiple cameras on one VCR and digital image processing andenhancement, also have contributed to recent growth of the market for Gyyr'sproducts. The Company believes that many of the same market forces at work inthe United States exist in certain foreign markets as well and that, generally,the international markets are growing as fast as in the United States. Duringfiscal 1996, the Gyyr Division introduced a new line of time-lapse VCR's and anew high performance FasTrans product family for communicating video and controlsignals over telephone and newer broadband communication channels. Sales, Marketing and Principal Customers Gyyr markets and sells its products directly to its private label OEMaccounts. Gyyr personnel located at the Company's principal facilities alsooversee a network of approximately 2,500 security equipment dealers anddistributors throughout the United States and Canada who sell the Gyyr'sproducts to end users. Gyyr utilizes foreign representatives in South America,Mexico and Asia and employs a business development and service staff throughOdetics Europe, Ltd., a wholly-owned United Kingdom subsidiary of the Company.Odetics Europe, Ltd. assists Gyyr in its sales and marketing activities inEuropean markets. Gyyr also utilizes Odetics Asia Pacific Pte Ltd. to assist insales to the Asian markets. Gyyr's principal customers include major securityequipment 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'sprincipal facilities. Gyyr primarily uses continuous unit flow assembly lines.Gyyr and the Broadcast Division share common infrastructure support in the areasof production and inventory control, purchasing, quality assurance andmanufacturing engineering. A single management structure oversees theseoperations. Gyyr purchases VCRs modified to the Company's specifications exclusivelythrough Nissei Sangyo America, the United States distribution affiliate ofHitachi, Ltd., into which the Company incorporates certain value-added features.The Company is vulnerable to changes in Hitachi, Ltd.'s basic VCR model, whichmight 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 berequired to accommodate such VCRs, and Gyyr could experience temporary delays orinterruptions in supply while such changes are incorporated or a new supplier isprocured. COMMUNICATIONS DIVISION The Communications Division includes both telecommunications relatedproducts and space borne digital data recorders. The telecommunications businessunit supplies products that synchronize telecommuni- 4 7 cation and computer systems and products that provide an interface between thepublic (WAN) network and private (LAN) networks. Odetics telecom synchronization products are sold for new applications incellular telephone systems and the new PCS networks being implemented throughoutthe world. The principal customer of the Communications Division is LGIC ofKorea. 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 productofferings fall into two categories: interface boards and stand alone systems.The interface boards are ATM and SONET based, and are sold primarily to othertelecom equipment manufacturers. The space business unit manufactures digital data recorders that are usedin manned and unmanned space vehicles to store data gathered by onboard sensorsprior to transmission of the data to ground receiving stations. These recordersare employed in satellite programs for space research, earth resource andenvironmental observation and weather monitoring, as well as global surveillanceand classified government programs. Sales, Marketing and Principal Customers The Communications Division conducts its selling and marketing activitiesworldwide directly from the Company's principal facilities. During the fiscalyear ended March 31, 1997 approximately 38% of the Communications Division'ssales were derived from contracts with domestic or foreign governmental agenciesand prime government contractors. Manufacturing and Materials The Communications Division production capabilities fall into twocategories: commercial and space. The telecom business unit manufactures to bestcommercial practices. The group became ISO certified in February 1997. Most ofthe manufacturing operations are final assembly and test. Board assembly andsome preliminary fabrication processes are outsourced. The space production is designed for low volume, program-managedmanufacture, often with nonrecurring engineering for individual customer needs.Because of these unique requirements, the space business unit has extensivemachining 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 asmaintenance and support services for ATL and Gyyr. The market for third party,on-site computer maintenance services includes certain United States Governmentinstallations and commercial businesses with large scale automated or electronicdocument storage and retrieval systems. Effective December 31, 1996, the Companyreorganized its service operations. As part of this reorganization, OCS'operations were divided between ATL and Gyyr, and merged into each respectivecorporation. CUSTOMER SUPPORT AND SERVICES The Company provides warranty service for each of its product lines, aswell as follow-on service and support for which the Company typically chargesseparately. The Company also offers separate software maintenance agreements toits customers. Management views customer support services as a criticalcompetitive factor as well as a revenue source. The Company maintains its ownservice groups and trains its customers, representatives and distributors in theperformance of user level maintenance. Modular product designs with recommendedspare packages are used wherever feasible to minimize mean time to repair. 5 8 BACKLOG The Company's backlog of unfulfilled firm orders was approximately $23.6million 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 asrevenues in fiscal 1997 and approximately 95.1% of the Company's backlog atMarch 31, 1997 is expected to be recognized as revenues in fiscal 1998. Pursuantto the customary terms of the Company's agreements with government contractorsand other customers, orders generally may be cancelled or rescheduled by thecustomer. Lead times for the release of purchase orders depend upon thescheduling and forecasting practices of the Company's individual customers,which also can affect the timing of the conversion of the Company's backlog intorevenues. For these reasons, among others, the Company's backlog at a particulardate may not be indicative of its future revenues. PRODUCT DEVELOPMENT The Company's business requires substantial ongoing research anddevelopment expenditures and other product development activities. For fiscalyears 1995, 1996 and 1997, the Company incurred approximately $9.3 million, $7.0million and $13.4 million, respectively, of Company sponsored research anddevelopment costs and expenses, including reimbursable research and developmentexpenses of the Company allowed in the Company's negotiated general andadministrative rates on cost contracts with the United States Government. Inaddition to the foregoing expenditures, the Company also conductscustomer-sponsored product development, principally for the United StatesGovernment, under long-term contracts. The Company typically retains the rightto 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 developmentprograms and incur significant research and development expenditures in all ofits principal product lines and services. These programs are directed towarddeveloping new products for advanced automated libraries as well as theprocessing and distribution of digital images. COMPETITION The Company faces significant competition in each of its targeted markets.Certain of the Company's competitors have substantially greater financial,technical, marketing and customer service resources than the Company. Increasedcompetition is likely to result in price reductions, reduced gross margins andloss of market share, all of which could have a material adverse effect on theCompany's business, financial condition and results of operations. The principalcompetitive factors in the markets in which the Company participates are productquality and performance, price, reliability, upgradeability, service andtechnical support. ATL competes directly, both domestically and internationally, with a numberof companies offering data storage products using various technologies,including Sun Microsystems, Silicon Graphics, Compaq, Hewlett Packard andothers. The Company believes eight tape library manufacturers currently provideDLT based products, including ATL's principal competitors, ADIC, Breece HillTechnologies, Hewlett-Packard and StorageTek. ATL competes indirectly with alarge number of manufacturers offering tape storage systems using formats otherthan DLT including 8mm, 4mm (DAT), 3480 and QIC that have larger installed basesand may be expected to continue to provide intense competition for the DLTformat. These competitors include ADIC, Exabyte, Fujitsu, Hitachi, IBM, SpectraLogic and StorageTek. ATL anticipates these competitors will expand thefunctionality and performance of their selected storage technologies to competeeffectively with DLT. The Broadcast Division's primary competitors include Sony, Panasonic, Avid,Louth and Pro-bel. Sony and Panasonic are large, international suppliers ofextensive professional quality products, including cart machines, for thebroadcast television market. Avid competes in the area of disk based videoserver products, principally against the Broadcast Division's SpotBank products.Louth and Probel principally provide automation control for video libraries anddisk recorders. The Broadcast Division's products compete primarily 6 9 on the basis of product features, including their capacity to accommodatebroadcast quality VCRs from all manufacturers, which is unique among productofferings 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 andother resources than the Company. Numerous other companies, including Japaneseand other offshore vendors of VCRs, also offer competitive products. Managementbelieves that Gyyr's products compete primarily on the basis of theirvalue-added features, including those relating to digital image processing. The primary competition for the Communications Division's networksynchronization products is Datum, Inc. The Communications Division's space taperecorder market, the Company competes with General Electric Corporation,Lockheed Corporation, and Schlumberger, S.A. An additional competitive factor inthis market is space flight experience; however, with the advent of solid staterecorders the Company may face new competitors. The Communications Divisionsemerging network interface products are addressing market niches. The market for the Company's products is highly competitive and ischaracterized by rapidly changing technology and evolving standards. The Companybelieves that its ability to compete depends on a number of factors, includingthe success and timing of new product development by the Company and itscompetitors, compatibility of the Company's products with a broad range ofcomputing systems, product performance, reliability and price, and customersupport. The Company believes that the principal competitive factors in thenetworked computing market are storage capacity, data transfer rate, low cost ofownership, price, product quality and reliability, timing of new productintroductions and ability to meet customer volume needs. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company's ability to compete effectively depends in part on its abilityto develop and maintain the proprietary aspects of its technology. The Company'spolicy is to obtain appropriate proprietary rights protection for anypotentially significant new technology acquired or developed by the Company. TheCompany currently holds a number of United States and foreign patents andtrademarks. The patents will expire at various dates through 2012. The Companyalso has pending a number of United States and foreign patent applicationsrelating to certain of its products; however, there can be no assurance that anypatents will be granted pursuant to these applications. In addition to patent laws, the Company relies on copyright and tradesecret laws to protect its proprietary rights. The Company attempts to protectits trade secrets and other proprietary information through agreements withcustomers and suppliers, proprietary information agreements with the Company'sAssociates (as hereinafter defined) and consultants and other similar measures.There can be no assurance, however, that the Company will be successful inprotecting its proprietary rights. While management believes its patents, patent applications, software andother proprietary know-how have value, changing technology makes the Company'sfuture success dependent principally upon its Associates' technical competenceand creative skills for continuing innovation. Litigation may be necessary inthe future to enforce the Company's proprietary rights, to determine thevalidity and scope of the proprietary rights of others, or to defend the Companyagainst claims of infringement or invalidity by others. An adverse outcome insuch litigation or similar proceedings could subject the Company to significantliabilities to third parties, require disputed rights to be licensed from othersor require the Company to cease marketing or using certain products, any ofwhich could have a material adverse effect on the Company's business, financialcondition and results of operations. In addition, the cost of addressing anyintellectual property litigation claim, both in legal fees and expenses and thediversion of management resources, regardless of whether the claim is valid,could be significant and could have a material adverse effect on the Company'sresults of operations. ASSOCIATES The Company refers to its employees as Associates. As of June 10, 1997, theCompany employed 630 Associates, including 115 Associates in general management,administration and finance; 67 Associates in 7 10 sales and marketing; 180 Associates in product development; 213 Associates inoperations, manufacturing and quality; and 55 Associates in customer service.None of the Company's Associates is represented by a labor union and the Companyhas 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 materialsinto the environment. The Company is not involved in any pending or threatenedproceedings which would require curtailment of its operations because of suchregulations. The Company continually expends funds to assure that its facilitiesare in compliance with applicable environmental regulations. However, suchexpenditures have not been significant in the past and no significant futureexpenditures 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 governmentinformation or may be used in classified programs of the United StatesGovernment. For this purpose, the Company and certain Associates possessrelevant security clearances. The Company's affected facilities and operationsare subject to security regulations of the United States Government. The Companybelieves it is in full compliance with these regulations. 8 11 RISK FACTORS The Company's business is subject to a number of risks, some of which arediscussed below. Other risks are presented elsewhere in this Report. Thefollowing risks should be considered carefully in addition to the otherinformation contained in this Report in evaluating the Company and its businessbefore purchasing the shares of the Company's Common Stock. Fluctuations in Quarterly Operating Results. The Company has experiencedwide fluctuations in quarterly and annual operating results in the past and maycontinue 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, withoutlimitation, the size and timing of significant customer orders; the introductionof new products by competitors; the availability of components used in themanufacture of the Company's products; the expenditure of substantial funds forresearch and development for its subsidiaries and divisions; changes in pricingpolicies by the Company, its suppliers or its competitors and increased pricecompetition; the ability of the Company to develop, introduce, market and gainmarket acceptance of new products, applications and product enhancements in atimely manner and to control costs; the Company's success in expanding andimplementing its sales and marketing programs; technological changes in thenetworked computing market and the other markets in which the Company operates;the reduction in revenues from government programs; the relatively thin level ofbacklog at any given time; the mix of sales among the Company's channels;deferrals of customer orders in anticipation of new products, applications orproduct enhancements; currency fluctuations; and general economic and marketconditions. Moreover, the Company's sales in any quarter typically consist of arelatively small number of large customer orders, and the timing of a smallnumber of orders can impact quarter to quarter results. The loss of or asubstantial reduction in orders from any significant customer could have amaterial adverse effect on the Company's business, financial condition andresults of operations. The Company's growth in revenues in recent periods maynot be sustainable and may not be indicative of future operating results, andthere can be no assurance that the Company will continue to achieveprofitability on a quarterly or annual basis in the future. Due to all of theforegoing factors and other risks discussed below, it is possible that in somefuture period the Company's operating results may be below the expectations ofanalysts and investors. In such event, the market price of the Company'ssecurities 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 independentsuppliers, 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 DLTbased products and related services. Quantum Corporation, which has theexclusive worldwide manufacturing rights for the DLT technology, is the solesupplier of the DLT tape drives used in ATL's products. Quantum has informed ATLthat the growth in the demand for the DLT7000 drives will result in continuedlimitations in the availability of these drives. ATL does not expect that itsindicated allocation of DLT7000 drives will have a material adverse effect onits results of operations in the near future. The foregoing statement isintended to be a forward-looking statement and actual results may differ as aresult of the factors set forth in this paragraph. There can be no assurancethat Quantum will not revise its allocation to ATL or that Quantum willotherwise continue to provide an adequate supply of the DLT7000 drives. TheCompany also currently relies on single supplier for the principal component ofthe GYYR's time-lapse videotape cassette recorders. The Company has not beenable to secure any guarantee of the future supply of its sole sourcedcomponents. The disruption or termination of the supply of any of the Company'ssource sourced components for any reason would have a material adverse effect onthe Company's business, financial condition and results of operations. Rapid Technological Change; Effect of New Product Introductions. Themarkets served by the Company are characterized by rapid technological advances,downward price pressure in the marketplace as technologies mature, changes incustomer requirements, frequent new product introductions and enhancements, andevolving industry standards. The Company's business requires substantial ongoingresearch and development efforts and expenditures, and its future success willdepend on its ability to enhance its current products, reduce product costs anddevelop and introduce new products which incorporate the latest technologicaladvancements in hardware, storage media, operating system software andapplications software in response to 9 12 evolving customer requirements. The Company's failure to anticipate or respondadequately to technological developments and changing customer requirements, theoccurrence of significant delays in new product development or introduction orthe failure of any new products to gain market acceptance could impair theCompany's competitiveness and could materially and adversely affect theCompany's business, financial condition and results of operations. There can beno assurance that the Company will be able to introduce new products orenhancements to existing products on a timely basis, if at all, or the effect towhich such introductions will have on sales of existing products. To the extentnew products are introduced, they may contain undetected design faults andsoftware errors, or "bugs," when first released by the Company that, despitetesting by the Company, are discovered only after a product has been installedand used by customers. Although the Company has not experienced any materialadverse effect resulting from any such faults or errors to date, there can be noassurance that faults or errors in the Company's existing products or in newproducts introduced by the Company will not be discovered in the future, causingdelays in product introduction and shipments or requiring design modificationsthat could adversely affect the Company's competitive position and results ofoperations. Competition. The Company competes in each of its markets with numerousother companies, many of which have far greater name recognition and financial,technological, marketing and customer service resources than the Company and maybe able to respond more quickly to new or emerging technologies and changes incustomer requirements, or devote greater resources to the development,promotion, sale and support of their products than the Company. The principalcompetitive factors in the markets in which the Company participates are productquality and performance, price, reliability, upgradeability, service andtechnical support. There can be no assurance that the Company will be able tocompete effectively in the markets for its products. Increased competition islikely to result in price reductions, reduced gross margins and loss of marketshare, any of which could have a material adverse affect upon the Company'sbusiness, operating results and financial condition. Risks Associated with International Sales. International product salesrepresented approximately 12% and 17% of the Company's total net sales andcontract revenues during fiscal 1996 and 1997, respectively. The Companybelieves that international sales will continue to represent a significantportion of its revenues, and that continued growth and profitability willrequire further expansion of its international operations. The Company'sinternational sales are currently denominated primarily in U.S. dollars, and anincrease in the relative value of the dollar could make the Company's productsmore expensive and, therefore, potentially less price competitive ininternational markets. Additional risks inherent in international businessactivities generally include unexpected changes in regulatory requirements,tariffs and other trade barriers, longer accounts receivable payment cycles,difficulties in managing and staffing international operations, potentiallyadverse tax consequences including restrictions on the repatriation of earnings,the burdens of compliance with a wide variety of foreign laws, currencyfluctuations and political and economical instability. The Company does notengage in any transactions as a hedge against risks of loss due to foreigncurrency fluctuations. There can be no assurance that such factors will not havea 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 totalrevenues may also be affected to a greater extent by seasonal fluctuationsresulting from lower sales that typically occur during the summer months inEurope and other parts of the world. Dependence on Key Personnel. The Company's future performance depends to asignificant extent on its senior management and other key employees, inparticular Joel Slutzky, the Company's Chief Executive Officer, and Kevin C.Daly, Ph.D., the Chief Executive Officer of ATL. The loss of the services ofeither Mr. Slutzky or Dr. Daly would have a material adverse effect on theCompany's development and marketing efforts. The Company's future success willalso depend in large part upon its ability to attract, retain and motivatehighly skilled employees. In addition, the Company is actively seeking to retaina 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 tocontinue to attract and retain sufficient numbers of such highly skilledemployees. The Company's inability to 10 13 attract and retain additional key employees or the loss of one or more of itscurrent key employees could have a material adverse effect upon the Company'sbusiness, financial condition and results of operations. Dependence on Proprietary Technology; Risks of Infringement. The Company'sability to compete effectively depends in part on its ability to develop andmaintain proprietary aspects of its technology which the Company attempts toprotect with a combination of patent, copyright, trademark and trade secretlaws, employee and third party nondisclosure agreements and similar means. Suchrights may not preclude competitors from developing substantially equivalent orsuperior products to the Company's products. In addition, the laws of someforeign countries do not protect the Company's proprietary rights as fully as dothe laws of the United States. There can be no assurance that the Company'smeans of protecting its proprietary rights in the United States or abroad willbe adequate, that future patents will be issued, or that competitors will notindependently develop technologies that are similar or superior to the Company'stechnology, duplicate the Company's technology, or design around any patent ofthe Company. Moreover, litigation may be necessary in the future to enforce theCompany's intellectual property rights, to determine the validity and scope ofthe proprietary rights of others, or to defend the Company against claims ofinfringement or invalidity by others. An adverse outcome in such litigation orsimilar proceedings could subject the Company to significant liabilities tothird parties, require disputed rights to be licensed from others or require theCompany to cease marketing or using certain products, any of which could have amaterial adverse effect on the Company's business, financial condition andresults of operations. If the Company is required to obtain licenses underpatents or proprietary rights of others, there can be no assurance that anyrequired licenses would be made available on terms acceptable to the Company, ifat all. In addition, the cost of addressing any intellectual property litigationclaim, both in legal fees and expenses and the diversion of managementresources, regardless of whether the claim is valid, could be significant andcould have a material adverse effect on the Company's results of operations. Volatility of Stock Price. The trading price of the Company's Common Stockcould be subject to wide fluctuations in response to quarterly variations inoperating results, shortages announced by suppliers, announcements oftechnological innovations or new products, applications or product enhancementsby the Company or its competitors, changes in financial estimates by securitiesanalysts and other events or factors. In addition, the stock market hasexperienced volatility which has particularly affected the market prices ofequity securities of many high technology companies and which often has beenunrelated to the operating performance of such companies. These broad marketfluctuations may adversely affect the market price of the Company's securities. Concentration of Ownership. As of June 26, 1997, the Company's officers anddirectors beneficially owned a majority of the total combined voting power ofthe outstanding shares of Class A Common Stock and Class B Common Stock. As aresult of their stock ownership, management will be able to significantlyinfluence the election of the Company's directors and the outcome of corporateactions requiring stockholder approval, such as mergers and acquisitions,regardless of how other stockholders of the Company may vote. This concentrationof voting control may have a significant effect in delaying, deferring orpreventing a change in management or change in control of the Company and mayadversely affect the voting or other rights of other holders of Common Stock. Pending Distribution. The Company has announced its intention to distributeto its stockholders all of its shares of ATL Class A Common Stock prior toDecember 31, 1997, subject to the satisfaction or waiver of certain conditions(including the receipt by the Company of a favorable tax ruling from theInternal Revenue Service confirming the tax-free nature of the Distribution). Noassurance can be given, however, that such conditions will be satisfied orwaived, or that the Distribution will occur. For the Distribution to occur, theBoard of Directors of the Company must conclude, at the time of theDistribution, that the Distribution is in the best interest of the stockholdersof the Company. Failure to undertake the Distribution could materially andadversely affect the market price of the Company's securities. Anti-Takeover Effect of Charter Provisions, Bylaws and Stock Structure. TheCompany has two classes of Common Stock which are substantially identical otherthan with respect to voting power. The Class A Common Stock offered herebyentitles the holder to 1/10th vote per share and Class B Common Stock 11 14 entitles the holder to one vote per share, with concentration of ownership ofthe Class B Common Stock in the Company's officers and directors and theiraffiliates. In addition, the Company's Board of Directors is elected annually ona split vote basis, with the holders of Class A Common Stock currently beingentitled to elect two of the directors and holders of the Class B Common Stockcurrently being entitled to elect the remaining six directors. These provisionscould have the effect of discouraging a proxy contest or making it moredifficult for a third party acquiring a substantial block of the Company'sCommon Stock to effect a change in management and control of the Company. Suchprovisions also could limit the price that investors might be willing to pay inthe future for shares of the Company's Common Stock. The Board of Directors of the Company is authorized to issue, withoutstockholder approval, up to 2,000,000 shares of Preferred Stock with voting,conversion and other rights and preferences, as well as additional shares ofCommon Stock, which could adversely affect the voting power or other rights ofthe holders of Class A Common Stock. Although the Company has no current plansto issue any shares of Preferred Stock or additional shares of Common Stockother than the Class A Common Stock offered hereby, the future issuance ofPreferred Stock or Common Stock or of rights to purchase Preferred Stock orCommon 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 buildingcomplex containing approximately 250,000 square feet situated on approximately14.1 acres adjacent to the Interstate 5 freeway one block from Disneyland. TheseCompany-owned facilities house the Company's corporate and administrativeoffices (approximately 43,000 dedicated square feet), as well as Gyyr and theBroadcast Division, (approximately 87,000 dedicated square feet), theCommunications Division (approximately 67,000 dedicated square feet), OCSDivision (approximately 15,000 dedicated square feet), until March 1997 ATL(approximately 50,000 dedicated square feet). Commencing in March 1997, ATLleased an additional 120,000 square foot facility in Irvine, California under alease which expires in October 2003. ATL has an option to extend the lease foran additional five year period. The base rent for ATL's new facility is $65,000per month. The Communications Division leases approximately 4,500 square feet of spacein a manufacturing facility located on 0.62 acre in El Paso, Texas. TheBroadcast Division leases approximately 5,000 square feet in Austin, Texas tomanufacture certain product families. Odetics Europe Limited's offices arelocated in leased space near London, England. Odetics Asia Pacific Pte. Ltd.offices are located in leased space in Singapore. The Company currently is operating a single shift in its manufacturing andassembly facilities and it believes that its facilities are adequate for itscurrent needs and for possible future growth. However, the Company may elect toexpand 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 allpending litigation with E-Systems, Inc. and EMASS, Inc. (collectively,"E-Systems"). The settlement was effected pursuant to a written SettlementAgreement and General Release between the parties, under which E-Systems paidthe Company approximately $6.1 million, including an amount designated as aroyalty payment on library systems sold by E-Systems which the Company allegedinfringed on its patented technology. See "Management's Discussion of FinancialCondition and Results of Operations." For its part, the Company agreed for aperiod of five years to provide spare parts and certain other customer supportservices for the installed base of DataTowers that the Company previously soldto E-Systems. The parts and services generally will be provided in accordancewith Odetics' general terms and conditions, less a specified discount. TheCompany 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 salescosts) realized by the Company from the sale of the refurbished units and todeliver 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 thatStorageTek had infringed the Company's patent covering robotics tape 12 15 cassette handling systems (United States Patent No. 4,779,151). StorageTekcounterclaimed alleging that the Company infringed several of StorageTek'spatents. Prior to trial, the court dismissed two of the infringement claimsagainst the Company and the third clam was resolved between the parties. InJanuary 1996, the jury determined that the patent claims were not infringedunder the doctrine of equivalents based upon a claim construction defined by thecourt prior to the trial. The jury also concluded that the Company's patent wasnot invalid. In June 1997, the United States Court of Appeals for the FederalCircuit vacated the lower court's claim construction and findings ofnoninfringement of the Company's patent. The appellate court remanded the casefor consideration of infringement under a proper claim construction. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourthquarter of fiscal 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 onthe Nasdaq National Market under the symbols "ODETA" and "ODETB," respectively.The following table sets forth for the fiscal periods indicated the high and lowsale prices for the Class A Common Stock and Class B Common Stock as reported bythe 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 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 ACommon Stock and 195 holders of record of Class B Common Stock according toinformation furnished by the Company's transfer agent. DIVIDEND POLICY Pursuant to the terms of the Company's Loan and Security Agreement with itsbanks, the Company is restricted in declaring cash dividends on its Common Stockin an amount not to exceed in any fiscal year 10% of the Company's consolidatednet income for the prior fiscal year. The Company never paid or declared cashdividends on its Common Stock, and has no current plans to pay such dividends inthe foreseeable future. The Company currently intends to retain any earnings forworking capital and general corporate purposes. The payment of any futuredividends will be at the discretion of the Company's Board of directors, andwill depend upon a number of factors, including, but not limited to, futureearnings, the success of the Company's business, activities, its capitalrequirements, the general financial condition and future prospects of theCompany, general business conditions, the consent of the Company's principallender 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. 13 16 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data with respect to theCompany's consolidated statement of operations for each of the five fiscal yearsin the period ended March 31, 1997 and the consolidated balance sheet data atMarch 31, 1993, 1994, 1995, 1996 and 1997 are derived from the auditedconsolidated financial statements of the Company. The consolidated financialstatements and the related report of independent auditors for the fiscal yearsended March 31, 1993 and 1994 and the Company's consolidated balance sheet atMarch 31, 1995 are not included in this Report. The following information shouldbe read in conjunction with "Management's Discussion and Analysis of FinancialCondition and Results of Operations" and with the Consolidated FinancialStatements of the Company and the related notes thereto included elsewhere inthis 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 $131,776Contract revenues.............................. 20,825 18,099 13,280 10,161 9,032 ------- ------- ------- -------- --------Total net sales and contract revenues.......... 69,312 84,162 87,745 104,627 140,808Cost of sales.................................. 33,668 44,281 51,148 63,398 84,096Cost of contract revenues...................... 13,967 11,114 6,633 4,374 4,907Selling, general and administrative expense.... 14,169 17,162 20,899 23,678 30,293Research and development expense............... 5,187 7,268 9,309 6,973 13,420Nonrecurring charge............................ -- -- 4,809 -- --Interest expense............................... 2,125 1,772 1,925 2,247 1,890Minority interest.............................. -- -- -- -- 53 ------- ------- ------- -------- --------Income (loss) before income taxes.............. 196 2,565 (6,978) 3,957 6,149Income 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 $ 39,176Total assets................................... 55,124 65,928 72,358 78,811 100,938Long term debt (less current portion).......... 24,413 16,723 25,757 22,019 11,860Retained earnings.............................. 8,884 10,706 6,027 8,481 12,211Total stockholders' equity..................... 19,213 31,239 27,736 30,985 51,828 14 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS. RESULTS OF OPERATIONS The Company specializes in the design and manufacture of systems andsubsystems to automate the collection, storage, distribution and management ofinformation. The Company is organized into separate divisions or subsidiaries,each having primary responsibility for product development, manufacturing andmarketing of one or more of the Company's principal product lines or services.The Company has four distinct manufacturing operations each tailored to therequirements of its principal product divisions. The following table sets forth certain income statement data as apercentage of total net sales and contract revenues for the periods indicatedand should be read in conjunction with Management's Discussion and Analysis ofFinancial 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 revenuesincreased 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 March31, 1996 ("fiscal 1996"), and increased 19.3% in fiscal 1996 from $87.7 millionfor the fiscal year ended March 31, 1995 ("fiscal 1995"). Net sales increased39.5% to $131.8 million in fiscal 1997 from $94.5 million in fiscal 1996primarily due to an increase in ATL's net sales which reflected continued growthin its DLT based products and included the initial shipments in the fourthquarter of fiscal 1997 of its new 7100 Series tape libraries. The Company alsoexperienced growth in sales of its telecommunication products in fiscal 1997largely due to increased unit sales of its synchronization products for cellulartelephone systems and sales of its LIMO family of products for telecommunicationinterfaces. Gyyr experienced a 12.5% increase in net sales in fiscal 1997 ascompared to fiscal 1996 while the Company's Broadcast Division's net salesdecreased 15% as compared to the prior fiscal year. The Company's net sales in increased 26.9% to $94.5 million in fiscal 1996from $74.5 million in fiscal 1995 due in large part to sales growth in alldivisions involved in commercial product sales, particularly in the Company'sBroadcast Division. The Broadcast Division's 59.9% increase in net sales fromfiscal 1996 as compared to fiscal 1995 reflected an increase in shipments of itsSpotBank(TM), Cache Machine(TM) and TCS 45(TM) systems, as well as additionalrevenue attributable to upgrades for previously sold systems. ATL's 29.9%increase in net sales in fiscal 1996 as compared to fiscal 1995 was primarilydue to an increase in sales of its 520 Series and 2640 Series product lines inboth the domestic and European markets through Odetics Europe Limited, awholly-owned subsidiary of the Company which more than offset the loss of 19mmtape library products that were discontinued in fiscal 1995. The Company's contract revenues are comprised of revenues from governmentcontracts and declined 11.8% to $9.0 million in fiscal 1997 from $10.2 millionin fiscal 1996, and declined 23.5% in fiscal 1996 from 15 18 $13.3 million in fiscal 1995. The declines in fiscal 1997 and fiscal 1996 areprimarily due to changes in government spending patterns and a transition by theCompany from certain government markets to commercial activities. Gross Profit. Total gross profit increased to 36.8% in fiscal 1997 ascompared to 35.2% in fiscal 1996 and 34.2% in fiscal 1995. The increase in totalgross profit in fiscal 1997 as compared to fiscal 1996 reflects ATL's improvedgross profit margin which was primarily attributable to improved absorption ofmanufacturing overhead over continued increases in sales of DLT based productsas well as reductions in materials for ATL's products. The increase in totalgross profit in fiscal 1996 as compared to fiscal 1995 is due in large part toan increase in ATL's gross profit on product sales to 36.8% in fiscal 1996 from22.8% in fiscal 1995 as ATL completed its first fiscal year selling primarilyDLT based products which generated improved margins as compared to the marginson 19mm products which accounted for approximately one-third of ATL's salesrevenues in fiscal 1995. The increase in gross profit in fiscal 1997 waspartially offset by reduced margins on certain large international sales to asingle customer in the Broadcast Division. The Company's increase in grossprofit in fiscal 1996 also reflected an overall commercial products sales mixthat favored new products with higher gross profits. Selling, General and Administrative Expense. Selling, general andadministrative 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 totalnet sales and contract revenues) and increased 13.3% in fiscal 1996 as comparedto $20.9 million (or 23.8% of total net sales and contract revenues) in fiscal1995. The dollar increase in fiscal 1997 primarily reflects the Company'sefforts to expand its sales and marketing capabilities through infrastructuregrowth which included higher sales commissions associated with increased sales,as well as increased expenditures for advertising, promotion and labor costsassociated with the Company's increased commercial sales and marketingactivities. The dollar increase in selling, general and administrative expensein fiscal 1996 was due in large part to professional fees related to theE-Systems litigation and increased expenses related to expanding foreignoperations in Odetics Europe, Limited, and Odetics Asia Pacific, Pte., Ltd. Research and Development Expense. Research and development expenseincreased 91.4% to $13.4 million (or 9.5% of total net sales and contractrevenues) in fiscal 1997 as compared to $7.0 million in fiscal 1996 (or 6.7% oftotal net sales and contract revenues), and declined 25.1% in fiscal 1996 ascompared to $9.3 million (or 10.6% of total net sales and contract revenues) infiscal 1995. The increase in research and development expense in fiscal 1997primarily 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 productsand the incorporation of the new DLT7000 tape drive into ATL's current products.The increase in research and development expense in fiscal 1997 also reflectedadditional expenditures related to new product development in Gyyr and theCommunications Division. The decline in research and development expense infiscal 1996 as compared to fiscal 1995, both in terms of absolute dollars and asa percentage of total net sales and contract revenues, reflects the effect ofthe completion of certain major research and development programs in fiscal 1995and certain cost reduction measures implemented during the second half of fiscal1995. The Company expects expenditures for research and development generally toincrease over time and to be higher during periods of new product developmentwhen significant expenditures are incurred in preproduction activities andincreased testing. These expenditures may, therefore, continue to fluctuate as apercentage of total net sales and contract revenues from period to period. Minority Interest. On March 13, 1997, the Company completed an initialpublic offering of 1,650,000 shares of Class A Common Stock of ATL, whichreduced the Company's beneficial ownership of ATL to 82.9%. The $53,000 minorityinterest represents the ATL stockholders' portion of ATL's net income for theperiod of time their shares were outstanding during fiscal 1997. The Companyintends to effect the Distribution prior to December 31, 1997, subject to thesatisfaction or waiver of certain conditions (including the receipt of afavorable letter ruling from the Internal Revenue Service concerning thetax-free nature of the Distribution). Interest Expense. Interest expense decreased approximately 15.9% to $1.9million in fiscal 1997 as compared to $2.2 million in fiscal 1996, and increased16.7% from $1.9 million in fiscal 1995. The decrease in 16 19 fiscal 1997 as compared to fiscal 1996 was primarily due to overall loweraverage borrowings, while the increase in interest expense in fiscal 1996 ascompared to fiscal 1995 reflected an overall higher average borrowings under theCompany's line of credit and increased cost of borrowings. Income Taxes. The Company's effective income tax rate was 39.3%, 38.0% and33.0% in fiscal 1997, 1996 and 1995, respectively. The Company's recognition ofgeneral business credits reduced the Company's effective tax rates below thestatutory rates. The increase in the effective tax rate for fiscal 1997 is dueto a reduction in the effect of general business tax credits on total income taxexpense. The Company entered into a Tax Allocation Agreement with ATL effectiveApril 1, 1996, pursuant to which ATL will make a payment to the Company, or theCompany will make a payment to ATL, as appropriate, in an amount equal to thetaxes attributable to the operations of the Company on its consolidated federalincome tax returns and consolidated or combined state tax returns. In addition,the Tax Allocation Agreement provides that members of the Company's consolidatedgroup generating tax losses after April 1, 1996 will be paid by other members ofthe group which utilize such tax losses to reduce such other members' taxliability. LIQUIDITY AND CAPITAL RESOURCES The Company's net income of $3.7 million in fiscal 1997, as adjusted fornoncash charges of depreciation and amortization and a net reduction inoperating assets and liabilities, contributed to $7.8 million net cash providedby operating activities during the year. The cash flow provided by operatingactivities was primarily used for the purchase of fixed assets and payments forthe reduction of long term borrowings. During fiscal 1997, the Company settledits litigation with E-Systems (see "Item 3. Legal Proceedings"), pursuant towhich E-Systems paid $6.2 million to the Company. The Company has a $17.0 million bank line of credit with Imperial Bank andComerica Bank-California which provides for borrowings generally at the lessorof the bank's prime rate (8.5% at March 31, 1997) or the bank's LIBOR rate plus2.25%. Borrowings are available for general working capital purposes, and atMarch 31, 1997, approximately $14.6 million was available for borrowing underthe line. The Company's borrowings under the line of credit are secured bysubstantially all of the Company's assets, other than the assets of ATL. AtMarch 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 withImperial Bank which provides for borrowings generally at the lessor of thebank'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 ofthe ATL's assets. In April 1997, ATL entered into a promissory note payable to the Company inthe original principal amount of $13.0 million representing the aggregatebalance of ATL's interest bearing advances from the Company. This note bearsinterest 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 sixteenequal quarterly installments at the end of each calendar quarter commencing June30, 1997. ATL entered into a lease for new facilities in Irvine, California duringthe first calendar quarter of 1997. ATL began to relocate to its new facility atthe end of fiscal 1997 and completed its move in the first quarter of fiscal1998. The Company anticipates that ATL will incur expenditures of approximately$500,000 for relocation costs, leasehold improvements and capital equipment forthis new facility. The Company anticipates that net cash flow generated by operatingactivities, together with the net proceeds of ATL's initial public offering andfunds available under the Company's line of credit will be adequate to enablethe Company to execute its operating plans and meet its obligations on a timelybasis 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-Xare 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 incorporatedherein by reference. (b) Identification of Executive Officers. The information under theheadings "Executive Officers," appearing in the Proxy Statement, is incorporatedherein by reference. (c) Compliance with Section 16(a) of the Exchange Act. The informationunder 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 inthe 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 "CommonStock Ownership of Certain Beneficial Owners and Management," appearing in theProxy Statement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the heading "Certain Transactions," appearing in theProxy Statement, is incorporated herein by reference. 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 Companyare included in a separate section of this Annual Report on Form 10-K commencingon 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 statementschedule of the Company is included in a separate section of this Annual Reporton Form 10-K commencing on the pages referenced below. All other schedules havebeen omitted because they are not applicable, not required, or the informationis included in the consolidated financial statements or notes thereto. Page ---- Schedule II -- Consolidated Valuation and Qualifying Accounts......... S-1 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 SecuritiesExchange Act of 1934, the Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized, in the City ofAnaheim, 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 herebyconstitute and appoint Joel Slutzky and Gregory A. Miner, and each of them, ourtrue and lawful attorneys-in-fact and agents, each with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this Report, and tofile the same, with exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite or necessary to be done inand about the premises, as fully to all intents and purposes as he might orcould do in person, hereby, ratifying and confirming all that each of saidattorneys-in-fact and agents, or his substitute or substitutes, may lawfully door cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, thisReport has been signed below by the following persons in the capacities and onthe dates indicated: SIGNATURE TITLE DATE- ------------------------------------ ------------------------------------ -------------- /s/ JOEL SLUTZKY Chief Executive Officer, 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-2Consolidated Balance Sheets as of March 31, 1996 and 1997............................. F-3Consolidated Statements of Operations for the years ended March 31, 1995, 1996 and 1997................................................................................ F-4Consolidated Statements of Stockholders' Equity for the years ended March 31, 1995, 1996 and 1997....................................................................... F-5Consolidated Statements of Cash Flows for the years ended March 31, 1995, 1996 and 1997................................................................................ F-6Notes to Consolidated Financial Statements............................................ F-7 F-1 26 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of DirectorsOdetics, Inc. We have audited the accompanying consolidated balance sheets of Odetics, Inc. asof March 31, 1996 and 1997, and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of the three years inthe period ended March 31, 1997. Our audits also included the financialstatement schedule listed in Item 14(a). These financial statements and scheduleare the responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 presentfairly, in all material respects, the consolidated financial position ofOdetics, Inc. at March 31, 1996 and 1997, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedMarch 31, 1997, in conformity with generally accepted accounting principles.Also, in our opinion, the related financial statement schedule, when consideredin relation to the basic financial statements taken as a whole, presents fairlyin all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Orange County, CaliforniaApril 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 74,371Property, 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 23,829Other assets........................................................... 1,504 2,738 -------- -------- Total assets................................................. $ 78,811 $100,938 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITYCurrent 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 35,195Long-term debt, less current portion (Note 4).......................... 22,019 11,860Deferred income taxes (Note 6)......................................... 497 540Minority interest...................................................... -- 1,515Commitments 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 ------- -------- -------- 87,745 104,627 140,808Costs 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 6,149Income 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 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 ACTIVITIESNet income (loss).......................................... $ (4,678) $ 2,453 $ 3,730Adjustments 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 ACTIVITIESPurchases 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 ACTIVITIESProceeds from line of credit and long-term borrowings...... 40,263 36,152 54,840Principal 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.................................................... -- -- 15,918Proceeds 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 10,217Cash 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 commercialsales. 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 intercompanyaccounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.Significant estimates made in preparing the consolidated financial statementsinclude the allowances for doubtful accounts and deferred tax assets, inventoryreserves and costs to complete long-term contracts. Revenue Recognition Contract revenues and earnings on long-term cost-reimbursement andfixed-price contracts of the Company's Communication Division are recognized onthe percentage-of-completion method of accounting as costs are incurred(cost-to-cost basis). Contract revenues include costs incurred plus a portion ofestimated fees or profits based on the relationship of costs incurred to totalestimated costs. Any anticipated losses on contracts are charged to earningswhen identified. Certain contracts contain incentive and/or penalty provisionswhich provide for increased or decreased revenues based upon performance inrelation to established targets. Incentive fees are recorded when earned andpenalty provisions are recorded when incurred, as long as the amounts canreasonably be determined. For all other divisions, sales and related cost of sales are recognized onthe date of shipment or, if required, upon acceptance by the customer. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments withmaturities of less than ninety days. Fair Values of Financial Instruments Fair values of cash and cash equivalents, and the current portion oflong-term debt approximate the carrying value because of the short period oftime to maturity. The fair value of long-term debt approximates its carryingvalue because the portion of fixed rates of interest approximate current marketrates and the remaining portion has variable rates of interest. Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determinedon the first-in, first-out method. Long-Lived Assets The Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 121, Accounting for the Impairment of Long-Lived Assetsand 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-livedassets and certain intangibles held and used by the Company will be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. The recoverability test isto be performed at the lowest level at which undiscounted net cash flows can bedirectly attributable to long-lived assets. SFAS No. 121 is effective for fiscalyears beginning after December 15, 1995. The Company adopted SFAS No. 121 infiscal 1997 and has determined that there is no material effect on the Company'sfinancial statements upon adoption. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Buildings aredepreciated using the straight-line method over their estimated useful lives upto a period of forty years. Equipment, furniture and fixtures, including assetsrecorded under capital lease obligations, are depreciated principally by thedeclining balance method over their estimated useful lives ranging from four toeight years. Research and Development Expenditures Software development costs incurred subsequent to determination oftechnical feasibility are capitalized. Amortization of capitalized softwarecosts is provided on a product-by-product basis at the greater of the amountcomputed using (a) the ratio of current gross revenues for the product to thetotal of current and anticipated future gross revenues or (b) the straight-linemethod over the remaining estimated economic life of the product. Amortizationbegins when product is available for general release to customers. Generally, anoriginal estimated economic life of two years is assigned to capitalizedsoftware development costs. During fiscal 1995, 1996 and 1997, software development costs wereamortized 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 inother assets at March 31, 1996 and 1997, respectively. All other research and development expenditures are charged to research anddevelopment expense in the period incurred. Foreign Currency Translation The balance sheet accounts of Odetics Europe, Ltd. are translated at thecurrent year-end exchange rate and income statement items are translated at theaverage exchange rate for the year. Resulting translation adjustments are madedirectly to a separate component of stockholders' equity. Gains and lossesresulting from transactions of the Company and its subsidiaries which are madein currencies different from their own are immaterial and are included in incomeas they occur. Income Taxes Deferred income tax assets and liabilities are computed for differencesbetween financial statement and tax basis of assets and liabilities based onenacted tax laws and rates applicable to the period in which differences areexpected to affect taxable income. Valuation allowances are established whennecessary to reduce deferred tax assets to amounts which are more likely thannot to be realized. The provision for income taxes is the taxes payable orrefundable for the period plus or minus the change during the period in deferredincome 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 numberof Class A and Class B common shares outstanding during the periods. Dilutiveemployee stock options (Note 8) were considered in earnings per sharecomputations for 1996 and 1997. The weighted average number of common shares andcommon equivalent shares used in the calculation of earnings per share wasapproximately 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 StatementNo. 128, Earnings per Share (Statement No. 128), which is required to be adoptedon December 31, 1997. At that time, the Company will be required to change themethod currently used to compute earnings per share and to restate all priorperiods. Under the new requirements for calculating primary earnings per share,the dilutive effect of stock options will be excluded. The impact is expected toresult in an increase in primary earnings per share for the years ended March31, 1996 and March 31, 1997 of $.01 and $.03 per share, respectively. The impactof Statement 128 on the calculation of fully diluted earnings per share forthese 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 Interpretationsin accounting for its employee stock options because, as discussed below, thealternative fair value accounting provided for under FASB Statement No. 123,Accounting for Stock-Based Compensation, requires use of option valuation modelsthat 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 themarket price of the underlying stock on the date of grant, no compensationexpense is recognized. To calculate the pro forma information required by Statement 123, theCompany uses the Black-Scholes option pricing model. The Black-Scholes model wasdeveloped for use in estimating the fair value of traded options which have novesting restrictions and are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions including the expectedstock price volatility. Because the Company's employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management's option, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options. Advertising Expenses The Company expenses advertising costs as incurred. Advertising expensetotaled $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 havebeen 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, atan 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 ATLtotals 82.9%. The Company has announced its intention to pursue a tax-freespinoff of its remaining interest in ATL to the Company's stockholders byDecember 31, 1997, subject to approval by the Company's Board of Directors andto obtaining a letter ruling from the Internal Revenue Service concerning thetax-free nature of the spinoff. 3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs incurred, estimated earnings and billings on uncompleted long-termcontracts 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 and1997 include $557,000 and $279,000, respectively, that were not billable ascertain milestone objectives specified in the contracts had not been attained.Substantially all costs and estimated earnings in excess of billings at March31, 1997 are expected to be billed and collected during the year ending March31, 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 ofthe Company's assets, excluding the Company's property and plant and ATL'sassets. Under the terms of the agreement, the Company is required to comply withcertain covenants, maintain certain debt to net worth ratios, current ratios andminimum net worth requirements. Included within the borrowing limits of the agreement, the Company hasavailable approximately $14,900,000 in letters of credit and approximately$300,000 has been reserved for standby letters of credit at March 31, 1997. In March 1997, ATL entered into a separate $5.0 million line of credit withImperial Bank which provides for borrowings generally at the lessor of thebank'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 ofATL'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 $4,393,000related to downsizing and restructuring in response to a deterioration in theCompany's contractual relationship with E-Systems, Inc., a major customer of ATLProducts, Inc. (see Note 9). The charge consisted of a $3,716,000 write-down ofinventories and accounts receivable to net realizable value and $677,000 ofseverance costs and other charges associated with the E-Systems dispute. TheCompany's restructuring plan also called for the implementation of an earlyretirement incentive program effective for the period January 1, 1995 throughMarch 31, 1995 which resulted in a nonrecurring charge of $416,000 during thefourth quarter of fiscal 1995. Approximately 100 associates, primarily inoperations, manufacturing, general management and administrative functions,received severance pay based on the number of years of service plus earlyretirees received HMO coverage for one year. All amounts accrued under the earlyretirement 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 computedat 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 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 asfollows: 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 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 generalbusiness credit carryforwards, and $883,000 of alternative minimum tax creditcarryforwards for federal income tax purposes. For financial reporting purposes,of the $1,351,000 valuation allowance $1,205,000 has been recorded to offset thedeferred tax asset related to these credits. Any future benefits recognized fromthe reduction of the valuation allowance will result in a reduction of incometax expense. These credit carryforwards expire at various dates beginning in2005. 7. ASSOCIATE INCENTIVE PROGRAMS Under the terms of a Profit Sharing Plan, the Company contributes to atrust fund such amounts as are determined annually by the Board of Directors. Nocontributions were made in 1995, 1996 or 1997. In May 1990, the Company adopted a 401(k) Plan as an amendment andreplacement of the former Associate Stock Purchase Plan that was an additionalfeature of the Profit Sharing Plan. Under the 401(k) Plan, eligible associatesvoluntarily contribute to the plan up to 15% of their salary through payrolldeductions. The Company matches 50% of contributions up to a stated limit. Underthe provisions of the 401(k) Plan, associates have four investment choices, oneof 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 noncontributoryAssociate Stock Ownership Plan (ASOP) for all associates with more than sixmonths of eligible service. The ASOP provides that Company contributions, whichare determined annually by the Board of Directors, may be in the form of cash orshares of Company stock. No contributions were made in 1995. The Companycontributions 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. Sharesdistributed through the ASOP Plan were included in total outstanding shares usedin the earnings per share calculation. 8. STOCK OPTION AND DEFERRED COMPENSATION PLANS The Company has adopted an Associate Stock Option Plan which provides thatoptions for shares of the Company's unissued Class A common stock may be grantedto directors and associates of the Company. Options granted enable the optionholder to purchase one share of Class A common stock at prices which are equalto 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 forone share of Class A common stock. Options expire ten years after date of grantor 90 days after termination of employment and vest ratably at 33% or 25% oneach 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'sunissued Class A and Class B common stock had been granted to directors andassociates 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 exerciseprice of those options is 7.63 years and $5.53, respectively. In calculating pro forma information regarding net income and earnings pershare, as required by Statement 123, the fair value was estimated at the date ofgrant using a Black-Scholes option pricing model with the followingweighted-average assumptions for the options on the Company's Class A commonstock: risk-free interest rate of 6.5%; a dividend yield of 0%; volatility ofthe expected market price of the Company's common stock of .40; and aweighted-average expected life of the option of 7 years. For purposes of pro forma disclosures, the estimated fair value of theoptions is amortized to expense over the options' vesting period. The Company'spro forma information for the 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 whichcertain executives may defer a portion of their annual compensation. Alldeferred 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 plantotaled $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' cancellationof purchase orders for ATL Products' DataLibrary and DataTower products. In May1996, the parties entered into a settlement agreement under which, among otherthings, E-Systems agreed to pay the Company $6,160,000, all claims asserted bythe parties were released and the litigation dismissed. In addition, the partiesagreed to an equitable disposition of disputed inventory and entered into a fiveyear service agreement for Odetics to service units that had been sold toE-Systems at agreed upon prices. The Company has not recorded any material gainor 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 commitmentunder this noncancelable operation lease at March 31, 1997 is as follows (inthousands): 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 oninformation automation through its design, development, manufacturing andmarketing of subsystems and other products for specialized informationautomation applications. The Company's principal products include magnetic tapecartridge and cassette handling subsystems for automated tape library systemsused in computer mass data storage applications; large library cart machinesused in broadcast and cable television station operations; time-lapse VCRs andrelated products used in commercial and industrial closed circuit televisionsecurity and surveillance applications; and space-qualified digital datarecorders used in manned and unmanned space vehicles. The Company manufactures and sells its products to commercial customers indiversified industries as well as to prime government contractors underlong-term contracts. The percentage of the Company's total net sales andcontract revenues contributed by direct and indirect sales to the United Statesand foreign governments were approximately 19%, 10% and 11% during 1995, 1996and 1997, respectively. The Company performs periodic credit evaluations of its customers'financial condition and generally does not require collateral. Credit losseshave been within management's expectations and within amounts provided throughthe allowances for doubtful accounts. At March 31, 1996 and 1997, accountsreceivable from governmental agencies and prime government contractors wereapproximately $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 asfollows: 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) 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............................................ 1 EXHIBIT 10.13 SEPARATION AND DISTRIBUTION AGREEMENT THIS AGREEMENT is made and entered into this 1st day of March, 1997, byand between ODETICS, INC., a Delaware corporation ("Odetics"), and ATL PRODUCTS,INC., a Delaware corporation ("ATL"). PRELIMINARY STATEMENT Odetics is the sole stockholder of ATL. Odetics, through ATL and ATL's wholly owned subsidiary, ATL ProductsLimited, a United Kingdom private limited liability company, is engaged in themanufacture and sale of automated tape libraries, and related services (the "ATLBusiness"). Odetics' Board of Directors has determined that Odetics will cause ATLto make an initial public offering of up to 1,897,500 shares of its Class ACommon Stock (the "IPO"), and subsequent to the IPO and subject to certainconditions, distribute to Odetics' stockholders all of the outstanding stock ofATL owned by Odetics through a spinoff (the "Distribution"). The IPO and theDistribution are together referred to herein as the "Separation" and will resultin the total and complete separation of the Business and ATL from Odetics at thetime of the Distribution (the "Separation Date"); provided, however, thatOdetics may continue to provide services to ATL pursuant to services agreementsafter the Separation Date. The parties hereto have determined that it is necessary and desirableto set forth in this Agreement and in a services agreement (the "ServicesAgreement"), a Promissory Note and a Tax Allocation Agreement (the "TaxAllocation Agreement") between ATL and Odetics (the Services Agreement and theTax Allocation Agreement are collectively referred to herein as the "AncillaryAgreements"), the principal corporate transactions determined by Odetics and ATLto be appropriate to effect the Separation and to set forth other agreements andundertakings by and between Odetics and ATL that will govern certain othermatters between the date hereof and the Distribution and following theDistribution. Simultaneously with the execution of this Agreement, Odetics and ATLare entering into the Ancillary Agreements. NOW, THEREFORE, in consideration of the promises and the mutualrepresentations, warranties, covenants and agreements, and upon the terms andsubject to the conditions hereinafter set forth, the parties do hereby agree asfollows: 1 2 ARTICLE I. THE TRANSFER 1.1 Transfer of Assets. On the terms and subject to the conditions setforth in this Agreement, and the other agreements and instruments of conveyancecontemplated hereunder, simultaneously with the execution and delivery of thisAgreement, Odetics has heretofore transferred, assigned and conveyed to ATL allof Odetics' right, title, and interest in and to all of the assets, tangible andintangible, related to the Business (the "ATL Assets") for a purchase priceequal to the book value thereof, as calculated in accordance with generallyaccepted accounting principles. The parties hereto believe that such purchaseprice constitutes fair market value of the ATL Assets. 1.2 Payment of Purchase Price. The purchase price of the ATL Assetswill be included in the principal amount of a Promissory Note (the "Note") insubstantially the form attached hereto as Exhibit A, which will be completed atthe consummation of the IPO, and executed and delivered in connection therewith,and such purchase price shall be payable in accordance with the terms of theNote. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF ODETICS Odetics represents and warrants to ATL as follows: 2.1 Power and Authority; Effect of Agreement. Odetics is a corporationduly organized, validly existing and in good standing under the laws ofDelaware, has requisite corporate power and authority to execute, deliver andperform this Agreement and to consummate the transactions contemplated hereby.The execution, delivery and performance by it of this Agreement and theconsummation by it of the transactions contemplated hereby have been dulyauthorized by all necessary corporate action on the part of Odetics. ThisAgreement has been duly and validly executed and delivered by Odetics andconstitutes its legal, valid and binding obligation. enforceable against it inaccordance with its terms, except to the extent that such enforceability may belimited by bankruptcy, insolvency, reorganization, moratorium or other similarlaws relating to creditors' rights generally. The execution, delivery andperformance by it of this Agreement and the consummation by Odetics of thetransactions contemplated by the Transfer does not, and will not, with orwithout the giving of notice or the lapse of time, or both: (i) violate anyprovision of law, rule or regulation to which it is subject; (ii) violate anyorder, judgment or decree applicable to it; (iii) conflict with, or result in abreach or default under, its Certificate of Incorporation or its Bylaws; or (iv)conflict with, or result in a breach or default under, any contract to which itis a party; except, in each case, for violations, conflicts, breaches ordefaults which in the aggregate would not materially hinder or impair theconsummation of the transactions contemplated hereby or have a material adverseeffect on the Business. 2 3 2.2 Stock of Transferred Subsidiaries. Odetics is the owner,beneficially and of record of all of the issued and outstanding stock of theassets referred to in Section 1.1 hereof, free and clear of all liens,encumbrances, security agreements, options, claims, charges and restrictions. 2.3 Government Consents. No consent, approval or authorization of, orexemption from, or filing with. any governmental or regulatory authority isrequired in connection with the execution, delivery or performance by Odetics ofthe terms of this Article II or the taking by it of any other action required toeffectuate the Transfer. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ATL ATL represents and warrants to Odetics as follows: 3.1 ATL's Power and Authority. ATL is a corporation duly organizedvalidly existing and in good standing under the laws of Delaware, and has allrequisite corporate power and authority to carry on the Business as it is nowbeing conducted and as proposed to be conducted. 3.2 Due Authorization, Execution and Delivery; Effect of Agreement. ATLhas all requisite corporate power and authority to execute, deliver and performthis Agreement and to consummate the transactions contemplated hereby. Theexecution, delivery and performance by ATL of this Agreement and theconsummation by ATL of the transactions contemplated hereby have been dulyauthorized by all necessary corporate action on the part of ATL. This Agreementhas been duly and validly executed and delivered by ATL and constitutes thelegal, valid and binding obligation of ATL, enforceable against ATL inaccordance with its terms, except to the extent that such enforceability may belimited by bankruptcy, insolvency, reorganization, moratorium or other similarlaws relating to creditors' rights generally. The execution, delivery andperformance by ATL of this Agreement and the consummation by ATL of thetransactions contemplated by the Transfer does not, and will not, with orwithout the giving of notice or the lapse of time, or both: (i) violate anyprovision of law, rule or regulation to which ATL is subject; (ii) violate anyorder, judgment or decree applicable to ATL; (iii) conflict with, or result in abreach or default under, the Certificate of Incorporation or Bylaws of ATL; or(iv) conflict with, or result in a breach or default under, any contract towhich it is a party; except, in each case, for violations, conflicts, breachesor defaults which in the aggregate would not materially hinder or impair theconsummation of the transactions contemplated hereby or have a material adverseeffect on the Business. 3.3 Consents. No consent, approval or authorization of, or exemptionfrom, or filing with, any governmental or regulatory authority or any otherthird party is required in connection with the execution, delivery orperformance by ATL of this Agreement or the taking by of any other actionrequired to effectuate the Transfer. 3 4 ARTICLE IV. COVENANTS OF ODETICS 4.1 Books and Records; Personnel. For a period of six years after theSeparation Date (or such longer period as maybe required by any law orregulation, any governmental agency, any ongoing litigation or class ofconnection with any administrative proceeding): (a) Odetics shall not dispose of or destroy any of the businessrecords and files of the Business retained by it or any of its subsidiaries (the"Retained Records"). If Odetics wishes to dispose of or destroy such records andfiles after such six year period, it shall use reasonable efforts to first give30 days' prior written notice to ATL and ATL shall have the right, at its optionand expense, upon prior written notice to Odetics within such 30 day period, totake possession of the Retained Records within 60 days after the date of ATL'snotice to Odetics. (b) Odetics shall allow ATL and its representatives reasonableaccess to all Retained Records during regular business hours and upon reasonablenotice. Odetics shall maintain the Retained Records in a manner and at locationsthat reasonably facilitates retrieval and review by ATL. ATL shall have theright, at its own expense, to make copies of any such records and files andOdetics shall provide convenient duplication facilities for such purpose,provided, however, that any such access or copying shall be had or done in suchmanner so as not to unreasonably interfere with the normal conduct of Odetics'business or operations; and (c) Odetics shall make reasonably available to ATL, upon writtenrequest and at ATL's expense: (i) personnel to assist in locating and obtainingrecords and files maintained by it (including those created after the datehereof, to the extent necessary and appropriate in connection with pending andfuture claims against ATL relating to the Business) and (ii) any of itspersonnel whose assistance or participation (including as a witness duringdepositions or at trial) is reasonably required by ATL in anticipation of, orpreparation for or during, existing or future litigation or other matters inwhich ATL or any of its affiliates is involved and which is related to theBusiness. 4.2 Supply Agreements. For a period of three years from theconsummation of the IPO, Odetics shall not unilaterally terminate or assign itsguarantee obligation with respect to any supply agreement pursuant to which ithas guaranteed the performance by ATL of ATL's obligations, unless suchsuppliers have consented to the termination or assignment of such guarantee. 4.3 Cooperation. Odetics agrees to cooperate with ATL, both before andafter the Separation Date, to enable both parties to implement the Separation,including but not limited to performing the obligations undertaken by theparties hereunder. Such cooperation will include but not be limited to preparingand submitting required financial reports after the Separation Date, which mayrelate to periods before or after the Separation Date, and executing such 4 5documents and doing such other acts and things as may be necessary to carry outthe intent of this Agreement as it relates to the Separation. ARTICLE V. COVENANTS OF ATL 5.1 Cooperation. ATL agrees to cooperate with Odetics, both before andafter the Separation Date, to enable both parties to implement the Separation,including but not limited to performing the obligations undertaken by theparties hereunder. Such cooperation will include but not be limited to preparingand submitting required financial reports after the Separation Date, which mayrelate to periods before or after the Separation Date, and executing suchdocuments and doing such other acts and things as may be necessary to carry outthe intent of this Agreement as it relates to the Separation. 5.2 Books and Records; Personnel. For a period of six years after theSeparation Date (or such longer period as may be required by any law orregulation, any governmental agency, any ongoing litigation or class oflitigation, or in connection with any administrative proceeding): (a) ATL shall not dispose of or destroy the business records andfiles of the Business that are transferred to it or any of its subsidiaries incarrying out the transactions contemplated hereby (the "Transferred Records").If ATL wishes to dispose of or destroy such records and files after that time,it shall use reasonable efforts to first give 30 days' prior written notice toOdetics and Odetics shall have the right. at its option and expense, upon priorwritten notice to ATL within such 30 day period, to take possession of theTransferred Records within 60 days after the date of Odetics' notice to ATL; (b) ATL shall allow Odetics and its representatives reasonableaccess to all Transferred Records during regular business hours and uponreasonable notice. ATL shall maintain the Transferred Records in a manner and atlocations that reasonably facilitates retrieval and review by Odetics. Odeticsshall have the right. at its own expense, to make copies of any such records andfiles and ATL shall provide convenient duplication facilities for such purposesprovided, however, that any such access or copying shall be had or done in sucha manner so as not to unreasonably interfere with the normal conduct of ATL'sbusiness or operations; and (c) ATL shall make reasonably available to Odetics upon writtenrequest and at Odetics' expense: (1) ATL's personnel to assist in locating andobtaining records and files maintained by it (including those created after thedate hereof, to the extent necessary and appropriate in connection with pendingand future claims against Odetics relating to the Business), and (ii) any of itspersonnel whose assistance or participation (including as a witness duringdepositions or at trial) is reasonably required by Odetics in anticipation of,or preparation for or during, existing or future litigation or other matters inwhich Odetics or any of its affiliates is involved. 5 6 ARTICLE VI. THE IPO AND ACTIONS PENDING THE IPO 6.1 Transactions Prior to the IPO. (a) Subject to the conditions specified in Section 6.3 hereof,Odetics and ATL shall use their reasonable best efforts to consummate the IPO.Such actions shall include, but shall not necessarily be limited to, thosespecified in this Section 6.1 (b) ATL shall file the IPO Registration Statement, and suchamendments or supplements thereto, as may be necessary in order to cause thesame to become and remain effective as required by law or by the Underwriters,including, but not limited to, filing such amendments to ATL's RegistrationStatement on Form S-1 as may be required by the Underwriting Agreement, theCommission or federal, state or foreign securities laws. Odetics and ATL shallalso cooperate in preparing, filing with the Securities and Exchange Commission(the "Commission") and causing to become effective a registration statementregistering the ATL Common Stock under the Exchange Act, and any registrationstatements or amendments thereof which are required to reflect the establishmentof, or amendments to, any employee benefit and other plans necessary orappropriate in connection with the IPO, the Separation, the Distribution or theother transactions contemplated by this Agreement and the Ancillary Agreements. (c) ATL and Odetics shall enter into the Underwriting Agreement,in form and substance reasonably satisfactory to ATL and Odetics, and shallcomply with their respective obligations thereunder. (d) Odetics and ATL shall consult with each other and theUnderwriters regarding the timing, pricing and other material matters withrespect to the IPO. (e) ATL shall use its reasonable best efforts to take all suchaction as may be necessary or appropriate under state securities laws of theUnited States (and any comparable laws under any foreign jurisdictions) inconnection with the IPO. (f) ATL shall prepare, file and use reasonable best efforts toseek to make effective, an application for listing of the Class A Common Stockof ATL (the "ATL Common Stock") issued in the IPO on the Nasdaq National Market,subject to official notice of issuance. (g) ATL and Odetics shall participate in the preparation ofmaterials and presentations as the Underwriters shall deem necessary ordesirable. (h) ATL shall pay all third party costs, fees and expensesrelating to the IPO, all of the reimbursable expenses of the Underwriterspursuant to the Underwriting 6 7Agreement, all of the costs of producing, printing, mailing and otherwisedistributing the Prospectus, as well as the Underwriters' discount as providedin the Underwriting Agreement. 6.2 Proceeds of the IPO. The IPO will be a primary offering of ATLCommon Stock and the net proceeds of the IPO will be retained by ATL, subject toits obligation to pay certain amounts to Odetics pursuant to the Note. 6.3 Conditions Precedent to Consummation of the IPO. As soon aspracticable after the date of this Agreement, the parties hereto shall use theirreasonable best efforts to satisfy the following conditions to the consummationof the IPO. The obligations of the parties to consummate the IPO shall beconditioned on the satisfaction, or waiver by Odetics, of the followingconditions: (a) The IPO Registration Statement shall have been declaredeffective by the Commission, and there shall be no stop-order in effect withrespect thereto. (b) The actions and filings with regard to state securities lawsof the United States (and any comparable laws under any foreign jurisdictions)described in Section 6.1 shall have been taken and, where applicable, havebecome effective or been accepted. (c) The ATL Common Stock to be issued in the IPO shall have beenaccepted for listing on the Nasdaq National Market, on official notice ofissuance. (d) ATL shall have entered into the Underwriting Agreement and allconditions to the obligations of ATL and the Underwriters shall have beensatisfied or waived. (e) Odetics shall be satisfied in its sole discretion that it willown at least 80.0% of the outstanding ATL voting stock following the IPO, andall other conditions to permit the Distribution to qualify as a tax freedistribution to Odetics' stockholders shall, to the extent applicable as of thetime of the IPO, be satisfied and there shall be no event or condition that islikely to cause any of such conditions not to be satisfied as of the time of theDistribution or thereafter. (f) No order, injunction or decree issued by any court or agencyof competent jurisdiction or other legal restraint or prohibition preventing theconsummation of the Separation or the IPO or any of the other transactionscontemplated by this Agreement or any Ancillary Agreement shall be in effect. (g) Such other actions as the parties hereto may, based upon theadvice of counsel, reasonably request to be taken prior to the Separation andthe IPO in order to assure the successful completion of the Separation and theIPO and the other transactions contemplated by this Agreement shall have beentaken. (h) This Agreement shall not have been terminated. 7 8 (i) A pricing committee of Odetics directors designated by theBoard of Directors of Odetics shall have determined that the terms of the IPOare acceptable to Odetics. ARTICLE VII. THE DISTRIBUTION 7.1 The Distribution. (a) Subject to the conditions specified in Section 7.3 hereof, onor prior to the Distribution Date, Odetics will deliver to First National Bankof Boston (the "Agent") for the benefit of holders of record of Odetics' Class ACommon Stock and Class B Common Stock on the record date established by theBoard of Directors of Odetics, a single stock certificate, endorsed by Odeticsin blank, representing all of the outstanding shares of ATL Common Stock thenowned by Odetics, and shall cause the transfer agent for the shares of OdeticsCommon Stock to instruct the Agent to distribute on the Distribution Date theappropriate number of such shares of ATL Common Stock to each such holder ordesignated transferee or transferees of such holder. (b) Subject to Section 7.4, each holder of Odetics Common Stock onthe Record Date (or such holder's designated transferee or transferees) will beentitled to receive in the Distribution a number of shares of ATL Common Stockequal to the number of shares of Odetics Common Stock held by such holder on theRecord Date multiplied by a fraction the numerator of which is the number ofshares of ATL Common Stock beneficially owned by Odetics on the Record Date andthe denominator of which is the number of shares of Odetics Common Stockoutstanding on the Record Date. (c) ATL and Odetics, as the case may be, will provide to the Agentall share certificates and any information required in order to complete theDistribution on the basis specified above. 7.2 Actions Prior to the Distribution. (a) Odetics and ATL shall prepare and mail, prior to theDistribution Date, to the holders of Odetics Common Stock, such informationconcerning ATL, its business, operations and management, the Distribution andsuch other matters as Odetics and ATL shall reasonably determine and as may berequired by law. Odetics and ATL will prepare, and ATL will, to the extentrequired under applicable law, file with the Commission any such documentationand any requisite no action letters which Odetics determines are necessary ordesirable to effectuate the Distribution and Odetics and ATL shall each use itsreasonable best efforts to obtain all necessary approvals from the Commissionwith respect thereto as soon as practicable. 8 9 (b) Odetics and ATL shall take all such action as may be necessaryor appropriate under the state securities laws of the United States (and anycomparable laws under any foreign jurisdiction) in connection with theDistribution. (c) Odetics and ATL shall take all reasonable steps necessary andappropriate to cause the conditions set forth in Section 7.3(d) (subject toSections 7.3(d)) to be satisfied and to effect the Distribution on theDistribution Date. (d) ATL shall prepare and file, and shall use its reasonable bestefforts to have approved, an application for the listing of the ATL Common Stockto be distributed in the Distribution on the Nasdaq National Market, subject toofficial notice of distribution. 7.3 Conditions to Distribution. The Odetics Board currently intends toeffect the Distribution by December 31, 1997. Subject to any restrictionscontained in the Underwriting Agreement, the Odetics Board shall have the solediscretion to determine the date of consummation of the Distribution at any timeafter the Closing Date and on or prior to December 31, 1997. Odetics shall beobligated to consummate the Distribution no later than December 31, 1997,subject to the satisfaction, or waiver by the Odetics Board in its solediscretion, of the conditions set forth below. In the event that any suchcondition shall not have been satisfied or waived on or before December 31,1997, Odetics shall consummate the Distribution as promptly as practicablefollowing the satisfaction or waiver of all such conditions. (a) a private letter ruling from the Internal Revenue Serviceshall have been obtained, and shall continue in effect, to the effect that,among other things, the Distribution will qualify as a tax free distribution forfederal income tax purposes under Section 355 of the Code and will not result inthe recognition of any gain to Odetics or Odetics' stockholders, and such rulingshall be in form and substance satisfactory to Odetics in its sole discretion; (b) any material governmental approvals and consents necessary toconsummate the Distribution shall have been obtained and be in full force andeffect; (c) no order, injunction or decree issued by any court or agencyof competent jurisdiction or other legal restraint or prohibition preventing theconsummation of the Distribution shall be in effect and no other event outsidethe control of Odetics shall have occurred or failed to occur that prevents theconsummation of the Distribution; and (d) no other events or developments shall have occurred subsequentto the date hereof that, in the judgment of the Board of Directors of Odetics,would result in the Distribution having a material adverse effect on Odetics oron the stockholders of Odetics.The foregoing conditions are for the sole benefit of Odetics and shall not giverise to or create any duty on the part of Odetics or the Odetics Board ofDirectors to waive or not waive any such condition. 9 10 7.4 Fractional Shares. As soon as practicable after the DistributionDate, Odetics shall direct the Agent to determine the number of whole shares andfractional shares of ATL Common Stock allocable to each holder of record orbeneficial owner of Odetics Common Stock as of the Record Date, to aggregate allsuch fractional shares and sell the whole shares obtained thereby at thedirection of Odetics either to Odetics, in open market transactions orotherwise, in each case at then prevailing trading prices, and to cause to bedistributed to each such holder or for the benefit of each such beneficialowner, in lieu of any fractional share, such holder's or owner's ratable shareof the proceeds of such sale, after making appropriate deductions of any amountrequired to be withheld for federal income tax purposes and after deducting anamount equal to all brokerage charges, commissions and transfer taxes attributedto such sale. Odetics and the Agent shall use their reasonable best efforts toaggregate the shares of Odetics Common Stock that may be held by any beneficialowner thereof through more than one account in determining the fractional shareallocable to such beneficial owner. 7.5 The ATL Board of Directors. Odetics and ATL shall each take allactions which may be required to elect or otherwise appoint as directors of ATL,on or prior to the Distribution Date, persons to be designated by a nominatingcommittee of ATL's Board of Directors as additional or substitute members of theBoard of Directors of ATL on the Distribution Date. ARTICLE VIII. MUTUAL RELEASES; INDEMNIFICATION 8.1 Release of Pre-closing Claims. (a) Except as provided in Section 8.1(c), effective as of the dateof consummation of the IPO (the "Closing Date"), ATL does hereby, for itself andeach of its affiliates, successors and assigns, and all persons who at any timeprior to the Closing Date have been stockholders, directors, officers, agents oremployees of ATL (in each case, in their respective capacities as such), remise,release and forever discharge each of Odetics and its affiliates, successors andassigns, and all persons who at any time prior to the Closing Date have beenstockholders, directors, officers, agents or employees of Odetics (in each case,in their respective capacities as such), and their respective heirs, executors,administrators, successors and assigns, from any and all losses, claims,actions, damages, expenses or liabilities whatsoever (collectively, the"Liabilities"), whether at law or in equity (including any right ofcontribution), whether arising under any contract or agreement, by operation oflaw or otherwise, existing or arising from any acts or events occurring orfailing to occur or alleged to have occurred or to have failed to occur or anyconditions existing or alleged to have existed on or before the Closing Date. (b) Except as provided in Section 8.1(c), effective as of theClosing Date, Odetics does hereby, for itself and its affiliates, successors andassigns, and all persons who at any time prior to the Closing Date have beenstockholders, directors, officers, agents or 10 11employees of Odetics (in each case, in their respective capacities as such),remise, release and forever discharge ATL, and its affiliates, successors andassigns, and all persons who at any time prior to the Closing Date have beenstockholders, directors, officers, agents or employees of ATL (in each case, intheir respective capacities as such), and their respective heirs, executors,administrators, successors and assigns, from any and all Liabilities whatsoever,whether at law or in equity (including any right of contribution), whetherarising under any contract or agreement, by operation of law or otherwise,existing or arising from any acts or events occurring or failing to occur oralleged to have occurred or to have failed to occur or any conditions existingor alleged to have existed on or before the Closing Date, including inconnection with the transactions and all other activities to implement any ofthe Separation, the IPO and the Distribution. (c) Nothing contained in Section 8.1(a) or (b) shall impair anyright of any person to enforce this Agreement, any Ancillary Agreement or anyagreements, arrangements, commitments or understandings that are specifiedherein or in the Schedules and Exhibits hereto not to terminate as of theClosing Date, in each case in accordance with its terms. Nothing contained inSection 8.1(a) or (b) shall release any person from: (i) any liability provided in or resulting from any agreementbetween Odetics and ATL that is specified herein or the Schedules and Exhibitshereto as not to terminate as of the Closing Date, or any other liabilityspecified as not to terminate as of the Closing Date; (ii) any liability, contingent or otherwise, assumed,transferred, assigned or allocated to such person; (iii) any liability that the parties may have with respect toindemnification or contribution pursuant to this Agreement for claims broughtagainst the parties by third Persons, which liability shall be governed by thisArticle VIII and, if applicable, the appropriate provisions of the AncillaryAgreements. (d) ATL shall not make any claim or demand or commence any actionasserting any claim or demand, including any claim of contribution or anyindemnification, against Odetics or any other person released pursuant toSection 8.1(a), with respect to any liabilities released pursuant to Section8.1(a). Odetics shall not make any claim or demand, or commence any actionasserting any claim or demand, including any claim of contribution or anyindemnification, against ATL or any other person released pursuant to Section8.1(b), with respect to any labilities released pursuant to Section 8.1(b). (e) It is the intent of each of Odetics and ATL by virtue of theprovisions of this Section 8.1 to provide for a full and complete release anddischarge of all liabilities existing or arising from all acts and eventsoccurring or failing to occur or alleged to have occurred or to have failed tooccur and all conditions existing or alleged to have existed on or before theClosing Date, between or among ATL and its affiliates on the one hand, andOdetics and its affiliates on the other hand (including any contractualagreements or arrangements existing or alleged to exist between or among anysuch persons on or before the 11 12Closing Date), except as expressly set forth in Section 8.1(c). At any time, atthe request of any other party, each party shall execute and deliver releasesreflecting the provisions hereof. 8.2 Indemnification by ATL. Except as provided in Section 8.4, ATLshall indemnify, defend and hold harmless Odetics, and each of its directors,officers and employees, and each of the heirs, executors, successors and assignsof any of the foregoing (collectively, the "Odetics Indemnitees"), from andagainst any and all Liabilities of the Odetics Indemnitees relating to, arisingout of or resulting from any of the following items (collectively, the ATLLiabilities"): (a) the operation of the ATL Business, as conducted at any timeprior to, on or after the Closing Date (including any Liability relating to,arising out of or from any act or failure to act by any director, officer,employee, agent or representative of ATL, whether or not such act or failure toact is or was within such person's authority); provided however, that ATL shallnot be responsible for and shall not indemnify, defend or hold harmless Odeticsfor any tax liability resulting from the reorganization of ATL's internationaloperations occurring prior to the Closing Date; 8.2.1 the ownership, leasing or use of any assets of ATL, including,without limitation, the ATL Assets, any personal property, real property andleasehold interests of ATL; (a) the failure of ATL or any other person to pay, perform orotherwise promptly discharge any liabilities of ATL or any material contract oragreement of ATL in accordance with their respective terms, whether prior to orafter the Closing Date or the date hereof; (b) any breach by ATL or its affiliates of this Agreement or anyof the Ancillary Agreements; or (c) any untrue statement or alleged untrue statement of a materialfact or omission or alleged omission to state a material fact required to bestated therein or necessary to make the statements therein not misleading, withrespect to all information contained in any IPO Registration Statement orProspectus made by ATL or any of its directors, officers, employees, agents orrepresentatives. 8.3 Indemnification by Odetics. Odetics shall indemnify, defend andhold harmless ATL, and each of its directors, officers and employees, and eachof the heirs, executors, successors and assigns of any of the foregoing(collectively, the "ATL Indemnitees"), from and against any and all Liabilitiesof the ATL Indemnitees relating to, arising out of or resulting from any of thefollowing items: (a) the operation of the business of Odetics (other than the ATLBusiness), as conducted at any time prior to, on or after the Closing Date(including any Liability relating to, arising out of or from any act or failureto act by any director, officer, employee, agent or representative of Odetics,whether or not such act or failure to act is or was within such person'sauthority); 12 13 8.3.1 the ownership, leasing or use of any assets of Odetics,including, without limitation, any personal property, real property andleasehold interests of Odetics; (a) the failure of Odetics or any other person to pay, perform orotherwise promptly discharge any liabilities of Odetics (other than the ATLLiabilities) or any material contract or agreement of Odetics in accordance withtheir respective terms, whether prior to or after the Closing Date or the datehereof; (b) any breach by Odetics or its affiliates (other than ATL) ofthis Agreement or any of the Ancillary Agreements; or (c) any untrue statement or alleged untrue statement of a materialfact or omission or alleged omission to state a material fact required to bestated therein or necessary to make the statements therein not misleading, withrespect to all information contained in any IPO Registration Statement orProspectus made by Odetics or any of its directors, officers, employees, agentsor representatives. 8.4 Indemnification Obligations Net of Insurance Proceeds and OtherAmounts. (a) The parties intend that any liability subject toindemnification or reimbursement pursuant to this Article VIII will be net ofinsurance proceeds that actually reduce the amount of the liability.Accordingly, the amount which any party (an "Indemnifying Party") is required topay to any person entitled to indemnification hereunder (an "Indemnitee") willbe reduced by any insurance proceeds theretofore actually recovered by or onbehalf of the Indemnitee in reduction of the related liability. If an Indemniteereceives a payment (an "Indemnity Payment") required by this Agreement from anIndemnifying Party in respect of any liability and subsequently receivesinsurance proceeds, then the Indemnitee will pay to the Indemnifying Party anamount equal to the excess of the Indemnity Payment received over the amount ofthe Indemnity Payment that would have been due if the insurance proceedsrecovery had been received, realized or recovered before the Indemnity Paymentwas made. (b) An insurer who would otherwise be obligated to pay any claimshall not be relieved of the responsibility with respect thereto or, solely byvirtue of the indemnification provisions hereof, have any subrogation rightswith respect thereto, it being expressly understood and agreed that no insureror any other third party shall be entitled to a benefit such insurer or otherthird party would not be entitled to receive in the absence of theindemnification provisions by virtue of the indemnification provisions hereof. 8.5 Procedures for Indemnification of Third Party Claims. (a) If an Indemnitee shall receive notice or otherwise learn ofthe assertion by any person other than the parties hereto of a claim (a "ThirdParty Claim") with respect to which an Indemnifying Party may be obligated toprovide indemnification to such Indemnitee pursuant to Section 8.2 or 8.3, orany other Section of this Agreement or any Ancillary Agreement, such Indemniteeshall give such Indemnifying Party written notice thereof 13 14within 20 days after becoming aware of such Third Party Claim. Any such noticeshall describe the Third Party Claim in reasonable detail. Notwithstanding theforegoing, the failure of any Indemnitee or other Person to give notice asprovided in this Section 8.5(a) shall not relieve the related Indemnifying Partyof its obligations under this Article VIII, except to the extent that suchIndemnifying Party is actually prejudiced by such failure to give notice. (b) An Indemnifying Party may elect to defend (and, unless theIndemnifying Party has specified any reservations or exceptions, to seek tosettle or compromise), at such Indemnifying Party's own expense and by suchIndemnifying Party's own counsel, any Third Party Claim. Within 30 days afterthe receipt of notice from an Indemnitee in accordance with Section 8.5(a), theIndemnifying Party shall notify the Indemnitee of its election whether theIndemnifying Party will assume responsibility for defending such Third PartyClaim, which election shall specify any reservations or exceptions. After noticefrom an Indemnifying Party to an Indemnitee of its election to assume thedefense of a Third Party Claim, such Indemnitee shall have the right to employseparate counsel and to participate in (but not control) the defense,compromise, or settlement thereof, but the fees and expenses of such counselshall be the expense of such Indemnitee except as set forth in the nextsentence. In the event that the Indemnifying Party has elected to assume thedefense of the Third Party Claim but has specified, and continues to assert, anyreservations or exceptions in such notice, then, in any such case, thereasonable fees and expenses of one separate counsel for all Indemnitees shallbe borne by the Indemnifying Party. (c) If an Indemnifying Party elects not to assume responsibilityfor defending a Third Party Claim, or fails to notify an Indemnitee of itselection as provided in Section 8.5(b), such Indemnitee may defend such ThirdParty Claim at the cost and expense of the Indemnifying Party. (d) Unless the Indemnifying Party has failed to assume the defenseof the Third Party Claim in accordance with the terms of this Agreement, noIndemnitee may settle or compromise any Third Party Claim without the consent ofthe Indemnifying Party. (e) No Indemnifying Party shall consent to entry of any judgmentor enter into any settlement of the Third Party Claim without the consent of theIndemnitee if the effect thereof is to permit any injunction, declaratoryjudgment, other order or other nonmonetary relief to be entered, directly orindirectly, against any Indemnitee. (f) The provisions of this Section 8.5 shall not apply to Taxes(which are covered by the Tax Allocation Agreement). 14 15 ARTICLE IX. INTERIM OPERATIONS AND CERTAIN OTHER MATTERS 9.1 Insurance Matters. (a) ATL agrees that it will reimburse Odetics for itsproportionate share of premiums paid or accrued, from the date hereof until theDistribution Date, in respect of Insurance Policies under which ATL willcontinue to have coverage following the date hereof. Odetics and ATL agree tocooperate in good faith to provide for an orderly transition of insurancecoverage from the date hereof through the Distribution Date and for thetreatment of any Insurance Policies that will remain in effect following theClosing Date on a mutually agreeable basis. In no event shall Odetics, or anyOdetics Indemnitee have any liability or obligation whatsoever to ATL in theevent that any Insurance Policy or other contract or policy of insurance shallbe terminated or otherwise cease to be in effect for any reason, shall beunavailable or inadequate to cover any liability of ATL for any reasonwhatsoever or shall not be renewed or extended beyond the current expirationdate. (b)(i) Except as otherwise provided in any Ancillary Agreement,the parties intend by this Agreement that ATL and its affiliates besuccessor-in-interest to all rights that any may have as of the Closing Date asa subsidiary or affiliate of Odetics prior to the Closing Date under any policyof insurance issued to Odetics by any insurance carrier or under any agreementsrelated to such policies executed and delivered prior to the Closing Date,including any rights ATL and its affiliates may have, as an insured oradditional named insured, subsidiary or affiliate to avail itself of any suchpolicy of insurance or any such agreements related to such policies as in effectprior to the Closing Date. At the request of ATL, Odetics shall take allreasonable steps, including the execution and delivery of any instruments, toeffect the foregoing; provided however that Odetics shall not be required to payany amounts, waive any rights or incur any liabilities in connection therewith. (ii) Except as otherwise contemplated by any Ancillary Agreement,after the Closing Date, neither of Odetics or ATL shall, without the consent ofthe other, provide any such insurance carrier with a release, or amend, modifyor waive any rights under any such policy or agreement, if such release,amendment, modification or waiver would adversely affect any rights or potentialrights of the other hereunder; provided, however, that the foregoing shall not(A) preclude either from presenting any claim or from exhausting any policylimit, (B) require either to pay any premium or other amount or to incur anyliability, or (C) require either to renew, extend or continue any policy inforce. Each of ATL and Odetics will share such information as is reasonablynecessary in order to permit the other to manage and conduct its insurancematters in an orderly fashion. (c) This Agreement shall not be considered as an attemptedassignment of any policy of insurance or as a contract of insurance and shallnot be construed to waive any right or remedy of either Odetics or ATL inrespect of any insurance policy or any other contract or policy of insurance. 15 16 (d) ATL does hereby, for itself and its affiliates, agree thatOdetics or any Odetics Indemnitee shall have any liability whatsoever as aresult of the insurance policies and practices of Odetics and its affiliates asin effect at any time prior to the Closing Date, including as a result of thelevel or scope of any such insurance, the creditworthiness of any insurancecarrier, the terms and conditions of any policy, the adequacy or timeliness ofany notice to any insurance carrier with respect to any claim or potential claimor otherwise. ARTICLE X. MISCELLANEOUS 10.1 Counterparts; Entire Agreement; Corporate Power. (a) This Agreement and each Ancillary Agreement may be executed inone or more counterparts, all of which shall be considered one and the sameagreement, and shall become effective when one or more counterparts have beensigned by each of the parties and delivered to the other party. (b) This Agreement, and the Ancillary Agreements and the Exhibits,Schedules and Appendices hereto and thereto contain the entire agreement betweenthe parties with respect to the subject matter hereof, supersede all previousagreements, negotiations, discussions, writings, understandings, commitments andconversations with respect to such subject matter and there are no agreements orunderstandings between the parties other than those set forth or referred toherein or therein. 10.2 Governing Law. This Agreement and, unless expressly providedtherein, each Ancillary Agreement, shall be governed by and construed andinterpreted in accordance with the laws of the State of California withoutregard to principles of conflicts of law. 10.3 Assignability. (a) Except as set forth in any Ancillary Agreement, this Agreementand each Ancillary Agreement shall be binding upon and inure to the benefit ofthe parties hereto and thereto, respectively, and their respective successorsand assigns; provided, however, that no party hereto or thereto may assign itsrespective rights or delegate its respective obligations under this Agreement orany Ancillary Agreement without the express prior written consent of the otherparties hereto or thereto. 10.4 Third Party Beneficiaries. Except for the indemnification rightsunder this Agreement of any Odetics Indemnitee or ATL Indemnitee in theirrespective capacities as such, (a) the provisions of this Agreement and eachAncillary Agreement are solely for the benefit of the parties and are notintended to confer upon any person except the parties any rights or remedieshereunder, and (b) there are no third party beneficiaries of this Agreement orany Ancillary Agreement and neither this Agreement nor any Ancillary Agreementshall provide any 16 17third person with any remedy, claim, liability, reimbursement, claim of actionor other right in excess of those existing without reference to this Agreementor any Ancillary Agreement. No party hereto shall have any right, remedy orclaim with respect to any provision of this Agreement or any Ancillary Agreementto the extent such provision relates solely to the other two parties hereto orthe members of such other two parties' respective Groups. No party shall berequired to deliver any notice under this Agreement or under any AncillaryAgreement to any other party with respect to any matter in which such otherparty has no right, remedy or claim. 10.5 Notices. All notices or other communications under this Agreementor any Ancillary Agreement shall be in writing and shall be deemed to be dulygiven when (a) delivered in person or (b) deposited in the United States mail orprivate express mail, postage prepaid, addressed as follows: If to Odetics, to: Odetics, Inc. 1515 South Manchester Avenue Anaheim, California 92802-2907 Attn: Joel Slutzky If to ATL, to: ATL Products, Inc. 2801 Kelvin Avenue Irvine, California 92614 Attn: Kevin C. Daly, Ph.D.Any party may, by notice to the other party, change the address to which suchnotices are to be given. 10.6 Severability. If any provision of this Agreement or any AncillaryAgreement or the application thereof to any Person or circumstance is determinedby a court of competent jurisdiction to be invalid, void or unenforceable, theremaining provisions hereof or thereof, or the application of such provision toPersons or circumstances or in jurisdictions other than those as to which it hasbeen held invalid or unenforceable, shall remain in full force and effect andshall in no way be affected, impaired or invalidated thereby, so long as theeconomic or legal substance of the transactions contemplated hereby or thereby,as the case may be, is not affected in any manner adverse to any party. Uponsuch determination, the parties shall negotiate in good faith in an effort toagree upon such a suitable and equitable provision to effect the original intentof the parties. 10.7 Force Majeure. No party shall be deemed in default of thisAgreement or any Ancillary Agreement to the extent that any delay or failure inthe performance of its obligations under this Agreement or any AncillaryAgreement results from any cause beyond its reasonable control and without itsfault or negligence, such as acts of God, acts of civil or military authority,embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes,floods, unusually severe weather conditions, labor problems or unavailability ofparts, or, in the case of computer systems, any failure in electrical or airconditioning equipment. In the event of any such excused delay, the time forperformance shall be extended for a period equal to the time lost by reason ofthe delay. 17 18 10.8 Publicity. Prior to the Distribution, each of ATL and Odeticsshall consult with the other prior to issuing any press releases or otherwisemaking public statements with respect to the IPO, the Distribution or any of theother transactions contemplated hereby and prior to making any filings with anygovernmental authority with respect thereto. 10.9 Headings. The article, section and paragraph headings contained inthis Agreement and in the Ancillary Agreements are for reference purposes onlyand shall not affect in any way the meaning or interpretation of this Agreementor any Ancillary Agreement. 10.10 Survival of Covenants and Representations and Warranties. Exceptas expressly set forth in any Ancillary Agreement, the covenants,representations and warranties contained in this Agreement and each AncillaryAgreement, and liability for the breach of any obligations contained herein,shall survive each of the Separation, the IPO and the Distribution and shallremain in full force and effect regardless of whether Odetics shall consummate,delay, modify or abandon the Distribution. 10.11 Waivers of Default. Waiver by any party of any default by theother party of any provision of this Agreement or any Ancillary Agreement shallnot be deemed a waiver by the waiving party of any subsequent or other default,nor shall it prejudice the rights of the other party. 10.12 Specific Performance. In the event of any actual or threateneddefault in, or breach of, any of the terms, conditions and provisions of thisAgreement or any Ancillary Agreement, the party or parties who are or are to bethereby aggrieved shall have the right to specific performance and injunctive orother equitable relief of its rights under this Agreement or such AncillaryAgreement, in addition to any and all other rights and remedies at law or inequity, and all such rights and remedies shall be cumulative. The parties agreethat the remedies at law for any breach or threatened breach, including monetarydamages, are inadequate compensation for any loss and that any defense in anyaction for specific performance that a remedy at law would be adequate iswaived. Any requirements for the securing or posting of any bond with suchremedy are waived. 10.13 Amendments. (a) No provisions of this Agreement or any Ancillary Agreementshall be deemed waived, amended, supplemented or modified by any party, unlesssuch waiver, amendment, supplement or modification is in writing and signed bythe authorized representative of the party against whom it is sought to enforcesuch waiver, amendment, supplement or modification. Without limiting theforegoing, the parties agree that any waiver, amendment, supplement ormodification of this Agreement or any Ancillary Agreement that solely relates toand affects only two of the three parties hereto shall not require the consentof the third party hereto. 18 19 (b) Without limiting the foregoing, the parties anticipate that,prior to the Closing Date, some or all of the Schedules to this Agreement may beamended or supplemented and, in such event, such amended or supplementedSchedules shall be attached hereto in lieu of the original Schedules. 19 20 IN WITNESS WHEREOF, the parties have caused this Separation andDistribution Agreement to be executed by their duly authorized representatives. ODETICS, INC. a Delaware corporation By: /s/ Joel Slutzky ------------------------------------- Joel Slutzky, Chief Executive Officer ATL PRODUCTS, INC. a Delaware corporation By: /s/ Kevin C. Daly -------------------------------------- Kevin C. Daly, Chief Executive Officer 20 1 EXHIBIT 10.14 TAX ALLOCATION AGREEMENT BY AND BETWEEN ODETICS, INC. AND ATL PRODUCTS, INC. 2 TAX ALLOCATION AGREEMENT THIS TAX ALLOCATION AGREEMENT (the "Agreement"), dated as of March 1,1997, by and between ODETICS, INC., a Delaware corporation ("Odetics"), and ATLPRODUCTS, INC., a Delaware corporation ("ATL"), is entered into in connectionwith the initial public offering ("IPO") of ATL. For purposes of this Agreement,ATL shall also be deemed to refer to ATL Products, Inc., a Californiacorporation, as predecessor of ATL. WHEREAS, Odetics on behalf of itself and its present and futuresubsidiaries other than ATL and its subsidiaries (the "Odetics Group"), and ATLon behalf of itself and its subsidiaries (the "ATL Group") have determined thatit is necessary and desirable to provide for allocation between the OdeticsGroup and the ATL Group of all responsibilities, liabilities and benefitsrelating to taxes paid or payable by either group for all taxable periods,whether beginning before, on or after the IPO, and to provide for certain othermatters; NOW, THEREFORE, in consideration of the mutual agreements, provisionsand covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Code: The Internal Revenue Code of 1986, as amended. 1.2 Effective Date: April 1, 1996. 1.3 Post-Spinoff Period: Any taxable period of ATL ending after thedistribution by Odetics of all of its ATL stock. 1.4 Pre-Spinoff Period: Any taxable period of ATL ending on or beforethe distribution by Odetics of all of its ATL stock. 1.5 Spinoff: The distribution by Odetics of all of its ATL stock. 1.6 Tax or Taxes: All taxes of the Odetics Group and the ATL Group,including any additions to tax, interest and penalties relating to such taxes. 1.7 Tax Benefit: The tax effect of any loss, deduction, credit or otheritem that decreases taxes paid or payable. Page 1 3 1.8 Tax Detriment: The tax effect of any income, gain, recapture ofcredit or other item that increases taxes paid or payable. ARTICLE II FILING OF TAX RETURNS 2.1 Pre-Spinoff Period Income Tax Returns (a) Federal Income Tax Returns. The income and other tax items of ATL for any Pre-Spinoff Period shall be included in the Odetics consolidated federal income tax return; provided that ATL is a member of the Odetics "affiliated group" within the meaning of Section 1504 of the Code. Odetics shallprepare and timely file all consolidated federal income tax returns for all suchperiods. (b) State Income Tax Returns. Odetics shall prepare and timely fileany consolidated or combined state income tax return that includes an OdeticsGroup member and an ATL Group member for all Pre-Spinoff Periods. 2.2 Other Tax Returns. All tax reports or returns for Pre-SpinoffPeriods not covered by Section 2.1 and all tax reports or returns forPost-Spinoff Periods shall be prepared and filed by ATL for the ATL Group and byOdetics for the Odetics Group unless otherwise mutually agreed to by them. ARTICLE III PAYMENT OF TAXES 3.1 Payment of Taxes in General (a) Except as otherwise provided in this Article III, Odetics shallpay, and shall indemnify and hold harmless ATL and each other member of the ATLGroup from and against, all Taxes attributable to the Odetics Group and the ATLGroup (including any Taxes arising to any member of the ATL Group by virtue ofSection 1.1502-6 of the Treasury Regulations), whether heretofore or hereafterarising or incurred. Odetics shall be entitled to any reduction in or refund ofTaxes for which it is responsible pursuant to the preceding sentence (except anyreduction in or refund of Taxes resulting from carrybacks of ATL as described inSection 3.4). (b) ATL shall pay, and shall indemnify and hold harmless eachOdetics Group member from and against, (i) all Taxes attributable to the ATL Group (in the case of income or franchise Taxes, as determined under Section 3.2) for any Pre-Spinoff Period commencing on or after the Effective Date and(ii) all Taxes for any Post-Spinoff Page 2 4Period that are attributable to the ATL Group. ATL shall be entitled to anyreduction in or refund of Taxes for which it is responsible pursuant to thepreceding sentence. (c) Notwithstanding anything to the contrary herein, Odetics shallbe responsible for, and shall indemnify the ATL Group against any Taxesresulting from the reorganization of the international operations of Odetics andATL prior to the IPO. (d) If a member of the Odetics Group or the ATL Group, as the casemay be, receives a refund of Taxes to which the other group is entitled underthis Article III, then such member shall remit such refund to the other group bypromptly sending such refund to Odetics or ATL, as the case may be. 3.2 Allocation and Payment of Income and Franchise Taxes (a) The consolidated Tax liability of the Odetics consolidatedgroup for each year commencing on or after the Effective Date shall beapportioned among the Odetics Group and ATL Group members in accordance withthis paragraph. For purposes of this Agreement, the consolidated Tax liabilityshall include any liability for alternative minimum Tax. The Tax liability for ataxable year shall be apportioned only among the members of the Odeticsconsolidated group with separate company taxable income for that year (the"Profit Members"). The Tax liability will be allocated to the Profit Members inthe same ratio as each Profit Member's separate company taxable income bears tothe total of the separate company taxable incomes of all Profit Members. No Taxliability will be allocated to members of the affiliated group with a taxableloss computed on a separate return basis ("Loss Members"). The Profit Memberswill make payments to Loss Members for Tax Benefits to the Profit Members as aresult of losses or credits generated by the Loss Members. For purposes ofallocating alternative minimum Tax, alternative minimum taxable income amountsshall be substituted for taxable income amounts in the foregoing calculation. (b) The principles set forth in Section 3.2(a) shall be applied forthe allocation of state income Taxes in states where the Odetics affiliatedgroup files consolidated or combined returns, with appropriate modifications, toaccount for differences in the tax laws of the United States and individualstates. As a general rule, the amount of the consolidated or combined Taxliability to a particular state shall be allocated among the profitable membersof a combined or consolidated group filing in such state based on the relativeamounts of their deemed taxable income in that state. For this purpose, eachmember of the consolidated or combined group of corporations filing in aparticular state shall generally be treated as having an amount of deemedtaxable income in that state which that member would be required to report tothe state if the member were filing a separate franchise or income tax returnfor the state, but applying the combined apportionment factors which are ineffect for the subject consolidated or combined group of corporations (ratherthan the member's individual factors). Page 3 5 (c) Payment of the consolidated or combined income or franchise Taxliability for a taxable period shall be made according to the schedule ofestimated tax installments and final payments prescribed in the Code orapplicable state law. ATL shall pay to Odetics the ATL Group members' share ofeach Tax payment within five (5) days of receiving notice from Odetics, but inno event more than ten (10) days prior to the due date for each such payment andno later than such due date. Any overpayment of estimated Tax shall be promptlyrefunded to the member which made such overpayment. 3.3 Adjustments to Tax Liability and Tax Attributes (a) Odetics shall be responsible for, and shall indemnify and holdharmless each member of the ATL Group from and against, all adjustments to Taxesattributable to the Odetics Group, whether heretofore or hereafter arising orincurred, except Taxes for which the members of the ATL Group are liablepursuant to Section 3.1(b). (b) Except as provided in Section 3.3(c), Odetics shall be entitledto any Tax Benefit and shall bear any Tax Detriment resulting from adjustmentsto Taxes attributable to the Odetics Group or the ATL Group (except adjustmentsresulting from carrybacks of ATL from a Post-Spinoff Period). If an adjustmentto a tax item attributable to the Odetics Group increases the Tax liability ofthe Odetics Group and correspondingly reduces a Tax liability for which the ATLGroup is responsible under this Agreement, ATL shall pay promptly to Odetics theamount of the Tax Benefit realized by the ATL Group. If an adjustment to a taxitem attributable to the Odetics Group reduces the Tax liability of the OdeticsGroup and correspondingly increases a Tax liability for which the ATL Group isresponsible under this Agreement, Odetics shall pay promptly to ATL the amountof the Tax Detriment realized by the ATL Group. (c) ATL shall be responsible for, and shall indemnify and holdharmless each Odetics Group member from and against, all adjustments to Taxes(i) for any Pre-Spinoff Period commencing on or after the Effective Date withrespect to the ATL Group and (ii) for any Post-Spinoff Period with respect tothe ATL Group. If an adjustment to a tax item for which ATL is responsible underthis Section 3.3 increases the Tax liability of the ATL Group andcorrespondingly reduces the Tax liability of the Odetics Group, Odetics shallpay promptly to ATL the amount of the Tax Benefit realized by the Odetics Group.If an adjustment to a tax item for which ATL is responsible under this Section3.3 reduces the Tax liability of the ATL Group and correspondingly increases theTax liability of the Odetics Group, ATL shall pay promptly to Odetics the amountof the Tax Detriment incurred by the Odetics Group. 3.4 Carrybacks from Post-Spinoff Periods to Pre-Spinoff Periods.Any loss, credit or other item attributable to the ATL Group and arising in aPost-Spinoff Period may be carried back to a consolidated or combined return ofthe Odetics affiliated group for a Page 4 6Pre-Spinoff Period as permitted under applicable law. Odetics shall cooperatewith any ATL Group member to the extent reasonably necessary (including, withoutlimitation, amending any return and filing any claim for refund) for such memberto realize the Tax Benefit of carrying such loss, credit or other item back tosuch Pre-Spinoff Period. Odetics shall remit promptly to ATL any refund orreduction in Tax resulting from such carryback; provided, however, that theamount payable in respect of any such refund shall be reduced by the amount ofany Tax incurred by any Odetics Group member as a result of the accrual orreceipt of the refund. ARTICLE IV COOPERATION 4.1 Cooperation in General (a) Each of Odetics and ATL agrees to make available to the otherparty documents and records in its custody and in the custody of any member ofits group, to furnish other information and otherwise to cooperate to the extentreasonably required for the filing of tax returns and the handling of audits ofsuch other party. (b) So long as the ATL Group is included in the consolidatedfinancial statements of Odetics, ATL shall timely provide the necessaryfinancial information of the ATL Group to Odetics so that Odetics may prepare aconsolidated tax provision to meet its deadlines. 4.2 Notice, Defense and Settlement of Tax Claims (a) If a member of the Odetics Group or ATL Group receives writtennotice of a deficiency, contest, audit or other proceeding with respect to aproposed Tax liability for which a member of the other group is or may be liableunder this Agreement (including liability hereunder to indemnify or reimburse amember of the other group), then the recipient shall notify the other group ofsuch matter by promptly sending written notice thereof to Odetics or ATL, as thecase may be. Odetics and ATL shall cooperate to contest and defend any suchproposed Tax liability, with each party bearing its own expenses relating tosuch proceeding. The corporation that is liable under applicable law for suchproposed Tax liability (without regard to this Agreement) shall not settle,compromise or otherwise agree to pay such liability without the consent of theparty that is liable for such Tax under this Agreement. Such consent shall notbe unreasonably withheld. (b) Odetics shall be responsible for responding to any notice ofdeficiency, contest, audit or other proceedings with respect to a proposed Taxliability of a consolidated or combined federal or state tax return of theOdetics Group or the ATL Group for a Pre-Spinoff Period. ATL shall beresponsible for responding to any notice Page 5 7of deficiency, contest, audit or other proceedings with respect to a proposedTax liability of a stand-alone tax return of ATL or any member of the ATL Groupfor a Pre-Spinoff Period. In addition, ATL shall be responsible for respondingto any proposed claims for Taxes other than income or franchise taxes, includingbut not limited to sales, property and payroll Taxes, attributable to the ATLGroup for a Pre-Spinoff Period. Odetics shall bear the expense of and havecontrol of such proceedings relating to the ATL Group except in cases involvingTaxes for which the ATL Group is responsible under this Agreement. 4.3 Confidentiality. The members of both the Odetics Group and the ATLGroup understand the confidential nature of financial information disclosed intax returns and the related supporting documentation. Each of Odetics and ATL(on behalf of themselves and the members of their respective groups) herebyagrees not to release any tax and supporting documentation or information withrespect to the other party to any outside party (including taxing authorities)without the consent of the other party, which consent shall not be unreasonablywithheld. ARTICLE V RESOLUTION OF DISPUTES Any dispute or ambiguity concerning the amount of any payment providedfor under this Agreement shall be resolved, in a manner consistent with theprinciples and procedures set forth in this Agreement, by an internationallyrecognized accounting firm (a so-called "Big-Six" accounting firm) jointlyselected by Odetics and ATL. The judgment of such accounting firm shall beconclusive and binding upon each of the parties to this Agreement. Theaccounting firm's fee shall be borne equally by Odetics and ATL. ARTICLE VI GENERAL 6.1 Waiver. Any waiver by any party of any default by the other partyhereunder shall not be deemed to be a continuing waiver of such default or awaiver of any other default or of any of the terms and conditions of thisAgreement. 6.2 Amendments. The terms and conditions of this Agreement may not besuperseded, modified or amended except in writing stating that it is such amodification and signed by an authorized representative of each party hereto. 6.3 Governing Law; Forum Selection. This Agreement shall be governed bythe laws of the State of California, without reference to conflict of lawsprinciples. All disputes arising out of this Agreement shall be subject to theexclusive jurisdiction and venue of the California state courts of Orange County(or, if there is exclusive federal Page 6 8jurisdiction, the United States District Court for the Southern District ofCalifornia), and the parties consent to the personal and exclusive jurisdictionand venue of these courts. 6.4 Attorneys' Fees. The prevailing party in any legal action broughtby one party against the other shall be entitled, in addition to any otherrights and remedies it may have, to reimbursement for its expenses incurredthereby, including court costs and reasonable attorneys' fees. 6.5 Complete Agreement. This Agreement constitutes the entire agreementbetween the parties as to the subject matter hereof, and supersedes and replacesall prior or contemporaneous agreements, written or oral, regarding such subjectmatter, including any prior tax sharing or tax allocation agreements. 6.6 Binding Agreement. This Agreement shall be binding upon and inureto the benefit of each party hereto, its respective successors and assigns, andeach member of the Odetics Group and the ATL Group not a party hereto. 6.7 Notices. Any notice which any party desires or is obligated to giveto the other shall be given in writing or by facsimile or telex and sent to thechief financial officer of the other party. Except as otherwise expresslyprovided herein, notice shall be deemed to have been received on the earlier ofthe date when actually received or ten (10) days after being deposited in themail, postage prepaid, registered or certified mail, or within one (1) day if byfacsimile or telex, promptly confirmed in writing, properly addressed to theother party. 6.8 Headings; Counterparts. Headings to sections of this Agreement areto facilitate reference only, do not form a part of this Agreement and shall notin any way affect the interpretation hereof. This Agreement may be executed intwo (2) or more counterparts or duplicate originals, all of which shall beregarded as one and the same instrument, and which shall be the official andgoverning version in the interpretation of this Agreement. 6.9 Partial Invalidity. If any provision in this Agreement shall befound or be held to be invalid or unenforceable in any jurisdiction in whichthis Agreement is being performed, then the meaning of said provision shall beconstrued, to the extent feasible, so as to render the provision enforceable,and if no feasible interpretation would save such provision, it shall be severedfrom the remainder of this Agreement which shall remain in full force andeffect. In such event, the parties shall negotiate, in good faith, a substitute,valid and enforceable provision which most nearly effects the parties' intent inentering this Agreement. 6.10 Additional Members. If during a Pre-Spinoff Period any othercorporation becomes a member of the Odetics Group or the ATL Group, then suchcorporation shall join in and be bound by this Agreement. Page 7 9 6.11 Effect of Prior Tax Allocation Agreement. The parties are partiesto an existing tax allocation agreement. Such prior allocation agreement issuperseded by this Agreement retroactive to the Effective Date. IN WITNESS WHEREOF, Odetics and ATL have caused this Agreement to beduly executed by their respective officers, each of whom is duly authorized, asof the date first above written. ODETICS, INC. By /s/ JOEL SLUTZKY ----------------------------- Title CEO -------------------------- ATL PRODUCTS, INC. By /s/ KEVIN C. DALY ----------------------------- Title CEO -------------------------- Page 8 1 EXHIBIT 10.15 SERVICES AGREEMENT This SERVICES AGREEMENT is made and entered into as of this 21st day ofMarch, 1997, by and between ODETICS, INC., a Delaware corporation ("Odetics")and ATL PRODUCTS, INC., a Delaware corporation ("ATL"). R E C I T A L S WHEREAS, Odetics and ATL have entered into a Separation andDistribution Agreement which sets forth the principal transactions betweenOdetics and ATL as a result of ATL's recent issuance of additional shares of itsauthorized but unissued Class A Common Stock in a registered and underwritteninitial public offering of less than 20% of its outstanding shares and Odetics'proposed distribution to its stockholders pursuant to a tax free spinoff underInternal Revenue Code ss. 355 of the Class A Common Stock of ATL which it owns(the "Distribution"); and WHEREAS, ATL desires Odetics to perform certain business, informationand facilities services on ATL's behalf following the Distribution; NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. Business Services. During the term of this Agreement, Odetics shallprovide to ATL the services set forth in Exhibit A attached hereto (the"Services") in substantially the same manner and to the same extent as currentlyand heretofore provided. 2. Performance of Services. 2.1 Services to be provided by Odetics may, at Odetics's sole discretion, be provided, in whole or in part, by affiliates of Odetics. Odetics shall not be obligated to acquire new or additional assets, or hire new or additional employees, to perform the Services. In addition, Odetics may contract with one or more third parties for the performance of all or any part of the Services provided (i) the costs to ATL for the services to be provided by the third party do not exceed the amounts that would have been charged by Odetics, (ii) the level of service provided by the third party is at least substantially equivalent to that provided by Odetics hereunder, and (iii) such third party is reasonably acceptable to ATL. It is currently contemplated that the Services will generally continue to be provided by the organization that is providing such Services as of the date hereof. ATL agrees that all third parties currently providing any Services are acceptable third parties to provide Services. 2.2 The Services to be provided by Odetics shall be provided to ATL as appropriate to reflect the organizational and operational structure of ATL; provided, 1 2 however, that Odetics shall not be required to provide any Services to the extent that the performance of such Services becomes more expensive for Odetics as a result of an organizational or operations change by ATL. 2.3 ATL shall provide to Odetics on a timely basis any and all information which is reasonably necessary for Odetics to provide the Services. ATL shall be solely responsible for the timely delivery of such information, and the accuracy and completeness thereof. ATL shall have no right to obtain any confidential or proprietary information of Odetics, and any such information so obtained by ATL shall be deemed to be confidential and treated in accordance with the provisions of Section 7 hereof. 3. Limitation of Services. 3.1 Odetics shall not be required to provide a level of service which is higher than that provided currently, at the date of this Agreement. 3.2 Odetics shall not be required to perform any information system services to the extent such services would result in the breach of any software license or other applicable contract. If Odetics believes it is unable to provide any information systems services pursuant to the foregoing, Odetics shall promptly notify ATL. If requested by ATL, Odetics shall use reasonable efforts to obtain the rights necessary to provide such information system services, including obtaining any appropriate consents from third parties. ATL shall be responsible for all additional costs and expenses incurred by Odetics in order to allow Odetics to provide such information system services. 3.3 Odetics shall not be required to provide any Services to the extent the performance of such Services becomes impractical as a result of a cause or causes outside the reasonable control of Odetics or to the extent the performance of such Services would require Odetics to violate any applicable laws, rules or regulations. 3.4 ODETICS MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AND ODETICS SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES TO BE PROVIDED HEREUNDER. 4. Fees. 4.1 ATL shall pay to Odetics, as fees for the Services performed by Odetics pursuant to this Agreement, the amounts set forth in Exhibit A, which amounts are intended to represent the fair market value of such services. Such fees shall be adjusted throughout the term of this Agreement, so that they will reflect fair market value at all times. In addition, ATL shall reimburse Odetics for all direct third party costs incurred by Odetics in connection with providing the Services, provided that such third party costs have been approved in advance by ATL. 2 3 4.2 Odetics shall submit to ATL, on a monthly basis, Odetics's invoice for Services performed under this Agreement in the preceding month. Each invoice shall be payable net thirty (30) days after the date of the invoice; however, in the event that ATL, in good faith, questions any invoiced item, payment of that item shall be made only after the satisfactory resolution of those questions. ATL shall pay a service charge of 1% per month for all overdue amounts, other than amounts which ATL has, in good faith, questioned. 5. Term. 5.1 Unless terminated earlier as provided in this Section, this Agreement shall terminate as of a date eighteen (18) months after the date of this Agreement. 5.2 ATL may terminate any of the Services, in whole or in part, upon 30 days written notice to Odetics. 5.3 This Agreement may be terminated at any time upon the mutual consent of the parties. 5.4 Either party may terminate this Agreement if the other party is in material default under this Agreement and fails to correct such default within 30 days after receiving written notice of such default. 5.5 The parties acknowledge that the purpose of this Agreement is to provide the Services on an interim basis to permit ATL to obtain alternative sources for the Services. ATL shall use its best efforts to obtain alternative sources for the Services as soon as practicable. 6. Indemnification. 6.1 ATL shall indemnify and hold harmless Odetics, its affiliates, and their officers, directors, employees, and agents from and against all claims, liabilities, obligations, suits, causes of action, or expenses (including reasonable attorneys fees) (collectively "Claims") claimed to have resulted, directly or indirectly, in connection with the performance of Services by Odetics, provided, however, that ATL shall not be required to indemnify or hold harmless any indemnitee to the extent the Claims are caused by the gross negligence or willful misconduct of such indemnitee. 6.2 An indemnitee shall provide written notice to ATL of any Claims with respect to which it seeks indemnification, and ATL shall assume the defense of such Claims with counsel reasonably satisfactory to the indemnitee. If such defense is assumed by ATL with counsel so selected, ATL will not be subject to any liability for 3 4 any settlement of such Claims made by an indemnified party without ATL's consent (such consent to not be unreasonably withheld or delayed). No indemnified party will be subject to any liability for any settlement of such Claims made by ATL without such party's consent (which consent is not to be unreasonably withheld), and such settlement shall include an unconditional release of all indemnitees from all liability on such Claims. If an indemnified party desires to retain separate counsel, such indemnified party shall have the right to do so, but ATL will not be obligated to pay the fees and expenses of such separate counsel. The parties hereto agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any legal proceeding, claim or demand and to engage in no action that would result in or increase liability on the part of another party. 6.3 The provisions of this Section 6 shall survive termination of the Agreement. 7. Confidentiality. 7.1 In the course of performance of this Agreement, either party ("Receiving Party") may acquire information the other party ("Disclosing Party") deems confidential, including trade secrets and unpublished technical or business related information and data to which the Disclosing Party (or companies affiliated with the Disclosing Party) has proprietary rights. Confidential information shall also include information of a third party which the Disclosing Party is under an obligation to maintain in confidence. All such information is referred to hereinafter as "Disclosed Information." 7.2 The Receiving Party shall retain Disclosed Information in strict confidence and shall not communicate it to others without the Disclosing Party's prior written agreement. Notwithstanding the foregoing, Odetics shall be allowed to disclose Disclosed Information of ATL to third parties as necessary to perform the Services, provided such third parties have undertaken confidentiality obligations substantially similar to those set forth in this Section 7. 7.3 Nothing in this Agreement shall prevent the communication to others of any Disclosed Information which the Receiving Party can show was known to it or its representatives prior to its receipt hereunder, was lawfully received by the Receiving party and its representatives other than directly or indirectly from the Disclosing Party or became public knowledge through no fault of the Receiving Party. 7.4 The provisions of this Section 7 shall survive termination of this Agreement for a period of three years. 4 5 8. Miscellaneous. 8.1 Notices. All notices required or permitted to be given under this Agreement shall be in writing and shall be sent by facsimile transmission or mailed by registered or certified mail addressed to the party to whom such notice is required or permitted to be given. All notices shall be deemed to have been given when transmitted if given by facsimile and confirmation of receipt is received or, if mailed, 48 hours after mailed as evidenced by the postmark at the point of mailing. All notices to Odetics shall be addressed as follows: Odetics, Inc. 1515 South Manchester Avenue Anaheim, California 92802-2907 Attn: Joel Slutzky All notices to ATL shall be addressed as follows: ATL Products, Inc. 2801 Kelvin Avenue Irvine, California 92614 Attn: Kevin C. Daly, Ph.D. Either party may, by written notice to the other, designate a newaddress to which notices to the party giving the notice shall thereafter bemailed. 8.2 Force Majeure. Odetics shall not be liable for any delay or failure of performance to the extent such delay or failure is caused by circumstances beyond its reasonable control and that by the exercise of due diligence it is unable to prevent, provided that the party claiming excuse use its best efforts to overcome the same. 8.3 Limitation of Liability. In no event shall Odetics be liable to ATL for indirect, consequential, incidental or special damages, including but not limited to lost profits, arising from or relating to any breach of this Agreement, regardless of any notice of such damages. Nothing in this Section is intended to limit or restrict the indemnification rights or obligations of either party. 8.4 Entirety of Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter contained herein and merges all prior discussions between them, and neither party shall be bound by any representation other than as expressly stated in this Agreement, or by a written amendment to this Agreement signed by authorized representatives of both parties. 5 6 8.5 Waiver. The failure of either party in any one or more instances to insist upon strict performance of any of the terms and conditions of this Agreement shall not be construed as a waiver or relinquishment, to any extent, of the right to assert or rely upon any such terms or conditions on any future occasion. 8.6 Disclaimer of Agency. This Agreement shall not constitute either party the legal representative or agent of the other, nor shall either party have the right or authority to assume, create, or incur any third-party liability or obligation of any kind, express or implied, against or in the name of or on behalf of the other party except as expressly set forth in this Agreement. The relationship of Odetics and ATL shall be solely that of contracting parties and no partnership, joint venture or other arrangement of any nature shall be deemed to be created hereby. 8.7 Severability. In the event any term of this Agreement is or becomes or is declared to be invalid or void by any court of competent jurisdiction, such term or terms shall be null and void and shall be deemed deleted from this Agreement, and all the remaining terms of the Agreement shall remain in full force and effect. 8.8 Governing Law. The validity, performance and construction of this Agreement shall be governed by the laws of California without regard to principles of conflicts of laws. 8.9 Assignment. Except as provided in Section 2, neither party shall delegate duties of performance or assign, in whole or in part, rights or obligations under this Agreement without the prior written consent of the other party, and any attempted delegation or assignment without such written consent shall be of no force or effect. Subject to the restrictions contained in the preceding sentence, this Agreement shall be binding upon the successors and assigns of both parties. 8.10 Amendment. This Agreement shall be amended as mutually agreed by Odetics and ATL in order to comply with any requirements imposed by the Internal Revenue Service in order to issue a ruling pursuant to Section 355 of the Internal Revenue Service Code of 1986, as amended. This Agreement is executed by the parties as of the date indicated above.ATL PRODUCTS, INC. ODETICS, INC.By: /s/ Kevin C. Daly By: /s/ Joel Slutzky ------------------------------- ----------------------------- Kevin C. Daly, Ph.D. Joel Slutzky, Chief Executive Officer Chief Executive Officer 6 7 EXHIBIT A ATL PRODUCTS, INC. ODETICS CORPORATE SERVICES TO BE PROVIDED TO ATL FOR THE PERIOD 4/1/97 - 3/31/98 --------------------------------------------------------------------------------------------------- AMOUNT ASSUMPTIONS- ----------------------------------------------------------------------------------------------------------------------------------- QTR QTR QTR QTR FYE QTR QTR QTR QTR- ----------------------------------------------------------------------------------------------------------------------------------- Jun-97 Sep-97 Dec-97 Mar-98 Mar-98 Jun-97 Sep-97 Dec-97 Mar-98 =================================================================================================================================== 40k sq ft 1.3k sq ft 1.3k sq ft 1.3k sq ftRENT @ 1515 S Manchester 32,000 3,000 3,000 3,000 41,000 apr mo mo mo- ----------------------------------------------------------------------------------------------------------------------------------- 1.3 sq ft mo - -----------------------------------------------------------------------------------------------------------------------------------Payroll preparation 16,600 16,600 16,600 16,600 66,400 .75MM .75MM .75MM .75MM- -----------------------------------------------------------------------------------------------------------------------------------All other accounting support 10,800 10,800 10,800 10,800 43,200 .25MM .25MM .25MM .25MM- -----------------------------------------------------------------------------------------------------------------------------------MIS Support- ----------------------------------------------------------------------------------------------------------------------------------- MRP 8,150 8,150 8,150 8,150 32,600 .25MM .25MM .25MM .25MM- ----------------------------------------------------------------------------------------------------------------------------------- Network security 8,150 8,150 8,150 8,150 32,600 .25MM .25MM .25MM .25MM- ----------------------------------------------------------------------------------------------------------------------------------- Alpha HW/SW maintenance support 11,550 11,550 11,550 11,550 46,200 35% 35% 35% 35%- ----------------------------------------------------------------------------------------------------------------------------------- Alpha lease payment 2,993 2,993 2,993 2,993 11,972 35% 35% 35% 35%- ----------------------------------------------------------------------------------------------------------------------------------- Sun H/S Support 2,100 2,100 2,100 2,100 8,400 35% 35% 35% 35%- -----------------------------------------------------------------------------------------------------------------------------------Phone Switch 0 0 0 0 0 25% 25% 0 0- -----------------------------------------------------------------------------------------------------------------------------------Facilities management 6,500 6,500 0 0 13,000 .25MM .25MM 0 0- -----------------------------------------------------------------------------------------------------------------------------------Associate Relations 30,000 30,000 0 0 60,000 1MM 1MM 0 0- -----------------------------------------------------------------------------------------------------------------------------------Health/Insurance Benefits 7,700 7,700 7,700 7,700 30,800 .25MM .25MM .25MM .25MM- -----------------------------------------------------------------------------------------------------------------------------------CFO 25,00 25,000 0 0 50,000 .5MM .5MM 0 0- -----------------------------------------------------------------------------------------------------------------------------------CEO Support 22,250 22,250 44,500 .25MM .25MM 0 0- ----------------------------------------------------------------------------------------------------------------------------------- TOTAL 183,793 154,793 71,043 71,043 480,672================================================================================ 8 ATL PRODUCTS LIMITED OEL FACILITY COSTS AND SERVICES TO BE PROVIDED TO APL FOR THE PERIOD 1/4/97 - 12/31/97 -------------------------------------------------------------------------------------------------- AMOUNT ASSUMPTIONS - ---------------------------------------------------------------------------------------------------------------------------------- QTR QTR QTR QTR FYE QTR QTR QTR QTR- ---------------------------------------------------------------------------------------------------------------------------------- Jun-97 Sep-97 Dec-97 Mar-98 Mar-98 Jun-97 Sep-97 Dec-97 Mar-98================================================================================================================================== RENT & RATES 23,822 23,822 23,822 0 71,466 1.5k sq ft 1.5k sq ft 1.5k sq ft N/A- ----------------------------------------------------------------------------------------------------------------------------------Utilities 2,616 2,616 2,616 0 7,848 Water, Light, Heat, Cleaning N/A- ----------------------------------------------------------------------------------------------------------------------------------Office equipment 2,450 2,450 2,450 0 7,350 fire, phone, copier, s/w, pc spt, etc N/A- ----------------------------------------------------------------------------------------------------------------------------------Depreciation on Tls 11,550 11,550 11,550 0 34,650 Ref: Seymour memo 3/26/97 N/A- ----------------------------------------------------------------------------------------------------------------------------------Support- ---------------------------------------------------------------------------------------------------------------------------------- Warehousing 2,549 2,549 2,549 0 7,647 1/3 MM 1/3 MM 1/3 MM N/A- ---------------------------------------------------------------------------------------------------------------------------------- Accounting 5,821 5,821 5,821 0 17,463 1/3 MM 1/2 MM 1/2 MM N/A- ----------------------------------------------------------------------------------------------------------------------------------TOTAL 48,808 48,808 48,808 0 146,424=============================================================================== 1 EXHIBIT 10.16 PROMISSORY NOTE$12,997,444 April 1, 1997 Anaheim, California FOR VALUE RECEIVED, ATL Products, Inc., a Delaware corporation (the"Borrower"), promises to pay to the order of Odetics, Inc., a Delawarecorporation (the "Lender"), at Anaheim, California, or at such other place asthe holder of this Note may from time to time designate in writing, theprincipal amount of $12,997,444.00 dollars, with interest on the principalamount from the date of disbursement of the principal amount at the rate perannum set forth in this Note, to be paid as set forth in this Note. The principal amount of this Note shall bear interest at the rate perannum equal to Lender's cost of borrowing from the lesser of either of Lender'sprimary banks, or Lender's principal bank, as the case may be during the term ofthe Note, but shall not exceed the maximum rate of interest permitted byapplicable law. The Borrower shall pay the principal amount of this Note and interestin sixteen (16) equal quarterly installments at the end of each calendar quartercommencing June 30, 1997 and continuing until all principal and interest havebeen fully paid. Each payment of principal shall be accompanied by a paymentequal to all interest accrued on the outstanding principal amount of the Note. The Borrower shall have the right to prepay the principal sum of thisNote, or any part thereof or interest thereon, at any time without penalty orprepayment charge. Both principal and interest shall be paid by Borrower in lawful moneyof the United States of America in cash or in the form of a cashier's orcertified check. If the Borrower shall default in the timely making of any payment ofprincipal and/or interest due hereunder and if the same remains unpaid forfifteen (15) days following receipt by Borrower of written notice of suchdefault the Lender may declare the entire remaining indebtedness owinghereunder, including any accrued interest, to become immediately due andpayable. Notwithstanding anything to the contrary in this Note, the totalliability of the Borrower for payments in the nature of interest shall notexceed the limits applicable to this Note, if any, imposed by the usury laws, ifany, of the United States of America or the State of California. If any paymentin the nature of interest made by the Borrower or received by the holder of thisNote is determined to be in excess of any limit applicable to this Note imposedby such usury laws, then the amount of such excess shall constitute and beconsidered a payment of principal, not interest, and such amount shall beapplied to reduce the principal sum so that the total liability of the Borrowerfor payments in the nature of interest does not exceed the 2applicable limits, if any, imposed by such usury laws. In the event and to theextent such excess amount of interest exceeds the outstanding unpaid principalbalance hereunder, any such excess amount shall be immediately returned toBorrower by Lender. No delay or omission on the part of the Lender hereof in exercising anyright hereunder shall operate as a waiver of such right or of any other rightunder this Note. Neither this Note nor any term hereof may be waived, amended,discharged, modified, changed, or terminated orally, nor shall any waiver of anyprovision hereof be effective except by an instrument in writing signed byBorrower and the Lender thereof. Whenever used herein, the words "Borrower" and "Lender" shall be deemedto include their respective heirs, personal representatives, successors andassigns. All notices to be given under this Note shall be deemed served uponreceipt by the addressee or, if mailed, upon the expiration of seventy-two (72)hours after deposit in the United States Postal Service, certified mail, postageprepaid, addressed to the address of Borrower or Lender as hereinafter setforth: Borrower's Address: 2801 Kelvin Avenue Irvine, California 92715 Attention: Chief Executive Officer Lender's Address: 1515 South Manchester Avenue Anaheim, California 92802-2907 Attention: Chief Executive Officer This Note may from time to time be extended or renewed, with or withoutnotice to Borrower or any guarantor hereon and any related right may be waived,exchanged, surrendered or otherwise dealt with, all without affecting theliability of Borrower or any guarantor hereon. There are no oral agreements between the Lender and the Borrowerrelating to this Note. If any provision of this Note is held to be invalid orunenforceable, it shall not affect the validity and enforceability of the otherprovisions of this Note. This Note has been executed and delivered in the Stateof California and is to be governed by and construed according to the lawsthereof. -2- 3 IN WITNESS WHEREOF, the Borrower has executed this Note as of the datefirst hereinabove written. ATL Products, Inc. By: /s/ Kevin C. Daly --------------------------- Kevin C. Daly, Ph.D. Chief Executive Officer - 3 - 1 EXHIBIT 10.17 AMENDMENT NUMBER SIX TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NUMBER SIX TO LOAN AND SECURITY AGREEMENT (this"Amendment"), dated as of March 31, 1997, is entered into by and among IMPERIALBANK, a California banking corporation, in its individual capacity and in itscapacity as agent for Banks (as hereinafter defined), and COMERICABANK-CALIFORNIA, a California banking corporation (collectively, "Banks"), onthe one hand, and ODETICS, INC., a Delaware corporation ("Parent Borrower"), ATLPRODUCTS, INC., a California corporation ("ATL"), and GYYR INCORPORATED, aCalifornia corporation ("Gyyr"), on the other hand, with reference to thefollowing facts: A. Banks, Parent Borrower, ATL and Gyyr have previously entered intothat certain Loan and Security Agreement, dated as of August 30, 1994, asamended by that certain letter agreement, dated as of December 6, 1994, thatcertain Amendment Number One to Loan and Security Agreement, dated as of March1, 1995, that certain Amendment Number Two to Loan and Security Agreement, datedas of June 27, 1995, that certain Amendment Number Three to Loan and SecurityAgreement, dated as of December 1, 1995, that certain Amendment Number Four toLoan and Security Agreement, dated as of February 26, 1996, and that certainAmendment Number Five to Loan and Security Agreement, dated as of December 4,1996 (the "Agreement"); and B. The parties hereto desire to make certain modifications to theAgreement, including, but not limited to, (i) the release of ATL as aco-borrower under the Agreement, (ii) the release by Banks of their securityinterest in the Assets of ATL, (iii) the termination of the Subsidiary BorrowerGuaranty and (iv) certain modifications to the financial covenants. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. DEFINED TERMS. All initially capitalized terms used but not definedherein shall have the meanings assigned to such terms in the Agreement. Inaddition, Section 1.1 of the Agreement is hereby amended by: (a) amending the definitions of "Borrowers", "Debt", "Guaranties",and "Parent Borrower Guaranty" in their entirety as follows: "`Borrowers' means and refers jointly and severally to Parent Borrower and Gyyr (each a `Borrower')." "`Debt' means, as of the date of determination, the sum (but without duplication) of any and all of a Person's (i) Capitalized Lease Obligations, (ii) indebtedness heretofore or hereafter created, issued, incurred or assumed by such 1 2 Person (directly or indirectly) for or in respect of borrowed money (including, in the case of Borrowers, the Loans), (iii) notes payable and drafts accepted representing extensions of credit to such Person, whether or not representing obligations for borrowed money, (iv) obligations owed by such Person for all or any part of the deferred purchase price of property or services, (v) indebtedness secured by any Lien on any Asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person, and (vi) all reimbursement or other obligations of such Person under or in respect of letters of credit, bankers acceptances, interest rate swaps, caps, floors and collars, currency swaps, or other similar financial products." "`Guaranties' means the Parent Borrower Guaranty, the Gyyr Guaranty, and any other guaranty of the Obligations executed by any Person in favor of Banks." "`Gyyr Guaranty' means that certain Continuing Guaranty, executed by Gyyr, dated as of December 4, 1996, as amended March 31, 1997, and as may be further amended from time to time, executed by Gyyr, for the benefit of Banks, Agent, and Issuing Bank, respecting the Obligations of Parent Borrower." "`Parent Borrower Guaranty' means that certain Continuing Guaranty, dated as of even date herewith, as amended December 4, 1996 and March 31, 1997, and as may be further amended from time to time, executed by Parent Borrower, for the benefit of Banks, Agent, and Issuing Bank, respecting the Obligations of Gyyr." (b) deleting the definitions of "Subsidiary Borrower" and"Subsidiary Borrower Guaranty" in their entirety. (c) adding the following new definitions in appropriate alphabeticalorder: "`ATL' means ATL Products, Inc., a California corporation. "`ATL Note' means that certain Promissory Note, dated April 1, 1997, executed by ATL, as maker, in favor of Odetics, in the original principal amount of $12,997,444. 2. CONSTRUCTION. All references to "any Borrower" in the Agreementshall be construed to be a reference to "either Borrower." 2 3 3. ATL AS BORROWER AND GUARANTOR. Upon the effectiveness of thisAmendment as set forth in Section 8 below, (i) ATL shall cease to be a signatoryto, and "Borrower" under, the Agreement, and shall no longer be bound by any ofthe terms and provisions thereof, except for such provisions which by theirterms survive termination of the Agreement, (ii) that certain ContinuingGuaranty, dated as of August 30, 1994, as amended December 4, 1996, executed byATL, shall be terminated, and (iii) Agent and Banks shall execute and deliver toATL any and all UCC Financing Statement Amendments and/or Terminations as ATLshall reasonably request in order to release Agent's and Banks' Liens upon theAssets of ATL. 4. AMENDMENT TO SECTION 9.12. Section 9.12 of the Agreement is herebyamended in its entirety as follows: "9.12 INDEBTEDNESS. Incur any Debt outside the ordinary course of such Borrower's business, or permit any Subsidiary to do so, except for (i) Permitted Debt, and (ii) in the case of ATL, a line of credit in a maximum principal amount (exclusive of interest and fees) not to exceed Five Million Dollars ($5,000,000) from Imperial." 5. AMENDMENT TO SECTION 10.16. Section 10.16 of the Agreement is herebyamended in its entirety as follows: "10.16 FINANCIAL COVENANTS. Borrowers shall: "(a) as of the last day of each fiscal quarter of Borrowers, maintain on a consolidated basis with the Subsidiaries (including ATL), on an operating and after-tax basis (excluding extraordinary income or gains), profitability; "(b) as of the last day of each fiscal quarter of Borrowers, maintain on a consolidated basis with the Subsidiaries (including ATL), a Tangible Net Worth (including minority interests in ATL) in an amount not less than the sum of (i) Fifty Million Five Hundred Thousand Dollars ($50,500,000) plus (ii) eighty percent (80%) of the cumulative consolidated net income (but without any offset for net losses) commencing with the fiscal quarter commencing April 1, 1997, and (iii) one hundred percent (100%) of the amount of all net cash proceeds received upon the issuance of any of each Borrower's or any of their Subsidiaries' capital stock after March 31, 1997; "(c) maintain on a consolidated basis with the Subsidiaries (including ATL), a ratio of (i) Total Liabilities (excluding minority interests in ATL) to (ii) Tangible Net Worth (including minority 3 4 interests in ATL), of not greater than 1.1:1.0 as of the last day of each fiscal quarter of Borrowers; "(d) maintain on a consolidated basis with the Subsidiaries (including ATL), a ratio of (i) Quick Assets to (ii) the sum of Current Liabilities plus the Revolving Loans Daily Balance, of not less than 0.9:1.0 as of the last day of each fiscal quarter of Borrowers. "(e) [Intentionally Deleted]; and "(f) as of the last day of each fiscal quarter of Borrowers, maintain on a consolidated basis with the Subsidiaries (including ATL), a ratio of (i) the sum of their net income after taxes for such quarter plus their interest expense (exclusive of interest income) for such quarter plus their depreciation and amortization expense for such quarter, to (ii) the sum of their interest expense (exclusive of interest income) for such quarter plus one fourth (1/4th) of the current portion of their long-term Debt outstanding as of the end of such fiscal quarter, of not less than 1.50:1.0. 6. REPLACEMENT OF EXHIBIT AND SCHEDULE. Schedule 8.19 and Exhibit 10.12to the Agreement are hereby deleted in their entirety and replaced,respectively, with Schedule 8.19 and Exhibit 10.12 attached to this Amendment. 7. REPRESENTATIONS AND WARRANTIES. In order to induce Banks to enterinto this Amendment, each of Parent Borrower, ATL and Gyyr represents andwarrants to Banks that: (a) as of the date hereof, no Event of Default, Unmatured Event ofDefault or Material Adverse Effect is continuing; (b) all of the representations and warranties set forth in theAgreement are true, complete and accurate in all respects as of the date hereof(except for representations and warranties which are expressly stated to be trueand correct as of the Closing Date); (c) this Amendment has been duly executed and delivered by ParentBorrower, ATL and Gyyr, and after giving effect to this Amendment, the Agreementcontinues to constitute the legal, valid and binding agreements and obligationsof each of Parent Borrower and Gyyr, enforceable in accordance with its terms,except as enforceability may be limited by bankruptcy, insolvency, and similarlaws and equitable principles affecting the enforcement of creditors' rightsgenerally; and 4 5 (d) ATL has completed a public offering of its common stock yieldingat least $16,879,000 in proceeds, net of underwriting discounts and commissions,of which ATL has paid $6,750,000 to Parent Borrower as a principal reduction onan intercompany obligation which is currently evidenced by the ATL Note. 8. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT. Theeffectiveness of this Amendment is subject to and contingent upon thefulfillment of each and every one of the following conditions on or before thedate of this Amendment: (a) Agent, on behalf of Banks and Issuing Bank, shall have receivedthe following agreements, instruments and documents, in each case in form andcontent satisfactory to Agent: (i) this Amendment, duly executed by Borrowers and Banks; and (ii) each Consent of Guarantor and Amendment to Guaranty attached to this Amendment, duly executed by Parent Borrower and Gyyr, as applicable. (b) Agent shall have received all outstanding and unpaid BankExpenses, including but not limited to the legal fees of Buchalter, Nemer,Fields & Younger and of Gray, Cary, Ware & Freidenrich, and the Bank Expensesrelating to the negotiation preparation and documentation of this Amendment. (c) Agent shall have received an executed copy of the ATL Note, inform and substance satisfactory to Agent. (d) No Event of Default, Unmatured Event of Default or MaterialAdverse Effect shall be continuing. (e) All of the representations and warranties set forth herein andin the Agreement shall be true, complete and accurate in all respects as of thedate hereof (except for representations and warranties which are expresslystated to be true and correct as of Closing Date). 9. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may beexecuted in any number of counterparts and by different parties on separatecounterparts, each of which, when executed and delivered, shall be deemed to bean original, and all of which, when taken together, shall constitute but one andthe same Amendment. Delivery of an executed counterpart of this Amendment bytelefacsimile shall be equally as effective as delivery of a manually executedcounterpart of this Amendment. Any party delivering an executed counterpart ofthis Amendment by telefacsimile also shall deliver a manually 5 6executed counterpart of this Amendment but the failure to deliver a manuallyexecuted counterpart shall not affect the validity, enforceability, and bindingeffect of this Amendment. 10. REAFFIRMATION OF THE AGREEMENT. Except as expressly modified bythis Amendment, the Agreement and the Credit Documents shall remain in fullforce and effect. [Remainder of this page intentionally left blank] 6 7 IN WITNESS WHEREOF, the parties hereto have executed and delivered thisAmendment as of the date first hereinabove written. ODETICS, INC., a Delaware corporation By:__________________________________________ Title:________________________________ ATL PRODUCTS, INC., a California corporation By:__________________________________________ Title:________________________________ GYYR INCORPORATED, a California corporation By:__________________________________________ Title:________________________________ IMPERIAL BANK, a California banking corporation, in its individual capacity and in its capacity as agent for Banks By:__________________________________________ Title:________________________________ COMERICA BANK-CALIFORNIA, a California banking corporation By:__________________________________________ Title:________________________________ 7 8 CONSENT OF GUARANTOR AND AMENDMENT TO GUARANTY The undersigned, as "Guarantor" under that certain Continuing Guaranty,dated as of August 30, 1994 ("Guaranty"), executed in favor of IMPERIAL BANK, aCalifornia banking corporation, in its individual capacity and in its capacityas agent for Banks (as hereinafter defined), and COMERICA BANK-CALIFORNIA, aCalifornia banking corporation (collectively, "Banks"), as amended by thatcertain Consent of Guarantor and Amendment to Guaranty, dated as of December 4,1996, with respect to the obligations of ODETICS, INC., a Delaware corporation,GYYR INCORPORATED, a California corporation, and ATL PRODUCTS, INC., aCalifornia corporation (collectively, "Borrowers"), owing to Bank, herebyacknowledges notice of the foregoing Amendment Number Six to Loan and SecurityAgreement, dated as of March 31, 1997, among Borrowers, on the one hand, andBanks, on the other hand, consents to the terms contained therein, and agreesthat the Guaranty shall remain in full force and effect. The undersigned further agrees that the first sentence of the firstparagraph of the Guaranty shall be amended in its entirety as follows: "Reference is hereby made to that certain Loan and Security Agreement, dated as of even date herewith (as amended, supplemented, restated, replaced, modified, or extended from time to time, the `Loan Agreement'), among Gyyr Incorporated, a California corporation (`Gyyr'), and Odetics, Inc., a Delaware corporation (`Guarantor'), as borrowers, and Imperial Bank, a California banking corporation, and Comerica Bank-California, a California banking corporation (hereinafter, together with their successors and assigns, `Banks'), as banks, Imperial Bank, a California banking corporation, as Issuing Bank (as that term is defined in the Loan Agreement), and Imperial Bank, a California corporation, as Agent (as that term is defined in the Loan Agreement) (Banks, Issuing Bank, and Agent are hereinafter collectively referred to as `Guaranteed Parties' and individually as, a `Guaranteed Party')." ODETICS, INC., a Delaware corporation By:__________________________________________ Title:________________________________ 8 9 CONSENT OF GUARANTOR AND AMENDMENT TO GUARANTY The undersigned, as "Guarantor" under that certain Continuing Guaranty,dated as of December 4, 1996 ("Guaranty"), executed in favor of IMPERIAL BANK, aCalifornia banking corporation, in its individual capacity and in its capacityas agent for Banks (as hereinafter defined), and COMERICA BANK-CALIFORNIA, aCalifornia banking corporation (collectively, "Banks"), with respect to theobligations of ODETICS, INC., a Delaware corporation, GYYR INCORPORATED, aCalifornia corporation, and ATL PRODUCTS, INC., a California corporation(collectively, "Borrowers"), owing to Bank, hereby acknowledges notice of theforegoing Amendment Number Six to Loan and Security Agreement, dated as of March31, 1997, among Borrowers, on the one hand, and Banks, on the other hand,consents to the terms contained therein, and agrees that the Guaranty shallremain in full force and effect. The undersigned further agrees that the first sentence of the firstparagraph of the Guaranty shall be amended in its entirety as follows: "Reference is hereby made to that certain Loan and Security Agreement, dated as of even date herewith (as amended, supplemented, restated, replaced, modified, or extended from time to time, the `Loan Agreement'), among Gyyr Incorporated, a California corporation (`Guarantor'), and Odetics, Inc., a Delaware corporation (`Borrower'), as borrowers, and Imperial Bank, a California banking corporation, and Comerica Bank-California, a California banking corporation (hereinafter, together with their successors and assigns, `Banks'), as banks, Imperial Bank, a California banking corporation, as Issuing Bank (as that term is defined in the Loan Agreement), and Imperial Bank, a California corporation, as Agent (as that term is defined in the Loan Agreement) (Banks, Issuing Bank, and Agent are hereinafter collectively referred to as `Guaranteed Parties' and individually as, a `Guaranteed Party')." GYYR INCORPORATED, a California corporation By: /s/ ------------------------------------------ Title:________________________________ 9 10 SUBSIDIARIES SUBSIDIARIES PARENT ------------ ------ ATL PRODUCTS, INC. ODETICS, INC. 82.9% OWNED SUBSIDIARY, INCORPORATED IN CALIFORNIAODETICS EUROPE, LTD. ODETICS, INC. ORGANIZED AND EXISTING UNDER THE LAWS OF THE UNITED KINGDOMODETICS, ASIA PACIFIC ODETICS, INC. ORGANIZED AND EXISTING UNDER THE LAWS OF THE REPUBLIC OF SINGAPORECENTRO CORPORATION ODETICS, INC. AN INACTIVE CORP., INCORPORATED IN CALIFORNIAODETICS INTERNATIONAL ODETICS, INC. AN INACTIVE CORP., INCORPORATED INSALES CORPORATION CALIFORNIAGYYR INCORPORATED ODETICS, INC. WHOLLY-OWNED SUBSIDIARY, INCORPORATED IN CALIFORNIA Schedule 8.19 10 11 FORM OF COMPLIANCE CERTIFICATE This Compliance Certificate (this "Compliance Certificate") isdelivered by Odetics, Inc., a Delaware corporation, and Gyyr Incorporated, aCalifornia corporation (individually, a "Borrower" and collectively, the"Borrowers") to Imperial Bank and Comerica Bank-California pursuant to Section10.12 of the Loan and Security Agreement dated as of August 30, 1994, asamended, among the Borrowers, Imperial Bank and Comerica Bank-California (asamended or modified from time to time, the "Agreement"). Initially capitalizedterms used herein and not defined herein shall have the meanings defined in theAgreement. The undersigned hereby certifies and warrants to each Bank that he isthe ______________________ of each Borrower and that, as such, he is authorizedto execute this Compliance Certificate on behalf of each Borrower and furthercertifies and warrants to each Bank that as of ______________, 19___ (the"Computation Date") the following is a true and correct computation of theratios and financial tests contained in the Agreement: 11. Section 10.16(a) - Profitability (a) Consolidated operating income of the Borrowers and their Subsidiaries during the fiscal quarter ending on the Computation Date (excluding extraordinary income or gains): $__________ (b) The amount set forth in Item 1(a) may not be less than: $0 (c) Consolidated net income of the Borrowers and their Subsidiaries during the fiscal quarter ending on the Computation Date (excluding extraordinary income or gains): $__________ (d) The amount set forth in Item 1(c) may not be less than: $0 (e) Fiscal year to date cumulative consolidated net income of the Borrowers and their Subsidiaries (excluding extraordinary income or gains): $__________ (f) The amount set forth in Item 1(e) may not be less than: $0 Exhibit 10.12 1 12 12. Section 10.16(b) - Tangible Net Worth (a) Base amount: $ 50,500,000 (b) Cumulative consolidated net income of the Borrowers and their Subsidiaries (but without any offset for net losses) from April 1, 1997 through the Computation Date: $__________ (c) 80% of Item 2(b): $__________ (d) 100% of the aggregate net proceeds received by the Borrowers or their Subsidiaries upon the issuance of capital stock after March 31, 1997: $__________ (e) Item 2(a) plus Item 2(c) plus Item 2(d): $__________ (f) Consolidated net book value of all Assets of the Borrowers and their Subsidiaries as of the Computation Date: $__________ (g) Consolidated Intangible Assets of the Borrowers and their Subsidiaries as of the Computation Date: $__________ (h) Consolidated Total Liabilities of the Borrowers and their Subsidiaries as of the Computation Date (excluding minority interests in ATL): $__________ (i) Item 2(f) minus Item 2(g) minus Item 2(h): $__________ ----- ----- (j) The amount in Item 2(i) may not be less than the amount in Item 2(e). 13. Section 10.16(c) - Leverage Ratio (a) Consolidated Total Liabilities of the Borrowers and their Subsidiaries as of the Computation Date (excluding minority interests in ATL) (Item 2(h) above): $__________ Exhibit 10.12 2 13Attorney wanted to freeze the (c) The ratio of Item 3(a) to Item 3(b): ______:1.00 (d) The ratio in Item 3(c) may not be greater than: 1.10:1.00 14. Section 10.16(d) - Quick Ratio (a) Consolidated unrestricted cash of the Borrowers and their Subsidiaries as of the Computation Date: $__________ (b) Consolidated unrestricted Cash Equivalent Investments of the Borrowers and their Subsidiaries as of the Computation Date: $__________ (c) Consolidated gross non-affiliated accounts receivable net of applicable reserves therefor of the Borrowers and their Subsidiaries as of the Computation Date (excluding costs and estimated earnings in excess of billings on uncompleted contracts): $__________ (d) Item 4(a) plus Item 4(b) plus Item 4(c): $__________ (e) Consolidated Current Liabilities of the Borrowers and their Subsidiaries as of the Computation Date: $__________ (f) Revolving Loans Daily Balance as of the Computation Date: $__________ (g) Item 4(e) plus Item 4(f): $__________ (h) The ratio of Item 4(d) to Item 4(g): ______:1.00 (i) The ratio in Item 4(h) may not be less than: 0.90:1.00 Exhibit 10.12 3 14 15. Section 10.16(f) - Fixed Charge Coverage Ratio (a) Consolidated net income of the Borrowers and their Subsidiaries for the fiscal quarter ending on the Computation Date: $__________ (b) Consolidated interest expense (exclusive of interest income) of the Borrowers and their Subsidiaries for the fiscal quarter ending on the Computation Date: $__________ (c) Consolidated depreciation and amortization expense of the Borrowers and their Subsidiaries for the fiscal quarter ending on the Computation Date: $__________ (d) Item 5(a) plus Item 5(b) plus Item 5(c): $__________ (e) Consolidated interest expense (exclusive of interest income) of the Borrowers and their Subsidiaries for the fiscal quarter ending on the Computation Date: $__________ (f) Consolidated current portion of long-term Debt of the Borrowers and their Subsidiaries as of the Computation Date: $__________ (g) 25% of Item 5(f): $__________ (h) Item 5(e) plus Item 5(g): $__________ (i) The ratio of Item 5(d) to Item 5(h): ______:1.00 (j) The ratio in Item 5(i) may not be less than: 1.50:1.00 Exhibit 10.12 4 15 The undersigned has reviewed the terms of the Agreement and has made, orcaused to be made under his or her supervision, a review in reasonable detail ofthe transactions and condition of the Borrowers and their Subsidiaries duringthe fiscal period covered by this Compliance Certificate. The undersigned doesnot (either as a result of such review or otherwise) have any knowledge of theexistence as of the date of this Compliance Certificate of any condition orevent that constitutes an Event of Default or an Unmatured Event of Default,with the exceptions set forth below in response to which the Borrowers aretaking or propose to take the following actions (if none, so state):________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ IN WITNESS WHEREOF, each Borrower has caused this Compliance Certificate tobe executed and delivered, and the certifications and warranties containedherein to be made, by its ____________________________ on this _____ day of_________________, 19___. ODETICS, INC. By:_________________________________________ Its:________________________________________ GYYR INCORPORATED By:_________________________________________ Its:________________________________________ Exhibit 10.12 5 1 EXHIBIT 10.18 NOTE$ 5,000,000.00 Costa Mesa, California, March 15, 1997On July 31, 1998 , and as hereinafter provided, for value received, theundersigned promises to pay to IMPERIAL BANK ("Bank"), a California bankingcorporation, or order, at its ORANGE CO. REGIONAL office, the principal sum of$5,000,000.00 MAXIMUM or such sums up to the maximum if so stated, as theBank may now or hereafter advance to or for the benefit of the undersigned inaccordance with the terms hereof, together with interest from date ofdisbursement or N/A , whichever is later, on the unpaid principalbalance [ ] at the rate of 0.000 % per year in excess of the rate of interestwhich Bank has announced as its prime lending rate (the "Prime Rate"), whichshall vary concurrently with any change in such Prime Rate, or $250.00 ,whichever is greater. Interest shall be computed at the above rate on the basisof the actual number of days during which the principal balance is outstanding,divided by 360, which shall, interest shall [ ] monthly [ ] quarterly [ ]included with principal [ ] in addition to principal [ ] beginning April 30,1997 , and if not so paid shall become a part of the principal. Allpayments shall be applied first to any late charges owing, then to interest andthe remainder, if any, to principal. [ ] (If checked), Principal shall bepayable in installments of $ , or more, each installment on the day ofeach , beginning Advances not to exceed any unpaid balance owing at any onetime equal to the maximum amount specified above, may be made at the option ofBank. Any partial prepayment shall be applied to the installments, if any, ininverse order of maturity. Should default be made in the payment of principal orinterest when due, or in the performance or observance, when due, of any item,covenant or condition of any deed of trust, security agreement or otheragreement (including amendments or extensions thereof) securing or pertaining tothis note, at the option of the holder hereof and without notice or demand, theentire balance of principal and accrued interest then remaining unpaid shall (a)become immediately due and payable, and (b) thereafter bear interest, until paidin full, at the increased rate of 5% per year in excess of the rate provided forabove, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s)to pay principal or interest when due; the filing as to each person obligatedhereon, whether as maker, co-maker, endorser or guarantor (individually orcollectively referred to as the "Obligor") of a voluntary or involuntarypetition under the provisions of the Federal Bankruptcy Act; the issuance of anyattachment or execution against any asset of any Obligor; the death of anyObligor; or any deterioration of the financial condition of any Obligor whichresults in the holder hereof considering itself, in good faith, insecure. If any installment payment, interest payment, principal payment or principalbalance payment due hereunder is delinquent ten or more days, Obligor agrees topay Bank a late charge in the amount of 5% of the payment so due and unpaid, inaddition to the payment; but nothing in this paragraph is to be construed as anyobligation on the part of the holder of this note to accept payment of anypayment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, each Obligor promises to pay all costsand expenses of collection and reasonable attorneys fees incurred by the holderhereof on account of such collection, plus interest at the rate applicable toprincipal, whether or not suit is filed hereon. Each Obligor shall be jointlyand severally liable hereon and consents to renewals, replacements andextensions of time for payment hereof, before, at, or after maturity; consentsto the acceptance, release or substitution of security for this note; and waivesdemand and protest and the right to assert any statute of limitations. Anymarried person who signs this note agrees that recourse may be had againstseparate property for any obligations hereunder. The indebtedness evidencedhereby shall be payable in lawful money of the United States. In any actionbrought under or arising out of this note, each Obligor, including successor(s)or assign(s) hereby consents to the application of California law, to thejurisdiction of any competent court within the State of California, and toservice or process by any means authorized by California law. No single or partial exercise of any power hereunder, or under any deed oftrust, security agreement or other agreement in connection herewith shallpreclude other or further exercises thereof or the exercise of any other such 1 2power. The holder hereof shall at all times have the right to proceed againstany portion of the security for this note in such order and in such manner assuch holder may consider appropriate, without waiving any rights with respect toany of the security. Any delay or omission on the part of the holder hereof inexercising any right hereunder, or under any deed of trust, security agreementor other agreement, shall not operate as a waiver of such right, or of any otherright, under this note or any deed of trust, security agreement or otheragreement in connection herewith. See LIBOR Addendum attached ATL PRODUCTS, INC. By- --------------------------------------- -------------------------------------- --------------------------------------- -------------------------------------- --------------------------------------- ------------------------------------- 2 3 GENERAL SECURITY AGREEMENT (TANGIBLE AND INTANGIBLE PERSONAL PROPERTY)This Agreement is executed on March 15, 1997, by ATL PRODUCTS, INC.(hereinafter called "Obligor"). In consideration of financial accommodationsgiven, to be given or continued, the Obligor grants to IMPERIAL BANK(hereinafter called "Bank") a security interest in (a) all property (i)delivered to Bank by Obligor, (ii) which shall be in Bank's possession orcontrol in any matter or for any purpose, (iii) described below, (iv) now ownedor hereafter acquired by Obligor of the type or class described below and/or inany supplementary schedule hereto, or in any financing statement filed by Bankand executed by or on behalf of Obligor; (b) the proceeds, increase and productsof such property, all accessions thereto, and all property which Obligor mayreceive on account of such collateral which Obligor will immediately deliver toBank (collectively referred to as "Collateral") to secure payment andperformance of all of Obligor's present or future debts or obligations to Bank,whether absolute or contingent (hereafter referred to as "Debt"). Unlessotherwise defined, words used herein have the meanings given them in theCalifornia Uniform Commercial Code.Collateral:A. VEHICLE, VESSEL, AIRCRAFT:- ------------------------------------------------------ ----------------- ----------------- ----------------- Identification License or Year Make/Manufacturer Model and Serial No. Registration No. New or Used- ------------------ ----------------- ----------------- ----------------- ----------------- ----------------- - ------------------------------------------------------------------------------------------------------------Engine or other equipment: ------------------------------------------------------(For aircraft - original ink signature on copy to FAA)B. DEPOSIT ACCOUNTS:Type Account Number Amount $ ----------- -------------- -------------------In name of Depository ----------------------- -----------------------------AND ALL EXTENSIONS OR RENEWALS THEREOF:C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe) All personal property, whether presently existing or hereafter created or acquired, including but not limited to: All accounts, chattel paper, documents, instruments, money, deposit accounts and general intangibles including returns, repossessions, books and records relating thereto, and equipment containing said books and records. All goods including equipment and inventory. All proceeds including, without limitation, insurance proceeds. All guarantees and other security therefor.The collateral not in Bank's possession will be located at: see Addendumattached 3 4[ ] If checked, the Obligor is executing this Agreement as an AccommodationDebtor only and the Obligor's liability is limited to the security interestgranted in the Collateral described herein. The party being accommodated is("Borrower").All the terms and provisions on the reverse side hereof are incorporated hereinas though set forth in full, and constitute a part of this Agreement. Signature (Indicate title, if Name applicable) Address ATL PRODUCTS, INC.- ---------------------------- --------------------------- -------------------------- BY- ---------------------------- --------------------------- --------------------------- ---------------------------- --------------------------- -------------------------- 4 5Obligor represents, warrants and agrees:1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs ofcollecting the Debt, of protecting, insuring or realizing on Collateral, and anyexpenditure of Bank pursuant hereto, including attorneys' fees and expenses,with interest at the rate of 24% per year, or the rate applicable to the Debt,whichever is less, from the date of expenditure, and (c) any deficiency afterrealization of Collateral.2. Obligor will use the proceeds of any loan that becomes Debt hereunder for thepurpose indicated on the application therefore, and will promptly contract topurchase and pay the purchase price of any property which becomes Collateralhereunder from the proceeds of any loan made for that purpose.3. As to all Collateral in Obligor's possession (unless specifically otherwiseagreed to by Bank in writing), Obligor will: (a) Have, or has, possession of the Collateral at the location disclosed to Bank and will not remove the Collateral from the location. (b) Keep the Collateral separate and identifiable. (c) Maintain the Collateral in good and saleable condition, repair it if necessary, clean, feed, shelter, water, medicate, fertilize, cultivate, irrigate, prune and otherwise deal with the Collateral in all such ways as are considered good practice by owners of like property, use it lawfully and only as permitted by insurance policies, and permit Bank to inspect the Collateral at any reasonable time. (d) Not sell, contract to sell, lease, encumber or transfer the Collateral (other than inventory Collateral) until the Debt has been paid, even though Bank has a security interest in proceeds of such Collateral.4. As to Collateral which is inventory and accounts, Obligor: (a) May, until notice from Bank, sell, lease or otherwise dispose of inventory Collateral in the ordinary course of business only, and collect the cash proceeds thereof. (b) Will, upon notice from Bank, deposit all cash proceeds as received in a demand deposit account with Bank, containing only such proceeds and deliver statements identifying units of inventory disposed of, accounts which gave rise to proceeds, and all acquisitions and returns of inventory as required by Bank. (c) Will receive in trust, schedule on forms satisfactory to the Bank and deliver to Bank all non-cash proceeds other than inventory received in trade. (d) If not in default, may obtain release of Bank's interest in individual units of inventory upon request, therefore, payment to Bank of the release price of such units shown on any Collateral schedule supplementary hereto, and compliance herewith as to proceeds thereof.5. As to Collateral which are accounts, chattel paper, general intangibles andproceeds described in 4(c) above, Obligor warrants, represents and agrees: (a) All such Collateral is genuine, enforceable in accordance with its terms, free from default, prepayment, defense and conditions precedent (except as disclosed to and accepted by Bank in writing), and is supported by consecutively numbered invoices to, or rights against, the debtors thereon. Obligor will supply Bank with duplicate invoices or other evidence of Obligor's rights on Bank's request; (b) All persons appearing to be obligated on such Collateral have authority and capacity to contract; (c) All chattel paper is in compliance with law as to form, content and manner of preparation and execution and has been properly registered, recorded, and/or filed to protect Obligor's interest thereunder; 5 6 (d) If an account debtor shall also be indebted to Obligor on another obligation, any payment made by him not specifically designated to be applied on any particular obligation shall be considered to be a payment on the account in which Bank has a security interest. Should any remittance include a payment not on an account, it shall be delivered to Bank and, if no event of default has occurred, Bank shall pay Obligor the amount of such payment; (e) Obligor agrees not to compromise, settle or adjust any account or renew or extend the time of payment thereof without Bank's prior written consent.6. Obligor owns all Collateral absolutely, and no other person has or claims anyinterest in any Collateral, except as disclosed to and accepted by Bank inwriting. Obligor will defend any proceeding which may affect title to or Bank'ssecurity interest in any Collateral, and will indemnify and hold Bank free andharmless from all costs and expenses of Bank's defense.7. Obligor will pay when due all existing or future charges, liens orencumbrances on and all taxes and assessments now or hereafter imposed on oraffecting the Collateral and, if the Collateral is in Obligor's possession, therealty on which the Collateral is located.8. Obligor will insure the Collateral with Bank as loss payee in form andamounts with companies, and against risks and liability satisfactory to Bank,and hereby assigns such policies to Bank, agrees to deliver them to Bank atBank's request, and authorizes Bank to make any claim thereunder, to cancel theinsurance on Obligor's default, and to receive payment of any endorse anyinstrument in payment of any loss or return premium. If Obligor should fail todeliver the required policy or policies to the Bank, Bank may, at Obligor's costand expense, without any duty to do so, get and pay for insurance naming as theinsured, at Bank's option, either both Obligor and Bank, or only Bank, and thecost thereof shall be secured by this Security Agreement, and shall be repayableas provided in Paragraph 1 above.9. Obligor will give Bank any information it requires. All information at anytime supplied to Bank by Obligor (including, but not limited to, the value andcondition of Collateral, financial statements, financing statements, andstatements made in documentary Collateral) is correct and complete, and Obligorwill notify Bank of any adverse change in such information. Obligor willpromptly notify Bank of any change or Obligor's residence, chief executiveoffice or mailing address.10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act whichObligor is obligated hereby to do, to exercise such rights as Obligor mayexercise, to use such equipment as Obligor might use, to enter Obligor'spremises to give notice of Bank's security interest, and to collect Collateraland proceeds and to execute and file in Obligor's name any financing statementsand amendments thereto required to perfect Bank's security interest hereunder,all to protect and preserve the Collateral and Bank's rights hereunder. Bankmay: (a) Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; (b) Make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable thereon or take security for the payment thereof, and compromise disputes in connection therewith; (c) Use or operate Collateral for the purpose of preserving Collateral or its value and for preserving or liquidating Collateral.11. If more than one signs this Agreement, their liability is joint and several.Any Obligor who is married agrees that recourse may be had against separateproperty for the Debt. Discharge of any Obligor except for full payment, or anyextension, forbearance, change of rate of interest, or acceptance, release orsubstitution of Collateral or any impairment or suspension of Bank's rightsagainst an Obligor, or any transfer of an Obligor's interest to another shallnot affect the liability of 6 7any other Obligor. Until the Debt shall have been paid or performed in full,Bank's rights shall continue even if the Debt is outlawed. All Obligors waive:(a) any right to require Bank to proceed against any Obligor before any other,or to pursue any other remedy; (b) presentment, protest and notice of protest,demand and notice of nonpayment, demand or performance, notice of sale, andadvertisement of sale; (c) any right to the benefit of or to direct theapplication of any Collateral until the Debt shall have been paid; (d) and anyright of subrogation to Bank until Debt shall have been paid or performed infull.12. Upon default, at Bank's option, without demand or notice, all or any part ofthe Debt shall immediately become due. Bank shall have all rights given by law,and may sell, in one or more sales, Collateral in any county where Bank has anoffice. Bank may purchase at such sale. Sales for cash or on credit to awholesaler, retailer or user of the Collateral, or at public or private auction,are all to be considered commercially reasonable. Bank may require Obligor toassemble the Collateral and make it available to Bank at the entrance to thelocation of the Collateral, or a place designated by Bank. Defaults shall include: (a) Obligor's failure to pay or perform this or any agreement with Bank or breach of any warranty herein, or Borrower's failure to pay or perform any agreement with Bank. (b) Any change in Obligor's or Borrower's financial condition which in Bank's judgment impairs the prospect of Borrower's payment or performance. (c) Any actual or reasonably anticipated deterioration of the Collateral or in the market price thereof which causes it, in Bank's judgment, to become unsatisfactory as security. (d) Any levy or seizure against Borrower or any of the Collateral. (e) Death, termination of business, assignment for creditors, insolvency, appointment of receiver, or the filing of any petition under bankruptcy or debtor's relief laws of, by or against Obligor or Borrower or any guarantor of the Debt. (f) Any warranty or representation which is false or is believed in good faith by Bank to be false.13. Bank's acceptance of partial or delinquent payments or the failure of Bankto exercise any right or remedy shall not waive any obligation to Obligor orBorrower or right of Bank to modify this Agreement, or waive any other similardefault.14. On transfer of all or any part of the Debt, Bank may transfer all or anypart of the Collateral. Bank may deliver all or any part of the Collateral toany Obligor at any time. Any such transfer or delivery shall discharge Bank fromall liability and responsibility with respect to such Collateral transferred ordelivered. This Agreement benefits Bank's successors and assigns and bindsObligor's heirs, legatees, personal representatives, successors and assigns.Obligor agrees not to assert against any assignee of Bank any claim or defensethat may exist against Bank. Time is of the essence. This Agreement andsupplementary schedules hereto contain the entire security agreement betweenBank and Obligor. Obligor will execute any additional agreements, assignments ordocuments reasonably required by Bank to carry this Agreement into effect.15. This Agreement shall be governed by and construed in accordance with thelaws of the State of California, to the jurisdiction of whose courts the Obligorhereby agrees to submit. Obligor agrees that service of process may beaccomplished by any means authorized by California law. All words used herein inthe singular shall be considered to have been used in to plural where thecontext and construction so require. 7 8March 15, 1997IMPERIAL BANK ("Bank") Borrower: ATL Products, Inc.695 Town Center DriveCosta Mesa, California 92626Subject: Credit Terms and Conditions (the "Agreement")Gentlemen:Subject to the terms and conditions of the Loan Documents (as defined below),IMPERIAL BANK ("Bank" or "you") shall make loans to ATL Products, Inc.("Borrower") from time to time as advances are requested by Borrower until July31, 1998, not to exceed, in the aggregate, $5,000,000. To induce Bank to makeloans to Borrower and in consideration of any loan or loans Bank may make toBorrower, Borrower warrants and agrees as follows:A. Borrower Represents and Warrants that:1. EXISTENCE AND RIGHTS. Borrower is a corporation and is duly organized,existing and in good standing under the laws of the State of Delaware and isauthorized and in good standing to do business in the State of California;Borrower has powers and adequate authority, rights and franchises to own itsproperty and to carry on its business as now conducted, and is duly qualifiedand in good standing in each State where failure to so qualify would have amaterial adverse effect on the operations of Borrower and Borrower has the powerand adequate authority to make and carry out this Agreement. Borrower has noinvestment in any other business entity.2. AGREEMENT AUTHORIZED. The execution, delivery and performance of thisAgreement are duly authorized and do not require the consent or approval of anygovernmental body or other regulatory authority; are not in contravention of orin conflict with any law or regulation or any term or provision of Borrower'sarticles of incorporation, by-laws, or Articles of Association, as the case maybe, and this Agreement is the valid, binding and legally enforceable obligationof Borrower in accordance with its terms, except as the enforceability thereofmay be limited by bankruptcy, insolvency or other similar laws of generalapplication relating to or affecting the enforcement of creditors' rights or bygeneral principals of equity.3. NO CONFLICT. The execution, delivery and performance of this Agreement arenot in contravention of or in conflict with any agreement, indenture orundertaking to which Borrower is a party or by which it or any of its propertymay be bound or affected, and do not cause any lien, charge or other encumbranceto be created or imposed upon any such property by reason thereof.4. LITIGATION. There is no litigation or other proceeding pending or threatenedagainst or affecting Borrower, and Borrower is not in default with respect toany order, writ, injunction, decree or demand of any court or other governmentalor regulatory authority 8 9(involving in excess of $100,000). Borrower also agrees to notify you in writingof any future litigation threatened against or affecting borrower that isreasonably likely to result in damages or costs to Borrower in excess of$100,000.5. FINANCIAL CONDITION. The balance sheet of Borrower as of December 31, 1996,and the related profit and loss statement for the nine (9) months ended on thatdate, a copy of which has heretofore been delivered to you by Borrower, and allother statements and data submitted in writing by Borrower to you in connectionwith this request for credit are materially true and correct, and said balancesheet and profit and loss statement fairly present the financial condition ofBorrower as of the date thereof and the results of operations for the periodcovered thereby, and has been prepared in accordance with generally acceptedaccounting principles on a basis consistently maintained. Since such date therehave been no material adverse changes in the financial condition or business ofBorrower. Borrower has no knowledge of any liabilities, contingent or otherwise,at such date not reflected in said balance sheet, and Borrower has not enteredinto any special commitments or substantial contracts which are not reflected insaid balance sheet, other than in the ordinary and normal course of itsbusiness, which may have a materially adverse effect upon its financialcondition, operations or business as not conducted.6. TITLE TO ASSETS. Borrower has good title to its assets, and the same are notsubject to any liens or encumbrances other than those permitted by Section C.3hereof.7. TAX STATUS. Borrower has no liability for any delinquent state, local orfederal taxes, and, if Borrower has contracted with any government agency,Borrower has no liability for renegotiation of profits.8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessarytrademarks, trade names, copyrights, patents, patent rights, and licenses toconduct its business as now operated, without any known conflict with the validtrademarks, trade names, copyrights, patents and license rights of others.9. REGULATION U. The proceeds of the notes have not been used to purchase orcarry margin stock (as defined within Regulation U of the Board of Governors ofthe Federal Reserve system).B. Borrower agrees that so long as it is indebted to you, under borrowings, orother indebtedness, it will, unless you shall otherwise consent in writing:1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and otherauthority adequate for the conduct of its business; maintain its properties,equipment and facilities in good order and repair; conduct its business in anorderly manner without voluntary interruption and, if a corporation orpartnership, maintain and preserve its existence.2. INSURANCE. Maintain public liability, property damage and workers'compensation insurance and insurance on all its insurable property against fireand other hazards with responsible insurance carriers to the extent usuallymaintained by similar businesses 9 10and/or in the exercise of good business judgment and as to property insurancehave Bank named in a Lenders Loss Payee Endorsement form 438BFU or equivalent3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same becomedelinquent and before penalties accrue thereon, all taxes, assessments andgovernmental charges upon or against it or any of its properties, and all itsother liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto.4. FINANCIAL COVENANTS. Maintain the following financial covenants, to be testedon a quarterly basis, for the periods set forth below, all as computed anddetermined in accordance with generally accepted accounting principles on abasis consistently maintained by Borrower: (a) Maintain a minimum TANGIBLE NET WORTH, defined as the excess of all tangible assets (excluding any value for goodwill, trademarks, patents, copyrights, organization expenses and other similar intangible items), less its liabilities, of not less than $8,750,000 for the period ending March 31, 1997, and increasing by (i) 90% of net profit after taxes for each reporting period thereafter, and with no offset for losses, and (ii) 100% of the aggregate net proceeds received by Borrower or their Subsidiaries upon issuance of capital stock after March 31, 1997. (b) Maintain a maximum LEVERAGE RATIO, defined as its total liabilities to its Tangible Net Worth, of not more than 4.00 to 1, beginning with the period ending March 31, 1997, and thereafter. (c) Maintain a minimum QUICK RATIO, defined as the ratio of Borrower's cash and cash equivalents plus accounts receivables to its current liabilities, of not less than 1.05 to 1, beginning with the period ending March 31, 1997, and thereafter. (d) Maintain NET PROFITABILITY AFTER TAXES of not less than $1.00 per fiscal quarter, beginning with the period ending March 31, 1997, and thereafter.5. RECORDS AND REPORTS. Maintain a standard and modern system of accounting inaccordance with generally accepted accounting principles on a basis consistentlymaintained; permit your representatives to have access to, and to examine itsproperties, books and records, upon reasonable notice and at all reasonabletimes during normal business hours; and furnish you: (a) As soon as available, and in any event within thirty (30) days after the close of each month of each fiscal year of Borrower, commencing with the month next ending, a balance sheet, profit and loss statement and reconciliation of Borrower's 10 11 capital accounts as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail and stating in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower, subject, however, to year-end audit adjustments. When the month end is a fiscal quarter end, Borrower to provide the financial information listed above in Form 10-Q, along with a covenant compliance worksheet certified by an officer of Borrower, within 45 days of quarter-end; (b) As soon as available, and in any event within ninety (90) days after the close of each fiscal year of Borrower, a report of audit of Company as of the close of and for such fiscal year, all in reasonable detail and stating in comparative form the figures as of the close of and for the previous fiscal year, with the unqualified opinion of independent certified public accountants satisfactory to you, accompanied by a covenant compliance worksheet certified by an officer of Borrower; (c) Promptly after the receipt thereof by Borrower, copies of any detailed audit reports submitted to Borrower by independent accountants in connection with each annual or interim audit of the accounts of Borrower made by such accountants; (d) Budgets, operating plans, and such other information relating to the affairs of Borrower as you reasonably may request from time to time.6. NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence of anyEvent of Default hereunder or any event which upon notice and lapse of timewould be an Event of Default.7. BUSINESS ACCOUNTS. Maintain all primary business deposit accounts at Bank.C. Borrower agrees that so long as it is indebted to you, it will not, withoutyour written consent:1. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the character ofits business; or make any change in its executive management.2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist anyindebtedness for borrowed moneys other than loans from you except obligationsnow existing as shown in the financial statement dated December 31, 1996,excluding those being refinanced by Bank; or sell or transfer, either with orwithout recourse, any accounts or notes receivable or any moneys due to becomedue, or in the financial statement dated 12/31/96, provided that the principalamount thereof is not increased or the terms thereof are not modified to imposemore burdensome terms upon Borrower.3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge,encumbrance, lien or charge of any kind (including the charge upon property atany time purchased or acquired under conditional sale or other title retentionagreement) upon any asset now owned or hereafter acquired by it, other thanliens for taxes not delinquent and liens in your favor. 11 124. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to anyperson or other entity other than in the ordinary course and normal course ofits business as now conducted or make any investment in the securities of anyperson or other entity other than the United States Government; or guarantee orotherwise become liable upon the obligation of any person or other entity,except by endorsement of negotiable instruments for deposit or collection in theordinary and normal course of its business, provided, however, that thefollowing loans and investments shall be permitted under this Section C.4: a. (i) commercial paper maturing no more that one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (ii) certificates of deposit maturing more than one (1) year from the date of investment therein issued by Bank; b. extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; c. investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; d. investments consisting of (i) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business , (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower, (iii) other loans to officers and employees approved by the Board of Directors in an amount not to exceed in any one fiscal year $50,000 per officer or director or $200,000 in the aggregate for all such employees or directors; and e. investments of Borrower not otherwise permitted hereunder, aggregating not in excess of $50,000 at any one time.5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase orotherwise acquire the assets or business of any person or other entity; orliquidate, dissolve, merge or consolidate, or commence any proceedings therefor;or sell any assets except in the ordinary and normal course of its business asnow conducted; or sell, lease, assign, or transfer any substantial part of itsbusiness or fixed assets, or any property or other assets necessary for thecontinuance of its business as now conducted, including without limitation theselling of any property or other asset accompanied by the leasing back of thesame.6. DIVIDENDS, STOCK PAYMENTS. Declare or pay any dividend (other than dividendspayable in common stock of Borrower) or make any other distribution on any ofits capital stock now outstanding or hereafter issued or purchase, redeem orretire any of such stock. 12 137. CAPITAL EXPENDITURES. Make or incur obligations for capital expenditures inexcess of $2,200,000 for the fiscal year ending March 31, 1998 or $2,000,000 forthe fiscal year ending March 31, 1999.D. The occurrence of any of the following events of default (individually an"Event of Default") shall, at your option, terminate your commitment to lend andmake all sums of principal and interest then remaining unpaid on all Borrower'sindebtedness to you immediately due and payable, all without demand, presentmentor notice, all of which are hereby expressly waived:1. FAILURE TO PAY NOTE. Failure to pay any installment of principal of orinterest on any indebtedness of Borrower to you.2. BREACH OF COVENANT. Failure of Borrower to perform any material term orcondition of this Agreement binding upon Borrower.3. BREACH OF WARRANTY. Any of Borrower's representations or warranties madeherein or any statement or certificate at any time given in writing pursuanthereto or in connection herewith shall be false or misleading in any materialrespect.4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admitits inability to pay its debts as they mature; or make an assignment for thebenefit of creditors; or apply for or consent to the appointment of a receiveror trustee for it or for a substantial part of its property or business.5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of attachment, orsimilar process shall be entered or filed against Borrower or any of its assetsand shall remain unvacated, unbonded or unstayed for a period of 10 days or inany event later than five days prior to the date of any proposed salethereunder.6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedingsor other proceedings for relief under any bankruptcy law or any law for therelief of debtors shall be instituted by or against Borrower and, if institutedagainst it, shall be consented to; provided, however, with respect to aninvoluntary petition in bankruptcy such petition shall not have been dismissedwithin 60 days after the filing thereof.E. Miscellaneous Provisions.1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of imperialBank or any holder of Notes issued hereunder, in the exercise of any power,right or privilege hereunder shall operate as a waiver thereof, nor shall anysingle or partial exercise of any such power, right or privilege preclude otheror further exercise thereof or of any other right, power or privilege. Allrights and remedies existing under this agreement or any note issued inconnection with a loan that Imperial Bank may make hereunder, are cumulative to,and not exclusive of, any rights or remedies otherwise available.2. CONFLICTS. In the event of a conflict between this Agreement and any otherrelated document, including but not limited to the General Security Agreement,Note, Agreement to Provide insurance and Disbursement Instructions, each datedof even 13 14date herewith (together with this Agreement, the "Loan Documents"), the termsand conditions of this Agreement shall prevail. 3. CURE. Upon the occurrence of an Event of Default other than non-payment ofamounts due to Bank under the Loan Documents, the Borrower shall have 30 daysfrom notice from Bank within which to cure any such default. Borrower shall havefive days from the due date of any payment within which to cure such paymentdefault.ATL Products, Inc.BY: ---------------------------ITS: ---------------------------Accepted and Agreed to:IMPERIAL BANKBY: ---------------------------ITS: --------------------------- 14 15 LIBOR ADDENDUMThis Libor Addendum ("Addendum") is dated as of March 15, 1997, and is by andbetween ATL PRODUCTS, INC. ("Borrower") and Imperial Bank ("Bank"). ThisAddendum amends and supplements the Note to which it is attached (the "Note")and forms a part of and is incorporated into the Note. In the event of any inconsistency between the terms herein and the terms ofthe Note, the terms herein shall in all cases govern and control. Allcapitalized terms herein, unless otherwise defined herein, shall have themeanings set forth in the Note. 1. ADVANCES 1.1 Prime Loans. Advances permitted pursuant to the terms of the Note orthis Addendum which bear interest in relation to Bank's Prime Rate shall bereferred to herein as "Prime Loans" and each such advance shall be a "PrimeLoan." Each Prime Loan shall bear interest at an annual rate equal to the sum of0.000 % plus the Bank's Prime Rate. "Prime Rate" shall mean the rate of interestpublicly announced by Bank from time to time in Inglewood, California, as itsprime rate for lending. The Prime Rate is not intended to be the lowest rate ofinterest charged by Bank in connection with extensions of credit to borrowers. 1.2 Libor Loans. Advances permitted pursuant to the terms of the Note orthis Addendum which bear interest in relation to the Libor Rate shall bereferred to herein as "Libor Loans" and each such advance shall be a "LiborLoan." Each Libor Loan shall bear interest at the Libor Rate, as defined below.A Libor Loan shall be in the minimum amount of One Million Dollars ($1,000,000)or such greater amount which is an integral multiple of Fifty Thousand Dollars($50,000). No Libor Loan shall be made after the last Business Day that is atleast three (3) months prior to the Maturity Date described in the Note. 2. INTEREST ON LIBOR LOANS. 2.1 Rate of Interest. Each Libor Loan shall bear interest on the unpaidprincipal amount thereof from the Loan Date through the date paid (whether byacceleration or otherwise) at a rate equal to the sum of 2.250% per annum plusthe Libor Rate for the Interest Period. (a) "Loan Date" shall mean the date on which (i) a Libor Loan is made, aLibor Loan is continued, or a Prime Loan is converted to a Libor Loan. (b) "Interest Period" shall mean a period of thirty (30), sixty (60), orninety (90) days, commencing on the applicable Loan Date, as selected byBorrower pursuant to Section 2.2; provided, however, that Borrower may notselect an Interest Period that would otherwise extend beyond the Maturity Dateof the Loan. Borrower may also select a twelve (12) month Interest Period if andwhen Bank notifies Borrower that such Interest Period is available, asdetermined by Bank in its sole discretion. (c) "Libor Rate" shall mean, for the applicable Interest Period for aLibor Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16of 1%) equal to (i) the Libor Base Rate for such Interest Period divided by (ii)1.00 minus the Reserve Requirement Rate (expressed as a decimal fraction) forsuch Interest Period. (d) "Libor Base Rate" shall mean with respect to any Interest Period,the rate equal to the arithmetic mean (rounded upwards, if necessary, to thenearest 1/16 of 1%) of: (i) the offered rates per annum for deposits in U.S. Dollars for aperiod equal to such Interest Period which appears at 11:00 a.m., London time,on the Reuters Screen LIBOR Page on 15 16 LIBOR ADDENDUMthe Business Day that is two (2) Business Days before the first day of suchInterest Period, in each case if at least four (4) such offered rates appear onsuch page, or (ii) if clause (i) is inapplicable, (x) the offered rate per annumfor deposits in U.S. Dollars for a period equal to such Interest Period whichappears as of 11:00 a.m., London time on the Telerate Monitor on Telerate Screen3750 on the Business Day which is two (2) Business Days before the first day ofsuch Interest Period; or (y) if clause (x) above is inapplicable, the arithmeticmean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interestrates per annum offered by at least three (3) prime banks selected by Bank atapproximately 11:00 a.m. London time, on the Business Day which is two (2)Business Days before such date for deposits in U.S. Dollars to prime banks inthe London interbank market, in each case for a period equal to such InterestPeriod in an amount equal to the amount to which the Libor Rate applies. (e) "Business Day" means any day on which Bank is open for business inthe State of California. (f) "Reuters Screen LIBOR Page" means the display designated as pageLIBOR on the Reuters Monitor Money Rates Service or such other page as mayreplace the LIBOR page on that service for the purpose of displaying Londoninterbank offered rates of major banks. (g) "Reserve Requirement Rate" means, for any Interest Period, theaggregate of the rates, effective as of the Business Day which is two (2)Business Days before the first day of the Interest Period, at which: (i) reserves (including any marginal, supplemental or emergencyreserves) are required to be maintained during such Interest Period underRegulation D against "Eurocurrency liabilities" (as such term is used inRegulation D) by member banks of the Federal Reserve System; and (ii) any additional reserves are required to be maintained by Bank byreason of any Regulatory Change against (x) any category of liabilities whichincludes deposits by reference to which the Libor Rate is to be determined asprovided in the definition of "Libor Base Rate;" or (y) any category ofextensions of credit or other assets which include Libor Loans. (h) "Regulatory Change" means, with respect to Bank, any change on orafter the date of the Note and this Addendum in any Governmental Regulation,including the introduction of any new Governmental Regulation or the rescissionof any existing Governmental Regulation. (i) "Governmental Regulation" means any (i) United States Federal, stateor foreign law or regulation (including without limitation Regulation D); and(ii) the adoption or making or any interpretation, application, directive orrequest applying to a class of lenders, including Bank, of or under any UnitedStates Federal, state, or any foreign law or regulation (whether or not havingthe force of law) by any court or by any governmental, central banking, monetaryor taxing authority charged with the interpretation or administration of suchlaw or regulation. 2.2 Determination of Interest Rates. Subject to the terms and conditions ofthe Note and this Addendum, Borrower, at its option, may request an advance inthe form of a Libor Loan, a continuation of a Libor Loan, or a conversion of aPrime Loan into a Libor Loan, only upon delivery to Bank of an irrevocablewritten notice received by Bank at least three (3) Business Days prior to therequested Loan Date, specifying (i) the principal amount of such Libor Loan,(ii) the requested Loan Date, and (iii) the selected Interest Period. Uponreceiving such notice, Bank shall determine (which determination shall be inaccordance with Section 2.1 and shall, absent manifest error, be final,conclusive and binding upon all parties hereto) the Libor Rate applicable tosuch Libor Loan two (2) Business Days prior to the Loan Date, and shall promptlygive notice thereof (in writing or 16 17 LIBOR ADDENDUMby telephone confirmed in writing) to Borrower. If Borrower shall fail to notifyBank of its selected Interest Period for a Libor Loan (including thecontinuation of an existing Libor Loan or the conversion of a Prime Loan into aLibor Loan), the Borrower shall be deemed to have selected an Interest Period ofthree (3) months. 2.3 Computation of Interest and Fees. All computations of interest and feespayable pursuant to the Note shall be calculated on the basis of a three hundredsixty (360) day year for the actual number of days elapsed (less the date ofrepayment). 2.4 Recordation by Bank. Bank is hereby authorized to record the Loan Date,the applicable Interest Period, the principal amount, and the interest rate ofeach Libor Loan made (or continued or converted) by Bank, and the date andamount of each payment or prepayment of principal thereof, in Bank's records.Any such recordation shall constitute prima facie evidence of the accuracy ofthe information recorded; provided that the failure to make any such recordationshall not in any way affect the Borrower's obligations hereunder. 3. CONVERSION TO PRIME LOANS. 3.1 Election by Borrower. Subject to all the terms and conditions of thisAddendum, Borrower may elect from time to time to convert a Libor Loan to aPrime Loan by giving Bank at least three (3) Business Days' prior irrevocablenotice of such election, and any such conversion of a Libor Loan shall be madeon the last day of the Interest Period with respect thereto. 3.2 Failure of Notice by Borrower. If Borrower otherwise fails to givenotice specifying its requests with respect to any Libor Loans that arescheduled to become due, such failure shall be deemed, in the absence of anynotice from Borrower to the contrary, to be notice of a requested advance in theform of a Prime Loan in a principal amount equal to the amount of said LiborLoan. 4. PREPAYMENTS. 4.1 Voluntary Prepayment by Borrower. Subject to the terms and conditionsof the Note and this Addendum, Borrower may, upon at least three (3) BusinessDays' irrevocable notice to Bank as provided herein, at any time and from timeto time on any Business Day prepay any Prime Loan or Libor Loan in whole or inpart, without penalty or premium, other than customary actual "Breakage Fees"and "Prepayment Costs" as defined below, resulting from prepayment of any LiborLoan prior to the expiration of the Interest Period relating thereto. The noticeof prepayment shall specify the date and amount of the prepayment, and the Loanto which the prepayment applies. Each partial prepayment of a Libor Loan shallbe in an amount not less than Fifty Thousand Dollars ($50,000) or such greateramount which is an integral multiple of Fifty Thousand Dollars ($50,000);provided, that unless a Libor Loan is prepaid in full, no prepayment shall bemade if, after giving effect to such prepayment, the aggregate principal amountof Libor Loans having the same Interest Period shall be less than One MillionDollars ($1,000,000). Notice of prepayment having been delivered as aforesaid,the principal amount of the prepayment specified in such notice shall become dueand payable on the prepayment date set forth in such notice. All payments ofprincipal under this Section 4 shall be accompanied by accrued but unpaidinterest on the amount being prepaid through the date of such prepayment. 4.2 Breakage Fees. If for any reason (including voluntary or mandatoryprepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan,or acceleration), Bank receives all or part of the principal amount of a LiborLoan prior to the last day of the Interest Period for such Loan, Borrower shallimmediately notify Borrower's account officer at Bank and, on demand by Bank,pay Bank the Breakage Fees, defined as the amount (if any) by which (i) theadditional interest which would have been payable on the amount so received hadit not been received until the last day of such Interest Period exceeds (ii) theinterest which would have been 17 18 LIBOR ADDENDUMrecoverable by Bank (without regard to whether Bank actually so invests saidfunds) by placing the amount so received on the deposit in the certificate ofdeposit markets or the offshore currency interbank markets or United StatesTreasury investment products, as the case may be, for a period starting on thedate on which it was so received and ending on the last day of such InterestPeriod at the interest rate determined by Bank in its reasonable discretion.Bank's determination as to such amount shall be conclusive and final, absentmanifest error. 4.3 Prepayment Costs. Borrower shall pay to Bank, upon the demand of Bank,such other amount or amounts as shall be sufficient (in the sole good faithopinion of Bank) to compensate it for any loss, costs or expense incurred by itas a result of any prepayment by Borrower (including voluntary or mandatoryprepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan,or prepayment due to acceleration) of all or part of the principal amount of aLibor Loan prior to the last day of the Interest Period for such Loan (includingwithout limitation any failure by Borrower to borrow a Libor Loan on the LoanDate for such borrowing specified in the relevant notice of borrowinghereunder). Such costs shall include, without limitation, any interest or feespayable by Bank to lenders of funds obtained by it in order to make or maintainits loans based on the London interbank eurodollar market. Bank's determinationas to such costs shall be conclusive and final, absent manifest error.5. REMEDIES UPON EVENTS OF DEFAULT. 5.1 Conversion to Prime Loans. If any Event of Default has occurred and iscontinuing under the Note or this Addendum, then in addition to all otherremedies available to Bank under the Note, at the option of Bank and withoutdemand or notice, all Libor Loans then outstanding shall be automaticallyconverted to Prime Loans on the last day or each respective Interest Period foreach Libor Loan. 5.2 Indemnity. Borrower agrees to pay and indemnify Bank for, and to holdBank harmless from, any and all cost, loss or expense (including withoutlimitation any such cost, loss or expense arising from interest or fees payableby Bank to lenders of funds obtained by it in order to maintain its Libor Loanshereunder, or in its reemployment of funds obtained in connection with themaking or maintaining of Libor Loans) which Bank may sustain or incur as aconsequence of any default by Borrower in connection with or related to: (a)payment of the principal amount of or interest on Libor Loans, (b) making aborrowing or conversion of a Libor Loan after Borrower has given a noticethereof in accordance with this Addendum, or (c) making a prepayment of a LiborLoan after Borrower has given a notice thereof in accordance with this Addendum,or any prepayment (whether optional or mandatory) of any Libor Loan prior to theend of the applicable Interest Period for such Loan.6. ADDITIONAL PROVISIONS REGARDING LIBOR LOANS. 6.1 Libor Rate Taxes. All payments of principal, interest, fees, costs,expenses and all other amounts payable to Borrower pursuant to the Note and thisAddendum shall be made free and clear of and without reduction by reason of allpresent and future income, stamp and other taxes or other charges whatsoeverimposed, assessed, levied or collected by any national government or anypolitical subdivision or taxing authority thereof or any organization of whichit is a member (excluding (i) any taxes imposed on or measured by the overallnet income or gross receipts of Bank by any such entity, and (ii) any taxeswhich would have been imposed even if no provisions for Libor Loans had appearedin this Addendum) (collectively, "Libor Taxes"). If any Libor Taxes are required to be withheld from any amounts payableto Bank, Borrower shall pay such additional amounts as may be necessary so as toyield to Bank a net amount equal to the total amount of the payments providedfor in this Addendum or under the Note which Bank would have received if suchamounts had not been subject to Libor Taxes. 18 19 LIBOR ADDENDUM If any Libor Taxes are payable directly by Borrower, they shall be paidby Borrower prior to the date on which penalties attach for failure to timelypay such Libor Taxes. Within forty five (45) days after the date on whichpayment of any such Libor Taxes is due pursuant to applicable law, Borrower willfurnish Bank the original receipt for the full payment of such Libor Taxes or,if such is not available, evidence of such payment satisfactory in form andsubstance to Bank. Borrower shall indemnify and hold Bank harmless against, andwill reimburse to Bank, upon demand, any incremental taxes, interest orpenalties that may become payable by Bank as a result of any failure by Borrowerto pay any Libor Taxes when due. 6.2 Inability to Determine Fair Interest Rate. If at any time Bank, in itssole and absolute discretion, determines that: (i) the amount of the Libor Loansfor periods equal to the corresponding Interest Periods are not available toBank in the offshore currency interbank markets, (ii) the Libor Rate does notaccurately reflect the cost to Bank of lending the Libor Loan, or (iii) byreason of any changes arising after the date of the Note affecting the Londoninterbank eurodollar market, adequate and fair means do not exist forascertaining the applicable interest rate on the basis provided for in Sections2.1 and 2.2 above, then Bank shall promptly give notice thereof to Borrower.Upon the giving of such notice, Bank's obligation to make Libor Loans shallterminate, unless Bank and the Borrower agree in writing to a different interestrate applicable to Libor Loans, or until such time as Bank notifies Borrowerthat the circumstances giving rise to Bank's notice no longer exist. While suchcircumstances continue to exist, (x) any requested Libor Loan shall be treatedas a request for a Prime Loan, (y) any Prime Loan that was to have beenconverted to a Libor Loan shall be continued as a Prime Loan, and (z) anyoutstanding Libor Loan shall be converted retroactively, on the first day of thethen current Interest Period with respect thereto, to a Prime Loan. 6.3 Illegality or Impracticability. If (i) due to any Government Regulationit shall become unlawful for Bank to continue to fund or maintain any LiborLoans, or to perform its obligations hereunder, or (ii) due to any contingencyoccurring after the date of the Note which has a material adverse effect on theLondon interbank eurodollar market, it has become impracticable for Bank tocontinue to fund or maintain any Libor Loans, or to perform its obligationshereunder, then Bank shall promptly give notice thereof to Borrower. Upon thegiving of such notice, Bank's obligation to make Libor Loans shall terminate,and in such event, (x) any requested Libor Loan shall be treated as a requestfor a Prime Loan, (y) any Prime Loan that was to have been converted to a LiborLoan shall be continued as a Prime Loan, and (z) any outstanding Libor Loanshall be converted retroactively, on the first date of the then current InterestPeriod with respect thereto, to a Prime Loan. 6.4 Governmental Regulations; Increased Costs. Borrower shall pay to Bank,within 15 days after demand by Bank, from time to time such amounts as Bank maydetermine to be necessary to compensate it for any increased costs incurred byBank that Bank determines are attributable to its making or maintaining of anyLibor Loans to Borrower (such increases in costs and reductions in amountreceivable being herein called "Additional Costs"), in each case resulting fromany Regulatory Change which: (a) imposes a new tax or changes the basis of taxation of any amountspayable to Bank under the Note or this Addendum in respect of any Libor Loans(other than changes which affect taxes measured by or imposed on the overall netincome of Bank by the jurisdiction in which such Bank has its principal office);or (b) imposes or modifies any reserve, special deposit or similarrequirements relating to any extensions of credit or other assets of, or anydeposits or other liabilities with or for the account of Bank (including anyLibor Loans or any deposits referred to in the definition of Libor Base Rate);or 19 20 LIBOR ADDENDUM (c) imposes any other condition affecting the Note (or any of suchextensions of credit or liabilities); or (d) imposes or modifies a Governmental Regulation regarding capitaladequacy which has or would have the effect of reducing the rate of return oncapital of Bank or any person or entity controlling Bank ("Parent") as aconsequence of its obligations hereunder to a level below that which Bank (orits Parent) could have achieved but for such adoption, change or compliance(taking into consideration its policies with respect to capital adequacy) by anamount deemed by Bank to be material. Bank will notify Borrower of any event occurring after the date of theNote which will entitle Bank to Additional Costs pursuant to this Section 6.4 aspromptly as practicable after it obtains knowledge thereof and determines torequest such compensation. Bank will furnish Borrower with a statement settingforth the basis and amount of each request by Bank for Additional Costs underthis Section 6.4. Determinations and allocations by Bank for purposes of thisSection 6.4 of the effect of any Regulatory Change on its costs of maintainingits obligations to make Libor Loans or of making or maintaining Libor Loans oron amounts receivable by it in respect of Libor Loans, and of the additionalamounts required to compensate Bank in respect of any Additional Costs, shall beconclusive and final, absent manifest error. This Addendum is executed as of the date first written above.BORROWER BANK IMPERIAL BANK,ATL PRODUCTS, INC. a California banking corporation,- ----------------------------- -------------------------------------a By- ----------------------------- ------------------------------------- Officer NameBy Its OFFICER TITLE- ----------------------------- -------------------------------------Its- ----------------------------- By - ----------------------------- Its- ----------------------------- 20 1 EXHIBIT 21 LIST OF SUBSIDIARIES STATE OF OTHER JURISDICTION OF INCORPORATION NAME OF ENTITY OR ORGANIZATION OWNERSHIP INFORMATION- --------------------------------- ------------------- ----------------------- ATL Products, Inc. Delaware 82.9% owned by OdeticsATL Products Limited England and Wales 100% owned by ATLCentro Corporation California 100% owned by OdeticsGyyr, Inc. California 100% owned by OdeticsOdetics Europe Limited England and Wales 100% owned by OdeticsOdetics Asia Pacific Pte. Ltd. Singapore 100% owned by OdeticsOdetics International Sales California 100% owned by Odetics Corporation 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORSWe consent to the incorporation by reference in the Registration Statement(Form S-3 No. 33-63983) of Odetics, Inc. and in the related Prospectus and inthe Registration Statement (Form S-8 No. 333-05735) pertaining to the Amendedand Restated Outside Director Stock Plan of Odetics, Inc. and the Odetics, Inc.Long-Term Incentive Equity Plan of Odetics, Inc. of our report dated April 29,1997, with respect to the consolidated financial statements and schedule ofOdetics, Inc. included in this Annual Report (Form 10-K) for the year endedMarch 31, 1997. /s/ ERNST & YOUNG LLPOrange County, CaliforniaJune 27, 1997

5 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 11,359 0 29,424 669 28,277 74,371 49,497 (25,668) 100,938 35,195 0 0 0 638 51,190 100,938 140,808 140,808 89,003 132,716 53 669 1,890 6,149 2,419 3,730 0 0 0 3,730 .55 .55

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Iteris Annual Report 1997

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Iteris
Annual Report 1997