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Ubiquiti -------------------------------------------------------------------------------------------------------------------------------------------------------------- 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 1934For the fiscal year ended March 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 tosuch filing requirements for the past 90 days. Yes [X] No [_] Indicate by a check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [X] Based on the closing sale price on Nasdaq National Market on June 24, 1999,the aggregate market value of the voting stock held by nonaffiliates of theregistrant was $63,577,358. 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 not necessarily a conclusive determination for other purposes. Odetics has two classes of common stock outstanding, the Class A commonstock and the Class B common stock. The rights, preferences and privileges ofeach class of common stock are identical in all respects, except for votingrights. Each share of Class A common stock entitles its holder to one-tenth ofone vote per share and each share of Class B common stock entitles its holderto one vote per share. As of June 24, 1999, there were 7,947,445 shares ofClass A common stock and 1,060,041 shares of Class B common stock outstanding.Unless otherwise indicated, all references to common stock shall collectivelyrefer to the Class A common stock and the Class B common stock. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the registrant'sdefinitive proxy statement for the annual meeting of the stockholdersscheduled to be held on September 30, 1999. -------------------------------------------------------------------------------------------------------------------------------------------------------------- ODETICS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I ITEM 1. BUSINESS. .................................................... 1 ITEM 2. PROPERTIES. .................................................. 15 ITEM 3. LEGAL PROCEEDINGS. ........................................... 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ......... 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ........................................ 16 ITEM 6. SELECTED FINANCIAL DATA. ..................................... 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. .................................. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ................. 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ................................... 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. .......... 24 ITEM 11. EXECUTIVE COMPENSATION. ...................................... 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ................................................. 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. .............. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ................................................... 25 i Note: When used in this Annual Report on Form 10-K and the information incorporated herein by reference, the words "expect(s)," "feel(s),""believe(s)," "will," "may," "anticipate(s)," and similar expressions areintended to identify forward-looking statement. Such statements are subject tocertain risks and uncertainties which could cause actual results to differmaterially from those projected. You should not place undue reliance on theseforward-looking statements which speak only as of the date hereof. Weundertake no obligation to republish revised forward-looking statements toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events. We encourage you to carefully review andconsider the various disclosures made by us which describe certain factorswhich affect our business, including the risk factors set forth at the end ofPart I, Item 1 of this report and in Part II, Item 7. "Management's Discussionand Analysis of Financial Condition and Results of Operations." PART I ITEM 1. BUSINESS General Odetics, Inc. was founded in 1969 to supply digital recorders for use in theUnited States space program. We pioneered new designs and standards fordigital magnetic tape recorders offering high reliability and enhancedperformance in the adverse environment attendant to space flight. In the1970s, we broadened our information automation product line to include time-lapse videocassette recorders for commercial and industrial security andsurveillance applications. Through our Gyyr division, we became a leadingsupplier of time-lapse videotape cassette recorders, digital image processingmodules and related products used in security and surveillance systems. Weincorporated our Gyyr division in 1997, forming a wholly-owned subsidiary,Gyyr, Inc. In October 1997, we expanded Gyyr by acquiring Intelligent ControlsInc., a manufacturer of access control products specializing in PC based,remote site and fiber optic communications. Leveraging our expertise in video image processing, we entered into theintelligent transportation system business with the introduction of a videovehicle detection system in 1993. In June 1997, we acquired certain assetscomprising the Transportation Systems business from Rockwell International,creating our ITS division, which expanded our offerings to include advancedtraffic management systems and advanced traveler information systems. Weincorporated our ITS division in 1998 as Odetics ITS, Inc. In October 1998, webroadened our systems offerings by acquiring Meyer, Mohaddes Associates, Inc.,which currently operates as a subsidiary of Odetics ITS. In the early 1980s, we set out to develop the technical expertise to applyautomation to new commercial applications and established our Broadcastdivision. The Broadcast division develops and manufactures broadcastautomation control systems and pioneered the use of video tape libraries inbroadcast television stations and satellite uplink operations. The success ofour video tape libraries led us to pursue new applications for informationautomation technologies. In 1991, we introduced an automated tape handlingsubsystem for integration into tape libraries designed for midrange computersand client/server networks. In January 1993, we formed a separate subsidiary,ATL Products, Inc., to pursue the market for automated tape libraries. InMarch 1997, ATL completed an initial public offering of 1,650,000 shares ofits Class A common stock. We distributed our remaining 82.9% interest in ATLto our stockholders in a tax-free distribution in October 1997. Today, Odetics is a collection of high technology companies and operatingdivisions, each with its own marketplace, customers and products. Theseoperations share a common corporate overhead for support for facilities, humanresources, benefits, accounting and finance, and some executive managementservices. We are pursuing our incubator business strategy to nurture anddevelop each of these operations with the ultimate goal of achieving a tax-free spin-off of each entity to our stockholders. In April 1999, we appliedfor a determination letter from the Internal Revenue Service to confirm thetax-free status of our proposed spin-off of Gyyr, Broadcast and Odetics ITS.We currently define our business segments as video products, telecom productsand ITS. Our video products segment includes our Broadcast division and ourGyyr subsidiary. Our telecom products segment includes our Communicationsdivision and our Mariner Networks subsidiary. Our ITS segment consists of ourOdetics ITS subsidiary. For financial information concerning our businesssegments, please see Note 12 of Notes to Consolidated Financial Statements. 1 Video Products Broadcast Division The Broadcast division delivers systems to automate the storage andscheduling of commercials, news stories and other television programmingrecorded on videotape and video server storage systems. We believe thatenhanced operational efficiencies will be a principal factor underlying theincreased automation of broadcast television stations and satellite uplinkoperations as the industry transitions to digital television. The Broadcast division's earliest commercial success came from themanufacture of video tape libraries. The video tape library market hasexperienced a trend toward smaller libraries, coupled with digital hard diskrecording devices. To address this market, we introduced the TCS45 tapelibrary, which incorporates highly integrated caching systems. The TCS45 canbe coupled with hard drive recorders available from several recognizedsuppliers to the broadcast community. We now offer software to form powerfulintegrated systems, including our SpotBank and AiroTM automation. In fiscal1999, we began shipping the Roswell facility management system, which isdesigned for enterprise automation of operations at television broadcastfacilities. Multi-channel presentation systems, which integrate the completeline of our hardware with commonly available broadcast quality video diskrecorders, are quickly becoming the core business of the Broadcast division.The Broadcast division is focused on video asset management including desktopvideo browsing using a network PC architecture, which can be extended to widearea network applications and Internet applications. Sales, Marketing and Principal Customers. The Broadcast division sellsdirectly to broadcast television stations, satellite uplink operations, andother broadcast television and cable television system operators. The salesand marketing management for our Broadcast division is located at ourprincipal facilities in Anaheim, California. The Broadcast division maintainsa dedicated field sales force of four persons operating in four U.S. salesregions and Canada, and a sales manager for Latin America. The European salesand marketing activities for the Broadcast division are conducted and managedby Odetics Europe Limited, a wholly-owned United Kingdom subsidiary ofOdetics. Odetics Asia Pacific Pte. Ltd., Odetics' wholly-owned subsidiarylocated in Singapore, conducts Asian sales and marketing activities for theBroadcast division. The Broadcast division also utilizes additionalindependent representative organizations to promote its products in variousother foreign markets. The Broadcast division's customers include major television networks such asFox, the Canadian Broadcasting Corporation, CNBC, FNN, Euronews, Televisa,Measat Broadcast Network Systems, NBC, the PBS Network, Group W SatelliteCommunications (for the Arts & Entertainment Network and the DiscoveryChannel), Asia Broadcast Centre, Univision and over 100 independent andnetwork-affiliated television stations. The Broadcast division currently hassystems installed in over 30 countries. Manufacturing and Materials. The Broadcast division maintains a dedicatedmanufacturing operation located within our Anaheim, California facilities. OurSpotBank and Airo products are manufactured primarily on a lot assembly/modulebuild basis in a second manufacturing plant located in Austin, Texas. At theAnaheim facility, the Broadcast division and Gyyr share common infrastructuresupport in the areas of production and inventory control, purchasing, qualityassurance, manufacturing and engineering. A single management structureoversees these operations. The Broadcast division purchases video servers from Tektronix, Leitch andHewlett-Packard and video switching, conversion and monitoring equipment fromTektronix and Leitch for installation in our automated video managementsystems. The Broadcast division also purchases cabinets and other fabricatedparts and components from other third party suppliers. Gyyr, Inc. Gyyr produces analog and digital video products and access control systemsthat meet the security and surveillance needs for a variety of marketsincluding banking, commercial/industrial and retail. Gyyr's timelapse 2 VCRs, for example, are installed in automated teller machines and retail pointof sale systems to record transaction information in an effort to deter andaddress incidents of theft and other crimes. Gyyr's access control systemsoffer managed access and monitoring of public, private and high securityfacilities. Customer demand for more sophisticated capabilities andintegration due to digital technology has also contributed to the recentgrowth in the market for Gyyr's products. Recent additions to Gyyr's productofferings include network video and device control, intelligent dome cameras,video multiplexing and digital recording. We sell these products as individualbox products as well as components of fully-integrated network securitycontrol systems. Sales, Marketing and Principal Customers. Gyyr markets and sells itsproducts through three established channels: OEMs, independent distributorsand system integrators. Gyyr personnel located at our principal facilities andsales offices throughout the world oversee approximately 2,000 of thesechannel partners. Gyyr has a business development and service organizationlocated at our Odetics Europe Limited subsidiary. In addition, Odetics EuropeLimited assists Gyyr with management in the development of European, MiddleEast and African markets. Gyyr also utilizes Odetics Asia Pacific Pte. Ltd. toassist in sales to the Asian markets. Gyyr's principal customers include majorsecurity equipment companies such as Diebold, Inc., ADT Security Systems,Inc., Honeywell, Inc., Mosler, Inc., Hamilton Safe and ADI. Manufacturing and Materials. Gyyr maintains a dedicated manufacturing arealocated within our principal facilities in Anaheim, California. Gyyr primarilyuses continuous demand flow techniques in its assembly lines. Gyyr and theBroadcast division share common infrastructure support in the areas ofproduction and inventory control, purchasing, quality assurance andmanufacturing engineering. A single management structure oversees theseoperations. Gyyr purchases VCRs modified to our specifications exclusively throughNissei Sangyo America, the United States distribution affiliate of Hitachi,Ltd., into which we incorporate certain value-added features. As a result ofits exclusive relationship with Hitachi, Ltd, Gyyr is vulnerable to Hitachi'sactions, which might necessitate changes in the design or manufacturing ofGyyr's products. While other suppliers are available who can manufacture VCRssuitable for use in Gyyr's products, we would be required to make changes inour product design or manufacturing methods to accommodate other VCRs, andGyyr could experience delays or interruptions in supply while these changesare incorporated or a new supplier is procured. Telecom Products Communications Division The Communications division includes telecom network synchronizationproducts and space borne digital data recorders. Our telecom networksynchronization products synchronize communications for data security, localtiming networks and wireless communications systems. These products are basedon G.P.S. technologies and are sold for new applications in cellular telephonesystems, PCS networks and satellite communications. A significant customer ofthe Communications division is LGIC of Korea. See "Risk Factors--Our OperatingResults Have Been Adversely Affected by the Asian Economic Crisis." The Communications division's space borne digital data recorders are used inmanned and unmanned space vehicles to store data gathered by onboard sensorsprior to transmission of the data to ground receiving stations. Theserecorders are employed in satellite programs for space research, earthresource and environmental observation and weather monitoring, as well asglobal surveillance and classified government programs. Sales, Marketing and Principal Customers. The Communications divisionconducts its selling and marketing activities worldwide directly from ourprincipal facilities in Anaheim, California. We sell our telecomsynchronization products primarily through manufacturers' representatives.During the fiscal year ended March 31, 1999, approximately 49% of theCommunication division's sales were derived from contracts with domestic orforeign governmental agencies and prime government contractors. 3 Manufacturing and Materials. The Communications division manufactures itstelecom synchronization products to best commercial practices and became ISOcertified in February 1997. Most of the manufacturing processes consist offinal assembly and test. We outsource board assembly and some preliminaryfabrication processes. The manufacture of space borne digital recorders consists primarily of lowvolume, program-managed manufacture, often with nonrecurring engineering forindividual customer needs. Because of these unique requirements, we haveextensive machining and electronic assembly capabilities in order to managecost, schedule and quality levels to the unusual and exacting needs of ourcustomers. Mariner Networks, Inc. We formed our wholly-owned subsidiary, Mariner Networks, Inc., during thefiscal year ended March 31, 1998, to pursue certain aspects of our networkinterface and communications business. Mariner Networks manufacturescomponents and complete solutions for branch office access applications.Mariner Networks' products include ATM subsystems, Frame Relay-to-ATMnetworking components and systems, and ATM wide area network accessconcentrators for handling intranet, data, voice and video traffic. Sales, Marketing and Principal Customers. Mariner Networks suppliesequipment to OEMs and end users through our offices in the United States,through Odetics Europe Limited in Europe and through Odetics Asia Pacific Pte.Ltd. in Asia. Mariner Networks sells its ATM interface module products throughmanufacturers representatives, both domestically and internationally. MarinerNetwork sells its Frame Relay and ATM access concentrator products throughresellers, OEMs and direct to large end users. Mariner Networks' significantcustomers include IBM and other network equipment manufacturers. Manufacturing and Materials. Mariner Networks' manufacturing processesconsist primarily of final assembly and test, and became ISO certified inFebruary 1997. Mariner Networks currently outsources circuit board assemblyand some fabrication processes. ITS Products--Odetics ITS, Inc. Odetics ITS, our 93% owned subsidiary, provides advanced information,software and sensor technologies to public agencies, vehicle manufacturers andconsumers that improve the efficiency and safety of surface transportation. Bycombining diverse expertise in transportation systems, software andinformation technology, Odetics ITS has developed the core competenciesnecessary to design and implement innovative advanced transportationmanagement systems utilizing proprietary technology. As one of the twocompanies developing and maintaining the National ITS Architecture, OdeticsITS is well positioned to influence the future direction of the deployment ofintelligent transportation systems in the United States. Odetics ITS leverages its proprietary outdoor image processing algorithmsand sensor technology to develop new ITS products. The Vantage vehicledetection system provides reliable detection and visual imagery under a broadrange of weather and lighting conditions. The flexibility, ease ofinstallation and low maintenance of Vantage represent an attractivealternative to inductive loops for controlling intersections. Our Auto VueTMproduct family provides an audible warning of lane departures and was jointlydeveloped with Daimler-Chrysler, using proprietary technologies of bothcompanies. We believe our initial Auto Vue product will be the firstcommercially available, image processing based lane departure warning system. Sales, Marketing and Principal Customers. Odetics ITS markets and sells itstransportation management systems and services directly to end user governmentagencies pursuant to negotiated contracts and individual purchase agreements.Sales of Odetics ITS' systems generally involve long lead times and requireextensive specification development, evaluation and price negotiations. Odetics ITS sells its Vantage vehicle detection systems primarily throughindirect sales channels comprised of approximately thirty independent dealersin the United States and Canada who sell integrated solutions and relatedproducts to the traffic intersection market. Odetics ITS' agreements withthese independent dealers 4 typically prohibit these dealers from distributing competitive video detectionsystems. Certain of these dealers have long-term supply arrangements with thegovernment agencies in their territory for the supply of various products forthe construction and renovation of traffic intersections. Odetics ITS' dealersgenerally maintain an inventory of demonstration traffic products includingthe Vantage vehicle detection system and sell directly to government agenciesand installation contractors. These dealers are primarily responsible forsales, installation and support of the Vantage products. Odetics ITS holdstechnical training classes for its dealers and maintains a full time staff ofcustomer support technicians to provide technical assistance when needed.Odetics ITS employs three Regional Sales Managers to support the dealer saleschannel and one District Sales Manager who sells directly to end user agenciesand contractors. Odetics ITS intends to sell its Auto Vue products initially to heavy truckmanufacturers through direct OEM sales. Sales of products to vehiclemanufacturers generally require lengthy design, testing and qualificationprocesses, which could take up to four years. We anticipate that Odetics ITSwill have to rely to a large extent on the marketing activities of the vehiclemanufacturers who will have the ultimate access to the consumers. Odetics ITSalso currently maintains an independent sales agent to assist its marketingand sales activities to OEMs in Europe. Manufacturing and Materials. Odetics ITS maintains a manufacturing facilityin our principal facilities located in Anaheim, California for the manufactureof its Vantage products. The manufacturing activities of Odetics ITS consistprimarily of testing and assembly. We intend to outsource the manufacture ofour Auto Vue products and currently rely on one manufacturer for this product.This manufacturer has not, to date, commenced volume production of the AutoVue product line. Customer Support and Services Each of our business units is responsible for its own customer support andservice organizations. We provide warranty service for each of our productlines, as well as follow-up service and support, for which we typically chargeseparately. We also offer separate software maintenance agreements to ourcustomers. We view customer support services as a critical competitive factoras well as a revenue source. Backlog Our backlog of unfulfilled firm orders was approximately $22.0 million as ofMarch 31, 1999 and approximately $21.6 million as of March 31, 1998.Approximately 85% of our backlog at March 31, 1998 was recognized as revenuesin fiscal 1999, and approximately 82% of our backlog at March 31, 1999 isexpected to be recognized as revenues in fiscal 2000. Pursuant to thecustomary terms of our agreements with government contractors and othercustomers, customers can generally cancel or reschedule orders with little orno penalties. Lead times for the release of purchase orders depend upon thescheduling and forecasting practices of our individual customers, which alsocan affect the timing of the conversion of our backlog into revenues. Forthese reasons, among others, our backlog at a particular date may not beindicative of our future revenues. Product Development Each of our business units directs and staffs its own product developmentactivities. Our businesses require substantial ongoing research anddevelopment expenditures and other product development activities. Ourcompany-sponsored research and development costs and expenses wereapproximately $7.7 million in fiscal 1997, $9.3 million in fiscal 1998 and$11.2 million in fiscal 1999. We expect to continue to pursue significant product development programs andincur significant research and development expenditures in each of ourbusiness units. 5 Competition Our business units face significant competition in each of their respective targeted markets. Increased competition may result in price reductions,reduced gross margins and loss of market share, any of which could have amaterial adverse effect on our business, financial condition and results ofoperations. 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 video tape libraries, forthe broadcast television market. Louth and Probel principally provideautomation control for video libraries and disk recorders. The Broadcastdivision's systems compete primarily in the arena of facility management andenterprise wide automation. We believe that the capability of our systems tointegrate the broadcast station business systems acquisition processes,storage devices and presentation devices under a relational data basemanagement system represents a unique and differentiable capability. As Gyyr expands its product base from time-lapse VCRs to providingintegrated security systems in CCTV and electronic access control, it willcompete with a broader set of companies. Major Japanese competitors in Gyyr'slegacy time-lapse VCR business include Panasonic, Toshiba, Sony, Sanyo,Mitsubishi and JVC. Gyyr also competes with large systems suppliers includingSensormatic, Honeywell, Pelco, Ultrak, Ademco and Vicon. In the sale of accesscontrol systems, Gyyr competes with Casi-Rusco, Checkpoint, Cardkey and Lenel.Gyyr competes based upon its strength in the integration of its variouscomponent products into systems that provide complete solutions through theuse of advanced software and networking technologies. The primary competition for the Communications division's networksynchronization products is Datum, Inc. In the Communications division's spacedata recorder market, our principal competitors include Seakr, L-3Communications and TRW. An additional competitive factor in this market isspace flight experience; however, with the advent of solid state recorders, wemay face new competitors in this market. We believe that Mariner Networks does not currently face significantcompetition in the sale of its ATM interface module products. For its accessconcentrator products, Mariner Networks' principal competition includes bothestablished networking vendors such as Cisco Systems and Nortel Networks, aswell as numerous small market entrants. Odetics ITS' competitors in the traffic management services market includeITS divisions of large corporations including Lockheed Martin and TRW, as wellas many civil engineering firms. We believe that the principal bases ofcompetition in the transportation management services market is the experienceof key individuals and their relationships with government agencies, projectmanagement experience, name recognition and the ability to develop integratedsoftware to link various aspects and components of the traffic managementsystem. In the market for vehicle detection, we compete primarily withmanufacturers and installers of inductive loops, with other manufacturers ofvideo camera detection systems such as Image Sensing Systems, Inc. and thePeek business unit of Thermo Power, and to a lesser extent with other non-intrusive detection devices including microwave, infrared, ultrasonic andmagnetic detectors. We are not aware of any other company that currently sellsa vision based lane tracking safety device for in-vehicle applications. The markets for our products and services are highly competitive and arecharacterized by rapidly changing technology and evolving standards. Webelieve that our ability to compete effectively depends on a number offactors, including the success and timing of our new product development, thecompatibility of our products with a broad range of computing systems, productquality and performance, reliability, functionality, price, and service andtechnical support. Many of our current and prospective competitors have longeroperating histories, greater name recognition, access to larger customer basesand significantly greater financial, technical, manufacturing, distributionand marketing resources than us. As a result, they may be able to adapt morequickly to new or emerging standards or technologies or to devote greaterresources to the promotion and sale of their products. 6 Accordingly, it is possible that new competitors or alliances amongcompetitors could emerge and rapidly acquire significant market share. Ourfailure to provide services and develop and market products that competesuccessfully with those of other suppliers and consultants in the market would have a material adverse effect on our business, financial condition andresults of operations. Intellectual Property and Proprietary Rights Our ability to compete effectively depends in part on our ability to developand maintain the proprietary aspects of our technology. Our policy is toobtain appropriate proprietary rights protection for any potentiallysignificant new technology acquired or developed each of our business units.We currently hold a number of United States and foreign patents andtrademarks, which will expire at various dates through 2015. We also havepending a number of United States and foreign patent applications relating tocertain of our products; however, we cannot be certain that any patents willbe granted pursuant to these applications. In addition to patent laws, we rely on copyright and trade secret laws toprotect our proprietary rights. We attempt to protect our trade secrets andother proprietary information through agreements with customers and suppliers,proprietary information agreements with our employees and consultants, andother similar measures. We cannot be certain that we will be successful inprotecting our proprietary rights. While we believe our patents, patentapplications, software and other proprietary know-how have value, changingtechnology makes our future success dependent principally upon our employees'technical competence and creative skills for continuing innovation. Litigation has been necessary in the past and may be necessary in the futureto enforce our proprietary rights, to determine the validity and scope of theproprietary rights of others, or to defend us against claims of infringementor invalidity by others. An adverse outcome in such litigation or similarproceedings could subject us to significant liabilities to third parties,require disputed rights to be licensed from others or require us to ceasemarketing or using certain products, any of which could have a materialadverse effect on our business, financial condition and results of operations.In addition, the cost of addressing any intellectual property litigationclaim, both in legal fees and expenses, and the diversion of management'sresources, regardless of whether the claim is valid, could be significant andcould have a material adverse effect on our business, financial condition andresults of operations. Employees We refer to our employees as associates. As of June 15, 1999, we employed546 associates, including 110 associates in general management, administrationand finance; 73 associates in sales and marketing; 185 associates in productdevelopment; 129 associates in operations, manufacturing and quality; and 49associates in customer service. None of our associates are represented by alabor union and we have not experienced a work stoppage. We provide centralized support for human resources management for each ofour operating divisions and subsidiaries. These services include recruiting,administration and outplacement. Government Regulation Our manufacturing operations are subject to various federal, state and locallaws, including those restricting the discharge of materials into theenvironment. We are not involved in any pending or threatened proceedingswhich would require curtailment of our operations because of such regulations.We continually expend funds to assure that our facilities are in compliancewith applicable environmental regulations. These expenditures have not,however, been significant in the past, and we do not expect any significantexpenditures in the near future. From time to time, a portion of our work relating to digital data recordersmay constitute classified United States government information or may be usedin classified programs of the United States Government. For this purpose, wepossess relevant security clearances. Our affected facilities and operationsare also subject to security regulations of the United States Government. Webelieve we are currently in full compliance with these regulations. 7 RISK FACTORS Our business is subject to a number of risks, some of which are discussedbelow. Other risks are presented elsewhere in this report. You should considerthe following risks carefully in addition to the other information containedin this report before purchasing the shares of our common stock. If any of thefollowing risks actually occur, they could seriously harm our business,financial condition or results of operations. In such case, the trading priceof our common stock could decline, and you may lose all or part of yourinvestment. Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Ourquarterly operating results have fluctuated and are likely to continue tofluctuate due to a number of factors, many of which are not within ourcontrol. Factors that could affect our revenues include the following: . our significant investment in research and development for our subsidiaries and divisions; . our ability to develop, introduce, market and gain market acceptance of new products applications and product enhancements in a timely manner; . the size and timing of significant customer orders; . the introduction of new products by competitors; . the availability of components used in the manufacture of our products; . our ability to control costs; . changes in our pricing policies and the pricing policies by our suppliers and competitors, as well as increased price competition in general; . the long lead times associated with government contracts or required by vehicle manufacturers; . our success in expanding and implementing our sales and marketing programs; . technological changes in our target markets; . our relatively small level of backlog at any given time; . the mix of sales among our divisions; . deferrals of customer orders in anticipation of new products, applications or product enhancements; . the Asian economic crisis and instability; . currency fluctuations and our ability to get currency out of certain foreign countries; and . general economic and market conditions. In addition, our sales in any quarter typically consist of a relativelysmall number of large customer orders. As a result, the timing of a smallnumber of orders can impact our quarter to quarter results. The loss of or asubstantial reduction in orders from any significant customer could seriouslyharm our business, financial condition and results of operations. Because of the factors listed above and other risks discussed in thisreport, our future operating results could be below the expectations ofsecurities analysts and/or investors. If that happens, the trading price ofour common stock could be adversely affected. We Have Experienced Substantial Losses and Expect Future Losses. We haveexperienced net losses of $20.1 million for the year ended March 31, 1999 and$6.6 million for the year ended March 31, 1998. We may not be able to achieveprofitability on a quarterly or annual basis in the future. Most of ourexpenses are fixed in advance, and we generally are unable to reduce ourexpenses significantly in the short term to compensate for any unexpecteddelay or decrease in anticipated revenues. In addition, in order to implementour incubator strategy successfully, we expect to continue to make significantinvestments in each of our business units. As a result, we may continue toexperience losses which could cause the market price of our common stock to decline. 8 Our Incubator Strategy is Expensive and May Not Be Successful. We haveinitiated a business strategy called our incubator strategy which is expensiveand highly risky. The goal of this strategy is to nurture and developcompanies that can be spun-off to our stockholders. This strategy has in thepast required us to make significant investments in our business units, bothfor research and development, and also to develop a separate infrastructurefor each of our divisions, sufficient to allow the division to function as anindependent public company. We expect to continue to invest heavily in thedevelopment of our divisions with the goal of conducting additional publicofferings. We may not recognize the benefits of this investment for asignificant period of time, if at all. Our ability to complete an initialpublic offering of any of our divisions and/or spin-off our interest to ourstockholders will depend upon many factors, including: . the overall performance and results of operations of the particular business unit; . the potential market for our business unit; . our ability to assemble and retain a broad, qualified management team for the business unit; . our financial position and cash requirements; . the business unit's customer base and product line; . the current tax treatment of spin-off transactions and our ability to obtain favorable determination letters from the Internal Revenue Service; and . general economic and market conditions. We may not be able to complete a successful initial public offering or spin-off of any of our divisions in the near future, or at all. Even if we docomplete additional public offerings, we may decide not to spin-off aparticular division, or to delay the spin-off until a later date. We Must Keep Pace with Rapid Technological Change to Remain Competitive. Ourtarget markets are in general characterized by the following factors: . rapid technological advances; . downward price pressure in the marketplace as technologies mature; . changes in customer requirements; . frequent new product introductions and enhancements; and . evolving industry standards and changes in the regulatory environment. We believe that we must continue to make substantial investments to supportongoing research and development in order to remain competitive. Inparticular, we will need to modify certain of our products to accommodate theanticipated deployment of digital television and the corresponding phase-outof analog transmissions. We will also have to continue to develop andintroduce new products that incorporate the latest technological advancementsin hardware, storage media, operating system software and applicationssoftware in response to evolving customer requirements. Our recent shifttowards providing more software solutions may create additional challenges forus, particularly in our Broadcast division. Our business and results ofoperations could be adversely affected if we do not anticipate or respondadequately to technological developments or changing customer requirements. Our Future Success Depends on the Successful Development and MarketAcceptance of New Products. We believe our revenue growth and future operatingresults will depend on our ability to complete development of new products andenhancements, achieve broad market acceptance of these products andenhancements, and reduce our product costs. We may not be able to introduceany new products or any enhancements to our existing products on a timelybasis, or at all. In addition, the introduction of any new products could adversely affect the sales of our certain of our existing products. 9 Our future success will also depend in part on the success of severalrecently introduced products including: . Roswell, our automated facility management system for broadcast television stations; . Bowser, our visual asset manager; . Vortex, our high performance dome product; . Digi Scan Pro, our advanced digital multiplexer; . Vantage One, our single camera traffic detection system; . Auto Vue, our lane departure warning system; and . Dexter, our networking access device. Market acceptance of our new products depends upon many factors, includingour ability to resolve technical challenges in a timely and cost-effectivemanner, the perceived advantages of our new products over traditional productsand the marketing capabilities of our independent distributors and strategicpartners. Our business and results of operations could be seriously harmed byany significant delays in our new product development. We have experienceddelays in the past in the introduction of new products, particularly with ourRoswell system. Certain of our new products could contain undetected designfaults and software errors or "bugs" when first released by us, despite ourtesting. We may not discover these faults or errors until after a product hasbeen installed and used by our customers. Any faults or errors in our existingproducts or in our new products may cause delays in product introduction andshipments, require design modifications or harm customer relationships, any ofwhich could adversely affect our business and competitive position. We currently anticipate that we will outsource the manufacture of our AutoVue product line to a single manufacturer. This manufacturer may not be ableto produce sufficient quantities of this product in a timely manner or at areasonable cost, which could materially and adversely affect our ability tolaunch or gain market acceptance of Auto Vue. We May Need Additional Capital in the Future and May Not Be Able to SecureAdequate Funds on Terms Acceptable to Us. We recently raised approximately$7.3 million in a private placement in December 1998 and approximately $2.0million in March 1999. We may need to raise additional capital in the nearfuture, either through additional bank borrowings or other debt or equityfinancings. Our capital requirements will depend on many factors, including: . market acceptance of our products; . increased research and development funding, and required investments in our divisions; . increased sales and marketing expenses; . potential acquisitions of businesses and product lines; and . additional working capital needs. If our capital requirements are materially different from those currentlyplanned, we may need additional capital sooner than anticipated. If additionalfunds are raised through the issuance of equity securities, the percentageownership of our stockholders will be reduced and such securities may haverights, preferences and privileges senior to our common stock. Additionalfinancing may not be available on favorable terms or at all. If adequate fundsare not available or are not available on acceptable terms, we may be unableto develop or enhance our products, expand our sales and marketing programs,take advantage of future opportunities or respond to competitive pressures. We Have Significant International Sales and Are Subject to Risks Associatedwith Operating in International Markets. International product salesrepresented approximately 27% of our total net sales and contract revenues for the fiscal year ended March 31, 1999, approximately 34% for the fiscal yearended 10 March 31, 1998 and approximately 36% for the fiscal year ended March 31, 1997.International business operations are subject to inherent risks, including: . unexpected changes in regulatory requirements, tariffs and other trade barriers; . longer accounts receivable payment cycles; . difficulties in managing and staffing international operations; . potentially adverse tax consequences; . the burdens of compliance with a wide variety of foreign laws; . reduced protection for intellectual property rights in some countries; . currency fluctuations and restrictions; and . political and economic instability. We believe that international sales will continue to represent a significantportion of our revenues, and that continued growth and profitability mayrequire further expansion of our international operations. Our internationalsales are currently denominated primarily in U.S. dollars. As a result, anincrease in the relative value of the dollar could make our products moreexpensive and potentially less price competitive in international markets. Wedo not engage in any transactions as a hedge against risks of loss due toforeign currency fluctuations. Any of these factors may adversely effect our future international salesand, consequently, on our business and operating results. Furthermore, as weincrease our international sales, our total revenues may also be affected to agreater extent by seasonal fluctuations resulting from lower sales thattypically occur during the summer months in Europe and other parts of theworld. Our Operating Results Have Been Adversely Affected by the Asian EconomicCrisis. Our telecommunications products are sold principally to LGIC of Korea.As a result of economic instability in Asia, particularly in Korea, our salesin this region have declined over 60% in the current fiscal year and maycontinue to decline in the future. It is possible that these sales could befurther impacted by the currency devaluations and related economic problems inthis region. We Need to Manage Growth and the Integration of Our Acquisitions. Over thepast two years, we have significantly expanded our operations and made severalsubstantial acquisitions of diverse businesses, including IntelligentControls, Inc., International Media Integration Services, Ltd., Meyer MohaddesAssociates, Inc., Viggen Corporation and certain assets of the TransportationSystems business of Rockwell International. A key element of our businessstrategy involves expansion through the acquisition of complementarybusinesses, products and technologies. Acquisitions may require significantcapital infusions and, in general, acquisitions also involve a number ofspecial risks, including: . potential disruption of our ongoing business and the diversion of our resources and management's attention; . the failure to retain or integrate key acquired personnel; . the challenge of assimilating diverse business cultures; . increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services; . the incurrence of unforeseen obligations or liabilities; . potential impairment of relationships with employees or customers as a result of changes in management; and . increased interest expense and amortization of acquired intangible assets. Our competitors are also soliciting potential acquisition candidates, whichcould both increase the price of any acquisition targets and decrease thenumber of attractive companies available for acquisition. 11 Acquisitions, combined with the expansion of our business divisions andrecent growth has placed and is expected to continue to place a significantstrain on our resources. To accommodate this growth, we anticipate that wewill be required to implement a variety of new and upgraded operational andfinancial systems, procedures and controls, including the improvement of ouraccounting and other internal management systems. All of these updates willrequire substantial management effort. Our failure to manage growth andintegrate our acquisitions successfully could adversely affect our business,financial condition and results of operations. We Depend on Government Contracts and Subcontracts and Face Additional RisksRelated to Fixed Price Contracts. Substantially all of the sales by oursubsidiary, Odetics ITS, Inc., and a portion of our sales by ourCommunications division were derived from contracts with governmentalagencies, either as a general contractor, subcontractor or supplier.Government contracts represented approximately 16% of our total net sales andcontract revenues for the year ended March 31, 1999. We expect revenue fromgovernment contracts will continue to increase in the near future. Governmentbusiness is, in general, subject to special risks and challenges, including: .long purchase cycles; .competitive bidding and qualification requirements; .performance bond requirements; .delays in funding, budgetary constraints and cut-backs; .milestone requirements, and liquidated damage provisions for failure to meet contract milestones. In addition, a large number of our government contracts are fixed pricecontracts. As a result, we may not be able to recover for any cost overruns.These fixed price contracts require us to estimate the total project costbased on preliminary projections of the project's requirements. The financialviability of any given project depends in large part on our ability toestimate these costs accurately and complete the project on a timely basis. Inthe event our costs on these projects exceed the fixed contractual amount, wewill be required to bear the excess costs. These additional costs adverselyaffect our financial condition and results of operations. Moreover, certain ofour government contracts are subject to termination or renegotiation at theconvenience of the government, which could result in a large decline in ournet sales in any given quarter. Our inability to address any of the foregoingconcerns or the loss or renegotiation of any material government contractcould seriously harm our business, financial condition and results ofoperations. The Markets in Which We Operate Are Highly Competitive and Have Many MoreEstablished Competitors. We compete with numerous other companies in ourtarget markets and we expect such competition to increase due to technologicaladvancements, industry consolidations and reduced barriers to entry. Increasedcompetition is likely to result in price reductions, reduced gross margins andloss of market share, any of which could seriously harm our business,financial condition and results of operations. Many of our competitors havefar greater name recognition and greater financial, technological, marketingand customer service resources than we do. This may allow them to respond morequickly to new or emerging technologies and changes in customer requirements.It may also allow them to devote greater resources to the development,promotion, sale and support of their products than we can. Recentconsolidations of end users, distributors and manufacturers in our targetmarkets have exacerbated this problem. As a result of the foregoing factors,we may not be able to compete effectively in our target markets andcompetitive pressures could adversely affect our business, financial conditionand results of operations. We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel andWe Do Not Have Employment Agreements with Any Key Personnel. Due to thespecialized nature of our business, we are highly dependent on the continuedservice of our executive officers and other key management, engineering andtechnical personnel, particularly Joel Slutzky, our Chief Executive Officerand Chairman of the Board, and Gregory A. Miner, our Chief Operating Officerand Chief Financial Officer. We do not have any employment contracts with anyof our officers or key employees. The loss of any of these persons wouldseriously harm our development and marketing efforts, and would adverselyaffect our business. Our success will also depend in 12 large part upon our ability to continue to attract, retain and motivatequalified engineering and other highly skilled technical personnel.Competition for employees, particularly development engineers, is intense. Wemay not be able to continue to attract and retain sufficient numbers of suchhighly skilled employees. Our inability to attract and retain additional keyemployees or the loss of one or more of our current key employees couldadversely affect upon our business, financial condition and results ofoperations. We May Not be Able to Adequately Protect or Enforce Our IntellectualProperty Rights. If we are not able to adequately protect or enforce theproprietary aspects of our technology, competitors could be able to access ourproprietary technology and our business, financial condition and results ofoperations will likely be seriously harmed. We currently attempt to protectour technology through a combination of patent, copyright, trademark and tradesecret laws, employee and third party nondisclosure agreements and similarmeans. Despite our efforts, other parties may attempt to disclose, obtain oruse our technologies or solutions. Our competitors may also be able toindependently develop products that are substantially equivalent or superiorto our products or design around our patents. In addition, the laws of someforeign countries do not protect our proprietary rights as fully as do thelaws of the United States. As a result, we may not be able to protect ourproprietary rights adequately in the United States or abroad. We have engaged in litigation in the past and litigation may be necessary inthe future to enforce our intellectual property rights or to determine thevalidity and scope of the proprietary rights of others. Litigation may also benecessary to defend against claims of infringement or invalidity by others. Anadverse outcome in litigation or any similar proceedings could subject us tosignificant liabilities to third parties, require us to license disputedrights from others or require us to cease marketing or using certain productsor technologies. We may not be able to obtain any licenses on terms acceptableto us, or at all. Any of these results could adversely affect on our business,financial condition and results of operations. In addition, the cost ofaddressing any intellectual property litigation claim, both in legal fees andexpenses, and the diversion of management resources, regardless of whether theclaim is valid, could be significant and could seriously harm our business,financial condition and results of operations. The Trading Price of Our Common Stock Is Volatile. The trading price of ourcommon stock has been subject to wide fluctuations in the past, decreasingfrom $20.375 in October 1997 to $4.25 in October 1998. We may not be able toincrease or sustain the current market price of our common stock in thefuture. The market price of our common stock could continue to fluctuate inthe future in response to various factors, including, but not limited to: . quarterly variations in operating results; . shortages announced by suppliers . announcements of technological innovations or new products; . acquisitions or businesses, products or technologies; . changes in pending litigation; . our ability to spin-off any division; . applications or product enhancements by us or by our competitors; and . changes in financial estimates by securities analysts. The stock market in general has recently experienced volatility which hasparticularly affected the market prices of equity securities of many hightechnology companies. This volatility has often been unrelated to theoperating performance of these companies. These broad market fluctuations mayadversely affect the market price of our common stock. We Are Controlled by Certain of Our Officers and Directors. As of March 31,1999, our officers and directors beneficially owned approximately 30.5% of thetotal combined voting power of the outstanding shares of our Class A commonstock and Class B common stock. As a result of their stock ownership, ourmanagement 13 will be able to significantly influence the election of our directors and theoutcome of corporate actions requiring stockholder approval, such as mergersand acquisitions, regardless of how our other stockholders may vote. Thisconcentration of voting control may have a significant effect in delaying,deferring or preventing a change in our management or change in control andmay adversely affect the voting or other rights of other holders of commonstock. Our Stock Structure and Certain Anti-Takeover Provisions May Effect thePrice of Our Common Stock. Certain provisions of our certificate ofincorporation and our stockholder rights plan could make it difficult for athird party to acquire us, even though an acquisition might be beneficial toour stockholders. These provisions could limit the price that investors mightbe willing to pay in the future for shares of our common stock. Our Class Acommon stock entitles the holder to one-tenth of one vote per share and ourClass B common stock entitles the holder to one vote per share. In addition,holders of the Class B common stock are presently entitled to elect six of ournine directors. The disparity in the voting rights between our common stock,as well as our insiders' significant ownership of the Class B common stock,could discourage a proxy contest or make it more difficult for a third partyto effect a change in our management and control. In addition, our Board ofDirectors is authorized to issue, without stockholder approval, up to2,000,000 shares of preferred stock with voting, conversion and other rightsand preferences superior to those of our common stock, as well as additionalshares of Class B common stock. Our future issuance of preferred stock orClass B common stock could be used to discourage an unsolicited acquisitionproposal. In March 1998, we adopted a stockholder rights plan and declared a dividendof preferred stock purchase rights to our stockholders. In the event a thirdparty acquires more than 15% of the outstanding voting control of our companyor 15% of our outstanding common stock, the holders of these rights will beable to purchase the junior participating preferred stock at a substantialdiscount off of the then current market price. The exercise of these rightsand purchase of a significant amount of stock at below market prices couldcause substantial dilution to a particular acquiror and discourage theacquiror from pursuing our company. The mere existence of the stockholderrights plan often delays or makes a merger, tender offer or proxy contest moredifficult. Year 2000 Compliance. Many currently installed computer systems and softwareproducts are coded to accept only two digit entries in the date code field.These systems and software products will need to accept four digit entries todistinguish 21st century dates from 20th century dates. As a result, computersystems and/or software used by many companies may need to be upgraded tocomply with such Year 2000 requirements or risk system failure ormiscalculations causing disruptions of normal business activities. Althoughour core products are designed to be Year 2000 compliant, it is difficult toensure that our products contain all necessary date code changes. We are inthe process of updating our existing information systems to become Year 2000compliant. We have established an internal task force to evaluate our currentstatus and state of readiness for the Year 2000. We believe the mostsignificant impact of the Year 2000 issues will be the readiness of oursuppliers, distributors, customers and lenders with whom we must interact.This evaluation is still at an early stage. We do not yet have any contingencyplans to address our inability to remedy these issues and we may not havefully identified the Year 2000 impact. As such, we may not be able to updateour systems and products or resolve the other Year 2000 issues without disrupting our business or without incurring significant expense. Our failureto address these issues on a timely basis or at all could result in lostrevenues, increased operating costs, the loss of customers and other businessinterruptions, any of which could have a material adverse effect on ourbusiness, financial condition and results of operations. We Do Not Pay Cash Dividends. We have never paid cash dividends on ourcommon stock and do not anticipate paying any cash dividends on either classof our common stock in the foreseeable future. We May Be Subject to Additional Risks. The risks and uncertainties describedabove are not the only ones facing our company. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also adversely affect our business operations. 14 ITEM 2. PROPERTIES. Our headquarters and principal operations are located in Anaheim,California. In 1984, we purchased and renovated a three building complexcontaining approximately 250,000 square feet situated on approximately 14acres adjacent to the Interstate 5 freeway, one block from Disneyland. Ourfacilities house our corporate and administrative offices (approximately43,000 dedicated square feet), as well as the operations of Gyyr and theBroadcast division, (approximately 87,000 dedicated square feet), theCommunications division (approximately 67,000 dedicated square feet), MarinerNetworks (approximately 8,000 dedicated square feet) and Odetics ITS(approximately 25,000 dedicated square feet). Our Communications division leases approximately 4,500 square feet of spacein a manufacturing facility located on 0.62 acre in El Paso, Texas. OurBroadcast 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. We currently operate a single shift in each of our manufacturing andassembly facilities, and we believe that our facilities are adequate for ourcurrent needs and for possible future growth. We may, however, elect to expandor relocate its offices and facilities in the future. ITEM 3. LEGAL PROCEEDINGS. We brought an action against Storage Technology Corporation, commonly knownas StorageTek, in the Eastern District Court of Virginia alleging thatStorageTek had infringed our patent covering robotics tape cassette handlingsystems (United States Patent No. 4,779,151). StorageTek counterclaimedalleging that we infringed several of StorageTek's patents. Prior to trial,the court dismissed two of the infringement claims against us and the thirdclaim was dismissed upon resolution between the parties. In January 1996, ajury determined that the patent claims were not infringed under the doctrineof equivalents based upon a claim construction defined by the court prior tothe trial. That jury also concluded that our patent was not invalid. In June1997, the United States Court of Appeals for the Federal Circuit vacated thelower court's claim construction and findings of non-infringement of ourpatent. The appellate court remanded the case for consideration ofinfringement under a proper claim construction. In August 1997, the appellatecourt denied a petition for rehearing requested by StorageTek. The case wasreturned to the Federal District Court for retrial, and in March 1998, a juryawarded us damages in the amount of $70.6 million. In June 1998, the U.S.District Court for the Eastern District of Virginia granted an injunctionagainst StorageTek enjoining StorageTek from making, selling or using anyinfringing devices, including the ACS4400, PowderHorn, Wolfcreek and Genesisautomated tape library systems that include a pass through port. In June 1998,the U.S. District Court issued an order requesting the parties to brief theissues of whether StorageTek's motion for judgment as a matter of law shouldhave been granted, and whether the injunction previously ordered by the courtagainst StorageTek should be stayed pending appeal. After filing hearings, thetrial court vacated its own injunction and granted StorageTek's motion forjudgment as a matter of law to vacate the jury trial result and to findStorageTek not infringing. We have appealed these and other court rulings. Thedefendants also cross-appealed certain other court rulings. The U.S. Court ofAppeals for the Federal Circuit heard final arguments on April 12, 1999. A decision from the U.S. Court of Appeals is pending. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. In connection with our special meeting of stockholders held on March 11,1999, the following proxies were tabulated representing 4,268,575 shares ofour Class A common stock or approximately 56% of total Class A sharesoutstanding, and 833,329 of Class B common stock, or approximately 79% of thetotal outstanding Class B shares outstanding, voted in the following manner: Proposal I: To approve the private placement and issuance of 308,528 shares of our Class A common stock to certain of our officers and directors at a purchase price per share of $6.625, as required by the rules of the Nasdaq Stock Market. Class A Class B Common Stock Common Stock (1/10 vote/share) (one vote/share) ----------------- ---------------- Total Represented............................ 4,268,575 833,329For.......................................... 3,349,681 507,852Against...................................... 378,225 17,989Total Voting................................. 3,727,906 525,841Abstain/Non-Vote............................. 540,669 307,488 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Class A common stock and Class B common stock are traded on the NasdaqNational Market under the symbols "ODETA" and "ODETB," respectively. Thefollowing table sets forth for the fiscal periods indicated the high and lowsales prices for the Class A common stock and Class B common stock as reportedby the Nasdaq National Market: Class A Class B Common Stock Common Stock --------------- ---------------- High Low High Low ------- ------- -------- ------- Fiscal Year Ended March 31, 1998 First Quarter............................... $14 1/2 $ 9 3/4 $14 1/2 $10 1/2 Second Quarter.............................. 19 1/4 12 1/4 19 1/4 12 Third Quarter............................... 21 3/4 4 5/8 21 4 1/2 Fourth Quarter.............................. 9 1/4 4 10 1/16 4 1/4 Fiscal Year Ended March 31, 1999 First Quarter................................ 17 1/8 8 3/8 17 9 Second Quarter............................... 13 5/8 4 5/8 14 1/4 5 Third Quarter................................ 8 1/4 4 1/16 9 5/8 4 Fourth Quarter............................... 10 5/8 7 1/16 10 3/4 7 3/8 As of June 24, 1999, we had 714 holders of record of Class A common stockand 155 holders of record of Class B common stock according to informationfurnished by our transfer agent. Dividend Policy Pursuant to the terms of our Loan and Security Agreement with our bank, we are prohibited from paying any dividends on our common stock without thebank's consent. We have never paid or declared cash dividends on either classof our common stock, and have no current plans to pay such dividends in theforeseeable future. We currently intend to retain any earnings for workingcapital and general corporate purposes. The payment of any future dividendswill be at the discretion of our Board of Directors, and will depend upon anumber of factors, including, but not limited to, future earnings, the successof our business, activities, its capital requirements, our general financialcondition and future prospects, general business conditions, the consent ofour principal lender and such other factors as the Board may deem relevant. 16 Recent Sales of Unregistered Securities During the last fiscal year, we have sold and issued the followingunregistered securities: 1. In September 1998, in connection with our acquisition of International Media Integration Systems Limited, we issued an aggregate of 173,214 shares of our Class A common stock to the four former shareholders of International Media in exchange for their holdings in International Media. 2. In October 1998, in connection with the acquisition by Odetics ITS of Meyer, Mohaddes Associates, Inc., we issued an aggregate of 55,245 shares of our Class A common stock to the four former shareholders of Meyer, Mohaddes in exchange for their shares of common stock of Meyer, Mohaddes. We also issued to these shareholders an aggregate of 457,000 shares of common stock of Odetics ITS, which was later reduced to 432,100 shares after giving effect to the purchase price adjustments set forth in the merger agreement. Pursuant to the terms of the merger agreement, in April 1999, we also issued an aggregate of 25,740 additional shares to these shareholders as a penalty for not completing the initial public offering of Odetics ITS. 3. In December 1998, we issued an aggregate of 1,191,323 shares of our Class A common stock to 17 accredited investors at a purchase price of $6.625 per share in a private placement. In March 1999, we issued an aggregate of 308,528 shares of our Class A common stock to eight of our officers and directors in a private placement at a purchase price of $6.625 per share. Cruttenden Roth Incorporated acted as placement agent in connection with both of these offerings. 4. In April 1999, we issued an aggregate of 27,603 shares of our Class A common stock to Viggen Corporation, in connection with our acquisition of certain assets of Viggen Corporation. The sale and issuance of securities set forth above were deemed to be exemptfrom registration under the Securities Act by virtue of Section 4(2) thereof.The recipients of the securities in each of the transactions set forth inabove represented their intention to acquire such securities for investmentonly and not with a view to or for sale in connection with any distributionthereof, and appropriate legends were affixed to the share certificates andinstruments used in such transactions. Except as indicated above, there wereno underwriters, brokers or finders employed in connection with any of theforegoing transactions. 17 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data with respect to ourconsolidated statement of operations for each of the five fiscal years in theperiod ended March 31, 1999 and the consolidated balance sheet data at March31, 1995, 1996, 1997, 1998 and 1999 are derived from the audited consolidatedfinancial statements of Odetics. The consolidated financial statements for thefiscal years ended March 31, 1995 and 1996 and our consolidated balance sheetat March 31, 1997 are not included in this report. The following informationshould be read in conjunction with "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" and with our ConsolidatedFinancial Statements and the related notes thereto included elsewhere in thisreport. Fiscal Year Ended March 31, --------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data:Net sales...................... $51,824 $65,056 $71,748 $ 79,552 $ 70,042Contract revenues.............. 13,280 10,161 9,032 10,284 13,331 ------- ------- ------- -------- --------Total net sales and contract revenues...................... 65,104 75,217 80,780 89,836 83,373Cost of sales.................. 34,225 44,535 48,507 55,227 49,816Cost of contract revenues...... 6,633 4,374 4,907 6,430 9,007Selling, general and administrative expense........ 16,199 15,620 19,831 26,010 31,670Research and development expenses...................... 6,061 5,242 7,734 9,271 11,191In process research and development................... -- -- -- 2,106 --Nonrecurring charge............ 767 -- -- 1,716 --Interest expense, net.......... 682 386 183 617 1,807 ------- ------- ------- -------- --------Income (loss) from continuing operations before income taxes......................... 537 5,060 (382) (11,541) (20,118)Income taxes (benefit)......... 177 1,418 (181) (2,858) -- ------- ------- ------- -------- --------Income (loss) from continuing operations.................... 360 3,642 (201) (8,683) (20,118)Income (loss) from discontinued operations, net of income taxes......................... (5,038) (1,189) 3,931 2,089 -- ------- ------- ------- -------- --------Net income (loss).............. $(4,678) $ 2,453 $ 3,730 $ (6,594) $(20,118) ======= ======= ======= ======== ========Diluted earnings (loss) per share(1):Continuing operations.......... $ 0.06 $ 0.59 $ (0.03) $ (1.26) $ (2.57)Discontinued operations........ (0.86) (0.19) 0.62 0.31 -- ------- ------- ------- -------- --------Earnings (loss) per share...... $ (0.80) $ 0.40 $ 0.59 $ (0.95) $ (2.57) ======= ======= ======= ======== ========Shares used in calculating di- luted earnings (loss) per share......................... 5,872 6,179 6,299 6,912 7,820--------(1) The earnings (loss) per share amounts prior to fiscal 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128 Earnings per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements. Fiscal Year Ended March 31, ----------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- -------- (in thousands) Consolidated Balance Sheet Data:Working capital.................... $24,892 $20,610 $21,903 $19,996 $ 15,216Total assets....................... 70,098 73,013 85,805 88,790 81,355Long-term debt (less current portion).......................... 25,757 22,019 11,860 21,000 19,962Retained earnings (deficit)........ 6,027 8,481 12,211 (3,795) (23,913)Total stockholders' equity......... 27,736 30,985 51,828 38,580 36,323 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations The following table sets forth certain income statement data as a percentageof total net sales and contract revenues for the periods indicated and shouldbe read in conjunction with Management's Discussion and Analysis of FinancialCondition and Results of Operations: As of March 31, -------------------- 1997 1998 1999 ----- ----- ----- Net sales.............................................. 88.8% 88.6% 84.0%Contract revenues...................................... 11.2 11.4 16.0 ----- ----- -----Total net sales and contract revenues.................. 100.0% 100.0% 100.0%Cost of sales.......................................... 60.0 61.4 59.7Cost of contract revenues.............................. 6.1 7.2 10.8Selling, general and administrative expenses........... 24.5 29.0 38.0Research and development expenses...................... 9.6 10.3 13.4In process research and development.................... -- 2.3 --Nonrecurring charge.................................... -- 1.9 --Interest expense, net.................................. 0.2 0.7 2.2 ----- ----- -----Income (loss) from continuing operations before income taxes................................................. (0.4) (12.8) (24.1)Income taxes (benefit)................................. (0.2) (3.2) -- ----- ----- -----Income (loss) from continuing operations............... (0.2) (9.6) (24.1)Income (loss) from discontinued operations, net of income taxes.......................................... 4.8 2.3 -- ----- ----- -----Net income (loss)...................................... 4.6% (7.3)% (24.1)% ===== ===== ===== General. On October 31, 1997, we completed the spin-off of our 82.9%interest in ATL by distributing our 8,005,000 shares of Class A common stockto our stockholders of record on October 31, 1997. In connection with thespin-off, we have restated our financial statements to reflect continuing anddiscontinued operations. Discontinued operations reflect our interest in theoperations of ATL for all periods presented. Net Sales and Contract Revenues. Net sales consist of sales of products andservices to commercial customers. Contract revenues consist of revenuesderived from contracts with state, county and municipal agencies forintelligent transportation systems projects and from contracts with agenciesof the United States Government and foreign entities for space recorders usedfor geographical information systems. Total net sales and contract revenuesdecreased 7.2% to $83.4 million for the fiscal year ended March 31, 1999("fiscal 1999") compared to $89.8 million for the fiscal year ended March 31,1998 ("fiscal 1998"), and increased 11.2% in fiscal 1998 from $80.8 millionfor the fiscal year ended March 31, 1997 ("fiscal 1997"). Net Sales. Net sales decreased 12.0% to $70.0 million in fiscal 1999compared to $79.6 million in fiscal 1998 as a result of a 10.2% decrease inGyyr sales and a 58.6% decrease in sales in the Communications division. Thedecrease in Gyyr sales reflects reduced purchases by certain of its OEMcustomers who sell to the banking industry segment of the electronic securitymarket. This market segment has undergone substantial consolidation in thecurrent fiscal year that has negatively impacted demand for certain of ourproducts including video multiplexers and time lapse video tape decks. Thedecrease in sales in the Communications division reflects a decrease in salesof timing and sychronization products to LGIC of Korea, a significantcustomer. The decline in sales to this customer largely reflects adverseeconomic conditions in Asia. Sales by Odetics ITS partially offset the decline in sales of Gyyr and the Communications division, reflecting an increase of approximately 360.0% infiscal 1999 compared to the previous year. This increase was primarily theresult of increasing market acceptance of our Vantage line of video basedtraffic intersection control 19 systems. We also experienced a 140% increase in Mariner Networks' sales infiscal 1999 compared to fiscal 1998 primarily due to increased sales ofnetwork interface products. Sales of Mariner Networks products represented2.0% of our total net sales and contract revenues in fiscal 1998 compared to6.0% in fiscal 1999. During fiscal 1999, Broadcast sales were relatively flatcompared to fiscal 1998. Net sales increased 10.9% to $79.6 million in fiscal 1998 compared to $71.7million in fiscal 1997 primarily as a result of an 18% increase in sales byGyyr and a 79% increase in sales of our timing and synchronization productssold by the Communications division to LGIC of Korea, a majortelecommunications customer. While sales in fiscal 1998 to this customerincreased as compared to fiscal 1997, we experienced a significant decline infourth quarter sales to this customer largely due to the economic crisis inAsia. During fiscal 1998, Gyyr increased sales of electronic securityequipment and service revenue. We completed the acquisition of IntelligentControls in fiscal 1998, which also contributed to the increased sales. Thesales increases in Gyyr and in the Communications division were offset bydeclines in sales in our Broadcast division, which was largely due to delaysin delivery of our Roswell facility management system. Contract Revenues. Contract revenues increased 29.6% to $13.3 million infiscal 1999 compared to $10.3 million in fiscal 1998, and increased 13.9% infiscal 1998 from $9.0 million in fiscal 1997. In October 1998, we acquiredMeyer, Mohaddes Associates, Inc. in exchange for an aggregate of 432,100shares of the common stock of Odetics ITS and an aggregate of 80,985 shares ofClass A common stock of Odetics. Approximately one-half of the increase incontract revenues in fiscal 1999 resulted from the acquisition of MeyerMohaddes. The balance of the increase in contract revenues in fiscal 1999represents increased contract volume in our intelligent transportation systemsbusiness. In the first quarter of fiscal 1998, we acquired certain assets ofthe Transportation Systems business of Rockwell International, which wereconsolidated into our Odetics ITS business. The increase in contract revenuesin fiscal 1998 reflects the revenue contribution from Odetics ITS. Theincreases in Odetics ITS' contract revenues in both fiscal 1999 and fiscal1998 were offset by continued declines in contract revenues derived from thesale of space recorders and related service and equipment to agencies of theUnited States Government. We have focused our recent contract procurementefforts on commercial markets and the markets for ITS products and services. Gross Profit. Total gross profit as a percent of net sales and contractrevenues decreased to 29.5% in fiscal 1999, compared to 31.4% in fiscal 1998,and 33.9% in fiscal 1997. The decrease in our fiscal 1999 compared to fiscal1998 reflects decreased gross profit performance in our Broadcast division andin our Communications division. The decrease in gross profit in our Broadcastdivision resulted from an unfavorable sales mix of low margin product sales inthe fourth quarter of fiscal 1999, in addition to an increase in charges forwarranty liabilities that are included in cost of sales. Gross profit in theCommunications division decreased from 46.5% of sales in fiscal 1998 to 36.7%of sales in fiscal 1999, as a result of the decline in sales to LGIC of Korea. The decrease in fiscal 1998 compared to fiscal 1997 reflects decreased grossprofit performance in our Broadcast division on an unfavorable sales mix andhigher unabsorbed manufacturing overhead, which was partially offset byimproved gross profit performance in Gyyr and the Communications division dueto changes in product mix toward products with higher margins, improvedefficiencies associated with increased sales volume, and improved margincontribution from the acquisition of Intelligent Controls in October 1997. Thedecrease in fiscal 1998 also reflects a lower gross profit contribution oncontract revenues from Odetics ITS compared to other contract revenues duringfiscal 1997. Selling, General and Administrative Expense. Selling, general andadministrative expense increased 21.8% to $31.7 million (or 38.0% of total netsales and contract revenues) in fiscal 1999 compared to $26.0 million (or29.0% of total net sales and contract revenues) in fiscal 1998, and increased31.2% in fiscal 1998 compared to $19.8 million (or 24.5% of total net sales and contract revenues) in fiscal 1997. During fiscal 1999, we increased salesand marketing expenditures $3.9 million or 20.7% over fiscal 1998 levels.Sales and marketing expense increased in our Odetics ITS, Gyyr, Broadcast andMariner Networks businesses in fiscal 1999. Approximately $514,000 of theincrease in fiscal 1999 was attributable to Meyer Mohaddes, which was acquiredby Odetics ITS in October 1998. The other increases in spending were incurredto support planned growth in sales and market 20 share and were incurred principally in the areas of labor and benefits, salescommissions, advertising and promotions, and charges related to supportincreased presence in international markets, particularly Europe. Theseincreases were partially offset by decreased spending in our Communicationsdivision, which enforced general spending cutbacks in response to the sharpreduction in sales in fiscal 1999 accompanying the Asian economic crisis.General and administrative expense increased $1.2 million in fiscal 1999compared to fiscal 1998 primarily as a result of the write off of deferredcosts associated with our delay in the initial public offering of Odetics ITS,an increase in goodwill amortization as a result of the acquisitions of MeyerMohaddes Associates and International Media Integration Services, and theadministrative infrastructure that accompanied the acquisition of MeyerMohaddes Associates. In fiscal 1998, we experienced increased costs across all of our businessunits for sales, marketing and administrative activities as a function or ourplanned growth compared to fiscal 1997. These expenses included labor costs,sales commissions on increased sales volume, advertising and promotion tosupport new product roll-out, and costs related to international expansion,particularly in Europe and Asia. In addition, selling, general andadministrative expense increased in absolute dollars in fiscal 1998 related tothe acquisition of Intelligent Controls and the acquisition of certain assetsof the Transportation Systems business of Rockwell International. Research and Development Expense. Research and development expense increased20.7% to $11.2 million (or 13.4% of total net sales and contract revenues) infiscal 1999 compared to $9.3 million (or 10.3% of total net sales and contractrevenues) in fiscal 1998, and increased 19.9% in fiscal 1998 compared to $7.7million (or 9.6% of total net sales and contract revenues) in fiscal 1997. Forcompetitive reasons, we closely guard the confidentiality of specificdevelopment projects. The increase in research and development expense infiscal 1999 compared to fiscal 1998 principally reflects increased productdevelopment activity in Gyyr, Mariner Networks and our Communicationsdivision. Most of these increases represent engineering labor and relatedbenefits, prototype material and consulting fees. Gyyr completed an aggressiveproduct development schedule during fiscal 1999 intended to broaden itsproduct family beyond time-lapse video recorders. During fiscal 1999, Gyyrintroduced its Vortex family of domes for facility monitoring, expanded itsvideo multiplexer product line, and launched a new Internet based securityproduct called Tango. Mariner Networks added substantial investment in thedevelopment of Dexter, a broadband communications interface product expectedto be in beta test in the first quarter of fiscal 2000. Mariner Networks alsoinvested development resources in FRAIM, an extension to its family ofproducts offering Frame Relay to ATM communications. The Communicationsdivision also experienced increased development costs related to its highperformance G.P.S. based synchronization product. Nonrecurring Charge. In March 1998, we recorded a nonrecurring charge of$1.7 million. This charge reflects severance costs related to retirement ofcertain of our founders and officers, and to a lesser extent, costs incurredto terminate a joint venture relationship in China. Interest Expense, Net. Interest expense, net reflects the net of interestexpense and interest income as follows: Year Ended March 31, -------------------- 1997 1998 1999 ------ ------ ------ Interest Expense........................................... $1,890 $1,609 $1,928 Interest Income............................................ 1,707 992 121 ------ ------ ------Interest Expense, Net...................................... $ 183 $ 617 $1,807 ------ ------ ------ 21 Interest expense increased 19.8% in fiscal 1999 compared to fiscal 1998, anddecreased 14.9% in fiscal 1998 compared to fiscal 1997. The increase in fiscal1999 represents increased average outstanding borrowings on our line of creditto fund negative operating cash flow. Interest income was derived primarilyfrom a note receivable due from ATL, our former subsidiary. The reduction ininterest income in each of the last three fiscal years reflects principalreduction on this note, which pursuant to its terms was payable in sixteenquarterly installments by ATL. ATL repaid in full the outstanding balance ofits note receivable in July 1998. In-Process Research and Development. In the fourth quarter of fiscal 1998,we completed the purchase price allocation related to our acquisition ofIntelligent Controls and determined that $2.1 million of the purchase pricewas attributable to the value of research and development activities inprocess at the date of acquisition. In accordance with the provisions of FASBStatement No. 2, "Accounting for Research and Development Costs," we recordeda charge in fiscal 1998 for this in-process research and development. Income Taxes. We have not provided income tax benefit for the lossesincurred in fiscal 1999 due to the uncertainty as to the ultimate realizationof the benefit. We provided for a tax benefit from continuing operations at aneffective rate of (24.8)% in fiscal 1998 and (47.4%) in fiscal 1997. The taxbenefit recorded in 1998 was less than the statutory rate because no benefitwas recorded in connection with $2.1 million write-off of purchased researchand development expenses associated with the acquisition of IntelligentControls, a reduction in the benefit of general business credits on totalexpense, and foreign losses recorded in Singapore for which no tax benefit wasrecognized. In 1997, we entered into a Tax Allocation Agreement with ATL effective April1, 1996 pursuant to which ATL made payments to us, or we made payments to ATL,as appropriate, in an amount equal to the taxes attributable to the operationsof Odetics on its consolidated federal, and consolidated or combined stateincome tax returns. In addition, the Tax Allocation Agreement provided thatmembers of our consolidated group generating tax losses after April 1, 1996will be paid by other members of the group that utilize such tax losses toreduce such other members' tax liability. Accordingly, the tax provisions forATL was recorded as a component of the income (loss) from discontinuedoperations at a 40% effective tax rate for each fiscal year. The TaxAllocation Agreement was effectively canceled upon completion of the spin-outof ATL on October 31, 1997. Income (Loss) from Continuing Operations. In connection with the spin-off ofour 82.9% ownership interest in ATL on October 31, 1997, we restated ourfinancial statements to present the results of operations of ATL asdiscontinued operations for all periods presented. Income (loss) fromcontinuing operations reflects our continuing operations, including Gyyr andthe Broadcast division; the Communications division and Mariner Networks; andOdetics ITS. Liquidity and Capital Resources Our incubator strategy is characterized by high levels of investment ofoperating cash flow to support the development of our businesses as potentialspin-off opportunities. During fiscal 1999, we financed our cash requirementsprimarily through equity offerings, repayment of amounts due from ATL,equipment financings and decreases in net working capital items excludingcash. We incurred negative cash flow from operating activities of $12.1million in fiscal 1999, principally as a result of financing net operatinglosses of $20.1 million incurred during the year. The impact of the netoperating loses on operating cash flow during the year was partially mitigatedby inventory reductions of $4.8 million and noncash expenses for depreciationand amortization of $5.2 million. A portion of the negative cash flow fromoperating activities was also financed by the receipt of $10.0 million on anote receivable due us from ATL, our former subsidiary, which note was paid infull in July 1998. In May 1999, we entered into an agreement with CIBC World Markets to provide for general investment banking advisory services. We currently have a $17.0 line of credit with Transamerica Business Creditproviding for borrowings at their prime rate plus 2.0% (9.75% at March 31,1999). This relationship succeeded our previous relationship with ImperialBank. Our borrowings under our line of credit with Transamerica BusinessCredit are secured by substantially all of our assets. 22 On December 18, 1998, we completed a private placement of 1,191,323 of ourClass A common stock to raise $7.3 million in net proceeds. On March 12, 1997,following stockholder approval, we sold an additional 308,528 shares of ourClass A common stock in a private placement for approximately $2.0 million innet proceeds. We used the net proceeds from these offerings for generalworking capital purposes. We anticipate that the cash flow available from our line of credit, andproceeds from the equity offerings of our common stock, in addition to thecommon stock of any companies that are ultimately spun-off from Odetics, willbe sufficient for us to execute our current operating plans and meet ourobligations on a timely basis for at least the next twelve months. Year 2000 Compliance We are currently addressing problems associated with our computer systems asthe year 2000 approaches. Many existing computer systems and applications, andother control devices use only two digits to identify a year in the datefield, without considering the impact of the upcoming change in the century.Others do not correctly process "leap year" dates. As a result, such systemsand applications could fail or create erroneous results unless corrected sothat they can correctly process data related to the year 2000 and beyond.These problems are expected to increase in frequency and severity as the year2000 approaches, and are commonly referred to as the year 2000 problem. We have evaluated each of our products and believe that each issubstantially year 2000 compliant. We have adopted the British StandardsInstitute standard for its statements of compliance regarding the year 2000.We believe that it is not possible to determine whether all of our customers'products into which our products are incorporated will be year 2000 compliantbecause we have little or no control over the design, production and testingof our customers' products. The year 2000 problem could affect the systems, transaction processingcomputer applications and devices that we use to operate and monitor all majoraspects of our business, including financial systems (such as general ledger,accounts payable, and payroll), customer services, infrastructure, masterproduction scheduling, materials requirement planning, networks andtelecommunications systems. We believe that we have identified substantiallyall of the major systems, software applications and related equipment used inconnection with our internal operations that must be modified or upgraded inorder to minimize the possibility of a material disruption to our business. Weare currently in the process of modifying and upgrading all affected systemsand expect to complete this process during the calendar year 1999. Becausemost of our software applications are recent versions of vendor supported,commercially available products, we have not incurred, and do not expect inthe future to incur, significant costs to upgrade these applications as year2000 compliant versions are released by the respective vendors. Systems suchas telephone, networking, test equipment, and security systems at ourfacilities may also be affected by the year 2000 problem. We are currentlyassessing the potential effect of and costs of remediating the year 2000problem on our facility systems. We estimate that our total cost of completingany required modifications, upgrades or replacements of these systems will nothave a material adverse effect on our business, financial condition or resultof operations. We presently estimate that the total cost of addressing our year 2000 issueswill be approximately $500,000. We based this estimate using numerousassumptions, including the assumption that we have already identified our mostsignificant year 2000 issues and that the plans of our third party supplierswill be fulfilled in a timely manner without cost to us. We cannot be surethat these assumptions are accurate, and actual results could differmaterially from those we anticipate. We are currently developing contingency plans to address the year 2000issues that may pose a significant risk to our on-going operations. Theseplans could include accelerated replacement of affected equipment or software,temporary use of back-up equipment or software or the implementation of manualprocedures to compensate for system deficiencies. We cannot be certain thatany contingency plans implemented by us would be adequate to meet our needswithout materially impacting our operations, that any such plan would be 23 successful or that our results of operations would not be materially andadversely affected by the delays and inefficiencies inherent in conductingoperations in an alternative manner. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. We are exposed to changes in interest rates primarily from our long-termdebt arrangements. Under our current policies, we do not use interest ratederivative instruments to manage our exposure to interest rate changes. The following table provides information about our debt obligations that aresensative to changes in interest rates. March 31, Expected maturity date --------------------------------------------------------------------- Fair 2000 2001 2002 2003 2004 Thereafter Total value ------ ------- ------ ------ ------ ---------- ------- -------- (dollars in thousands) Long-term Debt: Fixed Rate............ $2,074 $ 2,066 $2,221 $1,813 $1,666 $1,199 $11,039 $ 11,039 Average interest rate................. 8.95% 9.02% 9.14% 9.29% 9.36% 9.36% 9.09% Variable Rate......... -- $10,997 -- -- -- -- $10,997 $ 10,997 Average interest rate................. 9.75% 9.75% 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 heading "Electionof Directors," appearing in our proxy statement, is incorporated herein byreference. (b) Identification of Executive Officers. The information under the heading"Executive Compensation and Other Information," appearing in our proxystatement, is incorporated herein by reference. (c) Compliance with Section 16(a) of the Exchange Act. The information underthe heading "Executive Compensation and Other Information," appearing in ourproxy statement, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under the heading "Executive Compensation," appearing in ourproxy statement, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the heading "Principal Stockholders and Common StockOwnership of Certain Beneficial Owners and Management," appearing in our proxystatement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the heading "Certain Transactions," appearing in ourproxy statement, is incorporated herein by reference. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: 1. Financial Statements. The following financial statements of Odetics areincluded in a separate section of this Annual Report on Form 10-K commencingon the pages referenced below: Page ---- Index to Consolidated Financial Statements............................... F-1Report of Independent Auditors........................................... F-2Consolidated Balance Sheets as of March 31, 1999 and 1998................ F-3Consolidated Statements of Operations for the Years ended March 31, 1999, 1998 and 1997........................................................... F-5Consolidated Statements of Stockholders' Equity for the Years ended March 31, 1999, 1998 and 1997................................................. F-6Consolidated Statements of Cash Flows for the Years ended March 31, 1999, 1998 and 1997........................................................... F-7Notes to Consolidated Financial Statements............................... F-8 2. Financial Statement Schedules. Schedule II -- Valuation and Qualifying Accounts......................... S-1 All other schedules have been omitted because they are not required or therequired information is included in Odetics' Consolidated Financial Statementsand Notes thereto. 3. Exhibits. 3.1 Certificate of Incorporation of Odetics, as amended (incorporated by reference to Exhibit 19.2 to Odetics' Quarterly Report on Form 10-Q for the quarter ended September 30, 1987). 3.2 Bylaws of Odetics, as amended (incorporated by reference to Exhibit 4.2 to Odetics' Registration Statement on Form S-1 (Reg. No. 033- 67932) as filed with the SEC on July 6, 1993). 4.1 Specimen of Class A Common Stock and Class B Common Stock certificates (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on September 30, 1993). 4.2 Form of rights certificate for Odetics' preferred stock purchase rights (incorporated by reference to Exhibit A of Exhibit 4 to Odetics' Current Report on Form 8-K as filed with the SEC on May 1, 1998). 10.1 Profit Sharing Plan and Trust (incorporated by reference to Exhibit 10.3 to Odetics' Amendment No. 2 to the Registration Statement on Form S-8 (Reg. No. 002-98656) as filed with the SEC on May 5, 1988). 10.2 Form of Executive Deferral Plan between Odetics and certain employees of Odetics (incorporated by reference to Exhibit 10.4 to Odetics' Annual Report on Form 10-K for the year ended March 31, 1988). 10.3 Loan and Security Agreement dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics, and Schedule to Loan Agreement. 10.4 Amendment to Loan Agreement dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics, and related Schedule to Loan Agreement dated December 28, 1998. 25 10.5 Revolving Credit Note dated December 28, 1998 payable to Transamerica Business Credit Corporation in the original principal amount of $17,000,000. 10.6 Letter of Credit Agreement dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics. 10.7 Security Agreement in Copyrighted Works dated December 28, 1998 between Transamerica Business Credit Corporation and Odetics. 10.8 Patent and Trademark Security Agreement dated December 28, 1998 between Transamerica Business Credit Corporation and Odetics. 10.9 Cross-Corporate Continuing Guaranty dated December 28, 1998 among Transamerica Business Credit Corporation, Odetics and the subsidiaries of Odetics. 10.10 Form of Indemnity Agreement entered into by Odetics and certain of its officers and directors (incorporated by reference to Exhibit 19.4 to Odetics' Quarterly Report on Form 10-Q for the quarter ended September 30, 1988). 10.11 Schedule of officers and directors covered by Indemnity Agreement (incorporated by reference to Exhibit 10.9.2 to Amendment No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on July 6, 1993). 10.12 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust (incorporated by reference to Exhibits 4.3.1 and 4.3.2, respectively, to Amendment No. 3 to Odetics' Registration Statement on Form S-3 (Reg.No. 002-86220) as filed with the SEC on June 13, 1990). 10.13 Separation and Distribution Agreement dated March 1, 1997 between Odetics and ATL (incorporated by reference to Exhibit 10.13 to Odetics' Annual Report on Form 10-K for the year ended March 31, 1997). 10.14 Tax Allocation Agreement dated March 1, 1997 between Odetics and ATL (incorporated by reference to Exhibit 10.14 to Odetics' Annual Report on Form 10-K for the year ended March 31, 1997). 10.15 Services Agreement dated March 21, 1997 between Odetics and ATL (incorporated by reference to Exhibit 10.15 to Odetics' Annual Report on Form 10-K for the year ended March 31, 1997). 10.16 Promissory Note dated April 1, 1997 between Odetics and ATL (incorporated by reference to Exhibit 10.16 to Odetics' Annual Report on Form 10-K for the year ended March 31, 1997). 10.17 1997 Stock Incentive Plan of Odetics (incorporated by reference to Exhibit 99.1 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.18 Form of Notice of Grant of Stock Option (incorporated by reference to Exhibit 99.2 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.19 Form of Stock Option Agreement (incorporated by reference to Exhibit 99.3 to Odetics' Registration Statement on Form S-8 (File No. 333- 44907) as filed with the SEC on January 26, 1998). 10.20 Form of Addendum to Stock Option Agreement--Involuntary Termination Following Corporate Transaction/Change in Control (incorporated by reference to Exhibit 99.4 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.21 Form of Addendum to Stock Option Agreement--Limited Stock Appreciation Rights (incorporated by reference to Exhibit 99.5 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 26 10.23 Form of Stock Issuance Agreement (incorporated by reference to Exhibit 99.6 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.24 Form of Addendum to Stock Issuance Agreement--Involuntary Termination Following Corporate Transaction/Change in Control (incorporated by reference to Exhibit 99.7 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.25 Form of Notice of Grant of Automatic Stock Option--Initial Grant filed as Exhibit 99.8 filed as Exhibit (incorporated by reference to Exhibit 99.8 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.26 Form of Notice of Grant of Automatic Stock Option--Annual Grant (incorporated by reference to Exhibit 99.9 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.27 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the (incorporated by reference to Exhibit 99.10 to Odetics' Registration Statement on Form S-8 (File No. 333-44907) as filed with the SEC on January 26, 1998). 10.28 Rights Agreement dated April 24, 1998 between Odetics and BankBoston, N.A., which includes the form of Certificate of Designation for the junior participating preferred stock as Exhibit A, the form of rights certificate as Exhibit B and the summary of rights to purchase Series A preferred shares as Exhibit C (incorporated by reference to Exhibit 4 to Odetics' Current Report on Form 8-K as filed with the SEC on May 1, 1998). 10.29 Promissory Note in the original principal amount of $15,000,000 payable to The Northwestern Mutual Life Insurance Company dated October 31, 1989 and related Deed of Trust, Security Agreement and Financing Statement between Odetics, Inc. and Northwestern Mutual dated October 31, 1989 (incorporated by reference to Exhibit 10.12 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC July 6, 1993). 21 Subsidiaries of Odetics. 23.1 Consent of Independent Auditors. 27 Financial Data Schedule. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, in the City ofAnaheim, State of California, on June 28, 1999. Odetics, Inc. /s/ Joel Slutzky By: _________________________________ Joel Slutzky Chief Executive Officer, President and Chairman of the Board POWER OF ATTORNEY We, the undersigned officers and directors of Odetics, Inc., do herebyconstitute and appoint Joel Slutzky and Gregory A. Miner, and each of them,our true and lawful attorneys-in-fact and agents, each with full power 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 lawfullydo or 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, June 28, 1999______________________________________ President and Chairman of Joel Slutzky the Board (principal executive officer) /s/ Crandall Gudmundson Director June 28, 1999______________________________________ Crandall Gudmundson /s/ Jerry Muench Director June 28, 1999______________________________________ Jerry Muench /s/ Kevin C. Daly Director June 28, 1999______________________________________ Kevin C. Daly /s/ Gary Smith Vice President and June 28, 1999______________________________________ Controller (principal Gary Smith accounting officer) /s/ Ralph R. Mickelson Director June 28, 1999______________________________________ Ralph R. Mickelson 28 Signature Title Date /s/ Leo Wexler Director June 28, 1999______________________________________ Leo Wexler /s/ John Seazholtz Director June 28, 1999______________________________________ John Seazholtz /s/ Paul E. Wright Director June 28, 1999______________________________________ Paul E. Wright /s/ Gregory A. Miner Vice President, Director, June 28, 1999______________________________________ Chief Operating Officer Gregory A. Miner and Chief Financial Officer (principal financial officer) 29 ODETICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets as of March 31, 1998 and 1999................ F-3 Consolidated Statements of Operations for the Years ended March 31, 1997, 1998 and 1999........................................................... F-4 Consolidated Statements of Stockholders' Equity for the Years ended March 31, 1997, 1998 and 1999................................................. F-5 Consolidated Statements of Cash Flows for the Years ended March 31, 1997, 1998 and 1999........................................................... F-6 Notes to Consolidated Financial Statements............................... F-7 F-1 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of DirectorsOdetics, Inc. We have audited the accompanying consolidated balance sheets of Odetics,Inc. as of March 31, 1998 and 1999, and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of the three yearsin the period ended March 31, 1999. Our audits also included the financialstatement schedule listed in Item 14(a). These financial statements andschedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial positionof Odetics, Inc. at March 31, 1998 and 1999, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended March 31, 1999, in conformity with generally accepted accountingprinciples. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as awhole, presents fairly in all material respects the information set forththerein. /s/Ernst & Young LLP Orange County, CaliforniaMay 11, 1999, except for Note 1,as to which the date isJune 24, 1999 F-2 ODETICS, INC. CONSOLIDATED BALANCE SHEETS March 31 ---------------- 1998 1999 ------- ------- (In thousands) ASSETSCurrent assets: Cash and cash equivalents................................... $ 1,131 $ 787 Trade accounts receivable, net of allowance for doubtful accounts of $432,000 in 1998 and $839,000 in 1999.......... 15,048 18,889 Receivables from ATL (Note 4)............................... 4,802 -- Costs and estimated earnings in excess of billings on uncompleted contracts (Note 5)............................. 2,583 2,423 Inventories: Finished goods.............................................. 569 1,101 Work in process............................................. 2,176 749 Materials and supplies...................................... 18,065 14,135 Prepaid expenses and other.................................. 4,189 2,202 ------- -------Total current assets......................................... 48,563 40,286Property, plant and equipment: Land........................................................ 2,090 2,060 Buildings and improvements.................................. 18,481 18,674 Equipment................................................... 28,006 28,618 Furniture and fixtures...................................... 1,312 2,685 Allowances for depreciation................................. (26,550) (29,561) ------- ------- 23,339 22,476Long-term ATL note receivable less current portion (Note 4).. 6,770 --Capitalized software costs, net (Note 1)..................... 3,785 7,667Goodwill, net of accumulated amortization of $571,000 in 1998 and $1,046,000 in 1999...................................... 5,850 9,563Other assets................................................. 483 1,363 ------- -------Total assets................................................. $88,790 $81,355 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Trade accounts payable...................................... $13,672 $10,454 Accrued payroll and related................................. 5,093 5,441 Accrued expenses............................................ 2,083 1,933 Contract reserve............................................ 4,541 3,892 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 5)............................. 1,580 1,276 Current portion of long-term debt (Note 6).................. 1,598 2,074 ------- -------Total current liabilities.................................... 28,567 25,070Revolving line of credit (Notes 1 and 6)..................... 12,800 10,997Long-term debt, less current portion (Note 6)................ 8,200 8,965 Deferred income taxes (Note 8)............................... 643 --Commitments and contingencies (Notes 6 and 11)Stockholders' equity (Notes 9 and 10): Preferred stock: Authorized shares--2,000,000 Issued and outstanding--none................................ -- -- Common stock, $.10 par value: Authorized shares--10,000,000 of Class A and 2,600,000 of Class B Issued and outstanding shares--6,202,778 of Class A and 1,062,041 of Class B at March 31, 1998; 7,941,271 of Class A and 1,060,041 of Class B at March 31, 1999............... 726 901 Paid-in capital............................................. 45,240 59,579 Treasury stock, 50,000 and 50,093 shares in 1998 and 1999, respectively............................................... (239) (240) Notes receivable from employees (Note 10)................... (3,377) (96) Accumulated other comprehensive income...................... 25 92 Retained earnings........................................... (3,795) (23,913) ------- -------Total stockholders' equity................................... 38,580 36,323 ------- -------Total liabilities and stockholders' equity................... $88,790 $81,355 ======= ======= See accompanying notes. F-3 ODETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended March 31 --------------------------------------- 1997 1998 1999 ------------ ------------ ------------ (In thousands, except per share data) Net sales and contract revenues: Net sales.......................... $ 71,748 $ 79,552 $ 70,042 Contract revenues.................. 9,032 10,284 13,331 ----------- ------------ ------------ 80,780 89,836 83,373Costs and expenses: Cost of sales...................... 48,507 55,227 49,816 Cost of contract revenues.......... 4,907 6,430 9,007 Selling, general and administrative expense........................... 19,831 26,010 31,670 Research and development expense... 7,734 9,271 11,191 In process research and development....................... -- 2,106 -- Restructuring charge (Note 7)...... -- 1,716 -- Interest expense, net.............. 183 617 1,807 ----------- ------------ ------------ 81,162 101,377 103,491 ----------- ------------ ------------Loss from continuing operations before income taxes................. (382) (11,541) (20,118)Income tax benefit (Note 8).......... (181) (2,858) -- ----------- ------------ ------------Loss from continuing operations...... (201) (8,683) (20,118)Income from discontinued operations, net of income taxes................. 3,931 2,089 -- ----------- ------------ ------------Net income (loss).................... $ 3,730 $ (6,594) $ (20,118) =========== ============ ============Basic and diluted earnings (loss) per share: Continuing operations.............. $ (.03) $ (1.26) $ (2.57) Discontinued operations............ .62 .31 -- ----------- ------------ ------------ Earnings (loss) per share.......... $ .59 $ (.95) $ (2.57) =========== ============ ============ See accompanying notes. F-4 ODETICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common stock ----------------------------- Shares outstanding -------------------- Notes Accumulative Class A Class B receivable other Compre- common common Paid-in Treasury from Comprehensive Retained hensive stock stock Amount capital stock employees income earnings Total income --------- --------- ------ ------- -------- ---------- ------------- -------- -------- -------- (In thousands) Balance at March 31, 1996............... 4,935 1,161 $610 $21,904 $ -- $ -- $(10) $ 8,481 $ 30,985 Issuances of common stock (Notes 9 and 10)............... 284 -- 28 2,568 -- -- -- -- 2,596 Conversion of Class B common stock.... 97 (97) -- -- -- -- -- -- -- Issuance of ATL Products, Inc. common stock (Note 3)................ -- -- -- 14,455 -- -- -- -- 14,455 Purchase of treasury stock.... -- -- -- -- -- -- -- -- -- Foreign currency translation adjustments....... -- -- -- -- -- -- 62 -- 62 $ 62 Net income......... -- -- -- -- -- -- -- 3,730 3,730 3,730 --------- --------- ---- ------- ----- ------- ---- -------- -------- --------Balance at March 31, 1997............... 5,316 1,064 638 38,927 -- -- 52 12,211 51,828 $ 3,792 ======== Issuances of common stock (Notes 9 and 10)............... 885 -- 88 7,968 -- (3,377) -- -- 4,679 Conversion of Class B common stock.... 2 (2) -- -- -- -- -- -- -- Spin-off of ATL Products, Inc. common stock (Note 3)................ -- -- -- (1,655) -- -- -- (9,412) (11,067) Purchase of treasury stock.... -- -- -- -- (239) -- -- -- (239) Foreign currency translation adjustments....... -- -- -- -- -- -- (27) -- (27) $ (27) Net loss........... -- -- -- -- -- -- -- (6,594) (6,594) (6,594) --------- --------- ---- ------- ----- ------- ---- -------- -------- --------Balance at March 31, 1998............... 6,203 1,062 726 45,240 (239) (3,377) 25 (3,795) 38,580 $ (6,621) ======== Issuances of common stock (Notes 2, 9 and 10), net of offering costs of $774,000.......... 1,736 -- 175 14,339 -- -- -- -- 14,514 Conversion of Class B common stock.... 2 (2) -- -- -- -- -- -- -- Purchase of treasury stock.... -- -- -- -- (1) -- -- -- (1) Payments on notes receivable........ -- -- -- -- -- 3,281 -- -- 3,281 Foreign currency translation adjustments....... -- -- -- -- -- -- 67 -- 67 $ 67 Net loss........... -- -- -- -- -- -- -- (20,118) (20,118) (20,118) --------- --------- ---- ------- ----- ------- ---- -------- -------- --------Balance at March 31, 1999............... 7,941 1,060 $901 $59,579 $(240) $ (96) $ 92 $(23,913) $ 36,323 $(20,051) ========= ========= ==== ======= ===== ======= ==== ======== ======== ======== See accompanying notes. F-5 ODETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended March 31 1997 1998 1999 -------- -------- -------- (In thousands) Operating activitiesNet income (loss)............................... $ 3,730 $ (6,594) $(20,118)Adjustments to reconcile net income (loss) to net cash used in operating activities: Income from discontinued operations........... (3,931) (2,089) -- Depreciation and amortization................. 3,119 2,912 5,205 Write-off of in process research and development.................................. -- 2,106 -- Contribution to ASOP.......................... 517 511 -- Provision for losses on accounts receivable... 277 155 332 Provision (benefit) for deferred income taxes........................................ 266 (902) 915 Net proceeds from settlement of litigation.... 5,860 -- -- Other......................................... 492 (11) -- Changes in net assets of discontinued operations................................... 1,238 -- -- Changes in operating assets and liabilities (Note 13).................................... (6,773) (1,462) 1,560 -------- -------- --------Net cash used in operating activities........... 4,795 (5,374) (12,106)Investing activitiesPurchases of property, plant and equipment...... (3,295) (3,829) (2,747)Software development costs...................... (691) (2,527) (4,944)Purchase of net assets of acquired business..... -- (2,171) --Net cash received from ATL...................... 8,066 2,978 10,019 -------- -------- --------Net cash provided by (used in) investing activities..................................... 4,080 (5,549) 2,328Financing activitiesProceeds from line of credit and long-term borrowings..................................... 54,840 49,176 44,527Principal payments on line of credit, long-term debt, and capital lease obligations............ (65,069) (40,159) (45,089)Proceeds from issuance of common stock.......... 2,078 1,172 9,996 -------- -------- --------Net cash provided by (used in) financing activities..................................... (8,151) 10,189 9,434 -------- -------- --------Increase (decrease) in cash..................... 724 (734) (344)Cash and cash equivalents at beginning of year.. 1,141 1,865 1,131 -------- -------- --------Cash and cash equivalents at end of year........ $ 1,865 $ 1,131 $ 787 ======== ======== ======== See accompanying notes. F-6 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of Odetics, Inc. (the Company) includethe accounts of the Company and its subsidiaries Odetics Europe Limited, Odetics Asia Pacific Pte. Ltd. During fiscal 1990, the Company incorporatedOdetics Europe Limited to develop European commercial sales. During fiscal1995, the Company incorporated Odetics Asia Pacific Pte. Ltd. to developcommercial sales for the Asian market. All significant intercompany accountsand transactions are eliminated in consolidation. On October 31, 1997, the Company completed the spin-off of its 82.9%interest in ATL Products, Inc. (ATL) by distributing the Company's 8,005,000shares of Class A Common Stock to the Company's stockholders of record onOctober 31, 1997. As a result of the spin-off, the Company's financialstatements have been restated to reflect the operations of ATL as discontinuedoperations. Operations Odetics has initiated a business strategy known as its incubator strategywhereby its goal is to nurture and develop companies that can be spun-off toOdetics stockholders. In pursuing this strategy Odetics has incurred lossesfrom continuing operations of $8.7 million and $20.1 million in fiscal 1998and 1999, respectively, due in part to making investments in its business forresearch and development as well as developing a separate infrastructure forcertain business units sufficient for these business units to functionultimately as independent public companies. In addition, during fiscal 1998and 1999, the Company has invested $7.5 million in capitalized softwaredevelopment costs. The Company has obtained funds to pursue this strategy in fiscal 1998 and1999 from repayments of amounts due from ATL (see Note 4), revolving line ofcredit borrowings, equity offerings, equipment financing, and decreases in networking capital items, excluding cash. In fiscal 2000, it will be necessaryeither to obtain sufficient additional funding to continue this strategy orthe Company will be required to curtail the incubator strategy in order toreduce operating losses. Management believes cash flow available from therevolving line of credit, possible proceeds from additional equity offeringsof common stock, and from repayments of amounts due Odetics by any companiesthat are spun-out of Odetics should be sufficient to allow the Company toexecute its current operating plans and meet its obligations on a timely basisfor at least the next twelve months. Additionally, management believes it ispossible to obtain additional funds, if required, through the sale or placingof additional financing on its facilities in Anaheim, California. In June 1999, the Company learned it had exceeded the borrowing availabilityunder its revolving line of credit (see Note 6) due to having insufficienteligible collateral as of May 31, 1999. The Company is in discussions with thelender to amend the definition of eligible collateral in the revolving creditagreement and permit continued borrowings. Management believes the Companywill obtain a waiver with respect to its current noncompliance with thecollateral requirements of the revolving credit agreement and that theagreement will be amended to provide for a greater proportion of the Company'sassets being considered eligible collateral. 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, F-7 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) inventory reserves, certain accrued liabilities and costs to complete long-term contracts and estimates of future cash flows used to determine whetherasset impairments exist. Revenue Recognition Contract revenues and earnings on long-term cost-reimbursement and fixed-price contracts of the Company's subsidiary, Odetics ITS, Inc., and the Communications division are recognized on the percentage-of-completion methodof accounting as costs are incurred (cost-to-cost basis). Contract revenuesinclude costs incurred plus a portion of estimated fees or profits based onthe relationship of costs incurred to total estimated costs. Any anticipatedlosses on contracts are charged to earnings when identified. Certain contractscontain incentive and/or penalty provisions that provide for increased ordecreased revenues based upon performance in relation to established targets.Incentive fees are recorded when earned and penalty provisions are recordedwhen incurred, as long as the amounts can reasonably be determined. Certain products sold by the Company include software which is integral tothe functionality of the product. When such products do not requiresignificant production, modification or customization of the software, revenueis recognized upon delivery, assuming the fee is fixed and collectibility isprobable. If an arrangement requires significant production, modification orcustomization of the software, the arrangement is accounted for on thepercentage of completion method of accounting as costs are incurred. Revenues from follow-on service and support for which the Company typicallycharges separately are recognized when earned. Revenues from computer softwaremaintenance agreements are recognized ratably over the term of the agreements.When computer software maintenance is included in a software licenseagreement, an appropriate portion of the license fee is deferred andrecognized over the maintenance period. For all other products, 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. Concentration of Credit Risk The Company performs periodic credit evaluations of its customers' financialcondition and generally does not require collateral. Credit losses have beenwithin management's expectations and within amounts provided through theallowances for doubtful accounts. At March 31, 1998 and 1999, accountsreceivable from governmental agencies and prime government contractors wereapproximately $2,801,000 and $3,616,000, respectively. Fair Values of Financial Instruments Fair values of cash and cash equivalents, and the current portion of long-term debt approximate the carrying value because of the short period of timeto maturity. The fair value of long-term debt and the note receivable from ATLapproximates carrying value because the related rates of interest approximatecurrent market rates and have variable rates of interest. F-8 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determined onthe first-in, first-out method. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Buildings aredepreciated using the straight-line method over their estimated useful livesup to a period of forty years. Equipment, furniture and fixtures, includingassets recorded under capital lease obligations, are depreciated principallyby the declining balance method over their estimated useful lives ranging fromfour to eight years. Long-Lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. The recoverability test is performed at the lowest level based onundiscounted net cash flows. Based on its analysis, the Company believes thatno impairment of the carrying value of its long-lived assets, inclusive ofgoodwill, existed at March 31, 1999. The Company's analysis was based on anestimate of future undiscounted cash flows using forecasts contained in theCompany strategic plan. It is at least reasonably possible that the Company'sestimate of future undiscounted cash flows may change during fiscal 2000. Ifthe Company's estimate of future undiscounted cash flow should change or ifthe strategic plan is not achieved, future analyses may indicate insufficientfuture undiscounted cash flows to recover the carrying value of the Company'slong-lived assets, in which case such assets would be written down toestimated fair value. Goodwill Goodwill, representing the excess of the purchase price over the fair valueof the net assets of acquired entities, is being amortized using the straight-line method over the estimated useful life of 15 years. Research and Development Expenditures Software development costs incurred subsequent to determination of technicalfeasibility are capitalized. Amortization of capitalized software costs isprovided on a product-by-product basis at the greater of the amount computedusing (a) the ratio of current gross revenues for the product to the total ofcurrent and anticipated future gross revenues or (b) the straight-line methodover the remaining estimated economic life of the product. Amortization beginswhen product is available for general release to customers. Generally, anoriginal estimated economic life of two to five years is assigned tocapitalized software development costs. During fiscal 1997, 1998 and 1999, software development costs were amortizedto cost of sales totaling $473,000, $585,000, and $1,063,000, respectively. All other research and development expenditures are charged to research anddevelopment expense in the period incurred. Warranty The Company provides a one-year warranty on all products and records arelated provision for estimated warranty costs at the date of sale. Theestimated warranty liability at March 31, 1999 and 1998 was $411,000 and$250,000, respectively. F-9 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Foreign Currency Translation The balance sheet accounts of Odetics Europe Limited and Odetics AsiaPacific Pte. Ltd. are translated at the current year-end exchange rate andincome statement items are translated at the average exchange rate for theyear. Resulting translation adjustments are made directly to a separatecomponent of stockholders' equity. Gains and losses resulting fromtransactions of the Company and its subsidiaries which are made in currenciesdifferent from their own are immaterial and are included in income as theyoccur. Income Taxes Deferred income tax assets and liabilities are computed for differencesbetween financial statement and tax basis of assets and liabilities based onenacted tax laws and rates applicable to the period in which differences areexpected to affect taxable income. Valuation allowances are established whennecessary to reduce deferred tax assets to amounts which are more likely thannot to be realized. The provision for income taxes is the taxes payable orrefundable for the period plus or minus the change during the period indeferred income tax assets and liabilities. Earnings (Loss) Per Share Diluted earnings per share reflects the dilutive effects of options,warrants and convertible securities while basic earnings per share iscalculated solely on the basis of the Company's net loss divided by weightedaverage number of common shares outstanding. Earnings (Loss) Per Share The following table sets forth the computation of net income (loss) pershare: Years ended March 31 ------------------------------- 1997 1998 1999 --------- --------- --------- (in thousands, except share data) Numerator: Loss from continuing operation.......... $ (201) $(8,683) $(20,118) Income from discontinued operations..... 3,931 2,089 -- --------- --------- --------- Net income (loss)....................... $3,730 $(6,594) $(20,118) ========= ========= ========= Denominator: Weighted-average shares outstanding..... 6,299,000 6,912,000 7,820,000 ========= ========= ========= Basic and diluted earnings (loss) per share: Continuing operations................... $ (.03) $ (1.26) $ (2.57) Discontinued operations................. .62 .31 -- --------- --------- --------- Earnings (loss) per share............... $ .59 $ (.95) $ (2.57) ========= ========= ========= Stock Compensation The Company has elected to follow Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees (APB 25) and relatedInterpretations in accounting for its employee stock options because, asdiscussed below, the alternative fair value accounting provided for under FASBStatement No. 123, Accounting for Stock-Based Compensation, requires use ofoption valuation models that were not developed for use in valuing employeestock options. Under APB 25, because the exercise price of the Company'semployee stock options equals the market price of the underlying stock on thedate of grant, no compensation expense is recognized. F-10 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) To calculate the pro forma information required by Statement 123, theCompany uses the Black-Scholes option pricing model. The Black-Scholes modelwas developed for use in estimating the fair value of traded options whichhave no vesting restrictions and are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because the Company's employee stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management's option, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options. Advertising Expenses The Company expenses advertising costs as incurred. Advertising expense totaled $1,020,000, $2,226,000 and $2,622,000 in the years ended March 31,1997, 1998 and 1999, respectively. Adoption of Statement of Financial Accounting Standards No. 130 Effective April 1, 1998, the Company adopted FASB Statement No. 130,Reporting Comprehensive (Statement 130). Statement 130 establishes new rulesfor the reporting and display of comprehensive income and its components;however, the adoption of this Statement had no material impact on theCompany's net income or stockholders' equity. Statement 130 requiresunrealized gains or losses on foreign currency translation adjustments, whichprior to adoption were reported separately in stockholders' equity, to beincluded in other comprehensive income. Reclassifications Certain amounts in the 1997 and 1998 consolidated financial statements havebeen reclassified to conform with the 1999 presentation. 2. Acquisitions On June 20, 1997, the Company acquired certain assets and assumed certaincontracts from Rockwell Collins, Inc. (Rockwell). Revenues and costs relatedto contracts assumed from Rockwell are included in the accompanying statementof operations since the date of acquisition. The total cost of the acquisitionwas approximately $2.2 million in cash. A total of $1.3 million of assets wereacquired and $5.0 million of liabilities were assumed. The acquisition hasbeen accounted for as a purchase and, accordingly, the excess of cost over thefair value of net assets acquired of $5.9 million has been recorded asgoodwill, and is being amortized over its expected benefit period of 15 years. On October 29, 1997, the Company acquired the net assets of IntelligentControls Inc. (ICI). The total cost of the acquisition was approximately $2.7million which was paid in the Company's Class A common stock. A total of $1.0million of assets were acquired and $0.4 million of liabilities were assumed.In connection with the purchase, $2.1 million of in process research anddevelopment was written off. On September 12, 1998, the Company acquired International Media IntegrationServices Limited, a United Kingdom corporation (IMIS), pursuant to the termsof a Sale and Purchase of Shares Agreement whereby the Company purchased allof the issued and outstanding shares of stock of IMIS for an aggregatepurchase price of $970,000 which was paid in 173,214 shares of the Company'sClass A common stock. The acquisition has been accounted for as a purchase,and the purchase price has been allocated to the fair value of the net assetsacquired with the excess approximating $10,000 allocated to goodwill. F-11 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On October 16, 1998, the Company, through its subsidiary, Odetics ITS Inc.,a California corporation, acquired Meyer, Mohaddes Associates Inc., aCalifornia corporation (MMA). Pursuant to the terms of the merger agreement,the Company purchased all of the issued and outstanding shares of stock of MMAfor $4.6 million, by issuing 55,245 shares of the Company's Class A commonstock and 432,100 shares of Odetics ITS, Inc.'s common stock after givingeffect to the purchase price adjustment required by the merger agreement. Atotal of $2.0 million of assets were acquired and $1.2 million of liabilitieswere assumed. The acquisition was accounted for as a purchase and,accordingly, the excess of cost over the fair value of net assets acquired of$3.8 million has been recorded as goodwill, and is being amortized over itsexpected benefit period of 15 years. In April 1999, the Company issued anadditional 25,740 shares of Class A common stock valued at $250,000 to the MMAshareholders upon resolution of a contingency specified in the mergeragreement. Additional shares with a value of $1 million may be issued throughApril 2001 upon resolution of certain other contingencies specified in themerger agreement. On November 11, 1998, the Company, through its subsidiary, Odetics ITS,Inc., acquired certain assets and assumed certain liabilities of Viggen Corporation, a Virginia corporation, pursuant to the terms of an Agreement ofPurchase and Sale of Assets for an aggregate purchase price of $275,000evidenced by the issuance of 27,603 shares of the Company's Class A commonstock which were issued in April 1999. The acquisition has been accounted foras a purchase and the purchase price, including direct costs of theacquisition, has been allocated to the fair value of the net assets acquiredwith the excess approximating $746,000 allocated to goodwill. The recordedgoodwill is being amortized over its expected benefit period of 15 years. Pro forma information related to these acquisitions is not material to theCompany's historical consolidated results of operations. 3. Sale of Stock of ATL Products, Inc. On March 13, 1997, ATL Products, Inc. (ATL), which at that time was awholly-owned subsidiary of the Company, completed an initial public offeringof 1,650,000 shares of its Class A common stock, at an offering price of $11per share (the Offering). Following the Offering, the Company's beneficialownership interest in the ATL totaled 82.9%. On October 31, 1997, the Company completed a tax-free spin-off of itsremaining 82.9% interest in ATL to the Company's stockholders, pursuant towhich each holder of the Company's Class A and Class B Common as of October31, 1997, received approximately 1.1 shares of Class A Common Stock of ATL foreach share of the Company's common stock then held. 4. Receivables from ATL In April 1997, the Company entered into a promissory note receivable withATL in the original principal amount of $13.0 million representing theaggregate balance of ATL's interest bearing advances from the Company. Thenote was paid in full in July 1998. Up to the time its spin-off, the operating results of ATL were included inthe consolidated federal income tax return of the Company. Effective upon theclose of ATL's initial public offering, the companies entered into a taxsharing agreement, which was effective retroactively to April 1, 1996, wherebythe consolidated federal and state income tax liabilities for a given tax yearwere allocated to the companies in Odetics group according to their relativeand separate taxable income for such year. Amounts receivable from ATL underthis arrangement totaled $2.1 million in fiscal 1997 and $1.6 million infiscal 1998. The tax sharing agreement was terminated upon the spin-out ofOdetics remaining interest in ATL in October 1997. F-12 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Costs and Estimated Earnings on Uncompleted Contracts Costs incurred, estimated earnings and billings on uncompleted long-termcontracts are as follows: March 31 ---------------- 1998 1999 ------- ------- (In thousands) Costs incurred on uncompleted contracts................... $22,861 $19,204 Estimated earnings...................................... 1,903 1,557 ------- ------- 24,764 20,761 Less billings to date................................... 23,761 19,614 ------- ------- $ 1,003 $ 1,147 ======= ======= Included in accompanying balance sheets: Costs and estimated earnings in excess of billings on uncompleted contracts.................................. $ 2,583 $ 2,423 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. (1,580) 1,276 ------- ------- $ 1,003 $ 1,147 ======= ======= Costs and estimated earnings in excess of billings at March 31, 1998 and1999 include $740,000 and $320,000, 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, 1998 are expected to be billed and collected during the year ending March31, 1999. 6. Revolving Line of Credit and Long-Term Debt The Company has a $17.0 million revolving line of credit which provides forborrowings at the prime rate plus 2.0% (9.75% at March 31, 1999). Borrowingsare available for general working capital purposes, and at March 31, 1999,approximately $6.0 million was available for borrowing under the line. Theline expires December 31, 2000. (See Note 1--Operations.) The revolving line of credit is collateralized by substantially all of theCompany's assets. Under the terms of the loan and security agreement, theCompany is required to comply with certain covenants, maintain certain debt tonet worth ratios, working capital current ratios and minimum net worthrequirements, and prohibits the payment of dividends without the lender'sconsent. Included within the borrowing limits of the loan and security agreement, theCompany has available approximately $2,000,000 in letters of credit at March31, 1999. F-13 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-term debt consisted of the following: March 31 --------------- 1998 1999 ------- ------- (In thousands) Note payable, accruing interest at 9.36%, collateralized by deed of trust on land and buildings with a net book value of approximately $11,000,000, payable in monthly installments through December 2004....................... $ 9,218 $ 8,173 Notes payable, accruing interest at 7.08% to 9.21%, collateralized by equipment, payable in monthly installments through 2003................................ 580 2,866 ------- ------- 9,798 11,039 Less current portion...................................... 1,598 2,074 ------- ------- $ 8,200 $ 8,965 ======= ======= The annual maturities of long-term debt for the five years ending March 31,2003 and thereafter are as follows: (In thousands) 2000.......................................................... $ 2,074 2001.......................................................... 2,066 2002.......................................................... 2,221 2003.......................................................... 1,813 2004.......................................................... 1,666 Thereafter.................................................... 1,199 ------- $11,039 ======= 7. Restructuring Charge In the fourth quarter of fiscal 1998, the Board of Directors approved anearly retirement plan for certain founders, senior officers and employees ofthe Company. The Company recorded a charge of approximately $1.7 millionrelated to this plan that is expected to be paid out over a four year period. 8. Income Taxes The reconciliation of the income tax benefit from continuing operations totaxes computed at U.S. federal statutory rates is as follows: Year ended March 31 ----------------------- 1997 1998 1999 ----- ------- ------- (In thousands) Income tax benefit at statutory rates............. $(130) $(3,915) $(6,840) Acquired in process research and development...... -- 715 -- State income taxes, net of federal tax benefit.... (22) 189 -- Increase (decrease) of valuation allowance associated with federal deferred tax assets...... (99) (175) 5,373 Foreign losses recorded without benefit........... -- 118 1,061 Foreign income at lower tax rate.................. -- 15 -- Nondeductible goodwill amortization............... 7 11 31 Other............................................. 63 184 375 ----- ------- ------- $(181) $(2,858) $ -- ===== ======= ======= F-14 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) United States and foreign loss from continuing operations before income taxesare as follows: Year ended March 31 ------------------------- 1997 1998 1999 ----- -------- -------- (In thousands) Pretax loss: Domestic........................................ $(372) $ (9,726) $(16,997) Foreign......................................... (10) (1,815) (3,121) ----- -------- -------- $(382) $(11,541) $(20,118) ===== ======== ======== Significant components of the income tax benefit from continuing operations are as follows: Year ended March 31 ---------------------- 1997 1998 1999 ------ ------- ----- (In thousands) Current: Federal.......................................... $ (347) $(1,143) $(915) State............................................ (145) (328) -- Tax benefit from stock option exercises.......... (801) (300) -- Foreign.......................................... 45 (485) -- ------ ------- ----- Total current...................................... (1,248) (2,256) (915) Deferred: Federal.......................................... 350 (1,516) 915 State............................................ (84) 614 -- ------ ------- ----- Total deferred..................................... 266 (902) 915 Charge in lieu: Credit to additional paid-in capital attributable to stock option exercises....................... 801 300 -- ------ ------- ----- $ (181) $(2,858) $ -- ====== ======= ===== F-15 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of deferred tax assets and liabilities are as follows: 1998 1999 ------- ------- (In thousands) Deferred tax assets: Inventory reserves....................................... $ 979 $ 780 Deferred compensation and other payroll accruals......... 2,077 1,133 Acquired net operating loss carryforwards................ 217 217 Net operating loss carryover............................. -- 6,120 General business tax credit carryforwards................ 951 958 Alternative minimum tax credit carryforwards............. 404 404 Bad debt reserve......................................... 185 307 Other reserves........................................... 328 178 Other, net............................................... 338 314 ------- ------- Total deferred tax assets.................................. 5,479 10,411 Valuation allowance for deferred tax assets................ (1,490) (6,575) ------- ------- Net deferred tax assets.................................... 3,989 3,836 ------- ------- Deferred tax liabilities: Tax over book depreciation............................... 2,576 2,777 Capitalized interest and taxes........................... 468 468 Cash to accrual adjustment............................... -- 556 Other, net............................................... 30 35 ------- ------- Total deferred tax liabilities............................. 3,074 3,836 ------- ------- Net deferred tax assets.................................... $ 915 $ -- ======= ======= At March 31, 1999, for federal income tax purposes, the Company hadapproximately $958,000 in general business credit carryforwards, $404,000 ofalternative minimum tax credit carryforwards. The Company also has $14,600,000of net operating loss carryforwards for federal income tax purposes whichbegin to expire in 2019, and $640,000 of net operating loss carryforwardswhich were acquired as part of the ICI acquisition. For financial reportingpurposes, a valuation allowance has been recorded to offset the deferred taxasset related to these credits and net operating losses. Any future benefitsrecognized from the reduction of the valuation allowance related to thesecarryforwards will result in a reduction of income tax expense, other then theICI operating loss carryforwards whose realization will result in anadjustment of assets acquired in this acquisition. The credit carryforwardsexpire at various dates beginning in 2005 and the acquired net operatinglosses begin to expire in 2002. Because of the "change of ownership" provision of the Tax Reform Act of1986, utilization of the Company's net operating loss carryforwards may besubject to an annual limitation against taxable income in future periods. As aresult of the annual limitation, a portion of these carryforwards may expirebefore ultimately becoming available to reduce future income tax liabilities. 9. Associate Incentive Programs Under the terms of a Profit Sharing Plan, the Company contributes to a trustfund such amounts as are determined annually by the Board of Directors. Nocontributions were made in 1997, 1998 or 1999. 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, F-16 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) eligible associates voluntarily contribute to the plan up to 15% of theirsalary through payroll deductions. The Company matches 50% of contributions upto a stated limit. Under the provisions of the 401(k) Plan, associates havefour investment choices, one of which is the purchase of Odetics, Class Acommon stock at market price. Company matching contributions wereapproximately $525,000, $548,000 and $644,000 in 1997, 1998 and 1999,respectively. Effective April 1, 1987, the Company established a noncontributory AssociateStock Ownership Plan (ASOP) for all associates with more than six months ofeligible service. The ASOP provides that Company contributions, which aredetermined annually by the Board of Directors, may be in the form of cash orshares of Company stock. The Company contributions to the ASOP wereapproximately $517,000, $511,000 and $55,000 in 1997, 1998 and 1999,respectively. Shares distributed through the ASOP Plan were included in totaloutstanding shares used in the earnings per share calculation. 10. Stock Option and Deferred Compensation Plans The Company has adopted an Associate Stock Option Plan which provides thatoptions for shares of the Company's unissued Class A common stock may begranted to directors and associates of the Company. Options granted enable theoption holder to purchase one share of Class A common stock at prices whichare equal to or greater than the fair market value of the shares at the dateof grant. Options expire ten years after date of grant or 90 days aftertermination of employment and vest ratably at 33% on each of the first threeanniversaries of the grant date. Year ended March 31 -------------------------------------------------- 1997 1998 1999 ---------------- ---------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- (In thousands, except per share data) Options outstanding at beginning of year......... 691 $5.32 640 $6.41 563 $4.67 Granted.................. 183 9.17 502 4.63 149 7.36 Exercised................ (217) 5.41 (578) 4.79 (59) 4.63 Canceled................. (17) 4.43 (1) 5.99 (25) 4.63 ----- ----- ----- ----- ----- -----Options outstanding at end of year................... 640 $6.41 563 $4.67 628 $5.27 ===== ===== ===== ===== ===== =====Exercisable at end of year...................... 308 -- 165 ===== ===== =====Available for grant at end of year................... 164 157 37 ===== ===== =====Weighted average fair value of options granted........ $4.91 $2.43 $3.81 The exercise price for options outstanding as of March 31, 1999 is $4.63 to$8.75. The weighted-average remaining contractual life of those options isnine years. In connection with the completed spin-off of the Company's interest in ATL,the Company made secured loans to option holders in amounts up to the exerciseprice of their options, which totaled $3.4 million. These notes are fullrecourse, are secured by shares of stock of the Company and ATL, are interestbearing with a rate of 5.7% and are due five years from the exercise date.Loans must be repaid upon sale of the underlying shares of stock or upontermination of employment. In calculating pro forma information regarding net income and earnings pershare, as required by Statement 123, the fair value was estimated at the dateof grant using a Black-Scholes option pricing model with the F-17 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) following weighted-average assumptions for the options on the Company's ClassA common stock: risk-free interest rate of 6.0%; a dividend yield of 0%;volatility of the expected market price of the Company's Class A common stockof .40; and a weighted-average expected life of the option of seven years. For purposes of pro forma disclosures, the estimated fair value of theoptions is amortized to expense over the options' vesting period. TheCompany's pro forma information for the years ended March 31, 1997, 1998 and1999 follows: 1997 1998 1999 ---------- ----------- ------------ Pro forma net income.................. $3,441,000 $(7,084,000) $(20,555,000) Pro forma net income per share........ $ .55 $ (1.03) $ (2.63) During 1986, the Company adopted an Executive Deferral Plan under whichcertain executives may defer a portion of their annual compensation. Alldeferred amounts earn interest, generally with no guaranteed rate of return.Compensation charged to operations and deferred under the plan totaled$410,000, $302,000 and $377,000 for 1997, 1998 and 1999, respectively. 11. Commitments and Contingencies The Company has lease commitments for facilities in various locations throughout the United States. The annual commitment under these noncancelableoperating leases at March 31, 1999 is as follows (in thousands): Fiscal Year ----------- 2000................................................................ $505,000 2001................................................................ 282,000 2002................................................................ 122,000 2003................................................................ 10,000 2004................................................................ -- Thereafter.......................................................... -- -------- $919,000 ======== 12. Business Segment and Geographic Information Effectively January 1, 1998, the Company adopted FASB Statement No. 131,Disclosure about Segments of an Enterprise and Related Information (Statement131). Statement 131 establishes standard for the way that public businessenterprises report information about operating segments in annual financialstatements and requires that those enterprises report selected informationabout operating segments in interim financial reports. Operating segments arecomponents of an enterprise about which separate financial information isavailable that is regularly evaluated by the chief operating decision maker indeciding how to allocate resources and in assessing performance. Statement 131also establishes standards for related disclosures about products andservices, geographic areas and major customers. The adoption of Statement 131did not affect results of operations or financial position, but did affect thefollowing disclosure of segment information. The Company operates in three reportable segments: intelligenttransportation systems, video products, which includes products for thetelevision broadcast and video security markets, and telecommunications. Theaccounting policies of the reportable segments are the same as those describedin the summary of significant accounting policies except that certainexpenses, such as interest, amortization of certain intangibles and certaincorporate expenses are not allocated to the segments. In addition, certainassets including cash and cash equivalents, deferred taxes and certain long-lived and intangible assets are not allocated to the segments. Intersegmentsales are recorded at the selling segment's cost plus profit. F-18 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The reportable segments are each managed separately because they manufactureand distribute distinct products or provide services with different processes. Selected financial information for the Company's reportable segments as ofand for the years ended March 31, 1997, 1998 and 1999 follows: Intelligence Video Telecom Transportation Products Product Total -------------- -------- ------- -------- (In thousands) Year ended March 31, 1997 Revenue from external customers..................... $ 538 $51,656 $21,101 $ 73,295 Intersegment revenues.......... -- 4,347 -- 4,347 Depreciation and amortization.. 64 1,088 1,030 2,182 Segment income (loss).......... (3,149) 2,881 3,618 3,350 Segment assets................. 1,675 30,391 10,512 42,578 Expenditure for long-lived assets........................ 1,035 2,316 647 3,998 Year ended March 31, 1998 Revenue from external customers..................... $ 5,841 $54,161 $23,613 $ 83,615 Intersegment revenues.......... -- 4,163 53 4,216 Depreciation and amortization.. 514 1,362 589 2,465 Segment income (loss).......... (5,445) (2,240) 3,527 (4,158) Segment assets................. 11,614 37,913 7,943 57,470 Expenditure for long-lived assets........................ 7,384 4,003 1,001 12,388 Year ended March 31, 1999 Revenue from external customers..................... $14,580 $46,755 $13,974 $ 75,309 Intersegment revenues.......... -- 5,351 94 5,445 Depreciation and amortization.. 765 2,282 1,199 4,246 Segment income (loss).......... (3,865) (5,381) (2,617) (11,863) Segment assets................. 17,943 38,831 8,954 65,728 Expenditure for long-lived assets........................ 4,924 3,457 3,084 11,465 F-19 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following reconciles segment income to consolidated income before incometaxes and segment assets and deprecation and amortization to consolidatedassets and consolidated depreciation and amortization: 1997 1998 1999 ------- -------- -------- (In thousands) Revenue Total revenues for reportable segments.... $77,642 $ 87,832 $ 80,754 Non reportable segment revenues........... 7,485 6,220 8,064 Other revenues............................ -- -- -- Elimination of intersegment sales......... (4,347) (4,216) (5,445) ------- -------- -------- Total consolidated revenues........... $80,780 $ 89,836 $ 83,373 ======= ======== ======== Segment Profit or Loss Total profit or loss for reportable seg- ments.................................... $ 3,350 $ (4,158) $(11,863) Other profit or loss...................... 297 (273) (1,201) Unallocated amounts: Corporate and other expenses............ (3,846) (4,777) (5,247) Special charge.......................... -- (1,716) -- Interest expense........................ (183) (617) (1,807) ------- -------- -------- Loss from continuing operations before income taxes......................... $ (382) $(11,541) $(20,118) ======= ======== ======== Assets Total assets for reportable segments...... $42,578 $ 57,470 $ 65,728 Assets held at Corporate.................. 43,227 31,320 15,627 ------- -------- -------- Total assets.......................... $85,805 $ 88,790 $ 81,355 ======= ======== ======== Depreciation and Amortization Depreciation and amortization for report- able segments............................ $ 2,182 $ 2,465 $ 4,246 Other..................................... 937 447 959 ------- -------- -------- Total depreciation and amortization... $ 3,119 $ 2,912 $ 5,205 ======= ======== ======== Selected financial information for the Company's operations by geographicsegment is as follows: 1997 1998 1999 ------- ------- ------- (In thousands) Geographic Area Revenue United States....................................... $51,909 $60,502 $61,171 Europe.............................................. 4,980 5,538 7,582 Asia Pacific Rim.................................... 14,234 17,842 6,287 Other............................................... 9,657 5,954 8,333 ------- ------- ------- Total net revenue................................. $80,780 $89,836 $83,373 ======= ======= ======= Geographic Area Long-Lived Assets United States....................................... $23,309 $32,929 $39,424 Europe.............................................. 490 504 1,612 Asia Pacific Rim.................................... 49 24 33 Other............................................... -- -- -- ------- ------- ------- Total long-lived assets........................... $23,848 $33,457 $41,069 ======= ======= ======= F-20 ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Supplemental Cash Flow Information Year ended March 31 ------------------------- 1997 1998 1999 ------- ------- ------- (In thousands) Net cash used in changes in operating assets and liabilities, net of litigation settlement and acquisitions: (Increase) decrease in accounts receivable....... $(4,511) $ 1,136 $(2,706) (Increase) decrease in net costs and estimated earnings in excess of billings.................. (1,217) (1,771) 276 (Increase) decrease in inventories............... 401 (4,604) 4,825 Increase in prepaids and other assets............ (3,369) (951) 111 Increase (decrease) in accounts payable and accrued expenses................................ 1,923 4,728 (946) ------- ------- -------Net cash used in changes in operating assets and liabilities....................................... $(6,773) $(1,462) $ 1,560 ======= ======= =======Cash paid during the year: Interest......................................... $ 1,888 $ 1,526 $ 1,997 Income taxes paid (refunded)..................... 975 365 (463)Noncash transactions during the year: Equity of subsidiary allocable to minority interest........................................ $ 1,462 $ -- $ -- Purchase of subsidiary for stock................. -- 2,734 5,845 14. Legal Proceedings 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 cassettehandling systems (United States Patent No. 4,779,151). StorageTek counter claimed alleging that the Company infringed several of StorageTek's patents.Prior to the trial, the court dismissed two of the infringement claims againstthe Company and the third claim was resolved between the parties. In January1996, a jury concluded that the Company's patent claims were not infringedunder the doctrine of equivalents based upon a claim construction defined bythe court prior to the trial. The jury also concluded that the Company'spatent was not invalid. In June 1997, the United Stated Court of Appeals forthe Federal Circuit vacated the lower court's claim construction and findingsof noninfringement of the Company's patent. The appellate court remanded thecase for consideration of infringement under a proper claim construction ofinfringement under a proper claim construction. In August 1997, the appellatecourt denied a petition for rehearing requested by StorageTek. The case wasreturned to the Federal District court for retrial, in March 1998 a juryawarded the Company damages in the amount of $70.6 million. In June 1998, theU.S. District Court for the Eastern District of Virginia granted an injunctionagainst StorageTek enjoining StorageTek from making, selling or using anyinfringing devices, including the ACS4400, PowderHorn, Wolfcreek and Genesisautomated tape library systems that include a pass-through port. In June 1998,the U.S. District Court issued an order requesting the parties to brief theissues of whether StorageTek's motion for judgment as a matter of law shouldhave been granted, and whether the injunction previously ordered by the courtagainst StorageTek should be stayed pending appeal. After filing hearings, thetrial court vacated its own injunction and granted StorageTek's motion forjudgment as a matter of law to vacate the jury trial result and to findStorageTek not infringing. The Company has appealed these and other courtrulings. The defendants also cross-appealed certain other court rulings. TheU.S. Court of Appeals for the Federal Circuit heard final arguments on April12, 1999. A decision from the U.S. Court of Appeals is pending. Theaccompanying financial statements do not include any amounts related to theeventual settlement of this matter. F-21 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS ODETICS, INC. Column A Column B Column C Column D Column E -------- ---------- --------------------- ------------ -------- Balance at Charged to Charged to Balance at Beginning Costs and Accounts-- Deductions-- End of Description of Period Expenses Describe Describe Period ----------- ---------- ---------- ---------- ------------ ---------- Year ended March 31, 1997(1): Deducted from asset accounts: Allowance for doubtful accounts.. $ 326,000 $ 24,000 $ -- $ -- $ 350,000 Reserve for inventory obsolescence....... 1,811,000 626,000 -- -- 2,437,000 ---------- ---------- -------- ---------- ---------- Total............. $2,137,000 $ 650,000 $ -- $ -- $2,787,000 ========== ========== ======== ========== ========== Year ended March 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts.. $ 350,000 $ 155,000 $ -- $ 73,000(1) $ 432,000 Reserve for inventory obsolescence....... 2,437,000 1,240,000 -- $ 796,000(2) 2,881,000 ---------- ---------- -------- ---------- ---------- Total............. $2,787,000 $1,395,000 $ -- $ 869,000 $3,313,000 ========== ========== ======== ========== ==========Year ended March 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts.. $ 432,000 $ 332,000 $125,000(3) $ 50,000(1) $ 839,000 Reserve for inventory obsolescence....... 2,881,000 1,590,000 -- 1,300,000(2) 3,171,000 ---------- ---------- -------- ---------- ---------- Total............. $3,313,000 $1,922,000 $125,000 $1,350,000 $4,010,000 ========== ========== ======== ========== ========== --------(1) Uncollectible accounts written off against reserve (2) Inventory scrap (3) Allowance assumed in acquisition S-1 EXHIBIT 10.3-------------------------------------------------------------------------------- TBCC Loan and Security AgreementBorrowers: Odetics, Inc., a Delaware corporation Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporationAddress: 1515 S. Manchester Anaheim, California 92802 Date: December 28, 1998THIS LOAN AND SECURITY AGREEMENT is entered into as of the above date, betweenthe above borrower(s) (jointly and severally, the "Borrower"), having its chiefexecutive office and principal place of business at the address shown above, andTRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC")having its principal office at 9399 West Higgins Road, Suite 600, Rosemont,Illinois 60018 and having an office at 15260 Ventura Blvd., Suite 1240, ShermanOaks, CA 91403. The Schedule to this Agreement (the "Schedule") being signedconcurrently is an integral part of this Agreement. (Definitions of certainterms used in this Agreement are set forth in Section 9 below.) The partiesagree as follows:1. LOANS. ----- 1.1. Loans. TBCC, subject to the terms and conditions of this Agreement, ----- agrees to make loans (the "Loans") to Borrower, from time to time during theperiod from the date of this Agreement to the Maturity Date set forth in theSchedule, at Borrower's request, in an aggregate principal amount at any onetime outstanding not to exceed the Credit Limit shown on the Schedule. If at anytime the total outstanding Loans and other monetary Obligations exceed theCredit Limit, Borrower shall repay the excess immediately without demand*.Borrower shall use the proceeds of all Loans solely for lawful general businesspurposes. *provided, however, that if the total outstanding Loans and other monetaryObligations exceed the Credit Limit because of a change in the manner in whichEligible Receivables or Eligible Inventory is computed, then Borrower shall havefive (5) Business Days to repay such excess. 1.2. Due Date. The Loans, all accrued interest and all other monetary --------Obligations shall be payable in full on the Maturity Date. Borrower may borrow,repay and reborrow Loans (other than any Term Loans), in whole or in part, inaccordance with the terms of this Agreement. 1.3. Loan Account. TBCC shall maintain an account on its books in the name ------------of Borrower (the "Loan Account"). All Loans and advances made by TBCC toBorrower or for Borrower's account and all other monetary Obligations will becharged to the Loan Account. All amounts received by TBCC from Borrower or forBorrower's account will be credited to the Loan Account. TBCC will send Borrowera monthly statement reflecting the activity in the Loan Account, and each suchmonthly statement shall be an account stated between Borrower and TBCC and shallbe final conclusive and binding absent manifest error. 1.4. Collection of Receivables. Borrower shall remit to TBCC all Collections ------------------------- including all checks, drafts and other documents and instruments evidencingremittances in payment (collectively referred to as "Items of Payment") withinone Business Day after receipt, in the same form as received, with any necessary indorsements. For purposes of calculating interest due to TBCC, credit will begiven for Collections and all other proceeds of Collateral and other payments toTBCC three Business Days after receipt of cleared funds. For all purposes ofthis Agreement any cleared funds received by TBCC later than 10:00 a.m.(California time) on any Business Day shall be deemed to have been received onthe following Business Day and any applicable interest or fee shall continue toaccrue. Borrower's Loan Account will be credited only with the net amountsactually received in payment of Receivables, and such payments shall be creditedto the Obligations in such order as TBCC shall determine in its discretion.Pending delivery to TBCC, Borrower will not commingle any Items of Payment withany of its other funds or property, but will segregate them from the otherassets of Borrower and will hold them in trust and for the account and as theproperty of TBCC. Borrower hereby agrees to endorse any Items of Payment uponthe request of TBCC. 1.5. Reserves. TBCC may, from time to time, in its Good Faith business --------judgment: (i) establish and modify reserves against Eligible Receivables andEligible Inventory, (ii) modify advance rates with respect to Eligible -1- TBCC Loan and Security Agreement -----------------------------------------------------------------Receivables and Eligible Inventory, (iii) modify the standards of eligibilityset forth in the definitions of Eligible Receivables and Eligible Inventory, and(iv) establish reserves against available Loans. 1.6. Term. ---- (a) The term of this Agreement shall be from the date of this Agreement tothe Maturity Date set forth in the Schedule, unless sooner terminated inaccordance with the terms of this Agreement, provided that the Maturity Dateshall automatically be extended, and this Agreement shall automatically andcontinuously renew, for successive additional terms of one year each, unless oneparty gives written notice to the other, not less than sixty days prior to thenext Maturity Date, that such party elects to terminate this Agreement effectiveon the next Maturity Date. On the Maturity Date or on any earlier termination ofthis Agreement Borrower shall pay in full all Obligations, and notwithstandingany termination of this Agreement all of TBCC's security interests and all ofTBCC's other rights and remedies shall continue in full force and effect untilpayment and performance in full of all Obligations. (b) This Agreement may be terminated prior to the Maturity Date asfollows: (i) by Borrower, effective three business days after written notice oftermination is given to TBCC; or (ii) by TBCC at any time after the occurrenceof an Event of Default, without notice, effective immediately. If this Agreementis terminated by Borrower or by TBCC under this Section 1.6(b), Borrower shallpay to TBCC a termination fee (the "Termination Fee") in the amount shown on theSchedule. The Termination Fee shall be due and payable on the effective date oftermination. Notwithstanding the foregoing, Borrower shall have no right toterminate this Agreement at any time that any principal of, or interest on anyof the Loans or any other monetary Obligations are outstanding, except uponprepayment of all Obligations and the satisfaction of all other conditions setforth in the Loan Documents. 1.7. Payment Procedures. Borrower hereby authorizes TBCC to charge the Loan ------------------ Account with the amount of all interest, fees, expenses and other payments to bemade hereunder and under the other Loan Documents. TBCC may, but shall not beobligated to, discharge Borrower's payment obligations hereunder by so chargingthe Loan Account. Whenever any payment to be made hereunder is due on a day thatis not a Business Day, the payment may be made on the next succeeding BusinessDay and such extension of time shall be included in the computation of theamount of interest due. 1.8. Conditions to Initial Loan. The obligation of TBCC to make the initial -------------------------- Loan is subject to the satisfaction of the following conditions prior to orconcurrent with such initial Loan, and Borrower shall cause all such conditionsto be satisfied by the Closing Deadline set forth in the Schedule: (a) Except for the filing of termination statements under the Code by theexisting lender to Borrower whose loans are being repaid with the Loan proceeds,no consent or authorization of, filing with or other act by or in respect of anyGovernmental Authority or any other Person is required in connection, with theexecution, delivery, performance, validity or enforceability of this Agreement,or the other Loan Documents or the consummation of the transactions contemplatedhereby or thereby or the continuing operations of the Borrower following theconsummation of such transactions. (b) TBCC and its counsel shall have performed (i) a review satisfactory toTBCC of all of the Material Contracts and other assets of the Borrower, thefinancial condition of the Borrower, including all of its tax, litigation,environmental and other potential contingent liabilities, and the corporate andcapital structure of the Borrower and (ii) a pre-closing audit and collateralreview, in each case with results satisfactory to TBCC. (c) TBCC shall have received the following, each dated the date of theinitial Loan or as of an earlier date acceptable to TBCC, in form and substancesatisfactory to TBCC and its counsel: (i) a Depository Account Agreement (asTBCC shall designate), duly executed by the Borrower and its bank on TBCC'sstandard form; (ii) acknowledgment copies of Uniform Commercial Code financingstatements (naming TBCC as secured party and the Borrower as debtor), duly filedin all jurisdictions that TBCC deems necessary or desirable to perfect andprotect the Liens created hereunder, and evidence that all other filings,registrations and recordings have been made in the appropriate governmentaloffices, and all other action has been taken, which shall be necessary tocreate, in favor of TBCC, a perfected first priority Lien on the Collateral;(iii) the opinion of counsel for the Borrower covering such matters incident tothe transactions contemplated by this Agreement as TBCC may specify in itsdiscretion; (iv) certified copies of all policies of insurance required by thisAgreement and the other Loan Documents, together with loss payee endorsementsfor all such policies naming TBCC as lender loss payee and an additionalinsured; (v) copies of the Borrower's articles or certificate of incorporation,certified as true, correct and complete by the secretary of state of Borrower'sstate of incorporation within 45 days of the date hereof; (vi) copies of thebylaws of the Borrower and a copy of the resolutions of the Board of Directorsof the Borrower authorizing the execution, delivery and performance of thisAgreement, the other Loan Documents, and the transactions contemplated herebyand thereby, attached to which is a certificate of the Secretary or an AssistantSecretary of the Borrower certifying (A) that such copies of the bylaws andresolutions are true, complete and accurate copies thereof, have not beenamended or modified since the date of such certificate and are in full force andeffect and (B) the incumbency, names and true signatures of the officers of theBorrower; (vii) a good standing certificate from the Secretary of State ofBorrower's state of incorporation and each state in which the Borrower isqualified as a foreign corporation, each dated within ten days of the datehereof; (viii) the additional documents and agreements, if any, listed in theSchedule; and (ix) such other agreements and instruments as TBCC deems necessaryin its sole and absolute discretion in connection with the transactionscontemplated hereby. 1.9. Conditions to Lending. The obligation of TBCC to make any Loan is ---------------------subject to the satisfaction of the following conditions precedent: (a) There shall be no pending or, to the knowledge of Borrower after dueinquiry, threatened litigation, proceeding, inquiry or other action relating tothis Agreement, or any other Loan Document, or which could be expected to have aMaterial Adverse Effect in the judgment of TBCC; -2- TBCC Loan and Security Agreement ----------------------------------------------------------------- (b) Borrower shall be in compliance with all Requirements of Law andMaterial Contracts, other than such noncompliance that could not have a MaterialAdverse Effect; (c) The Liens in favor of TBCC shall have been duly perfected and shallconstitute first priority Liens, except for Permitted Liens; (d) All representations and warranties contained in this Agreement and theother Loan Documents shall be true and correct * on and as of the date of such Loan as if then made, other than representations and warranties that expresslyrelate solely to an earlier date, in which case they shall have been true andcorrect * as of such earlier date; *in all material respects (e) No Default or Event of Default shall have occurred and be continuingor would result from the making of the requested Loan as of the date of suchrequest; and (f) No Material Adverse Effect shall have occurred.2. INTEREST AND FEES. ----------------- 2.1. Interest. Borrower shall pay TBCC interest on all outstanding Loans -------- and other monetary Obligations, at the interest rate set forth in the Schedule.Interest shall be payable monthly in arrears on the first Business Day of eachmonth, and on the Maturity Date. Following the occurrence and during thecontinuance of any Event of Default, the interest rate applicable to allObligations shall be increased by two percent per annum. 2.2. Fees. Borrower shall pay TBCC the fees set forth in the Schedule. ---- 2.3. Calculations. All interest and fees under this Agreement shall be ------------ calculated on the basis of a year of 360 days for the actual number of dayselapsed in the period for which such interest or fees are payable. 2.4. Taxes. Any and all payments by Borrower under this Agreement or any ----- other Loan Document shall be made free and clear of and without deduction forany and all present or future taxes, levies, imposts, deductions, charges orwithholdings and penalties, interest and all other liabilities with respectthereto, excluding in the case of TBCC, taxes imposed on its net income andfranchise taxes imposed on it by the jurisdiction under the laws of which TBCCis organized or any political subdivision thereof.3. SECURITY. -------- 3.1. Grant of Security Interest. To secure the payment and performance when -------------------------- due of all of the Obligations, Borrower hereby grants to TBCC a securityinterest in all of its present and future Receivables, Investment Property,Inventory, Equipment, Other Property, and other Collateral, wherever located*. *including without limitation all stock of Subsidiaries of Borrower, exceptthat TBCC's security interest in stock of the UK Sub, as defined in theSchedule, shall be limited to 65% of such stock. Borrower shall, concurrently,deliver certificates evidencing all such stock with duly executed stock powerswith respect thereto. 3.2. Other Liens; Location of Collateral. Borrower represents, warrants and ----------------------------------- covenants that all of the Collateral is, and will at all times continue to be,free and clear of all Liens, other than Permitted Liens and Liens in favor ofTBCC. All Collateral is and will continue to be maintained at the locationsshown on the Schedule. 3.3. Receivables. ----------- (a) Schedules and Other Actions. As often as requested by TBCC, Borrower ---------------------------shall execute and deliver to TBCC written schedules of Receivables and EligibleReceivables (but the failure to execute or deliver any schedule shall not affector limit TBCC's security interest in all Receivables). On TBCC's request,Borrower shall also furnish to TBCC copies of invoices to customers and shippingand delivery receipts. Borrower shall deliver to TBCC the originals of allletters of credit, notes, and instruments in its favor and such endorsements orassignments as TBCC may reasonably request and, upon the request of TBCC,Borrower shall deliver to TBCC all certificated securities with respect to any Investment Property, with all necessary indorsements, and obtain such accountcontrol agreements with securities intermediaries and take such other actionwith respect to any Investment Property, as TBCC shall request, in form andsubstance satisfactory to TBCC. Upon request of TBCC Borrower additionally shallobtain consents from any letter of credit issuers with respect to the assignmentto TBCC of any letter of credit proceeds. (b) Records, Collections. Borrower shall report all customer credits to --------------------- TBCC, on the regular reports to TBCC in the form from time to time specified byTBCC. Borrower shall notify TBCC of all returns and recoveries of merchandiseand of all claims asserted with respect to merchandise, on its regular reportsto TBCC. Borrower shall not settle or adjust any dispute or claim, or grant anydiscount, credit or allowance or accept any return of merchandise, except in theordinary course of its business, without TBCC's prior written consent. (c) Representations. Borrower represents and warrants to TBCC that each ---------------Receivable with respect to which Loans are requested by Borrower shall, on thedate each Loan is requested and made, represent an undisputed, bona fide,existing, unconditional obligation of the account debtor created by the sale,delivery, and acceptance of goods, the licensing of software or the rendition ofservices, in the ordinary course of Borrower's business, and meet the MinimumEligibility Requirements set forth in Section 9.1(n) below. 3.4. Inventory. A physical verification of all Inventory wherever located --------- will be taken by Borrower at least every twelve months and, in any case, asoften as reasonably requested by TBCC and a copy of such physical verificationshall be promptly submitted to TBCC. Borrower shall also submit to TBCC a copyof the annual physical Inventory as observed and tested by its publicaccountants in accordance with generally accepted auditing standards and GAAP.If so requested by TBCC, Borrower shall execute and deliver to TBCC, aconfirmatory written instrument, in form and substance satisfactory to TBCC,listing all its Inventory, but any failure to execute or deliver the same shallnot affect or limit TBCC's security interest in and to the Inventory. Borrowershall maintain full, accurate and complete records respecting the Inventorydescribing the kind, type and quantity of the Inventory and Borrower's costtherefor, withdrawals therefrom and additions thereto, including a perpetualinventory for work in process and finished goods. -3- TBCC Loan and Security Agreement ----------------------------------------------------------------- 3.5. Equipment. Borrower shall at all times keep correct and accurate --------- records itemizing and describing the location, kind, type, age and condition ofthe Equipment, Borrower's cost therefor and accumulated depreciation thereof andretirements, sales, or other dispositions thereof. Borrower shall keep all ofits Equipment in a satisfactory state of repair and satisfactory operatingcondition in accordance with industry standards, ordinary wear and tearexcepted. No Equipment shall be annexed or affixed to or become part of anyrealty, unless the owner of the realty has executed and delivered a LandlordWaiver in such form as TBCC shall specify. Where Borrower is permitted todispose of any Equipment under this Agreement or by any consent theretohereafter given by TBCC, Borrower shall do so at arm's length, in good faith andby obtaining the maximum amount of recovery practicable therefor and withoutimpairing the operating integrity or value of the remaining Equipment. 3.6. Investment Property. Borrower shall have the right to retain all ------------------- Investment Property payments and distributions, unless and until a Default or anEvent of Default has occurred. If a Default or an Event of Default exists,Borrower shall hold all payments on, and proceeds of, and distributions withrespect to, Investment Property in trust for TBCC, and Borrower shall deliverall such payments, proceeds and distributions to TBCC, immediately upon receipt,in their original form, duly endorsed, to be applied to the Obligations in suchorder as TBCC shall determine. Upon the request of TBCC, any such distributionsand payments with respect to any Investment Property held in any securitiesaccount shall be held and retained in such securities account as part of theCollateral. 3.7 Further Assurances. Borrower will perform any and all steps that ------------------ TBCC may reasonably request to perfect TBCC's security interests in theCollateral, including, without limitation, executing and filing financing andcontinuation statements in form and substance satisfactory to TBCC. TBCC ishereby authorized by Borrower to sign Borrower's name or file any financingstatements or similar documents or instruments covering the Collateral whetheror not Borrower's signature appears thereon. Borrower agrees, from time to time,at TBCC's request, to file notices of Liens, financing statements, similardocuments or instruments, and amendments, renewals and continuations thereof,and cooperate with TBCC, in connection with the continued perfection andprotection of the Collateral. If any Collateral is in the possession or controlof any Person other than a public warehouseman where the warehouse receipt is inthe name of or held by TBCC, Borrower shall notify such Person of TBCC'ssecurity interest therein and, upon request, instruct such Person or Persons tohold all such Collateral for the account of TBCC and subject to TBCC'sinstructions. If so requested by TBCC, Borrower will deliver to TBCC warehousereceipts covering any Collateral located in warehouses showing TBCC as thebeneficiary thereof and will also cause the warehouseman to execute and deliversuch agreements as TBCC may request relating to waivers of liens by suchwarehouseman and the release of the Inventory to TBCC on its demand. Borrowershall defend the Collateral against all claims and demands of all Persons. 3.8. Power of Attorney. Borrower hereby appoints and constitutes TBCC as ----------------- Borrower's attorney-in-fact (i) to request at any time from account debtorsverification of information concerning Receivables and the amount owing thereon,(ii) upon the occurrence and during the continuance of an Event of Default, toconvey any item of Collateral to any purchaser thereof, (iii) to give or signBorrower's name to any notices or statements necessary or desirable to create orcontinue the Lien on any Collateral granted hereunder, (iv) to execute anddeliver to any securities intermediary or other Person any entitlement order,account control agreement or other notice, document or instrument with respectto any Investment Property, and (v) to make any payment or take any actnecessary or desirable to protect or preserve any Collateral. TBCC's authorityhereunder shall include, without limitation, the authority to execute and givereceipt for any certificate of ownership or any document, transfer title to anyitem of Collateral and take any other actions arising from or incident to thepowers granted to TBCC under this Agreement. This power of attorney is coupledwith an interest and is irrevocable.4. Representations and Warranties of Borrower. Borrower represents and warrants ------------------------------------------ as follows: 4.1. Organization, Good Standing and Qualification. Borrower (i) is a --------------------------------------------- corporation duly * organized, validly existing and in good standing under thelaws of the State set forth above, (ii) has the corporate power and authority toown its properties and assets and to transact the businesses in which it isengaged and (iii) is duly qualified, authorized to do business and in goodstanding in each jurisdiction where it is engaged in business, except to theextent that the failure to so qualify or be in good standing would not have aMaterial Adverse Effect. *incorporated 4.2. Locations of Offices, Records and Collateral. The address of the -------------------------------------------- principal place of business and chief executive office of Borrower is, and thebooks and records of Borrower and all of its chattel paper and records relatingto Collateral are maintained exclusively in the possession of Borrower at, theaddress of Borrower specified in the heading of this Agreement. Borrower hasplaces of business, and Collateral is located, only at such address and at theaddresses set forth in the Schedule and at any additional locations reported toTBCC as provided in Section 5.8(c) as to which TBCC has taken all necessaryaction to perfect and protect its security interests in the Collateral at anysuch locations. 4.3. Authority. Borrower has the requisite corporate power and authority to --------- execute, deliver and perform its obligations under each of the Loan Documents.All corporate action necessary for the execution, delivery and performance byBorrower of the Loan Documents has been taken. 4.4. Enforceability. This Agreement is, and, when executed and delivered, -------------- each other Loan Document will be, the legal, valid and binding obligation ofBorrower enforceable in accordance with its terms, except as enforceability maybe limited by bankruptcy, insolvency or similar laws affecting creditors' rightsgenerally and general principles of equity. 4.5. No Conflict. The execution, delivery and performance of each Loan ----------- Document by Borrower does not and will not contravene (i) any of the GoverningDocuments, (ii) any Requirement of Law or (iii) any Material Contract -4- TBCC Loan and Security Agreement -----------------------------------------------------------------and will not result in the imposition of any Liens other than in favor of TBCC. 4.6. Consents and Filings. No consent, authorization or approval of, or -------------------- filing with or other act by, any shareholders of Borrower or any GovernmentalAuthority or other Person is required in connection with the execution,delivery, performance, validity or enforceability of this Agreement or any otherLoan Document, the consummation of the transactions contemplated hereby orthereby or the continuing operations of Borrower following such consummation,except (i) those that have been obtained or made, (ii) the filing of financingstatements under the Uniform Commercial Code and (iii) any necessary filingswith the U.S. Copyright Office and the U.S. Patent and Trademark Office. 4.7. Solvency. Borrower is Solvent and will be Solvent upon the completion -------- of all transactions contemplated to occur on or before the date of thisAgreement (including, without limitation, the Loans to be made on the date ofthis Agreement). 4.8. Financial Data. Borrower has provided to TBCC complete and accurate -------------- Financial Statements, which have been prepared in accordance with GAPPconsistently applied throughout the periods involved and fairly present thefinancial position and results of operations of Borrower for each of the periodscovered, subject, in the case of any quarterly financial statements, to normalyear-end adjustments and the absence of notes. Borrower has no ContingentObligation or liability for taxes, unrealized losses, unusual forward or long-term commitments or long-term leases, which is not reflected in such FinancialStatements or the footnotes thereto. Since the last date covered by suchFinancial Statements, there has been no sale, transfer or other disposition byBorrower of any material part of its business or property and no purchase orother acquisition of any business or property (including any capital stock ofany other Person) material in relation to the financial condition of Borrower atsaid date. Since said date, (i) there has been no change, occurrence,development or event which has had or could reasonably be expected to have aMaterial Adverse Effect and (ii) none of the capital stock of Borrower has beenredeemed, retired, purchased or otherwise acquired for value by Borrower. 4.9. Accuracy and Completeness of Information. All data, reports and ---------------------------------------- information previously, now or hereafter furnished by or on behalf of Borrowerto TBCC or the Auditors are or will be true and accurate in all materialrespects on the date as of which such data, reports and information are dated orcertified, and not incomplete by omitting to state any material fact necessaryto make such data, reports and information not materially misleading at suchtime. There are no facts now known to Borrower which individually or in theaggregate would reasonably be expected to have a Material Adverse Effect andwhich have not been disclosed in writing to TBCC. 4.10. No Joint Ventures, Partnerships or Subsidiaries. Borrower is not ----------------------------------------------- engaged in any joint venture or partnership with any other Person. Borrower hasno Subsidiaries*. *except as set forth in the Schedule 4.11. Corporate and Trade Name. During the past five years, Borrower has not ------------------------ been known by or used any other corporate, trade or fictitious name except forits name as set forth on the signature page of this Agreement and the othernames specified in the Schedule. 4.12. No Actual or Pending Material Modification of Business. There exists ------------------------------------------------------ no actual or, to the best of Borrower's knowledge after due inquiry, threatenedtermination, cancellation or limitation of, or any modification or change in thebusiness relationship of Borrower with any customer or group of customers whosepurchases individually or in the aggregate are material to the operation ofBorrower's business or with any material supplier. 4.13. No Broker's or Finder's Fees. No broker or finder brought about this ---------------------------- Agreement or the Loans. No broker's or finder's fees or commissions will bepayable by Borrower to any Person in connection with the transactionscontemplated by this Agreement. 4.14. Taxes and Tax Returns. Borrower has properly completed and timely filed --------------------- all income tax returns it is required to file. The information filed is completeand accurate in all material respects. All deductions taken in such income taxreturns are appropriate and in accordance with applicable laws and regulations,except deductions that may have been disallowed but are being challenged in goodfaith and for which adequate reserves have been made in accordance with GAAP.All taxes, assessments, fees and other governmental charges for periodsbeginning prior to the date of this Agreement have been timely paid (or, if notyet due, adequate reserves therefor have been established in accordance withGAAP) and Borrower has no liability for taxes in excess of the amounts so paidor reserves so established. No deficiencies for taxes have been claimed,proposed or assessed by any taxing or other Governmental Authority againstBorrower and no notice of any tax Lien has been filed. There are no pending orthreatened audits, investigations or claims for or relating to any liability fortaxes and there are no matters under discussion with any Governmental Authoritywhich could result in an additional liability for taxes. No extension of astatute of limitations relating to taxes, assessments, fees or othergovernmental charges is in effect with respect to Borrower. Borrower is not aparty to and does not have any obligations under any written tax sharingagreement or agreement regarding payments in lieu of taxes. 4.15. No Judgments or Litigation. Except as set forth in the Schedule, no -------------------------- judgments, orders, writs or decrees are outstanding against Borrower, nor isthere now pending or, to the knowledge of Borrower after due inquiry, threatenedlitigation, contested claim, investigation, arbitration, or governmentalproceeding by or against Borrower that (i) could individually or in theaggregate be likely in the reasonable business judgment of TBCC to have aMaterial Adverse Effect or (ii) purports to affect the legality, validity orenforceability of this Agreement, any other Loan Document or the consummation ofthe transactions contemplated hereby or thereby. 4.16. Investments; Contracts. Borrower (i) has not committed to make any ---------------------- Investment; (ii) is not a party to any indenture, agreement, contract,instrument or lease or subject to any charter, by-law or other corporaterestriction or any injunction, order, restriction or decree, which wouldmaterially and adversely affect its business, operations, assets or financialcondition; (iii) is not a party to any take or pay contract as to which it isthe purchaser; or (iv) has no material contingent or long-term liability,including -5- TBCC Loan and Security Agreement -----------------------------------------------------------------management contracts (excluding employment contracts of full-time individualofficers or employees), which could have a Material Adverse Effect. 4.17. No Defaults; Legal Compliance. Borrower is not in default under any ----------------------------- term of any Material Contract or in violation of any Requirement of Law, nor isBorrower subject to any investigation with respect to a claimed violation of any Requirement of Law. 4.18. Rights in Collateral; Priority of Liens. All Collateral is owned or --------------------------------------- leased by Borrower, free and clear of any and all Liens in favor of thirdparties, other than Permitted Liens. The Liens granted to TBCC pursuant to theLoan Documents constitute valid, enforceable and perfected first-priority Lienson the Collateral, except for Permitted Liens. 4.19. Intellectual Property. Set forth in the written Representations and --------------------- Warranties of Borrower previously delivered to TBCC is a complete and accuratelist of all patents, trademarks, trade names, service marks and copyrights(registered and unregistered), and all applications therefor and licensesthereof, of Borrower. Borrower owns or licenses all material patents,trademarks, service-marks, logos, tradenames, trade secrets, know-how,copyrights, or licenses and other rights with respect to any of the foregoing,which are necessary or advisable for the operation of its business as presentlyconducted or proposed to be conducted. To the best of its knowledge after dueinquiry, Borrower has not infringed any patent, trademark, service-mark,tradename, copyright, license or other right owned by any other Person by thesale or use of any product, process, method, substance, part or other materialpresently contemplated to be sold or used, where such sale or use wouldreasonably be expected to have a Material Adverse Effect and no claim orlitigation is pending, or to the best of Borrower's knowledge, threatenedagainst or affecting Borrower that contests its right to sell or use any suchproduct, process, method, substance, part or other material. 4.20. Labor Matters. There are no existing or threatened strikes, lockouts or ------------- other disputes relating to any collective bargaining or similar agreement towhich Borrower is a party which would, individually or in the aggregate, bereasonably likely to have a Material Adverse Effect. 4.21. Licenses and Permits. Borrower has obtained and holds in full force and -------------------- effect, all franchises, licenses, leases, permits, certificates, authorizations,qualifications, easements, rights of way and other rights and approvals whichare necessary or advisable for the operation of its business as presentlyconducted and as proposed to be conducted, except where the failure to possessany of the foregoing (individually or in the aggregate) would not have aMaterial Adverse Effect. 4.22. Government Regulation. Borrower is not subject to regulation under the --------------------- Public Utility Holding Company Act of 1935, the Federal Power Act, theInterstate Commerce Act, the Investment Company Act of 1940, or any otherRequirement of Law that limits its ability to incur indebtedness or its abilityto consummate the transactions contemplated by this Agreement and the other LoanDocuments. 4.23. Business and Properties. The business of Borrower * affected by any -----------------------fire, explosion, accident, strike, lockout or other labor dispute, drought,storm, hail, earthquake, embargo, act of God or of the public enemy or othercasualty (whether or not covered by insurance) that could reasonably be expectedto have a Material Adverse Effect. *has not been 4.24. Affiliate Transactions. Borrower is not a party to or bound by any ---------------------- agreement or arrangement (whether oral or written) to which any Affiliate ofBorrower is a party except (i) in the ordinary course of and pursuant to thereasonable requirements of the business of Borrower and (ii) upon fair andreasonable terms no less favorable to Borrower than it could obtain in acomparable arm's-length transaction with an unaffiliated Person. 4.25. Survival of Representations. All representations made by Borrower in --------------------------- this Agreement and in any other Loan Document executed and delivered by it inconnection herewith shall survive the execution and delivery hereof and thereofand the closing of the transactions contemplated hereby and thereby.5. AFFIRMATIVE COVENANTS OF THE BORROWER. Until termination of this Agreement -------------------------------------- and payment and satisfaction of all Obligations: 5.1. Corporate Existence. Borrower shall (i) maintain its corporate ------------------- existence, (ii) maintain in full force and effect all material licenses, bonds,franchises, leases, trademarks, qualifications and authorizations to dobusiness, and all material patents, contracts and other rights necessary oradvisable to the profitable conduct of its business, and (iii) continue in, andlimit its operations to, the same lines of business as presently conducted byit. 5.2. Maintenance of Property. Borrower shall keep all property useful and ----------------------- necessary to its business in good working order and condition (ordinary wear andtear excepted) in accordance with its past operating practices. 5.3. Affiliate Transactions. Borrower shall conduct transactions with any of ---------------------- its Affiliates on an arm's-length basis or other basis no less favorable toBorrower and which are approved by the board of directors of Borrower. 5.4. Taxes. Borrower shall pay when due (i) all tax assessments, and other ----- governmental charges and levies imposed against it or any of its property and(ii) all lawful claims that, if unpaid, might by law become a Lien upon itsproperty; provided, however, that, unless such tax assessment, charge, levy or -------- ------- claim has become a Lien on any of the property of Borrower, it need not be paidif it is being contested in good faith, by appropriate proceedings diligentlyconducted and an adequate reserve or other appropriate provision shall have beenmade therefor as required in accordance with GAAP. 5.5. Requirements of Law. Borrower shall comply with all Requirements of Law ------------------- applicable to it, including, without limitation, all applicable Federal, State,local or foreign laws and regulations, including, without limitation, thoserelating to environmental matters, employee matters, the Employee RetirementIncome Security Act of 1974, and the collection, payment and deposit ofemployees' income, unemployment and social security taxes, provided that -------- Borrower shall not be deemed in violation hereof if Borrower's failure to complywith any of the foregoing would not require more than $50,000 to cure the same. -6- TBCC Loan and Security Agreement ----------------------------------------------------------------- 5.6. Insurance. Borrower shall maintain public liability insurance, business --------- interruption insurance, third party property damage insurance and replacementvalue insurance on its assets (including the Collateral) under such policies ofinsurance, with such insurance companies, in such amounts and covering suchrisks as are at all times satisfactory to TBCC in its commercially reasonablejudgment, all of which policies covering the Collateral shall name TBCC as anadditional insured and lender loss payee in case of loss, and contain otherprovisions as TBCC may reasonably require to protect fully TBCC's interest inthe Collateral and any payments to be made under such policies. 5.7. Books and Records; Inspections. Borrower shall (i) maintain books and ------------------------------ records (including computer records) pertaining to the Collateral in suchdetail, form and scope as is consistent with good business practice and (ii)provide TBCC and its agents access to the premises of Borrower at any time andfrom time to time, during normal business hours and upon reasonable notice underthe circumstances, and at any time on and after the occurrence of a Default orEvent of Default, for the purposes of (A) inspecting and verifying theCollateral, (B) inspecting and copying (at Borrower's expense) any and allrecords pertaining thereto, and (C) discussing the affairs, finances andbusiness of Borrower with any officer, employee or director of Borrower or withthe Auditors. Borrower shall reimburse TBCC for the reasonable travel andrelated expenses of TBCC's employees or, at TBCC's option, of such outside accountants or examiners as may be retained by TBCC to verify or inspectCollateral, records or documents of Borrower on a regular basis or for a specialinspection if TBCC deems the same appropriate*. If TBCC's own employees areused, Borrower shall also pay therefor $600 per person per day (or such otheramount as shall represent TBCC's then current standard charge for the same), or,if outside examiners or accountants are used, Borrower shall also pay TBCC suchsum as TBCC may be obligated to pay as fees therefor*. *provided that all such expenses shall be included in the CollateralMonitoring Fee provided for in the Schedule and shall not be charged separately,unless an Event of Default has occurred and is continuing 5.8. Notification Requirements. Borrower shall give TBCC the following ------------------------- notices and other documents: (a) Notice of Defaults. Borrower shall give TBCC written notice of any ------------------ Default or Event of Default within two Business Days after becoming aware of thesame. (b) Proceedings or Adverse Changes. Borrower shall give TBCC written ------------------------------ notice of any of the following, promptly, and in any event within five BusinessDays after Borrower becomes aware of any of the following: (i) any proceedingbeing instituted or threatened by or against it in any federal, state, local orforeign court or before any commission or other regulatory body involving a sum,together with the sum involved in all other similar proceedings, in excess of$50,000 in the aggregate, (ii) any order, judgment or decree being enteredagainst Borrower or any of its properties or assets involving a sum, togetherwith the sum of all other orders, judgments or decrees, in excess of $50,000 inthe aggregate, and (iii) any actual or prospective change, development or eventwhich has had or could reasonably be expected to have a Material Adverse Effect. (c) Change of Name or Chief Executive Office; Opening Additional Places of ----------------------------------------------------------------------Business. Borrower shall give TBCC at least 30 days prior written notice of any-------- change of Borrower's corporate name or its chief executive office or of theopening of any additional place of business. (d) Casualty Loss. Borrower shall (i) provide written notice to TBCC, ------------- within ten Business Days, of any material damage to, the destruction of or anyother material loss to any asset or property owned or used by Borrower otherthan any such asset or property with a net book value (individually or in theaggregate) less than $10,000 or any condemnation, confiscation or other taking,in whole or in part, or any event that otherwise diminishes so as to renderimpracticable or unreasonable the use of such asset or property owned or used byBorrower together with the amount of the damage, destruction, loss or diminutionin value and (ii) diligently file and prosecute its claim or claims for anyaward or payment in connection with any of the foregoing. (e) Intellectual Property. Borrower shall promptly give TBCC written --------------------- notice of any copyright registration made by it, any rights Borrower may obtainto any copyrightable works, new trademarks or any new patentable inventions, andof any renewal or extension of any trademark registration, or if it shallotherwise become entitled to the benefit of any patent or patent application ortrademark or trademark application. (f) Deposit Accounts and Security Accounts. Borrower shall promptly give -------------------------------------- TBCC written notice of the opening of any new bank account or other depositaccount, and any new securities account. 5.9. Qualify to Transact Business. Borrower shall qualify to transact ---------------------------- business as a foreign corporation in each jurisdiction where the nature orextent of its business or the ownership of its property requires it to be soqualified or authorized and where failure to qualify or be authorized would havea Material Adverse Effect. 5.10. Financial Reporting. Borrower shall timely deliver to TBCC the ------------------- following financial information: the information set forth in the Schedule, and,when requested by TBCC in its good-faith judgment, any further informationrespecting Borrower or any Collateral. Borrower authorizes TBCC to communicatedirectly with its officers, employees and Auditors and to examine and makeabstracts from its books and records. Borrower authorizes its Auditors todisclose to TBCC any and all financial statements, work papers and otherinformation of any kind that they may have with respect to Borrower and itsbusiness and financial and other affairs. Borrower shall deliver a letteraddressed to the Auditors requesting them to comply with the provisions of thisparagraph when requested by TBCC. 5.11. Payment of Liabilities. Borrower shall pay and discharge, in the ---------------------- ordinary course of business, all Indebtedness, except where the same may becontested in good faith by appropriate proceedings and adequate reserves withrespect thereto have been provided on the books and records of Borrower inaccordance with GAAP. 5.12. Patents, Trademarks, Etc. Borrower shall do and cause to be done all ------------------------ things necessary to preserve, maintain and keep in full force and effect all ofits registrations of trademarks, service marks and other marks, trade names andother trade rights, patents, copyrights and other -7- TBCC Loan and Security Agreement -----------------------------------------------------------------intellectual property in accordance with prudent business practices. 5.13. Proceeds of Collateral. Without limiting any of the other terms of this ---------------------- Agreement, and without implying any consent to any sale or other transfer ofCollateral in violation of any provision of this Agreement, Borrower shalldeliver to TBCC all proceeds of any sale or other transfer or disposition of anyCollateral, immediately upon receipt of the same and in the same form asreceived, with any necessary endorsements, and Borrower will not commingle anysuch proceeds with any of its other funds or property, but will segregate themfrom the other assets of Borrower and will hold them in trust and for theaccount and as the property of TBCC. 5.14. Solvency. Borrower shall be Solvent at all times. -------- 6. NEGATIVE COVENANTS. Until termination of this Agreement and payment and ------------------ satisfaction of all Obligations: 6.1. Contingent Obligations. Borrower will not, directly or indirectly, ---------------------- incur, assume, or suffer to exist any Contingent Obligation, excludingindemnities given in connection with this Agreement or the other Loan Documentsin favor of TBCC or in connection with the sale of Inventory or other assetdispositions permitted hereunder. 6.2. Corporate Changes. Borrower will not, directly or indirectly, merge or ------------------ consolidate with any Person, or liquidate or dissolve (or suffer any liquidationor dissolution). 6.3. Change in Nature of Business. Borrower will not at any time make any ---------------------------- material change in the lines of its business as carried on at the date of thisAgreement or enter into any new line of business. 6.4. Sales of Assets. Borrower will not, directly or indirectly, in any --------------- fiscal year, sell, transfer or otherwise dispose of any assets, or grant anyoption or other right to purchase or otherwise acquire any assets other than (i)Equipment with an aggregate value of less than $25,000 the proceeds of whichshall be paid to TBCC and applied to the Obligations, (ii) sales of Inventory inthe ordinary course of business and (iii) licenses or sublicenses on a non-exclusive basis of intellectual property in the ordinary course of Borrower's business. 6.5. Cancellation of Debt. Borrower will not cancel any claim or debt owed -------------------- to it, except in the ordinary course of business. 6.6. Loans to Other Persons. Borrower will not at any time make loans or ---------------------- advance any credit (except to trade debtors in the ordinary course of business)to any Person in excess of $25,000 in the aggregate at any time for all suchloans. 6.7. Liens. Borrower will not, directly or indirectly, at any time create, -----incur, assume or suffer to exist any Lien on or with respect to any of theCollateral, other than: Liens created hereunder and by any other Loan Document;and Permitted Liens. 6.8. Dividends, Stock Redemptions. Borrower will not, directly or ---------------------------- indirectly, pay any dividends or distributions on, purchase, redeem or retireany shares of any class of its capital stock or any warrants, options or rightsto purchase any such capital stock, whether now or hereafter outstanding(Stock), or make any payment on account of or set apart assets for a sinking orother analogous fund for, the purchase, redemption, defeasance, retirement orother acquisition of its Stock, or make any other distribution in respectthereof, either directly or indirectly, whether in cash or property or inobligations of Borrower, except for dividends paid solely in stock of theBorrower. 6.9. Investments in Other Persons. Borrower will not, directly or ---------------------------- indirectly, at any time make or hold any Investment in any Person (whether incash, securities or other property of any kind) other than Investments in CashEquivalents*. *, and other than (i) existing Investments in existing wholly-ownedSubsidiaries, and (ii) new Investments in existing wholly-owned Subsidiaries inthe ordinary course of business. 6.10. Partnerships; Subsidiaries; Joint Ventures; Management Contracts. ---------------------------------------------------------------- Borrower will not at any time create any direct or indirect Subsidiary, enterinto any joint venture or similar arrangement or become a partner in any generalor limited partnership or enter into any management contract (other than anemployment contract for the employment of an officer or employee entered into inthe regular course of Borrower's business) permitting third party managementrights with respect to Borrower's business. 6.11. Fiscal Year. Borrower will not change its fiscal year. ----------- 6.12. Accounting Changes. Borrower will not at any time make or permit any ------------------ change in accounting policies or reporting practices, except as required byGAAP. 6.13. Broker's or Finder's Fees. Borrower will not pay or incur any broker's ------------------------- or finder's fees in connection with this Agreement or the transactionscontemplated hereby. 6.14. Unusual Terms of Sale. Borrower will not sell goods or products on --------------------- extended terms, consignment terms, on a progress billing or bill and hold basis,or on any other unusual terms. 6.15. Amendments of Material Contracts. Borrower will not amend, modify, -------------------------------- cancel or terminate, or permit the amendment, modification, cancellation ortermination of, any Material Contract, if such amendment, modification,cancellation or termination could have a Material Adverse Effect. 6.16. Sale and Leaseback Obligations. Borrower will not at any time create, ------------------------------ incur or assume any obligations as lessee for the rental of real or personalproperty in connection with any sale and leaseback transaction. 6.17. Acquisition of Stock or Assets. Borrower will not acquire or commit or ------------------------------ agree to acquire all or any stock, securities or assets of any other Personother than Inventory and Equipment acquired in the ordinary course of business*. *and other than acquisitions of new wholly-owned Subsidiaries made withTBCC's prior written consent (which shall not be unreasonably withheld). Suchconsent by TBCC may be conditioned on such new Subsidiary executing anddelivering a Continuing Guaranty of all of the Obligations in such form as TBCCshall reasonably specify and a Security Agreement granting TBCC a first-prioritysecurity -8- TBCC Loan and Security Agreement -----------------------------------------------------------------interest in the assets of such Subsidiary (subject to permitted liens defined ina manner comparable to that set forth in this Agreement) in such form as TBCCshall reasonably specify (together with UCC-1 financing statements, certifiedresolutions and other related documents in such form as TBCC shall reasonablyspecify.7. EVENTS OF DEFAULT. ----------------- 7.1. Events of Default. The occurrence of any of the following events shall -----------------constitute an Event of Default: (a) Borrower shall fail to pay any principal, interest, fees, expenses orother Obligations when payable, whether at stated maturity, by acceleration, orotherwise; or (b) Borrower shall default in the performance or observance of anyagreement, covenant, condition, provision or term contained in Section 1.1, 1.2,1.4, 3.3, 5.7, 5.13, 6 (and its Sections and subsections), or 8.1 of thisAgreement, or Borrower shall fail to perform any non-monetary Obligation whichby its nature cannot be cured; or (c) Borrower shall default in the performance or observance of any otheragreement, covenant, condition, provision or term of this Agreement (other thanthose referred to in Section 7.1(a) above or Section 7.1(b) above) or any otherLoan Document, and such failure continues uncured for a period of five BusinessDays after the date it occurs; or (d) Borrower or any Guarantor shall dissolve, wind up or otherwise ceaseto conduct its business; or (e) Borrower or any Guarantor shall become the subject of (i) anInsolvency Event except as set forth in clause (e) of the definition ofInsolvency Event or (ii) an Insolvency Event as set forth in clause (e) of thedefinition of Insolvency Event that is not dismissed within sixty days; or (f) any representation or warranty made by or on behalf of Borrower or anyGuarantor to TBCC, under this Agreement or otherwise, shall be incorrect ormisleading in any material respect when made or deemed made; or (g) A change in the ownership or control * of the voting stock of theBorrower compared to such ownership on the date of this Agreement; or *in one transaction or a series of related transactions of more than 50% (h) any judgment or order for the payment of money shall be renderedagainst Borrower and shall not be stayed, vacated, bonded or discharged withinthirty days; or (i) any defined "Event of Default" shall occur under any other LoanDocument; or Borrower or any Guarantor shall deny or disaffirm its obligationsunder any of the Loan Documents or any Liens granted in connection therewith orshall otherwise challenge any of its obligations under any of the Loan Documents; or any Liens granted in any of the Collateral shall be determined tobe void, voidable or invalid, are subordinated or are not given the prioritycontemplated by this Agreement; or (j) any Loan Document shall for any reason cease to create a valid andperfected Lien on the Collateral purported to be covered thereby, of firstpriority (except for Permitted Liens); or (k) the Auditors for Borrower shall deliver a Qualified opinion on anyFinancial Statement; or (l) Borrower or any Guarantor (i) shall fail to pay any Indebtedness owingto TBCC under any other agreement with TBCC or note or instrument in favor ofTBCC, when due (whether at scheduled maturity or by required prepayment,acceleration, demand or otherwise), or (ii) shall otherwise be in breach of ordefault in any of its obligations under any such agreement, note or instrumentwith respect to any such Indebtedness; or (m) Borrower or any Guarantor (i) shall fail to pay any Indebtedness inexcess of * owing to any Person other than TBCC or any interest or premiumthereon, when due (whether at scheduled maturity or by required prepayment,acceleration, demand or otherwise), or (ii) shall otherwise be in breach ordefault in any of its obligations under any agreement with respect to any suchIndebtedness, if the effect of such breach, default or failure to pay is tocause such Indebtedness to become due or redeemed or permit the holder orholders of such Indebtedness (or a trustee or agent on behalf of such holder orholders) to declare such Indebtedness due or require such Indebtedness to beredeemed prior to its stated maturity; or *$100,000 (n) the occurrence of any event or condition that, in TBCC's * judgment,could reasonably be expected to have a Material Adverse Effect. *reasonableTBCC may cease making any Loans hereunder during any of the above cure periods,and thereafter if any Event of Default has occurred and is continuing. 7.2. Remedies. Upon the occurrence and during the continuance of an Event of -------- Default, TBCC shall have all rights and remedies under applicable law and theLoan Documents, and TBCC may do any or all of the following: (a) Declare all Obligations to be immediately due and payable (except withrespect to any Event of Default with respect to Borrower set forth in Section7.1(e), in which case all Obligations shall automatically become immediately dueand payable) without presentment, demand, protest or any other action orobligation of TBCC; (b) Cease making any Loans or other extensions of credit to Borrower ofany kind; (c) Take possession of all documents, instruments, files and records(including the copying of any computer records) relating to the Receivables orother Collateral and use (at the expense of Borrower) such supplies or space ofBorrower at Borrower's places of business necessary to administer and collectthe Receivables and other Collateral; (d) Accelerate or extend the time of payment, compromise, issue credits,or bring suit on the Receivables and other Collateral (in the name of Borroweror TBCC) and otherwise administer and collect the Receivables and otherCollateral; (e) Collect, receive, dispose of and realize upon any Investment Property,including withdrawal of any and all funds from any securities accounts; (f) Sell, assign and deliver the Receivables and other Collateral, with orwithout advertisement, at public or pri- -9- TBCC Loan and Security Agreement ----------------------------------------------------------------- vate sale, for cash, on credit or otherwise, subject to applicable law; (g) Foreclose on the security interests created pursuant to the LoanDocuments by any available procedure, take possession of any or all of theCollateral, with or without judicial process and enter any premises where anyCollateral may be located for the purpose of taking possession of or removingthe same; and (h) Bid or become a purchaser at any sale, free from any right ofredemption, which right is expressly waived by Borrower, if permitted underapplicable law. If notice of intended disposition of any Collateral is requiredby law, it is agreed that ten days' notice shall constitute reasonablenotification. Borrower will assemble the Collateral and make it available atsuch locations as TBCC may specify, whether at the premises of Borrower orelsewhere, and will make available to TBCC the premises and facilities ofBorrower for the purpose of TBCC's taking possession of or removing theCollateral or putting the Collateral in salable form. (i) Borrower recognizes that TBCC may be unable to make a public sale ofany or all of the Investment Property, by reasons of prohibitions contained inapplicable securities laws or otherwise, and expressly agrees that a privatesale to a restricted group of purchasers for investment and not with a view toany distribution thereof shall be considered a commercially reasonable sale. * *Notwithstanding anything to the contrary in any Patent and TrademarkSecurity Agreement or other agreement, TBCC shall give Borrower at least 20 daysprior written notice of any foreclosure sale of Patent 151. 7.3. Receivables. Upon the occurrence and during the continuance of an Event ------------ of Default, or at any time that TBCC believes in good faith that fraud hasoccurred or that Borrower has failed to deliver the proceeds of Receivables orother Collateral to TBCC as required by this Agreement or any other LoanDocument, TBCC may (i) settle or adjust disputes or claims directly with accountdebtors for amounts and upon terms which it considers advisable, and (ii) notifyaccount debtors on the Receivables and other Collateral that the Receivables andCollateral have been assigned to TBCC, and that payments in respect thereofshall be made directly to TBCC. If an Event of Default has occurred and iscontinuing or TBCC reasonably believes in good faith that fraud has occurred, orthat Borrower has failed to deliver the proceeds of Receivables or otherCollateral to TBCC as required by this Agreement or any other Loan Document,Borrower hereby irrevocably authorizes and appoints TBCC, or any Person TBCC maydesignate, as its attorney-in-fact, at Borrower's sole cost and expense, toexercise, all of the following powers, which are coupled with an interest andare irrevocable, until all of the Obligations have been indefeasibly paid andsatisfied in full in cash: (A) to receive, take, endorse, sign, assign anddeliver, all in the name of TBCC or Borrower, any and all checks, notes, drafts,and other documents or instruments relating to the Collateral; (B) to receive,open and dispose of all mail addressed to Borrower and to notify postalauthorities to change the address for delivery thereof to such address as TBCCmay designate; and (C) to take or bring, in the name of TBCC or Borrower, allsteps, actions, suits or proceedings deemed by TBCC necessary or desirable toenforce or effect collection of Receivables and other Collateral or file andsign Borrower's name on a proof of claim in bankruptcy or similar documentagainst any obligor of Borrower. 7.4. Right of Setoff. In addition to all rights of offset that TBCC may have --------------- under applicable law, upon the occurrence and during the continuance of anyEvent of Default, and whether or not TBCC has made any demand or the Obligationsof Borrower have matured, TBCC shall have the right to appropriate and apply tothe payment of the Obligations of Borrower all deposits and other obligationsthen or thereafter owing by TBCC to or for the credit or the account ofBorrower. In the event that TBCC exercises any of its rights under this Section,TBCC shall provide notice to Borrower of such exercise, provided that thefailure to give such notice shall not affect the validity of the exercise ofsuch rights. 7.5. License for Use of Software and Other Intellectual Property. After the ----------------------------------------------------------- occurrence and during the continuance of an Event of Default, unless expresslyprohibited by any licensor thereof, TBCC is hereby granted a license to use allcomputer software programs, data bases, processes, trademarks, tradenames andmaterials used by Borrower in connection with its businesses or in connection with the Collateral. 7.6. No Marshalling; Deficiencies; Remedies Cumulative. The net cash ------------------------------------------------- proceeds resulting from TBCC's exercise of any of its rights with respect toCollateral, including any and all Collections (after deducting all of TBCC'sreasonable expenses related thereto), shall be applied by TBCC to such of theObligations in such order as TBCC shall elect in its sole and absolutediscretion, whether due or to become due. Borrower shall remain liable to TBCCfor any deficiencies and TBCC shall remit to Borrower or its successor orassign, any surplus resulting therefrom. The remedies specified in thisAgreement are cumulative, may be exercised in such order and with respect tosuch Collateral as TBCC may deem desirable and are not intended to be exclusive,and the full or partial exercise of any of them shall not preclude the full orpartial exercise of any other available remedy under this Agreement, under anyother Loan Document, at equity or at law. 7.7. Waivers. Borrower hereby waives any bonds, security or sureties ------- required by any statute, rule or any other law as an incident to any taking ofpossession by TBCC of any Collateral. Borrower also waives any damages (direct,consequential or otherwise) occasioned by the enforcement of TBCC's rights underthis Agreement or any other Loan Document including the taking of possession ofany Collateral or the giving of notice to any account debtor or the collectionof any Receivable or other Collateral (other than damages that are the result ofacts or omissions constituting gross negligence or willful misconduct of TBCC).These waivers and all other waivers provided for in this Agreement and the otherLoan Documents have been negotiated by the parties and Borrower acknowledgesthat it has been represented by counsel of its own choice and has consulted suchcounsel with respect to its rights hereunder. 7.8. Right to Make Payments. In the event that Borrower shall fail to ---------------------- purchase or maintain insurance required hereunder, or to pay any tax,assessment, government charge or levy, except as the same may be otherwisepermitted hereunder, or in the event that any Lien prohibited hereby shall notbe paid in full or discharged, or -10- TBCC Loan and Security Agreement -----------------------------------------------------------------in the event that Borrower shall fail to perform or comply with any othercovenant, promise or obligation to TBCC hereunder or under any other LoanDocument, TBCC may (but shall not be required to) perform, pay, satisfy,discharge or bond the same for the account of Borrower, and all amounts so paidby TBCC shall be treated as a Loan hereunder to Borrower and shall constitutepart of the Obligations.8. ASSIGNMENTS AND PARTICIPATIONS. ------------------------------ 8.1. Assignments. Borrower shall not assign this Agreement or any right or ----------- obligation hereunder without the prior written consent of TBCC. TBCC may assign(without the consent of Borrower) to one or more Persons all or a portion of itsrights and obligations under this Agreement and the other Loan Documents. 8.2. Participations. TBCC may sell participations in or to all or a portion -------------- of its rights and obligations under this Agreement (including, withoutlimitation, all or a portion of the Loans); provided, however, that TBCC'sobligations under this Agreement shall remain unchanged. 8.3. Disclosure. TBCC may, in connection with any permitted assignment or ---------- participation or proposed assignment or participation pursuant to thisAgreement, disclose to the assignee or participant or proposed assignee orparticipant any information relating to Borrower furnished to TBCC by or onbehalf of Borrower.9. DEFINITIONS. ----------- 9.1. General Definitions. As used herein, the following terms shall have the ------------------- meanings herein specified (to be equally applicable to both the singular andplural forms of the terms defined): (a) Affiliate means as to any Person, any other Person who directly or --------- indirectly controls, is under common control with, is controlled by or is adirector or officer of such Person. As used in this definition, "control"(including its correlative meanings, "controlled by" and "under common controlwith") means possession, directly or indirectly, of the power to direct or causethe direction of management or policies (whether through ownership of votingsecurities or partnership or other ownership interests, by contract orotherwise), provided that, in any event, any Person who owns directly orindirectly twenty percent (20%) or more of the securities having ordinary votingpower for the election of the members of the board of directors or othergoverning body of a corporation or twenty percent (20%) or more of thepartnership or other ownership interests of any other Person (other than as alimited partner of such other Person) will be deemed to control suchcorporation, partnership or other Person. (b) Agreement means this Loan and Security Agreement, as amended, --------- supplemented or otherwise modified from time to time. (c) Auditors means a nationally recognized firm of independent public -------- accountants selected by Borrower and reasonably satisfactory to TBCC. (d) Bankruptcy Code means Title 11 of the United States Code entitled --------------- "Bankruptcy," as that title may be amended from time to time, or any successorstatute. (e) Borrowing means a borrowing of Loans. --------- (f) Business Day means any day other than a Saturday, Sunday or any other ------------ day on which commercial banks in Chicago, Illinois are required or permitted bylaw to close. (g) Cash Equivalents means (i) securities issued, guaranteed or insured ---------------- by the United States or any of its agencies with maturities of not more than oneyear from the date acquired; (ii) certificates of deposit with maturities of notmore than one year from the date acquired, issued by any U.S. federal or statechartered commercial bank of recognized standing which has capital andunimpaired surplus in excess of $100,000,000; (iii) investments in money marketfunds registered under the Investment Company Act of 1940; and (iv) otherinstruments, commercial paper or investments acceptable to TBCC in its solediscretion. (h) Collateral means Receivables, Investment Property, Inventory, ---------- Equipment, and Other Property, and all additions and accessions thereto andsubstitutions and replacements therefor and improvements thereon, and allproceeds (whether cash or other property) and products thereof, including,without limitation, all proceeds of insurance covering the same and all tortclaims in connection therewith, and all records, files, computer programs andfiles, data and writings relating to the foregoing, and all equipment containingthe foregoing. (i) Collections means all cash, funds, checks, notes, instruments, any ----------- other form of remittance tendered by account debtors in respect of payment ofReceivables and any other payments received by Borrower with respect to anyother Collateral. (j) Compliance Certificate means a certificate as to compliance with the ---------------------- Obligations, on TBCC's standard form (in effect from time to time). (k) Contingent Obligation means any direct, indirect, contingent or non- --------------------- contingent guaranty or obligation for the Indebtedness of another Person, exceptendorsements in the ordinary course of business. (l) Default means any of the events specified in Section 7.1, whether or ------- not any of the requirements for the giving of notice, the lapse of time, orboth, or any other condition, has been satisfied. (m) Eligible Inventory means Inventory of Borrower which TBCC in its sole ------------------ discretion deems eligible for borrowing, based on such considerations as TBCC inits sole discretion may deem appropriate from time to time and less any suchreserves as TBCC, in its sole discretion, may require. Without limiting the factthat the determination of which Inventory is eligible for borrowing is a matterof TBCC's sole discretion, the following are the minimum requirements forInventory to be Eligible Inventory: (i) the Inventory must consist of * in good,new and salable condition which is not perishable, not obsolete orunmerchantable, and is not comprised of raw materials, work in process,packaging materials or supplies; (ii) the Inventory must meet all applicablegovernmental standards; (iii) the Inventory must have been manufactured incompliance with the Fair Labor Standards Act; (iv) the Inventory must conform inall respects to the warranties and representations set forth in this Agreement;(v) the Inventory must at all times be subject to TBCC's duly perfected, firstpriority security interest; and (vi) the Inventory must be in Borrower'sexclusive possession, separately identifiable from goods of others, and situatedat -11- TBCC Loan and Security Agreement -----------------------------------------------------------------Borrower's chief executive office or at one of the otherBorrower locations set forth on the Schedule. The value of Eligible Inventoryshall be computed at the lower of cost (computed on a "first in, first out"basis) or wholesale market value. *tape decks and video cameras (n) Eligible Receivables means and includes only those Receivables which -------------------- TBCC in its sole discretion deems eligible for borrowing, based on suchconsiderations as TBCC in its sole discretion may deem appropriate from time totime and less any such reserves as TBCC, in its sole discretion, may require.Without limiting the fact that the determination of which Receivables areeligible for borrowing is a matter of TBCC's sole discretion, the following (the"Minimum Eligibility Requirements") are the minimum requirements for a --------------------------------- Receivable to be an Eligible Receivable: (i) the Receivable must not beoutstanding for more than 90 days from its invoice date, (ii) the Receivablemust not represent progress billings, or be due under a fulfillment orrequirements contract with the account debtor, (iii) the Receivable must not besubject to any contingencies (including Receivables arising from sales onconsignment, guaranteed sale or other terms pursuant to which payment by theaccount debtor may be conditional), (iv) the Receivable must not be owing froman account debtor with whom the Borrower has any dispute (whether or notrelating to the particular Receivable), (v) the Receivable must not be owingfrom an Affiliate of Borrower, (vi) the Receivable must not be owing from anaccount debtor which is subject to any insolvency or bankruptcy proceeding, orwhose financial condition is not acceptable to TBCC, or which, fails or goes outof a material portion of its business, (vii) the Receivable must not be owingfrom the United States or any department, agency or instrumentality thereof(unless there has been compliance, to TBCC's satisfaction, with the UnitedStates Assignment of Claims Act), (viii) the Receivable must not be owing froman account debtor located outside the United States or Canada (unless pre-approved by TBCC in its discretion in writing, or backed by a letter of creditsatisfactory to TBCC, or FCIA insured satisfactory to TBCC), (ix) the Receivablemust not be owing from an account debtor to whom Borrower is or may be liablefor goods purchased from such account debtor or otherwise, (x) the Receivablemust not violate any representation or warranty set forth in this Agreement, and(xi) the Receivable must not be one in which TBCC does not have a first-priority, valid, perfected Lien. Without limiting the generality of theforegoing, Borrower must be in compliance with all requirements of the Loan Documents regarding registration with the U.S. Copyright Office of anycopyrightable software in order for any Receivable arising from any licensing ofsuch software to constitute an Eligible Receivable hereunder. Receivables owingfrom one account debtor will not be deemed Eligible Receivables to the extentthey exceed 30% of the total eligible Receivables outstanding. In addition, ifmore than 50% of the Receivables owing from an account debtor are outstandingmore than 90 days from their invoice date (without regard to unapplied credits)or are otherwise not eligible Receivables, then all Receivables owing from thataccount debtor will be deemed ineligible for borrowing. * TBCC may, from time totime, in its sole discretion, revise the Minimum Eligibility Requirements, uponwritten notice to the Borrower. *Receivables for services which have been fully performed, but which havenot yet been billed as a result of dates specified in the contract with theAccount Debtor as to when during a month billings will be made, may be EligibleReceivables if they meet all of the other Minimum Eligibility Requirements andare deemed eligible for Borrower by TBCC as set forth above and are not unbilledfor more than 90 days after the date the services were performed (the "UnbilledEligible Receivables"). (o) Equipment means all machinery, equipment, furniture, fixtures, --------- conveyors, tools, materials, storage and handling equipment, hydraulic presses,cutting equipment, computer equipment and hardware, including central processingunits, terminals, drives, memory units, printers, keyboards, screens,peripherals and input or output devices, molds, dies, stamps, vehicles, andother equipment of every kind and nature and wherever situated now or hereafterowned by Borrower or in which Borrower may have any interest as lessee orotherwise (to the extent of such interest), together with all additions andaccessions thereto, all replacements and all accessories and parts therefor, allmanuals, blueprints, know-how, warranties and records in connection therewith,all rights against suppliers, warrantors, manufacturers, sellers or others inconnection therewith, and together with all substitutes for any of theforegoing. (p) Event of Default means the occurrence of any of the events specified ---------------- in Section 7.1. (q) Financial Statements means the balance sheets, profit and loss -------------------- statements, statements of cash flow, and statements of changes in intercompanyaccounts, if any, for the period specified, prepared in accordance with GAAP andconsistent with prior practices. (r) GAAP means generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board of the AmericanInstitute of Certified Public Accountants and statements and pronouncements ofthe Financial Accounting Standards Board that are applicable to thecircumstances as of the date of determination. Whenever any accounting term isused herein which is not otherwise defined, it shall be interpreted inaccordance with GAAP. (s) Good Faith means "good faith" as defined in the Uniform Commercial ---------- Code, from time to time in effect in the State of Illinois. (t) Governing Documents means the articles or certificate of ------------------- incorporation and by-laws of Borrower. (u) Governmental Authority means any nation or government, any state or ---------------------- other political subdivision thereof or any entity exercising executive,legislative, judicial, regulatory or administrative functions thereof orpertaining thereto. (v) Guarantor means any present or future guarantor of any or all of the --------- Obligations. (w) Indebtedness means, with respect to any Person, as of the date of ------------ determination any indebtedness, liability or obligation of such Person (including without limitation obligations under capital leases and ContingentObligations). -12- TBCC Loan and Security Agreement ----------------------------------------------------------------- (x) Insolvency Event means, with respect to any Person, the occurrence ---------------- of any of the following: (a) such Person shall be adjudicated insolvent orbankrupt, or shall generally fail to pay or admit in writing its inability topay its debts as they become due, (b) such Person shall seek dissolution orreorganization or the appointment of a receiver, trustee, custodian orliquidator for it or a substantial portion of its property, assets or businessor to effect a plan or other arrangement with its creditors, (c) such Personshall make a general assignment for the benefit of its creditors, or consent toor acquiesce in the appointment of a receiver, trustee, custodian or liquidatorfor a substantial portion of its property, assets or business, (d) such Personshall file a voluntary petition under any bankruptcy, insolvency or similar lawor take any corporate or similar act in furtherance thereof, or (e) such Person,or a substantial portion of its property, assets or business shall become thesubject of an involuntary proceeding or petition for its dissolution,reorganization, and such proceeding is not dismissed or stayed within sixtydays, or the appointment of a receiver, trustee, custodian or liquidator, andsuch receiver is not dismissed within sixty days. (y) Inventory means all present and future goods intended for sale, --------- lease or other disposition by Borrower including, without limitation, all rawmaterials, work in process, finished goods and other retail inventory, goods inthe possession of outside processors or other third parties, goods consigned toBorrower to the extent of its interest therein as consignee, materials andsupplies of any kind, nature or description which are or might be used inconnection with the manufacture, packing, shipping, advertising, selling orfinishing of any such goods, and all documents of title or documentsrepresenting the same. (z) Investment in any Person means, as of the date of determination ---------- thereof, any payment or contribution, or commitment to make a payment orcontribution, by any Person including, without limitation, property contributedor committed to be contributed by any Person, on its account for or inconnection with its acquisition of any stock, bonds, notes, debentures,partnership or other ownership interest or any other security of the Person inwhom such Investment is made or any evidence of indebtedness by reason of aloan, advance, extension of credit, guaranty or other similar obligation for anydebt, liability or indebtedness of such Person in whom the Investment is made. (aa) Investment Property means any and all investment property of Borrower, ------------------- including all securities, whether certificated or uncertificated, securityentitlements, securities accounts, commodity contracts and commodity accounts,and all financial assets held in any securities account or otherwise, whereverlocated, and whether now existing or hereafter acquired or arising. (bb) Lien means any lien, claim, charge, pledge, security interest, ---- assignment, hypothecation, deed of trust, mortgage, lease, conditional sale,retention of title or other preferential arrangement having substantially thesame economic effect as any of the foregoing, whether voluntary or imposed bylaw. (cc) Loan Account has the meaning specified in Section 1.3. ------------ (dd) Loan Documents means this Agreement and all present and future -------------- documents and instruments delivered or to be delivered by Borrower or any of itsAffiliates or any Guarantor under, in connection with or relating to thisAgreement, as each of the same may be amended, supplemented or otherwisemodified from time to time. (ee) Loans means the loans and financial accommodations made by TBCC ----- hereunder. (ff) Material Adverse Effect means (i) a material adverse effect on the ----------------------- business, prospects, operations, results of operations, assets, liabilities orcondition (financial or otherwise) of Borrower*, (ii) the impairment ofBorrower's ability to perform its obligations under the Loan Documents to whichit is a party or of TBCC to enforce the Obligations or realize upon theCollateral or (iii) a material adverse effect on the value of the Collateral orthe amount which TBCC would be likely to receive (after giving consideration todelays in payment and costs of enforcement) in the liquidation of theCollateral. *and their Subsidiaries taken as a whole (gg) Material Contract means any contract or other arrangement to which ----------------- Borrower is a party (other than the Loan Documents) for which breach,nonperformance, cancellation or failure to renew could have a Material AdverseEffect. (hh) Obligations means and includes all loans (including the Loans), ----------- advances, debts, liabilities, obligations, covenants and duties owing byBorrower to TBCC of any kind or nature, present or future, whether or notevidenced by any note, guaranty or other instrument, which may arise under, outof, or in connection with, this Agreement, any other Loan Document or any otheragreement executed in connection herewith or therewith, whether or not for thepayment of money, whether arising by reason of an extension of credit, opening,guaranteeing or confirming of a letter of credit, loan, guaranty,indemnification or in any other manner, whether direct or indirect (includingthose acquired by assignment, purchase, discount or otherwise), whether absoluteor contingent, due or to become due, now due or hereafter arising and howeveracquired. The term includes, without limitation, all interest (includinginterest accruing on or after an Insolvency Event, whether or not an allowedclaim), charges, expenses, commitment, facility, closing and collateralmanagement fees, letter of credit fees, reasonable attorneys' fees, and anyother sum properly chargeable to Borrower under this Agreement, the other LoanDocuments or any other agreement executed in connection herewith or therewith. (ii) Other Property means all present and future: instruments, documents, -------------- documents of title, securities, bonds, notes, promissory notes, drafts,acceptances, letters of credit and rights to receive proceeds of letters ofcredit, deposit accounts, chattel paper, certificates, insurance policies,insurance proceeds, leases, computer tapes, causes of action, judgments, claimsagainst third parties, leasehold rights in any personal property, books,ledgers, files and records, general intangibles (including without limitation,all contract rights, tax refunds, rights to receive tax refunds, patents, patentapplications, copyrights (registered and unregistered), royalties, licenses,permits, franchise rights, authorizations, customer lists, rights ofindemnification, contribution and subrogation, computer programs, discs andsoftware, trade secrets, computer service contracts, trademarks, trade names,service marks and names, logos, -13- TBCC Loan and Security Agreement -----------------------------------------------------------------goodwill, deposits, choses in action, designs, blueprints, plans, know-how,telephone numbers and rights thereto, credits, reserves, and all forms ofobligations whatsoever now or hereafter owing to Borrower), all property at anytime in the possession or under the control of TBCC, and all security given byBorrower to TBCC pursuant to any other Loan Document or agreement. (jj) Permitted Liens means such of the following as to which no --------------- enforcement, collection, execution, levy or foreclosure proceeding shall havebeen commenced and be continuing: (i) Liens for taxes, assessments and othergovernmental charges or levies or the claims or demands of landlords, carriers,warehousemen, mechanics, laborers, materialmen and other like Persons arising byoperation of law in the ordinary course of business for sums which are not yet due and payable, (ii) deposits or pledges to secure the payment of workmen'scompensation, unemployment insurance or other social security benefits orobligations, public or statutory obligations, surety or appeal bonds, bid orperformance bonds, or other obligations of a like nature incurred in theordinary course of business (but nothing in this clause (ii) shall permit thecreation of Liens on Receivables, Investment Property, Inventory or OtherProperty), (iii) zoning restrictions, easements, encroachments, licenses,restrictions or covenants on the use of property which do not materially impaireither the use of the property in the operation of the business of Borrower orthe value of the property, (iv) rights of general application reserved to orvested in any municipality or other governmental, statutory or public authorityto control or regulate property, or to use property in a manner which does notmaterially impair the use of the property for the purposes for which it is heldby Borrower, (v) state and municipal Liens for personal property taxes which arenot yet due and payable, (vi) Purchase Money Liens*. *, (vii) Liens in favor of TBCC and any of its affiliates, (viii) Liens inexistence as of the date hereof and listed on Exhibit A hereto, and (ix) Lienscreated in connection with the refinancing of Indebtedness secured by PermittedLiens, provided that the amount of Indebtedness secured by any such Lien shallnot be increased as a result of such refinancing, and provided that no such Lienshall extend to property or assets which were not encumbered by the PermittedLien securing the Indebtedness refinanced (kk) Person means any individual, sole proprietorship, partnership, joint ------ venture, limited liability company, trust, unincorporated organization, jointstock company, association, corporation, institution, entity, party orgovernment (including any division, agency or department thereof) or any otherlegal entity, whether acting in an individual, fiduciary or other capacity, and,as applicable, the successors, heirs and assigns of each. (ll) Plan means any employee benefit plan, program or arrangement ---- maintained or contributed to by Borrower or with respect to which it may incurliability. (mm) Purchase Money Lien means a Lien on any item of Equipment created ------------------- substantially simultaneously with the acquisition of such Equipment for thepurpose of financing such acquisition, provided that such Lien shall attach onlyto the Equipment acquired. (nn) Qualification or Qualified means, with respect to any report of ------------- --------- Auditors covering Financial Statements, a material qualification to such report(i) resulting from a limitation on the scope of examination of such FinancialStatements or the underlying data, (ii) as to the capability of Borrower tocontinue operations as a going concern or (iii) which could be eliminated bychanges in Financial Statements or notes thereto covered by such report (such asby the creation of or increase in a reserve or a decrease in the carrying valueof assets) and which if so eliminated by the making of any such change and aftergiving effect thereto would result in a Default or an Event of Default. (oo) Receivables means all present and future accounts and accounts ----------- receivable, together with all security therefor and guaranties thereof and allrights and remedies relating thereto, including any right of stoppage intransit. (pp) Requirement of Law means (a) the Governing Documents, (b) any law, ------------------ treaty, rule, regulation, order or determination of an arbitrator, court orother Governmental Authority or (c) any franchise, license, lease, permit,certificate, authorization, qualification, easement, right of way, right orapproval binding on Borrower or any of its property. (qq) Schedule means the Schedule to this Agreement being signed -------- concurrently by Borrower and TBCC, as amended from time to time. (rr) Solvent means when used with respect to any Person that as of the ------- date as to which such Person's solvency is to be measured: (a) the fair salablevalue of its assets is in excess of the total amount of its liabilities (including contingent liabilities as valued in accordance with applicable law)as they become absolute and matured; (b) it has sufficient capital to conductits business; and (c) it is able to meet its debts as they mature. (ss) Subsidiary means, as to any Person, a corporation or other entity in ---------- which that Person directly or indirectly owns or controls shares of stock orother ownership interests having ordinary voting power to elect a majority ofthe board of directors or appoint other managers of such corporation or otherentity. 9.2. Accounting Terms and Determinations. Unless otherwise defined or ----------------------------------- specified herein, all accounting terms used in this Agreement shall be construedin accordance with GAAP, applied on a basis consistent in all material respectswith the Financial Statements delivered to TBCC on or before the date of thisAgreement. All accounting determinations for purposes of determining compliancewith this Agreement shall be made in accordance with GAAP as in effect on thedate of this Agreement and applied on a basis consistent in all materialrespects with the audited Financial Statements delivered to TBCC on or beforethe date of this Agreement. The Financial Statements required to be deliveredhereunder, and all financial records, shall be maintained in accordance withGAAP. If GAAP shall change from the basis used in preparing the auditedFinancial Statements delivered to TBCC on or before the date of this Agreement,the Compliance Certificates required to be delivered pursuant to this Agreementshall include calculations setting forth the adjustments necessary todemonstrate how Borrower is in compliance with the Financial Covenants (if any)based upon GAAP as in effect on the date of this Agreement. 9.3. Other Terms; Headings; Construction. Unless otherwise defined herein, ----------------------------------- terms used herein that are defined in the Uniform Commercial Code, from time totime in -14- TBCC Loan and Security Agreement -----------------------------------------------------------------effect in the State of Illinois, shall have the meanings set forth therein. Eachof the words "hereof," "herein," and "hereunder" refer to this Agreement as awhole. The term "including", whenever used in this Agreement, shall mean"including (but not limited to)". An Event of Default shall "continue" or be"continuing" unless and until such Event of Default has been waived or curedwithin the grace period specified therefor under Section 7.1. References toArticles, Sections, Annexes, Schedules, and Exhibits are internal references tothis Agreement, and to its attachments, unless otherwise specified. The headingsand any Table of Contents are for convenience only and shall not affect themeaning or construction of any provision of this Agreement. This Agreement hasbeen fully reviewed and negotiated between the parties and no uncertainty orambiguity in any term or provision of this Agreement shall be construed strictlyagainst TBCC or Borrower under any rule of construction or otherwise.10. GENERAL PROVISIONS. ------------------- 10.1. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS ------------- AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR INCONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHERSOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THEINTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS. 10.2. SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE BORROWER AND -------------------------- TBCC, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVEDONLY BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TOWHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVETHE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THEBORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCC IN GOODFAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OROTHER COURT ORDER IN FAVOR OF TBCC. THE BORROWER AGREES THAT IT WILL NOT ASSERTANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHTBY TBCC. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUTLIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NONCONVENIENS. 10.3. SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT ------------------ CORPORATION SYSTEM, 1209 ORANGE STREET, WILMINGTON, DELAWARE 19801, AS THEDESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THEBORROWER, SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TOTHIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCHPROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAILTO THE BORROWER, BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOTAFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THERIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 10.4. LIMITATION OF LIABILITY. TBCC SHALL HAVE NO LIABILITY TO THE BORROWER ----------------------- (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THEBORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THETRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BYA FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON TBCC THAT THELOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE ORWILLFUL MISCONDUCT OF TBCC. THE BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINSTTBCC FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES. 10.5. Delays; Partial Exercise of Remedies. No delay or omission of TBCC to ------------------------------------ exercise any right or remedy hereunder shall impair any such right or operate asa waiver thereof. No single or partial exercise by TBCC of any right or remedyshall preclude any other or further exercise thereof, or preclude any otherright or remedy. 10.6. Notices. Except as otherwise provided herein, all notices and ------- correspondence hereunder shall be in writing and sent by certified or registeredmail, return receipt requested, by overnight delivery service, with all chargesprepaid, or by telecopier followed by a hard copy sent by regular mail, to theparties at their addresses set forth in the heading to this Agreement. All suchnotices and correspondence shall be deemed given (i) if sent by certified orregistered mail, three Business Days after being postmarked, (ii) if sent byovernight delivery service, when received at the above stated addresses or whendelivery is refused and (iii) if sent by telecopier transmission, when receiptof such transmission is acknowledged. Borrower's and TBCC's telecopier numbersfor purpose of notice hereunder are set forth in the Schedule; each party'snumber may be changed by written notice to the other party. 10.7. Indemnification; Reimbursement of Expenses of Collection. Borrower -------------------------------------------------------- hereby indemnifies and agrees, whether or not any of the transactionscontemplated by this Agreement or the other Loan Documents are consummated, todefend and hold harmless (on an after-tax basis) TBCC, its successors andassigns and their respective directors, officers, agents, employees, advisors,shareholders, attorneys and Affiliates (each, an "Indemnified Party") from and ------------------- against any and all losses, claims, damages, liabilities, deficiencies,obligations, fines, penalties, actions (whether threatened or existing),judgments, suits (whether threatened or existing) or expenses (including,without limitation, reasonable fees and disbursements of counsel, experts,consultants and other professionals) incurred by any of them (collectively,"Claims") (except, in the case of each Indemnified Party, to the extent that any-------- Claim is determined in a final and non-appealable judgment by a -15- TBCC Loan and Security Agreement -----------------------------------------------------------------court of competent jurisdiction to have directly resulted from such IndemnifiedParty's gross negligence or willful misconduct) arising out of or by reason of(i) any litigation, investigation, claim or proceeding which arises out of or isrelated to (A) Borrower, or this Agreement, any other Loan Document or thetransactions contemplated hereby or thereby, (B) any actual or proposed use by Borrower of the proceeds of the Loans, or (C) TBCC's entering into thisAgreement or any other Loan Document or any other agreements and documentsrelating hereto, including, without limitation, amounts paid in settlement,court costs and the reasonable fees and disbursements of counsel incurred inconnection with any such litigation, investigation, claim or proceeding, (ii)any remedial or other action taken by Borrower in connection with compliance byBorrower, or any of its properties, with any federal, state or localenvironmental laws, rules or regulations, and (iii) any pending, threatened oractual action, claim, proceeding or suit by any shareholder or director ofBorrower or any actual or purported violation of Borrower's charter, by-laws orany other agreement or instrument to which Borrower is a party or by which anyof its properties is bound. In addition and without limiting the generality ofthe foregoing, Borrower shall, upon demand, pay to TBCC all reasonable costs andexpenses incurred by TBCC (including the reasonable fees and disbursements ofcounsel and other professionals) in connection with the preparation, execution,delivery, administration, modification and amendment of the Loan Documents, andpay to TBCC all reasonable costs and expenses (including the reasonable fees anddisbursements of counsel and other professionals) paid or incurred by TBCC inorder to enforce or defend any of its rights under or in respect of thisAgreement, any other Loan Document or any other document or instrument now orhereafter executed and delivered in connection herewith, collect the Obligationsor otherwise administer this Agreement, foreclose or otherwise realize upon theCollateral or any part thereof, prosecute actions against, or defend actions by,account debtors; commence, intervene in, or defend any action or proceeding;initiate any complaint to be relieved of the automatic stay in bankruptcy; fileor prosecute any probate claim, bankruptcy claim, third-party claim, or otherclaim; examine, audit, copy, and inspect any of the Collateral or any ofBorrower's books and records; protect, obtain possession of, lease, dispose of,or otherwise enforce TBCC's security interest in, the Collateral; and otherwiserepresent TBCC in any litigation relating to Borrower. Without limiting thegenerality of the foregoing, Borrower shall pay TBCC a fee with respect to eachwire transfer in the amount of $15 plus all bank charges and a fee of $15 forall returned checks plus all bank charges. If either TBCC or Borrower files anylawsuit against the other predicated on a breach of this Agreement, theprevailing party in such action shall be entitled to recover its reasonablecosts and attorneys' fees, including (but not limited to) reasonable attorneys'fees and costs incurred in the enforcement of, execution upon or defense of anyorder, decree, award or judgment. If and to the extent that the Obligations ofBorrower hereunder are unenforceable for any reason, Borrower hereby agrees tomake the maximum contribution to the payment and satisfaction of the Obligationswhich is permissible under applicable law. Borrower's obligations under Section2.4 and this Section shall survive any termination of this Agreement and theother Loan Documents and the payment in full of the Obligations, and are inaddition to, and not in substitution of, any of the other Obligations. 10.8. Amendments and Waivers. Any provision of this Agreement or any other ---------------------- Loan Document may be amended or waived if, but only if, such amendment or waiveris in writing and signed by Borrower and TBCC and then any such amendment orwaiver shall be effective only to the extent set forth therein. The failure ofTBCC at any time or times to require Borrower to strictly comply with any of theprovisions of this Agreement or any other present or future agreement betweenBorrower and TBCC shall not waive or diminish any right of TBCC later to demandand receive strict compliance therewith. Any waiver of any default shall notwaive or affect any other default, whether prior or subsequent, and whether ornot similar. None of the provisions of this Agreement or any other agreement nowor in the future executed by Borrower and delivered to TBCC shall be deemed tohave been waived by any act or knowledge of TBCC or its agents or employees, butonly by a specific written waiver signed by an authorized officer of TBCC anddelivered to Borrower. 10.9. Counterparts; Telecopied Signatures. This Agreement and any waiver or ----------------------------------- amendment hereto may be executed in counterparts and by the parties hereto inseparate counterparts, each of which when so executed and delivered shall be anoriginal, but both of which shall together constitute one and the sameinstrument. This Agreement and each of the other Loan Documents and any noticesgiven in connection herewith or therewith may be executed and delivered bytelecopier or other facsimile transmission all with the same force and effect asif the same was a fully executed and delivered original manual counterpart. 10.10. Severability. In case any provision in or obligation under this ------------ Agreement or any other Loan Document shall be invalid, illegal or unenforceablein any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any otherjurisdiction, shall not in any way be affected or impaired thereby. 10.11. Joint and Several Liability. If Borrower consists of more than one --------------------------- Person, their liability shall be joint and several, and the compromise of anyclaim with, or the release of, any Borrower shall not constitute a compromisewith, or a release of, any other Borrower. 10.12. Maximum Rate. Notwithstanding anything to the contrary contained ------------ elsewhere in this Agreement or in any other Loan Document, the parties heretohereby agree that all agreements between them under this Agreement and the otherLoan Documents, whether now existing or hereafter arising and whether written ororal, are expressly limited so that in no contingency or event whatsoever shallthe amount paid, or agreed to be paid, to TBCC for the use, forbearance, ordetention of the money loaned to Borrower and evidenced hereby or thereby or forthe performance or payment of any covenant or obligation contained herein ortherein, exceed the maximum non-usurious interest rate, if any, that at any timeor from time to time may be contracted for, taken, reserved, charged or receivedon the Obligations, under the laws of the State of Illinois (or the laws of anyother jurisdiction whose laws may be mandatorily applicable notwithstandingother provisions of this Agreement and the other Loan Documents), or underapplicable federal laws which may presently or hereafter be in effect and whichallow a higher maximum non-usurious interest rate than under the laws of theState of Illinois (or such other jurisdiction), in any case after taking into ac- -16- TBCC Loan and Security Agreement -----------------------------------------------------------------count, to the extent permitted by applicable law, any and all relevant paymentsor charges under this Agreement and the other Loan Documents executed inconnection herewith, and any available exemptions, exceptions and exclusions(the "Highest Lawful Rate"). If due to any circumstance whatsoever, fulfillmentof any provisions of this Agreement or any of the other Loan Documents at thetime performance of such provision shall be due shall exceed the Highest LawfulRate, then, automatically, the obligation to be fulfilled shall be modified orreduced to the extent necessary to limit such interest to the Highest LawfulRate, and if from any such circumstance TBCC should ever receive anything ofvalue deemed interest by applicable law which would exceed the Highest LawfulRate, such excessive interest shall be applied to the reduction of the principalamount then outstanding hereunder or on account of any other then outstandingObligations and not to the payment of interest, or if such excessive interestexceeds the principal unpaid balance then outstanding hereunder and such otherthen outstanding Obligations, such excess shall be refunded to Borrower. Allsums paid or agreed to be paid to TBCC for the use, forbearance, or detention ofthe Obligations and other indebtedness of Borrower to TBCC shall, to the extentpermitted by applicable law, be amortized, prorated, allocated and spreadthroughout the full term of such indebtedness, until payment in full thereof, sothat the actual rate of interest on account of all such indebtedness does notexceed the Highest Lawful Rate throughout the entire term of such indebtedness.The terms and provisions of this Section shall control every other provision ofthis Agreement, the other Loan Documents and all other agreements between theparties hereto. 10.13. Entire Agreement; Successors and Assigns. This Agreement and the ---------------------------------------- other Loan Documents constitute the entire agreement between the parties,supersede any prior written and verbal agreements between them, and shall bindand benefit the parties and their respective successors and permitted assigns.There are no oral understandings, oral representations or oral agreements-------------------------------------------------------------------------between the parties which are not set forth in this Agreement or in other-------------------------------------------------------------------------written agreements signed by the parties in connection herewith.--------------------------------------------------------------- 10.14. MUTUAL WAIVER OF JURY TRIAL. TBCC AND BORROWER EACH HEREBY WAIVE THE --------------------------- RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (iii) ANY CONDUCT,ACTS OR OMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC ORBORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORTOR OTHERWISE.Borrower:ODETICS, INC.By /s/ Gregory A. Miner --------------------Title COO -------------------- By: /s/ Joel Slutzky --------------------Title: Chairman and CEO --------------------Borrower:ODETICS ITS, INC.By /s/ Gregory A. Miner --------------------Title CFO --------------------By: /s/ Jack Johnson --------------------Title: CEO --------------------Borrower:GYYR INCORPORATEDBy /s/ Gregory A. Miner --------------------Title CFO --------------------By: /s/ --------------------Title: VP -------------------- -17- TBCC Loan and Security Agreement -----------------------------------------------------------------Borrower:MARINER NETWORKS, INC.By /s/ Gregory A. Miner --------------------Title CFO --------------------By: /s/ David J. Scheel -------------------- Title: President --------------------Borrower:MEYER, MOHADDES ASSOCIATES, INC.By /s/ Michael P. Meyer --------------------Title Vice President --------------------TBCC:TRANSAMERICA BUSINESS CREDITCORPORATIONBy /s/ --------------------Title Senior VP and General Manager ----------------------------- -18- Exhibit A Existing Liens (Section 9.1(jj)) --------------------------------------------------------------------------------TBCC Schedule to Loan and Security AgreementBorrowers: Odetics, Inc., a Delaware corporation Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporation Date: December 28, 1998This Schedule is an integral part of the Loan and Security Agreement betweenTRANSAMERICA BUSINESS CREDIT CORPORATION (TBCC) and the above borrower(Borrower) of even date.1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of (1) or (2) below: (1) $17,000,000 ("Dollar Limit"), at any one time outstanding; or (2) an amount equal to the sum of (a), (b), (c), (d) and (e) below: (a) 85% of the amount of Borrower's Eligible Receivables (as defined in Section 9.1(n) above) (other than Unbilled Eligible Receivables), plus (b) the lesser of (i) $2,000,000, or (ii) 85% of the amount of Borrower's Unbilled Eligible Receivables (as defined in Section 9.1(n) above), plus (c) the lesser of (i) $2,000,000, or (ii) 50% of the Value of Borrower's Eligible Inventory (as defined in Section 9.1(m) above), plus (d) the lesser of (i) $2,000,000, or (ii) 70% (the "Equipment Advance Rate") of the appraised orderly liquidation value of Eligible Equipment (as defined below), plus (e) $1,000,000 (the "Non-Formula Loans"). (a). UK Sub. Receivables of Borrower's subsidiary, ------ Odetics Europe Ltd., a UK company (the "UK Sub") may be included as Eligible Receivables, provided that (i) they meet the other requirements for Eligible Receivables, and (ii) the Guaranty and Security Agreementy referred to in Section 9(a) below have been executed and delivered and are in full force and effect, and (iii) TBCC has a first-priority, perfected security interest in all such Receivables, TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- and (iv) Loans with respect to Eligible Receivables of the UK Sub shall be limited to $1,500,000. With respect to the Eligible Receivables of the UK Sub, Receivables owing from one account debtor will not be deemed Eligible Receivables to the extent they exceed $500,000. (b). Value. "Value", as used above, means the lower of cost or ----- wholesale market value of Borrower's Eligible Inventory. (c). Loans Separate. Loans will be made separately to each Borrower -------------- based on the Eligible Receivables, Eligible Inventory and Eligible Equipment of each Borrower. Non-Formula Loans and Loans based on the on the Eligible Receivables of the UK Sub will be made to Odetics, Inc. (the "Parent"). (d). Equipment. "Eligible Equipment" shall mean Equipment which --------- TBCC in its sole discretion deems eligible for borrowing, based on such considerations as TBCC in its sole discretion may deem appropriate from time to time and less any such reserves as TBCC, in its sole discretion, may require. Without limiting the fact that the determination of which Equipment is eligible for borrowing is a matter of TBCC's sole discretion, the following are the minimum requirements for Equipment to be Eligible Equipment: (i) the Equipment must be in good condition and repair; (ii) the Equipment must meet all applicable governmental standards; (iii) the Equipment must conform in all respects to the warranties and representations set forth in this Agreement; (iv) the Equipment must at all times be subject to TBCC's duly perfected, first priority security interest; and (v) the Equipment must be in Borrower's exclusive possession, and situated at Borrower's chief executive office or at one of the other Borrower locations set forth on this Schedule. (e). Appraisals. Appraisals of the orderly liquidation value of the ---------- Eligible Equipment may be done from time to time, at TBCC's option, at the cost of Borrower, and by an appraiser selected by TBCC, but no more frequently than once every six-months (except that such limitation on the frequency of appraisals shall not apply if an Event of Default or an event which, with notice or passage of time or both, would constitute an Event of Default, has occurred and is continuing). (f). Reduction in Equipment Advance Rate. The Equipment Advance Rate ----------------------------------- shall be reduced by 23.3 percentage points on December 31, 1999 and on December 31 of each year thereafter, until it is reduced to zero. Borrower may, however, at its option, request in writing a reappraisal of the orderly liquidation value of the Eligible Equipment by giving written notice thereof to TBCC on or before November 1 of each year, and in that event the Equipment Advance Rate will not be reduced the following December 31, but the Equipment Advance Rate will be applied to the appraised orderly liquidation value of Eligible Equipment as determined by the new appraisal. Appraisals under this Section shall be at the cost of Borrower, by appraisers selected by TBCC, and such appraisals shall be satisfactory to TBCC in its discretion. -2- TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- Example. If the beginning appraised orderly ------- liquidation value of Eligible Equipment was $2,000,000, then the Loans available under Section 1(2)(d) above would be 70% of said amount or $1,400,000. On December 31, 1999, the Equipment Advance Rate would be reduced by 23.3 percentage points from 70% to 46.7%, and the Loans available under Section 1(2)(d) above would then be 46.7%, of $2,000,000 or $934,000. However, if Borrower made a written request to TBCC by November 1, 1999 for a reappraisal, then there would be no reduction in the Equipment Advance Rate. If the new appraisal of the Eligible Equipment was $2,000,000, then the Loans available under Section 1(2)(d) above would be 70% of said $2,000,000 or $1,400,000. Letter of Credit Sublimit TBCC, in its Good Faith business judgment, will from time to time during the term of this Agreement issue letters of credit for the account of the Borrower ("Letters of Credit"), in an aggregate amount at any one time outstanding not to exceed $2,000,000, upon the request of the Borrower, provided that, on the date the Letters of Credit are to be issued, Borrower has available to it Loans in an amount equal to or greater than the face amount of the Letters of Credit to be issued. Prior to the issuance of any Letters of Credit, Borrower shall execute and deliver to TBCC such documentation relating thereto as TBCC shall specify (the "Letter of Credit Documentation"). Fees for the Letters of Credit shall be as provided in the Letter of Credit Documentation. The Dollar Limit and the Loans available to Borrower under this Agreement at any time shall be reduced by the total face amount of all Letters of Credit from time to time outstanding.2. INTEREST.(Section 2.1): The interest rate in effect throughout each calendar month during the term of this Agreement shall be the highest "Base Rate" in effect during such month, plus 2% per annum, provided that (i) the interest rate applicable to the Non-Formula Loans shall be the highest "Base Rate" in effect during such month, plus 4% per annum, and (ii) the interest rate in effect in each month shall not be less than 9% per annum, and (iii) the interest charged for each month shall be a minimum of $20,000, regardless of the amount of the Obligations outstanding. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Base Rate" shall mean --------- the higher of (a) the highest prime, base or equivalent rate of interest announced from time to time by Citibank, N.A., First National Bank of Chicago and Bank of America National Trust and Savings Association (which may not be the lowest rate of interest charged by such bank) and (b) the published annualized rate for 90-day dealer commercial paper which appears in the "Money Rates" section of The Wall Street Journal. -----------------------3. FEES (Section 2.2): Loan Fees: $170,000, payable concurrently herewith and fully earned on the date hereof, plus $85,000 payable and fully earned on the first anniversary of the date hereof. -3- TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- Collateral Monitoring Fee: $25,000 per year, payable in advance, on the date hereof and on each anniversary of the date hereof. Termination Fee: An amount equal to $20,000 multiplied by each month (or portion thereof) from the effective date of termination to the Maturity Date, which Termination Fee shall be payable on the date of termination, provided that no Termination Fee shall be payable if Borrower terminates this Agreement effective on the first anniversary of the date hereof and give TBCC written notice of termination at least 60 days before the first anniversary of the date hereof. Such termination shall be subject to all of the provisions of Section 1.6 above.4. MATURITY DATE (Section 1.6): December 31, 2000 (the "Maturity Date"), subject to automatic renewal and early termination as provided in Section 1.6 above.5. REPORTING (Section 5.10): Borrower shall provide TBCC with the following reports: (a). Monthly Financial Statements. Monthly unaudited ---------------------------- financial statements, as soon as available, and in any event within 30 days after the end of each month. (b). Monthly Receivable Agings. Monthly Receivable ------------------------- agings, aged by invoice date, within 10 days after the end of each month. (c). Monthly Payable Agings. Monthly accounts ---------------------- payable agings, aged by invoice date, and outstanding or held check registers within 10 days after the end of each month. (d). Monthly Inventory Reports. Monthly perpetual ------------------------- inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with generally accepted accounting principles) or such other inventory reports as are reasonably requested by TBCC, all within 30 days after the end of each month. (e). Monthly Compliance Certificates. As soon as ------------------------------- available, but not later than thirty days after the end of each month, a Compliance Certificate, with an attached schedule of calculations demonstrating compliance or indicating non- compliance with any Financial Covenants. (f). Quarterly Financial Statements. Quarterly ------------------------------ unaudited financial statements, as soon as available, and in any event within 30 days after the end of each fiscal quarter of Borrower. (g). Annual Financial Statements. As soon as --------------------------- available, but not later than 90 days after the end of the Borrower's fiscal year, (A) Borrower's annual audited Financial Statements; (B) a comparison in reasonable detail to the prior year's audited Financial Statements; (C) the Auditors' opinion without Qualification, a Management Letter and a statement indicating that the Auditors have not obtained knowledge of the existence of any Default or Event of Default during their audit; (D) a narrative -4- TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- discussion of Borrower's financial condition and results of operations and the liquidity and capital resources for such fiscal year.6. BORROWER INFORMATION: (a) Prior Names of Borrower (Section 4.11): As set forth in the Representations and Warranties of the Parent dated September 18, 1998 (the "Representations"). (b) Prior Trade Names of Borrower (Section 4.11): As set forth in the Representations. (c) Existing Trade Names of Borrower (Section 4.11): As set forth in the Representations. (d) Other Places of Business and Locations of Collateral (Section 4.2): As set forth in the Representations.7. FACSIMILE NUMBERS: Borrower: (714) 780-7857 TBCC: (818) 995-91488. CLOSING DEADLINE (Section 1.8): December 31, 19989. ADDITIONAL PROVISIONS: (a) Guaranty. Within 21 days after the date hereof, Borrower shall cause the UK Sub to execute and deliver to TBCC a Continuing Guaranty, in such form as TBCC shall specify, with respect to all of the Obligations, and a security agreement granting TBCC a first- priority, perfected security interest in all of the assets of the UK Sub, in such form as TBCC shall specify, and Borrower shall cause the UK Sub to deliver and cause to be delivered all such certificates, opinions and other documents and take all such other actions in connection therewith as TBCC shall specify in its reasonable discretion. Borrower shall cause such Guaranty and Security Agreement to continue in full force and effect throughout the term of this Loan Agreement and so long as any portion of the Obligations remains outstanding. (b) Copyright Filings. Concurrently, Borrower is executing and delivering to TBCC a Security Agreement in Copyrighted Works (the "Copyright Agreement"). Within 60 days after the date hereof, Borrower shall (i) cause all of its computer software, the licensing of which results in Receivables, to be registered with the United States Copyright Office, (ii) complete the Exhibits to the Copyright Agreement with all of the information called for with respect to such software, (iii) cause the Copyright Agreement to be recorded in the United States Copyright Office, and (iv) provide evidence of such recordation to TBCC. -5- TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- (c) Real Estate-Negative Pledge. Borrower shall not permit any liens or encumbrances to exist on Borrower's real property located at 1515 S. Manchester Ave., Anaheim, California, except for liens for taxes not delinquent and covenants, conditions and restrictions. Within 45 days after the date hereof, Borrower shall provide TBCC with a preliminary title report confirming the foregoing. (d) Financial Covenants. (1) Working Capital. As of the end of each fiscal quarter of Parent ending during the term of this Agreement, Parent shall maintain an excess of current assets over current liabilities of not less than $10,000,000 (on a consolidated basis with its U.S. Subsidiaries). Current assets and current liabilities shall be determined in accordance with GAAP. (2) Unsecured Indebtedness. Parent shall not permit its total outstanding trade debt (on a consolidated basis with its U.S. Subsidiaries) to exceed $12,000,000 at any time outstanding. (3) Secured Indebtedness. During the period from the date hereof through December 31, 1999, and during each twelve-month period thereafter, Parent (on a consolidated basis with its U.S. Subsidiaries) shall limit total Indebtedness incurred during each such period, which is secured by Permitted Liens (other than Indebtedness to TBCC), to an aggregate amount for all such Indebtedness not to exceed $1,500,000 during each such period. (e) Corporate Structure. Borrower represents and warrants that its corporate structure is as follows: Odetics, Inc., a Delaware corporation, owns 100% of the issued and outstanding stock of the following Subsidiaries: Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporation Odetics Europe Ltd., a UK company (f) Sale of Stock or Assets. (1) Paydown of Loans. In the event any Borrower sells ----------------- or transfers stock of any Subsidiary or transfers any of its assets outside the ordinary course of business (which sale shall be subject to Section 6.4 of this Loan Agreement as well as this Section 9(f)), then the following shall apply: (A) Borrower shall pay to TBCC an amount equal to all outstanding Loans made with respect to all Receivables, Inventory and Equipment, which belong to such Subsidiary or which are included in any such asset sale, to repay such Loans in full upon such sale; and -6- TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- (B) Borrower shall pay to TBCC an additional amount equal to the lesser of one-third of such Loan payment or an amount equal to the outstanding Non-Formula Loans, which sum shall be applied to the outstanding Non-Formula Loans; and (C) Thereafter, the amount of Non-Formula Loans available to the Borrower shall be permanently reduced by an amount equal to one-third of the Loan Payment made under Section 9(f)(1)(A) above. (2) Example. The following is an example of the -------- operation of this Section 9(f): If Borrower sold all of the stock of Gyyr Incorporated, and the outstanding Loans with respect to the Receivables, Inventory and Equipment of Gyyr Incorporated under the formulas in Section 1 of this Schedule were $1,500,000, then Borrower would pay to TBCC (i) $1,500,000 to pay all outstanding Loans with respect to the Receivables, Inventory and Equipment of Gyyr Incorporated, and (ii) $500,000 (one-third of the $1,500,000) to be applied to the outstanding Non- Formula Loans. If at that date the Non-Formula Loans were only $250,000, then the payment on such Non-Formula Loans would be $250,000 to pay them in full. Thereafter, the Non-Formula Loans would be limited to $500,000 (i.e. $1,000,000 minus $500,000) (even if the amount of the Non-Formula Loans paid off was only $250,000). (g) Additional Equity. Without limiting any of the other conditions precedent set forth in this Agreement, prior to the first disbursement of the Loans, Borrower shall provide evidence to TBCC that it has received not less than $2,000,000 in net cash proceeds from the issuance and sale after December 15, 1998 of Borrower's equity and/or subordinated debt securities to investors acceptable to TBCC in its discretion. Subordinated debt securities shall be fully subordinated to the Obligations on terms and conditions satisfactory to TBCC in its discretion and shall be unsecured.Borrower: Borrower: ODETICS, INC. ODETICS ITS, INC. By /s/ Gregory A. Miner By /s/ Gregory A. Miner ------------------------------------ ------------------------------- President or Vice President President or Vice President (Signatures continue) -7- TRANSAMERICA Schedule to Loan and Security Agreement-------------------------------------------------------------------------------- Borrower: Borrower: GYYR INCORPORATED MARINER NETWORKS, INC. By /s/ Gregory A. Miner By /s/ Gregory A. Miner ---------------------------------- --------------------------------- President or Vice President President or Vice President Borrower: TBCC: MEYER, MOHADDES ASSOCIATES, INC. TRANSAMERICA BUSINESS CREDIT CORPORATION By /s/ Gregory A. Miner By /s/ ---------------------------------- --------------------------------- President or Vice President Title Senior VP and General Manager -8- EXHIBIT 10.4 AMENDMENT TO LOAN AGREEMENT December __, 1998Transamerica Business Credit Corporation15260 Ventura Blvd. Suite 1240Sherman Oaks, CA 91403Gentlemen: Reference is made to the Loan and Security Agreement between us datedDecember __, 1998 (the "Loan Agreement"). (Capitalized terms used in thisAgreement, which are not defined, shall have the meanings set forth in the LoanAgreement. The Loan Agreement and all other present and future documents andagreements relating thereto are collectively referred to herein as the "LoanDocuments".) This will confirm our agreement to amend the Loan Agreement as follows: 1. Inventory Reports. Section 5(d) of the Schedule, titled "Monthly ----------------- Inventory Reports", is amended by changing "30 days after the end of each month"to "10 days after the end of each month". 2. Real Estate. Section 9(c) of the Schedule, titled "Real Estate- ----------- Negative Pledge" is amended by adding the following at the end of the firstsentence thereof: "and except for the existing first trust deed in favor ofNorthwestern Mutual Life securing not more than $8 million. Borrower agrees notto increase the amount of the obligation secured by said first trust deed infavor of Northwestern Mutual Life or any of the terms thereof without TBCC'sprior written consent. 3. Sale of Stock or Assets. Sections 9(f)(1)(B) and (C) and Section ----------------------- 9(f)(2) of the Schedule, are amended in their entirety to read as follows: "(B) Borrower shall pay to TBCC an additional amount equal to the lesser of (i) one-third of the "Sold Asset Loan Availability" (as defined below), or (ii) an amount equal to the outstanding Non-Formula Loans, which sum shall be applied to the outstanding Non-Formula Loans. As used herein, "Sold Asset Loan Availability" means the total Loans available to Borrower with respect to all Receivables, Inventory and Equipment, which belong to such Subsidiary or which are included in any such asset sale (including any such Loans as are outanding). "(C) Thereafter, the amount of Non-Formula Loans available to the Borrower shall be permanently reduced by an amount equal to one-third of the Sold Asset Loan Availability. "(2) Example. The following is an example of the operation of this ------- Section 9(f): "If Borrower sold all of the stock of Gyyr Incorporated, and the outstanding Loans with respect to the Receivables, Inventory and Equipment of Gyyr Incorporated under the formulas in Section 1 of this Schedule were $1,000,000, and the total Loans available with respect to the Receivables, Inventory and Equipment of Gyyr Incorporated under the formulas in Section 1 of this Schedule were $1,500,000 (including the Loans outstanding), then Borrower would pay to TBCC (i) $1,000,000 to pay all outstanding Loans with respect to the Receivables, Inventory and Equipment of Gyyr Incorporated, and (ii) $500,000 (one- third of the $1,500,000) to be applied to the outstanding Non-Formula Loans. "If at that date the Non-Formula Loans were only $250,000, then the payment on such Non-Formula Loans would be $250,000 to pay them in full. Thereafter, the Non-Formula Loans would be limited to $500,000 (i.e. $1,000,000 minus $500,000) (even if the amount of the Non- Formula Loans paid off was only $250,000)." As herein expressly modified the Loan Agreement shall continue in fullforce and effect and the same is hereby ratified and confirmed. This Amendmentand the other written agreements and documents between us set forth in full allof the representations and agreements of the parties with respect to the subjectmatter hereof and supersede all prior discussions, oral representations, oralagreements and oral understandings between the parties with respect to thesubject matter hereof. This Amendment may not be modified or amended, nor mayany rights hereunder be waived, except in a writing signed by the partieshereto. This Amendment is being entered into, and shall be governed by the lawsof the State of California. Sincerely yours,ODETICS, INC. ODETICS ITS, INC. By /s/ Gregory A. Miner By /s/ Gregory A. Miner --------------------- ---------------------Title VP & COO Title VP, CFOGYYR INCORPORATED MARINER NETWORKS, INC. By /s/ Gregory A. Miner By /s/ Gregory A. Miner --------------------- ---------------------- Title VP, CFO Title VP, CFO MEYER, MOHADDES ASSOCIATES, INC. By: /s/ Gregory A. Miner ---------------------Title VP, CFAccepted and agreed:TRANSAMERICA BUSINESS CREDIT CORPORATIONBy /s/ -------------------------------------------Title Senior Vice President, General Manager -------------------------------------- -2- EXHIBIT 10.5-------------------------------------------------------------------------------- REVOLVING CREDIT NOTE$17,000,000 Chicago, Illinois December 28, 1998 FOR VALUE RECEIVED, Odetics, Inc., Odetics ITS, Inc., Gyyr Incorporated,Mariner Networks, Inc. and Meyer, Mohaddes Associates, Inc., having its chiefexecutive office and principal place of business at 1515 S. Manchester, Anaheim,California 92802 (jointly and severally, the "Borrower"), herebyunconditionally and absolutely promises to pay to the order of TRANSAMERICABUSINESS CREDIT CORPORATION, a Delaware corporation ("TBCC"), on the MaturityDate, at TBCC's office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois60018, or at such other location as TBCC may from time to time designate, inlawful money of the United States of America and in immediately available funds,the principal amount equal to $17,000,000 or such greater or lesser amount asrepresents the aggregate unpaid principal amount of all Loans made by TBCC tothe Borrower under the revolving credit facility made available pursuant to theLoan and Security Agreement between TBCC and Borrower dated December 28, 1998(the "Loan Agreement"). The Borrower further promises to pay interest in likemoney and funds at TBCC's office specified above (or at such other location asTBCC may from time to time designate) on the unpaid principal amount hereof fromtime to time outstanding from and including the date hereof until paid in full(both before and after judgment) at the rates and on the dates set forth in theLoan Agreement. All capitalized terms used herein which are not defined hereinshall have the meanings ascribed to such terms in the Loan Agreement. The holder of this Note is authorized to record the date and amount of eachLoan evidenced by this Note, the date and amount of each payment or prepaymentof principal hereof and the interest rate with respect thereto on a scheduleattached hereto, or on a continuation of such schedule attached hereto and madea part hereof, and any such notation shall be conclusive and binding for allpurposes absent manifest error; provided, however, that the failure of TBCC to -------- ------- make any such recordation or endorsement shall not affect the obligations of theBorrower hereunder or under the Loan Agreement. Whenever any payment to be made hereunder shall be stated to be due on aday that is not a Business Day, the payment may be made on the next succeedingBusiness Day and such extension of time shall be included in the computation ofthe amount of interest due hereunder. This Note is entitled to the benefit of all terms and conditions of, andthe security of all security interests, liens, mortgages, deeds of trust andrights granted pursuant to, the Loan Agreement and the other Loan Documents, andis subject to optional and mandatory prepayment as provided therein. Upon the occurrence of any one or more Events of Default, all amounts thenremaining unpaid on this Note may be declared to be or may automatically becomeimmediately due and payable as provided in the Loan Agreement. The Borrower acknowledges that the holder of this Note may assign, transferor sell all or a portion of its rights and interests to and under this Note toone or more Persons as provided in the Loan Agreement and that such Personsshall thereupon become vested with all of the rights and benefits of TBCC inrespect hereof as to all or that portion of this Note which is so assigned,transferred or sold. In the event of any conflict between the terms hereof and the terms andprovisions of the Loan Agreement, the terms and provisions of the Loan Agreementshall control. The Borrower and all other parties that at any time may be liable hereuponin any capacity, jointly or severally, waive presentment, demand for payment,protest and notice of dishonor of this Note and authorize the holder hereof,without notice, to increase or decrease the rate of interest on any amount owingunder this Note in accordance with the Loan Agreement. The Borrower furtherwaives promptness, diligence, notice of acceptance and any other notice withrespect to any of the Obligations and any requirement that TBCC exhaust anyrights or take any action against any other Person or any collateral. TheBorrower further hereby waives notice of or proof of reliance by TBCC upon this Note, and the Obligations shall conclusively be deemed to have been created,contracted, incurred, renewed, extended, amended or waived in reliance upon thisNote. The Borrower shall make all payments hereunder and under the LoanAgreement without defense, offset or counterclaim. No failure to exercise andno delay in exercising any rights hereunder on the part of the holder hereofshall operate as a waiver of such rights. This Note may not be changed orally,but only by an agreement in writing, which is signed by the party or partiesagainst whom enforcement of any waiver, change, modification or discharge issought. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE AND THE OTHERLOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS NOTE,WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BYTHE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) AND DECISIONSOF THE STATE OF ILLINOIS. ALL DISPUTES ARISING UNDER OR IN CONNECTION WITH THIS NOTE AND ANY OTHERLOAN DOCUMENT BETWEEN THE BORROWER AND TBCC, WHETHER SOUNDING IN CONTRACT, TORT,EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATEDIN CHICAGO, ILLINOIS, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN;PROVIDED, HOWEVER, THAT TBCC SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BYAPPLICABLE LAW, TO PROCEED TBCC Revolving Credit Note--------------------------------------------------------------------------------AGAINST THE BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCCIN GOOD FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE AJUDGMENT OR OTHER COURT ORDER IN FAVOR OF TBCC. THE BORROWER AGREES THAT IT WILLNOT ASSERT ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANYPROCEEDING BROUGHT BY TBCC. THE BORROWER WAIVES ANY OBJECTION THAT THE BORROWERMAY HAVE TO THE LOCATION OF THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING,INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ONFORUM NON CONVENIENS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, 1209ORANGE STREET, WILMINGTON, DELAWARE 19801 AS THE DESIGNEE AND AGENT OF THEBORROWER TO RECEIVE, FOR AND ON BEHALF OF THE BORROWER SERVICE OF PROCESS IN ANYLEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS NOTE OR ANY OTHER LOAN DOCUMENT.IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT AT ITS ADDRESSWILL BE PROMPTLY FORWARDED BY MAIL TO THE BORROWER, BUT THE FAILURE OF THEBORROWER TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCHPROCESS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF TBCC TO SERVE LEGAL PROCESSIN ANY OTHER MANNER PERMITTED BY LAW. THE BORROWER AND, BY ITS ACCEPTANCE HEREOF, TBCC EACH HEREBY WAIVE THERIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,OR IN ANY WAY RELATING TO: (i) THIS NOTE; OR (ii) ANY OTHER PRESENT OR FUTUREINSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (iii) ANY CONDUCT, ACTS OROMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR BORROWER; INEACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.Borrower: Borrower: ODETICS, INC. ODETICS ITS, INC. By: /s/ Gregory A. Miner By: /s/ Gregory A. Miner --------------------------- --------------------------- President or Vice President President or Vice PresidentBorrower: Borrower: GYYR INCORPORATED MARINER NETWORKS, INC. By: /s/ Gregory A. Miner By: /s/ Gregory A. Miner -------------------------- --------------------------- President or Vice President President or Vice PresidentBorrower: MEYER, MOHADDES ASSOCIATES, INC. By: /s/ Gregory A. Miner --------------------------- President or Vice President -2- TBCC Revolving Credit Note-------------------------------------------------------------------------------- SCHEDULE TO REVOLVING CREDIT NOTE DATED DECEMBER 28, 1998Date Amount of Loan Interest Rate Amount of Unpaid Notation ---- -------------- ------------- --------- ------ -------- Principal Paid Principal Made by -------------- --------- ------- Balance ------- -3- EXHIBIT 10.6--------------------------------------------------------------------------------TBCC Letter of Credit AgreementBorrowers: Odetics, Inc., a Delaware corporation Odetics ITS, Inc., a California corporation Gyyr Incorporated, a California corporation Mariner Networks, Inc., a Delaware corporation Meyer, Mohaddes Associates, Inc., a California corporationAddress: 1515 S. Manchester Anaheim, California 92802 Date: December 28, 1998THIS LETTER OF CREDIT AGREEMENT ("Agreement"), dated the above date, is enteredinto between TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation,("TBCC") having its principal office at 9399 West Higgins Road, Suite 600,Rosemont, Illinois 60018 and having an office at 15260 Ventura Blvd., Suite1240, Sherman Oaks, CA 91403 and the borrower named above ("Borrower"), inconnection with the Loan and Security Agreement ("Loan Agreement") between TBCCand Borrower dated December 28, 1998. This Agreement is an integral part of theLoan Agreement, and all of the terms and provisions of the Loan Agreement areincorporated herein by this reference. (Capitalized terms used in thisAgreement, which are not defined in this Agreement, shall have the meanings setforth in the Loan Agreement. This Agreement, the Loan Agreement and all otherpresent and future documents instruments and agreements between TBCC and theBorrower are referred to herein collectively as the "Loan Documents.") 1. Letters of Credit. From time to time, in order to assist Borrower inestablishing or opening Letters of Credit (the "LCs") with a bank, trust companyor other issuer ("Bank") to cover the purchase of goods or for other purposes,Borrower may request that TBCC provide guarantees of, and/or indemnities withrespect to, payment or performance of the LCs and/or any drafts or acceptancesthereunder and/or Borrower's obligations in connection therewith (collectively,"Guarantees"). The decision to do so shall be a matter of TBCC's Good Faithbusiness judgment, provided that TBCC shall not be obligated to provideGuarantees with respect to LCs having an expiry date later than 12 months fromthe date of issuance. In the event TBCC joins in such applications and/orprovides Guarantees, the transactions shall be subject to the terms andconditions of this Agreement. The amount, extent, terms and conditions of theLCs and any drafts or acceptance relating thereto, shall in all respects bedetermined solely by TBCC and shall be subject to change, modification andrevision by TBCC at any time and from time to time, in its discretion. 2. Indemnity. Borrower unconditionally agrees to indemnify, defend and holdTBCC harmless from any and all indebtedness, liabilities, obligations, lossesand claims, of every sort whatsoever, however arising, whether present orfuture, fixed or contingent, due or to become due, paid or incurred, arising,incurred in connection with, or relating to, any LCs, applications for LCs,Guarantees, drafts or acceptances thereunder or LC Collateral (as definedbelow), including without limitation (i) any and all losses and claims due toany action or omission by any Bank, any errors or omissions of TBCC or any Bank,or otherwise, (ii) all amounts due or which may become due under LCs, or anydrafts or acceptances thereunder, (iii) all liabilities and obligations underany steamship or airway guarantees or releases or any Guarantees, (iv) allamounts charged or chargeable to Borrower or to TBCC by any Bank, any otherfinancial institution or any correspondent bank which opens, issues or isinvolved with the LCs, (v) all other bank charges, and (vi) all fees,commissions, duties, taxes, costs of insurance, and all such other charges andexpenses which may pertain either directly or indirectly to any LC, draft,acceptance, or Guarantee or to the goods or documents relating thereto.Borrower's obligation to indemnify TBCC under this Agreement and Borrower'sother obligations under this Agreement are referred to herein as the "LCObligations" (which shall include, without limitation, the aggregate face amounts of all LCs and Guarantees). Borrower's LC Obligations shall not bemodified or diminished for any reason or in any manner whatsoever, shall beincluded in the "Obligations" (as defined in the Loan Agreement), and shallsurvive termination of the Loan Agreement and any other Loan Document. Withoutlimiting the generality of the -1- TBCC Letter of Credit Agreement --------------------------------------------------------------------------------foregoing, Borrower agrees that any charges made to TBCC by any Bank forBorrower's account or relating to any LC shall be conclusive on Borrower and maybe charged to any of Borrower's Loan accounts with TBCC. TBCC shall have theright, at any time and without notice to Borrower, to charge any of Borrower'sLoan accounts with TBCC with the amount of any and all sums due from Borrower toTBCC under this Agreement, and the same shall constitute Loans for all purposesof the Loan Documents and shall bear interest at the rate provided in the LoanAgreement. All sums payable by Borrower to TBCC under this Agreement shall bepaid solely in United States dollars. 3. LC Limits. Without limiting the fact that TBCC's decisions to join in anapplication for an LC or issue a Guarantee are a matter of its Good Faithbusiness judgment, the total amount of all outstanding LC Obligations shall notat any time exceed $2,000,000 in the aggregate, and if for any reason they do,Borrower shall provide cash collateral to TBCC in an amount equal to the excess,to secure all of the Obligations, and Borrower shall execute and deliver to TBCCa pledge agreement with respect thereto on TBCC's standard form. 4. Loan Availability Reserve. Without limiting the fact that Loans under theLoan Documents are discretionary on the part of TBCC, the amount of Loans whichwould otherwise be available to Borrower from time to time under the lendingformulas set forth in the Loan Agreement and the other Loan Documents shall bereduced by 100% of the total amount of all LC Obligations from time to timeoutstanding. 5. Charges. In addition to any charges, fees or expenses of any Bank orother person in connection with any LC (all of which shall be charged toBorrower's Loan account), TBCC shall be entitled to charge Borrower's Loanaccount with a fee in an amount equal to four percent (4%) per annum of theamount of all LC Obligations from time to time outstanding, calculated on thebasis of a 360-day year for the actual number of days elapsed. 6. Security. Without limiting the security interests granted in the LoanDocuments, Borrower hereby grants TBCC a security interest in the following (the"LC Collateral"), whether now owned or hereafter acquired by Borrower, whereverlocated, whether in transit or not, to secure all of the Obligations: all billsof lading, shipping documents, documents of title, chattel paper, invoices,cash, checks, drafts, notes, documents, warehouse, shipping and dock receipts,and other title, payment, or other instruments, and instruments, whethernegotiable or not, relating to any LC, and all goods and inventory relatingthereto in all stages of manufacture, process or production, and all cash andnon-cash proceeds and insurance proceeds thereof of whatever sort and howeverarising. All references in the Loan Agreement to "Collateral" shall, for allpurposes, include without limitation the LC Collateral, and all terms andprovisions of the Loan Agreement applicable to Collateral shall also apply tothe LC Collateral. 7. Non-Responsibility. TBCC shall not be responsible for: the existence,character, quality, quantity, condition, packing, value or delivery of the goodspurporting to be represented by any documents; any difference or variation inthe character, quality, quantity, condition, packing, value or delivery of thegoods from that expressed in the documents; the validity, sufficiency orgenuineness of any documents or of any endorsements thereon, even if suchdocuments should in fact prove to be in any or all respects invalid,insufficient, fraudulent or forged; the time, place, manner or order in whichshipment is made; partial or incomplete shipment, or failure or omission to shipany or all of the goods referred to in the LCs or documents; any deviation frominstructions, delay, default, or fraud by the shipper and/or anyone else inconnection with the LC Collateral or the shipping thereof; or any breach ofcontract between the shipper or vendors and Borrower. Furthermore, withoutbeing limited by the foregoing, TBCC shall not be responsible for any act oromission with respect to or in connection with any LC Collateral. 8. TBCC's Authority. Borrower agrees that any action taken by TBCC, if takenin good faith, or any action taken by any Bank, under or in connection with theLCs, the Guarantees, the drafts or acceptances, or the LC Collateral, shall bebinding on Borrower and shall not result in any liability of TBCC to Borrower.In furtherance thereof, TBCC shall have the full right and authority to clearand resolve any questions of non-compliance of documents; to give anyinstructions as to acceptance or rejection of any documents or goods; to executeany and all applications for steamship or airway guarantees, indemnities ordelivery orders; to grant any extensions of the maturity of, time or paymentfor, or time of presentation of, any drafts, acceptances, or documents; and toagree to any amendments, renewals, extensions, modifications, changes orcancellations of any of the terms or conditions of any of the applications, LCs,drafts or acceptances; all in TBCC's sole name, and the Bank shall be entitledto comply with and honor any and all such documents or instruments executed byor received solely from TBCC, all without any notice to or any consent fromBorrower. 9. TBCC's Rights. Any rights, remedies, duties or obligations granted orundertaken by Borrower to any Bank in any application for LCs, or any standingagreement relating to LCs or otherwise, shall be deemed to have been granted toTBCC and apply in all respects to TBCC and shall be in addition to any rights,remedies, duties or obligations contained herein. Borrower hereby agrees thatprior to the payment of all Obligations to TBCC, TBCC may be deemed to be theabsolute owner of, with unqualified rights to possession and disposition of, allLC Collateral, all of which may be held by TBCC as security as herein provided.Should possession of any LC Collateral be transferred to Borrower, said LCCollateral shall continue to serve as security as herein provided, and any goodsor inventory covered hereby may be sold, transferred or disposed of only aspermitted by the Loan Documents. 10. Negative Covenants. Without TBCC's prior written approval, Borroweragrees not to clear or resolve any questions of non-compliance of documents; notto give any instructions as to acceptance or rejection of any documents orgoods; not to execute any applications for steamship or airway guarantees,indemnities or delivery orders; not to grant any extensions of the maturity of,time of payment for, or time of presentation of, any drafts, acceptances ordocuments; and not to agree to any amendments, renewals, extensions,modifications, changes -2- TBCC Letter of Credit Agreement --------------------------------------------------------------------------------or cancellations of any of the terms or conditions of any of the applications,LCs, drafts or acceptances. 11. Affirmative Covenants. Borrower shall cause: all necessary import,export or other licenses or certificates for the import or handling of the LCCollateral to be promptly procured; all foreign and domestic governmental lawsand regulations in regard to the shipment and importation of the LC Collateral,or the financing thereof to be promptly and fully complied with; and anycertificates in that regard that TBCC may at any time request to be promptlyfurnished. In this connection, Borrower warrants and represents to TBCC thatall shipments made under the LCs are and shall be in accordance with thegovernmental laws and regulations of the countries in which the shipmentsoriginate and terminate, and shall not be prohibited by any such laws orregulations. Borrower assumes all risk, liability and responsibility for, andagrees to pay and discharge, all present and future local, state, federal orforeign taxes, duties, and levies. Any embargo, restriction, laws, customs orregulations of any country, state, city, or other political subdivision, wherethe Collateral is or may be located, or wherein payments are to be made, orwherein drafts may be drawn, negotiated, accepted, or paid, shall be solelyBorrower's risk, liability and responsibility. 12. Termination. Without limiting any of the terms of the Loan Agreement, onthe effective date of termination of the Loan Agreement, in addition to payingand performing in full all other Obligations, Borrower shall provide cashcollateral to TBCC in an amount equal to 110% of the amount of all LCObligations, to secure all of the Obligations. Such cash collateral shall beheld by TBCC in a cash collateral account which shall be in the name of TBCC andshall be under the sole dominion and control of TBCC. Borrower hereby pledgesand grants to TBCC a security interest in all such cash and all interest thereonand proceeds thereof as security for all of the "Obligations" (as defined in the Loan Agreement). Neither Borrower nor any person claiming on behalf or throughBorrower shall have any right to withdraw any of the cash collateral. TBCCshall not have an obligation to invest the funds in the cash collateral accountor deposit such funds in an interest-bearing account. Borrower shall executeand deliver any documentation relating to the cash collateral as TBCC shallrequest. 13. Default. On any failure to pay or perform any Obligation when due, orthe occurrence of any other "Event of Default" (as defined in the LoanAgreement), TBCC shall have all of the rights and remedies set forth in the LoanDocuments and which it otherwise has under applicable law, and without limitingthe generality of the foregoing, TBCC shall have the right to require Borrowerto deposit cash collateral with TBCC in an amount equal to 110% of the amount ofall LC Obligations, to secure all of the Obligations, and Borrower shall executeand deliver to TBCC a pledge agreement with respect thereto on TBCC's standardform. 14. Power of Attorney. Without limiting the terms of any of the LoanDocuments, Borrower hereby appoints each employee, attorney or agent of TBCC asBorrower's attorney-in-fact, with full power and authority in each of them, atTBCC's option, but without obligation, with or without notice to Borrower, inconnection with any LC and any purchase agreement or other document or agreemententered into, or goods delivered, in connection therewith, at Borrower'sexpense, to do any or all of the following in Borrower's name or otherwise: (i)to sign or endorse all warehouse, shipping, dock or other receipts, letters ofcredit, notes, acceptances, checks, drafts, money orders and all other evidenceof indebtedness, and all financing statements, invoices, trust receipts, billsof lading and other title documents; (ii) to complete any transaction inconnection with, arising out of, or which is the subject of any LC or Guarantee,to obtain, execute and deliver all necessary or proper documents in connectiontherewith and to collect the proceeds thereof; (iii) upon any Event of Defaultunder the Loan Agreement, or this Agreement, to cancel, rescind, terminate,modify, amend, or adjust, in any other way, in whole or in part, any transactionin connection with, arising out of, or which is the subject of any LC orGuarantee; and (iv) to do any and all other acts and things which may benecessary or appropriate in connection with this Agreement or any LC, or anytransaction relating thereto, or to enable TBCC to obtain payment of anyObligations. The power of attorney granted hereunder is coupled with aninterest and shall be irrevocable until all Obligations have been paid in full. 15. General. Without limiting any of the other provisions of this Agreement,all of the General Provisions of Section 10 of the Loan Agreement, as well asall other provisions of the Loan Agreement, are hereby incorporated herein bythis reference. 16. Mutual Waiver of Jury Trial. BORROWER AND TBCC EACH HEREBY WAIVE THERIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTUREINSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER, OR ANY CONDUCT, ACTS OROMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR BORROWER, IN ALLOF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.Borrower:ODETICS, INC.By /s/ Gregory A. Miner ------------------------Title CFO ------------------------Borrower:ODETICS ITS, INC.By /s/ Gregory A. Miner ------------------------Title CFO ------------------------ -3- TBCC Letter of Credit Agreement --------------------------------------------------------------------------------Borrower:GYYR INCORPORATEDBy /s/ Gregory A. Miner -------------------------Title CFO -------------------------Borrower:MARINER NETWORKS, INC.By /s/ Gregory A. Miner -------------------------Title CFO -------------------------Borrower:MEYER, MOHADDES ASSOCIATES, INC.By /s/ Gregory A. Miner -------------------------Title CFO ------------------------- TBCC: TRANSAMERICA BUSINESS CREDIT CORPORATIONBy /s/ -------------------------Title Senior VP and General Manager ----------------------------- -4- EXHIBIT 10.7 SECURITY AGREEMENT IN COPYRIGHTED WORKS This Security Agreement In Copyrighted Works (this "Agreement") is made atChicago, Illinois as of December 28, 1998, is entered into between ODETICS,INC., a Delaware corporation ("Grantor"), which has a mailing address at 1515 S.Manchester, Anaheim, California 92802, and TRANSAMERICA BUSINESS CREDITCORPORATION, a Delaware corporation, ("TBCC") having its principal office at9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018 and having an officeat 15260 Ventura Blvd., Suite 1240, Sherman Oaks, California 91403. RECITALS A. TBCC is providing financing to Grantor pursuant to the Loan andSecurity Agreement of even date herewith between TBCC and Grantor (as amendedfrom time to time, the "Loan Agreement"). Pursuant to the Loan Agreement,Grantor has granted to TBCC a security interest in all of Grantor's present andfuture assets, including without limitation all of Grantor's present and futuregeneral intangibles, and including without limitation the "Copyrights" (asdefined below), to secure all of its present and future indebtedness,liabilities, guaranties and other obligations to TBCC. B. To supplement TBCC's rights in the Copyrights, Grantor is executing anddelivering this Agreement. NOW, THEREFORE, for valuable consideration, Grantor agrees as follows: 1. Assignment. To secure the complete and timely payment and performance ---------- of all "Obligations" (as defined in the Loan Agreement), and without limitingany other security interest Grantor has granted to TBCC, Grantor herebyhypothecates to TBCC and grants, assigns, and conveys to TBCC a securityinterest in Grantor's entire right, title, and interest in and to all of thefollowing, now owned and hereafter acquired (collectively, the "Collateral"): (a) Registered Copyrights and Applications for Copyright ----------------------------------------------------Registrations. All of Grantor's present and future United States registered-------------copyrights and copyright registrations, including, without limitation, theregistered copyrights listed in Schedule A to this Agreement (and including all ---------- of the exclusive rights afforded a copyright registrant in the United Statesunder 17 U.S.C. (S)106 and any exclusive rights which may in the future arise byact of Congress or otherwise) and all of Grantor's present and futureapplications for copyright registrations (including applications for copyrightregistrations of derivative works and compilations) (collectively, the"Registered Copyrights"), and any and all royalties, payments, and other amountspayable to Grantor in connection with the Registered Copyrights, together withall renewals and extensions of the Registered Copyrights, the right to recoverfor all past, present, and future infringements of the Registered Copyrights,and all computer programs, computer databases, computer program flow diagrams,source codes, object codes and all tangible property embodying or incorporatingthe Registered Copyrights, and all other rights of every kind whatsoeveraccruing thereunder or pertaining thereto. (b) Unregistered Copyrights. All of Grantor's present and future ----------------------- copyrights which are not registered in the United States Copyright Office (the"Unregistered Copyrights"), whether now owned or hereafter acquired, includingwithout limitation the Unregistered Copyrights listed in Schedule B to this ---------- Agreement, and any and all royalties, payments, and other amounts payable toGrantor in connection with the Unregistered Copyrights, together with allrenewals and extensions of the Unregistered Copyrights, the right to recover forall past, present, and future infringements of the Unregistered Copyrights, andall computer programs, computer databases, computer program flow diagrams,source codes, object codes and all tangible property -1- embodying or incorporating the Unregistered Copyrights, and all other rights ofevery kind whatsoever accruing thereunder or pertaining thereto. The RegisteredCopyrights and the Unregistered Copyrights collectively are referred to hereinas the "Copyrights." (c) Licenses. All of Grantor's right, title and interest in and to -------- any and all present and future license agreements with respect to theCopyrights, including without limitation the license agreements listed inSchedule C to this Agreement (the "Licenses").---------- (d) Accounts Receivable. All present and future accounts, accounts ------------------- receivable and other rights to payment arising from, in connection with orrelating to the Copyrights. (e) Proceeds. All cash and non-cash proceeds of any and all of the -------- foregoing. 2. Representations. Grantor represents and warrants that: --------------- (a) Each of the Copyrights is valid and enforceable (except to theextent that the Unregistered Copyrights must be registered to be enforced); (b) Except for the security interest granted hereby and the non-exclusive licenses granted to Grantor's licensees with respect to the Copyrightsin the ordinary course of business of Grantor, Grantor is (and upon creation ofall future Copyrights, will be) the sole and exclusive owner of the entire andunencumbered right, title, and interest in and to each of the Copyrights andother Collateral, free and clear of any liens, charges, or encumbrances; (c) There is no pending claim that the use of any of the Copyrightsdoes or may infringe upon or violate the rights of any third person nor doesGrantor have knowledge of any pending or threatened infringement of any of theCopyrights by any third person. (d) Listed on Schedules A and B are all copyrights owned by Grantor,in which Grantor has an interest, or which are used in Grantor's business. (e) Listed on Schedule C are all Licenses to which Grantor is a party. (f) Each employee, agent and/or independent contractor who hasparticipated in the creation of the property constituting the Collateral haseither executed an assignment of his or her rights of authorship to Grantor oris an employee of Grantor acting within the scope of his or her employment andwas such an employee at the time of said creation. (g) All of Grantor's present and future software, computer programsand other works of authorship subject to United States copyright protection, thesale, licensing or other disposition of which results in royalties receivable,license fees receivable, accounts receivable or other sums owing to Grantor(collectively, "Receivables"), have been and shall be registered with the UnitedStates Copyright Office prior to the date Grantor requests or accepts any loanfrom TBCC with respect to such Receivables and prior to the date Grantorincludes any such Receivables in any accounts receivable aging, borrowing basereport or certificate or other similar report provided to TBCC, and Grantorshall provide to TBCC copies of all such registrations promptly upon the receiptof the same*.*except that Grantor shall have 60 days after the date hereof to register all ofits present software with the United States Copyright Office (as provided in theSchedule to the Loan Agreement), and during such 60-day period Grantor mayrequest and accept loans with respect to Receivables arising from the licensingof such software. 3. Covenants. Until all of the Obligations have been satisfied in full --------- and the Loan Agreement has terminated: -2- (a) Grantor shall not grant a security interest in any of theCopyrights or other Collateral to any other person and shall not enter into anyagreement or take any action that is inconsistent with Grantor's obligationshereunder or Grantor's other Obligations or would impair TBCC's rights, underthis Agreement or otherwise, without TBCC's prior written consent. (b) Grantor shall ensure that each use of the Copyrights described inSection 1 of this Agreement carries a complete and accurate copyright notice. (c) Grantor shall use its best efforts to preserve and defendGrantor's rights in the Copyrights unless Grantor, with the concurrence of TBCC,reasonably determines that a Copyright is not worth preserving or defending. (d) Grantor shall undertake all reasonable measures to cause itsemployees, agents and independent contractors to assign to Grantor all rights ofauthorship to any copyrighted material in which Grantor has or may subsequentlyacquire any right or interest. 4. License Rights. Grantor may license or sublicense the Copyrights only -------------- in the ordinary course of business and only on a non-exclusive basis, and onlyto the extent of Grantor's rights and subject to TBCC's security interest andGrantor's obligations under this Agreement. 5. TBCC May Supplement. Grantor authorizes TBCC to modify this Agreement ------------------- by amending Schedule A or B to include any future copyrights to be included inthe Copyrights. Grantor shall from time to time update the lists of RegisteredCopyrights and Unregistered Copyrights on Schedules A and B and lists of LicenseAgreements on Schedule C as Grantor obtains or acquires copyrights or grants orobtains licenses in the future. Notwithstanding the foregoing, no failure to somodify this Agreement or amend Schedules A or B or C shall in any way affect,invalidate or detract from TBCC's continuing security interest in allCopyrights, whether or not listed on Schedule A or B and all license agreementswhether or not listed on Schedule C. 6. Default. Upon an Event of Default (as defined in the Loan Agreement) ------- TBCC shall have, in addition to all of its other rights and remedies under theLoan Agreement, all rights and remedies of a secured party under the UniformCommercial Code (as enacted in any jurisdiction in which the Copyrights or otherCollateral are located or deemed to be located) or other applicable law. Uponoccurrence of an Event of Default, Grantor shall, upon request of TBCC, givewritten notice to all parties to the Licenses that all payments thereunder shallbe made to TBCC, and TBCC may itself give such notice. 7. Fees and Expenses. On demand by TBCC, without limiting any of the ----------------- terms of the Loan Agreement, Grantor shall pay all reasonable fees, costs, andexpenses (including without limitation reasonable attorneys' fees and legalexpenses) incurred by TBCC in connection with (a) preparing this Agreement andall other documents relating to this Agreement, (b) consummating thistransaction, (c) filing or recording any documents (including all taxes inconnection therewith) in public offices; and (d) paying or discharging anytaxes, counsel fees, maintenance fees, encumbrances, or other amounts inconnection with protecting, maintaining, or preserving the Copyrights ordefending or prosecuting any actions or proceedings arising out of or related tothe Copyrights. 8. TBCC's Rights. In the event that Grantor fails to use its best efforts ------------- to preserve and defend Grantor's rights in the Copyrights (except as permittedby paragraph 3(c) hereof) within a reasonable period of time after learning ofthe existence of any actual or threatened infringement thereof, upon twenty (20)days prior written notice to Grantor, TBCC shall have the right, but shall in noway be obligated to, bring suit or take any other action, in its own name or inGrantor's name, to enforce or preserve TBCC's or Grantor's rights in theCopyrights. Grantor shall at the request of TBCC and at Grantor's expense doany lawful acts and execute any documents requested by TBCC to assist with suchenforcement. In the event Grantor has not taken action to enforce or preserveTBCC's and Grantor's rights in the Copyrights and TBCC -3- thereupon takes such action, Grantor, upon demand, shall promptly reimburse andindemnify TBCC for all costs and expenses incurred in the exercise of TBCC's orGrantor's rights under this Section 8. 9. No Waiver. No course of dealing between Grantor and TBCC, nor any --------- failure to exercise nor any delay in exercising, on the part of TBCC, any right,power, or privilege under this Agreement or under the Loan Agreement or anyother agreement, shall operate as a waiver. No single or partial exercise ofany right, power, or privilege under this Agreement or under the Loan Agreementor any other agreement by TBCC shall preclude any other or further exercise ofsuch right, power, or privilege or the exercise of any other right, power, orprivilege by TBCC. 10. Rights Are Cumulative. All of TBCC's rights and remedies with respect --------------------- to the Copyrights and other Collateral whether established by this Agreement,the Loan Agreement, or any other documents or agreements, or by law shall becumulative and may be exercised concurrently or in any order. 11. Copyright Office. At the request of TBCC, Grantor shall execute any ---------------- further documents necessary or appropriate to create and perfect TBCC's securityinterest in the Copyrights, including without limitation any documents forfiling with the United States Copyright Office and/or any applicable stateoffice. TBCC may record this Agreement, an abstract thereof, or any otherdocument describing TBCC's interest in the Copyrights with the United StatesCopyright Office, at the expense of Grantor. 12. Indemnity. Grantor shall protect, defend, indemnify, and hold --------- harmless TBCC and TBCC's assigns from all liabilities, losses, and costs(including without limitation reasonable attorneys' fees) incurred or imposed onTBCC relating to the matters in this Agreement, including, without limitation,in connection with TBCC's defense of any infringement action brought by a thirdparty against TBCC. 13. Severability. The provisions of this Agreement are severable. If any ------------ provision of this Agreement is held invalid or unenforceable in whole or in partin any jurisdiction, then such invalidity or unenforceability shall affect onlysuch provision, or part thereof, in such jurisdiction, and shall not in anymanner affect such provision or part thereof in any other jurisdiction, or anyother provision of this Agreement in any jurisdiction. 14. Amendments; Entire Agreement. This Agreement is subject to ---------------------------- modification only by a writing signed by the parties, except as provided inSection 5 of this Agreement. To the extent that any provision of this Agreementconflicts with any provision of the Loan Agreement, the provision giving TBCCgreater rights or remedies shall govern, it being understood that the purpose ofthis Agreement is to add to, and not detract from, the rights granted to TBCCunder the Loan Agreement. This Agreement, the Loan Agreement, and the documentsrelating thereto comprise the entire agreement of the parties with respect tothe matters addressed in this Agreement. 15. Further Assurances. At TBCC's request, Grantor shall execute and ------------------ deliver to TBCC any further instruments or documentation, and perform any acts,that may be reasonably necessary or appropriate to implement this Agreement, theLoan Agreement or any other agreement, and the documents relating thereto,including without limitation any instrument or documentation reasonablynecessary or appropriate to create, maintain, perfect, or effectuate TBCC'ssecurity interests in the Copyrights or other Collateral. 16. Release. At such time as Grantor shall completely satisfy all of the ------- Obligations and the Loan Agreement shall be terminated, TBCC shall execute anddeliver to Grantor all assignments and other instruments as may be reasonablynecessary or proper to terminate TBCC's security interest in the Copyrights,subject to any disposition of the Copyrights which may have been made by TBCCpursuant to this Agreement. For the purpose of this Agreement, the Obligationsshall be deemed to continue if Grantor enters into any bankruptcy or similar -4- proceeding at a time when any amount paid to TBCC could be ordered to be repaidas a preference or pursuant to a similar theory, and shall continue until it isfinally determined that no such repayment can be ordered. 17. True and Lawful Attorney. Grantor hereby appoints TBCC as Grantor's ------------------------ true and lawful attorney, with full power of substitution, to do any or all ofthe following, in the name, place and stead of Grantor: (a) execute an abstractof this Agreement or any other document describing TBCC's interest in theCopyrights, for filing with the United States Copyright Office; (b) execute anymodification of this Agreement pursuant to Section 5 of this Agreement; and (c)following an Event of Default (as defined in the Loan Agreement) execute anyassignments, notices or transfer documents for purposes of transferring title orright to receive any of the Copyrights or other Collateral to any person,including without limitation TBCC. 18. Successors. The benefits and burdens of this Agreement shall inure to ---------- the benefit of and be binding upon the respective successors and permittedassigns of the parties; provided that Grantor may not transfer any of theCollateral or any rights hereunder, without the prior written consent of TBCC,except as specifically permitted hereby. 19. Governing Law. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS ------------- AGREEMENT AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT,WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BYTHE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS. ALL DISPUTES BETWEENTHE GRANTOR AND TBCC, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE,SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS,AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER,THAT TBCC SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TOPROCEED AGAINST THE GRANTOR OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTEDBY TBCC IN GOOD FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCEA JUDGMENT OR OTHER COURT ORDER IN FAVOR OF TBCC. THE GRANTOR AGREES THAT ITWILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANYPROCEEDING BROUGHT BY TBCC. THE GRANTOR WAIVES ANY OBJECTION THAT IT MAY HAVETO THE LOCATION OF THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING,INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ONFORUM NON CONVENIENS. 20. Waiver of Right to Jury Trial. TBCC AND GRANTOR EACH HEREBY WAIVE THE ----------------------------- RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT ORFUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND GRANTOR; OR (III) ANY CONDUCT,ACTS OR OMISSIONS OF TBCC OR GRANTOR OR ANY OF THEIR DIRECTORS, OFFICERS,EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC ORGRANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OROTHERWISE. -5- WITNESS the execution hereof as of the date first written above. Grantor: ODETICS, INC. By: /s/ Gregory A. Miner ----------------------------------------------- Name (please print): Greg Miner --------------------------------------------------- Title:VP & CFO Chairman of the Board, President, or Vice PresidentAccepted.TBCC: TRANSAMERICA BUSINESS CREDITCORPORATIONBy: /s/ --------------------------------------------- Name (please print): Schrider------------------------------------------------Title: Senior Vice President and General Manager ----------------------------------------- -6- Schedule A to Security Agreement in Copyrighted Works Odetics, Inc. Registered CopyrightsU.S. Copyrights--------------- TITLE OF WORK/YEAR OF REGISTRATION --------------------- CREATION NUMBER USER -------- ------ ---- Gyyr Digiquad Operating Instruction TX2469442 Gyyr Operating Instructions Time Lapse TX1640148 Gyyr Video Cassette Recorder -7- Schedule B to Security Agreement in Copyrighted Works Odetics, Inc. Unregistered Copyrights (Where No Copyright Application Is Pending) TITLE OF WORK/YEAR OF REGISTRATION --------------------- CREATION NUMBER USER -------- ------ ---- Copyright to the computer program --- Broadcast known as Bowser which was developed by IMIS during the period Oct. 1, 1997 to Sept. 12, 1998 (date of acquisition) -8- Schedule C to Security Agreement in Copyrighted Works Odetics, Inc. License Agreements None -9- EXHIBIT 10.8 PATENT AND TRADEMARK SECURITY AGREEMENT This PATENT AND TRADEMARK SECURITY AGREEMENT ("Agreement"), dated as ofDecember 28, 1998, is entered into between ODETICS, INC., a Delaware corporation("Grantor"), which has a mailing address at 1515 S. Manchester, Anaheim,California 92802, and TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delawarecorporation, ("TBCC") having its principal office at 9399 West Higgins Road,Suite 600, Rosemont, Illinois 60018 and having an office at 15260 Ventura Blvd.,Suite 1240, Sherman Oaks, California 91403. RECITALS A. Grantor and TBCC are, contemporaneously herewith, entering into thatcertain Loan and Security Agreement ("Loan Agreement") and other instruments,documents and agreements contemplated thereby or related thereto (collectively,together with the Loan Agreement, the "Loan Documents"); and B. Grantor is the owner of certain intellectual property, identifiedbelow, in which Grantor is granting a security interest to TBCC. NOW THEREFORE, in consideration of the mutual promises, covenants,conditions, representations, and warranties hereinafter set forth and for othergood and valuable consideration, the parties hereto mutually agree as follows:1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. The following terms, as used in this Agreement, have thefollowing meanings: "Code" means the Illinois Uniform Commercial Code, as amended and ---- supplemented from time to time, and any successor statute. "Collateral" means all of the following, whether now owned or ---------- hereafter acquired: (i) Each of the trademarks and rights and interest which are capable of being protected as trademarks (including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles, and other source or business identifiers, and applications pertaining thereto), which are presently, or in the future may be, owned, created, acquired, or used (whether pursuant to a license or otherwise) by Grantor, in whole or in part, and all trademark rights with respect thereto throughout the world, including all proceeds thereof (including license royalties and proceeds of infringement suits), and rights to renew and extend such trademarks and trademark rights; (ii) Each of the patents and patent applications which are presently, or in the future may be, owned, issued, acquired, or used (whether pursuant to a license or otherwise) by Grantor, in whole or in part, and all patent rights with respect thereto throughout the world, including all proceeds thereof (including license royalties and proceeds of infringement suits), foreign filing rights, and rights to extend such patents and patent rights; -1- (iii) All of Grantor's right to the trademarks and trademark registrations listed on Exhibit A attached hereto, as the same may be --------- updated hereafter from time to time; (iv) All of Grantor's right, title, and interest, in and to the patents and patent applications listed on Exhibit B attached hereto, as the --------- same may be updated hereafter from time to time; (v) All of Grantor's right, title and interest to register trademark claims under any state or federal trademark law or regulation of any foreign country and to apply for, renew, and extend the trademark registrations and trademark rights, the right (without obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of TBCC for past, present, and future infringements of the trademarks, registrations, or trademark rights and all rights (but not obligations) corresponding thereto in the United States and any foreign country; (vi) All of Grantor's right, title, and interest in all patentable inventions, and to file applications for patent under federal patent law or regulation of any foreign country, and to request reexamination and/or reissue of the patents, the right (without obligation) to sue or bring interference proceedings in the name of Grantor or in the name of TBCC for past, present, and future infringements of the patents, and all rights (but not obligations) corresponding thereto in the United States and any foreign country; (vii) the entire goodwill of or associated with the businesses now or hereafter conducted by Grantor connected with and symbolized by any of the aforementioned properties and assets; (viii) All general intangibles relating to the foregoing and all other intangible intellectual or other similar property of the Grantor of any kind or nature, associated with or arising out of any of the aforementioned properties and assets and not otherwise described above; and (ix) All products and proceeds of any and all of the foregoing (including, without limitation, license royalties and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance, or any indemnity, warranty, or guaranty payable by reason of loss or damage to or otherwise with respect to the Collateral. "Obligations" means all obligations, liabilities, and indebtedness of ----------- Grantor to TBCC, whether direct, indirect, liquidated, or contingent, andwhether arising under this Agreement, the Loan Agreement, any other of the LoanDocuments, or otherwise, including all reasonable costs and expenses as setforth in the Loan Agreement. 1.2 Construction. Unless the context of this Agreement clearly requiresotherwise, references to the plural include the singular, references to thesingular include the plural, and the term "including" is not limiting. The words"hereof," "herein," "hereby," "hereunder," and other similar terms refer to thisAgreement as a whole and not to any particular provision of this Agreement. Anyinitially capitalized terms used but not defined herein shall have the meaningset forth in the Loan Agreement. Any reference herein to any of the LoanDocuments includes any and all alterations, amendments, extensions,modifications, renewals, or supplements thereto or thereof, as applicable.Neither this Agreement nor any uncertainty or ambiguity herein shall beconstrued or resolved against TBCC or Grantor, whether under any rule ofconstruction or otherwise. On the contrary, this Agreement has been reviewed byGrantor, TBCC, and their respective counsel, and shall be construed andinterpreted according to the ordinary meaning of -2- the words used so as to fairly accomplish the purposes and intentions of TBCCand Grantor. Headings have been set forth herein for convenience only, and shallnot be used in the construction of this Agreement.2. GRANT OF SECURITY INTEREST. To secure the complete and timely payment and performance of allObligations, and without limiting any other security interest Grantor hasgranted to TBCC, Grantor hereby grants, assigns, and conveys to TBCC a securityinterest in Grantor's entire right, title, and interest in and to theCollateral.3. REPRESENTATIONS, WARRANTIES AND COVENANTS. Grantor hereby represents, warrants, and covenants that: 3.1 Trademarks; Patents. A true and complete schedule setting forth allfederal and state trademark registrations owned or controlled by Grantor orlicensed to Grantor, together with a summary description and full information inrespect of the filing or issuance thereof and expiration dates is set forth onExhibit A; and a true and complete schedule setting forth all patent and patent--------- applications owned or controlled by Grantor or licensed to Grantor, togetherwith a summary description and full information in respect of the filing orissuance thereof and expiration dates is set forth on Exhibit B. --------- 3.2 Validity; Enforceability. Each of the patents and trademarks is validand enforceable, and Grantor is not presently aware of any past, present, orprospective claim by any third party that any of the patents or trademarks areinvalid or unenforceable, or that the use of any patents or trademarks violatesthe rights of any third person, or of any basis for any such claims. 3.3 Title. Grantor is the sole and exclusive owner of the entire andunencumbered right, title, and interest in and to each of the patents, patentapplications, trademarks, and trademark registrations, free and clear of anyliens, charges, and encumbrances, including pledges, assignments, licenses, shoprights, and covenants by Grantor not to sue third persons. 3.4 Notice. Grantor has used and will continue to use proper statutorynotice in connection with its use of each of the patents and trademarks. 3.5 Quality. Grantor has used and will continue to use consistentstandards of high quality (which may be consistent with Grantor's pastpractices) in the manufacture, sale, and delivery of products and services soldor delivered under or in connection with the trademarks, including, to theextent applicable, in the operation and maintenance of its merchandisingoperations, and will continue to maintain the validity of the trademarks. 3.6 Perfection of Security Interest. Except for the filing of appropriatefinancing statements (all of which filings have been made) and filings with theUnited States Patent and Trademark Office necessary to perfect the securityinterests created hereunder, no authorization, approval, or other action by, andno notice to or filing with, any governmental authority or regulatory body isrequired either for the grant by Grantor of the security interest hereunder orfor the execution, delivery, or performance of this Agreement by Grantor or forthe perfection of or the exercise by TBCC of its rights hereunder to theCollateral in the United States.4. AFTER-ACQUIRED PATENT OR TRADEMARK RIGHTS. -3- If Grantor shall obtain rights to any new trademarks, any new patentableinventions or become entitled to the benefit of any patent application or patentfor any reissue, division, or continuation, of any patent, the provisions ofthis Agreement shall automatically apply thereto. Grantor shall give promptnotice in writing to TBCC with respect to any such new trademarks or patents, orrenewal or extension of any trademark registration. Grantor shall bear anyexpenses incurred in connection with future patent applications or trademarkregistrations. Without limiting Grantor's obligation under this Section 4,Grantor authorizes TBCC to modify this Agreement by amending Exhibits A or B to --------------- include any such new patent or trademark rights. Notwithstanding the foregoing,no failure to so modify this Agreement or amend Exhibits A or B shall in any way --------------- affect, invalidate or detract from TBCC's continuing security interest in allCollateral, whether or not listed on Exhibit A or B. -------------- 5. LITIGATION AND PROCEEDINGS. Grantor shall commence and diligently prosecute in its own name, as thereal party in interest, for its own benefit, and its own expense, such suits,administrative proceedings, or other action for infringement or other damages asare in its reasonable business judgment necessary to protect the Collateral.Grantor shall provide to TBCC any information with respect thereto requested byTBCC. TBCC shall provide at Grantor's expense all necessary cooperation in connection with any such suits, proceedings, or action, including, withoutlimitation, joining as a necessary party. Following Grantor's becoming awarethereof, Grantor shall notify TBCC of the institution of, or any adversedetermination in, any proceeding in the United States Patent and TrademarkOffice, or any United States, state, or foreign court regarding Grantor's claimof ownership in any of the patents or trademarks, its right to apply for thesame, or its right to keep and maintain such patent or trademark rights.6. POWER OF ATTORNEY. Grantor hereby appoints TBCC as Grantor's true and lawful attorney, withfull power of substitution, to do any or all of the following, in the name,place and stead of Grantor: (a) file this Agreement (or an abstract hereof) orany other document describing TBCC's interest in the Collateral with the UnitedStates Patent and Trademark Office; (b) execute any modification of thisAgreement pursuant to Section 4 of this Agreement; (c) take any action andexecute any instrument which TBCC may deem necessary or advisable to accomplishthe purposes of this Agreement; and (d) following an Event of Default (asdefined in the Loan Agreement), (i) endorse Grantor's name on all applications,documents, papers and instruments necessary for TBCC to use or maintain theCollateral; (ii) ask, demand, collect, sue for, recover, impound, receive, andgive acquittance and receipts for money due or to become due under or in respectof any of the Collateral; (iii) file any claims or take any action or instituteany proceedings that TBCC may deem necessary or desirable for the collection ofany of the Collateral or otherwise enforce TBCC's rights with respect to any ofthe Collateral, and (iv) assign, pledge, convey, or otherwise transfer title inor dispose of the Collateral to any person.7. RIGHT TO INSPECT. Grantor grants to TBCC and its employees and agents the right to visitGrantor's plants and facilities which manufacture, inspect, or store productssold under any of the patents or trademarks, and to inspect the products andquality control records relating thereto at reasonable times during regularbusiness hours.8. SPECIFIC REMEDIES. Upon the occurrence of any Event of Default (as defined in the LoanAgreement), TBCC shall have, in addition to, other rights given by law or inthis Agreement, the Loan Agreement, or -4- in any other Loan Document, all of the rights and remedies with respect to theCollateral of a secured party under the Code, including the following: 8.1 Notification. TBCC may notify licensees to make royalty payments onlicense agreements directly to TBCC; 8.2 Sale. TBCC may sell or assign the Collateral and associated goodwillat public or private sale for such amounts, and at such time or times as TBCCdeems advisable. Any requirement of reasonable notice of any disposition of theCollateral shall be satisfied if such notice is sent to Grantor five (5) daysprior to such disposition. Grantor shall be credited with the net proceeds ofsuch sale only when they are actually received by TBCC, and Grantor shallcontinue to be liable for any deficiency remaining after the Collateral is soldor collected. If the sale is to be a public sale, TBCC shall also give notice ofthe time and place by publishing a notice one time at least five (5) days beforethe date of the sale in a newspaper of general circulation in the county inwhich the sale is to be held. To the maximum extent permitted by applicable law,TBCC may be the purchaser of any or all of the Collateral and associatedgoodwill at any public sale and shall be entitled, for the purpose of biddingand making settlement or payment of the purchase price for all or any portion ofthe Collateral sold at any public sale, to use and apply all or any part of theObligations as a credit on account of the purchase price of any collateralpayable by TBCC at such sale.9. GENERAL PROVISIONS. 9.1 Effectiveness. This Agreement shall be binding and deemed effectivewhen executed by Grantor and TBCC. 9.2 Notices. Except to the extent otherwise provided herein, all notices, demands, and requests that either party is required or elects to give to theother shall be in writing and shall be governed by the notice provisions of theLoan Agreement. 9.3 No Waiver. No course of dealing between Grantor and TBCC, nor anyfailure to exercise nor any delay in exercising, on the part of TBCC, any right,power, or privilege under this Agreement or under the Loan Agreement or anyother agreement, shall operate as a waiver. No single or partial exercise ofany right, power, or privilege under this Agreement or under the Loan Agreementor any other agreement by TBCC shall preclude any other or further exercise ofsuch right, power, or privilege or the exercise of any other right, power, orprivilege by TBCC. 9.4 Rights Are Cumulative. All of TBCC's rights and remedies with respectto the Collateral whether established by this Agreement, the Loan Agreement, orany other documents or agreements, or by law shall be cumulative and may beexercised concurrently or in any order. 9.5 Successors. The benefits and burdens of this Agreement shall inure tothe benefit of and be binding upon the respective successors and permittedassigns of the parties; provided that Grantor may not transfer any of theCollateral or any rights hereunder, without the prior written consent of TBCC,except as specifically permitted hereby. 9.6 Severability. The provisions of this Agreement are severable. If anyprovision of this Agreement is held invalid or unenforceable in whole or in partin any jurisdiction, then such invalidity or unenforceability shall affect onlysuch provision, or part thereof, in such jurisdiction, and shall not in anymanner affect such provision or part thereof in any other jurisdiction, or anyother provision of this Agreement in any jurisdiction. 9.7 Entire Agreement. This Agreement is subject to modification only by awriting signed by the parties, except as provided in Section 4 of thisAgreement. To the extent that any -5- provision of this Agreement conflicts with any provision of the Loan Agreement,the provision giving TBCC greater rights or remedies shall govern, it beingunderstood that the purpose of this Agreement is to add to, and not detractfrom, the rights granted to TBCC under the Loan Agreement. This Agreement, theLoan Agreement, and the documents relating thereto comprise the entire agreementof the parties with respect to the matters addressed in this Agreement. 9.8 Fees and Expenses. Grantor shall pay to TBCC on demand all costs andexpenses that TBCC pays or incurs in connection with the negotiation,preparation, consummation, administration, enforcement, and termination of thisAgreement, including: (a) reasonable attorneys' and paralegals' fees anddisbursements of counsel to TBCC; (b) costs and expenses (including reasonableattorneys' and paralegals' fees and disbursements) for any amendment,supplement, waiver, consent, or subsequent closing in connection with thisAgreement and the transactions contemplated hereby; (c) costs and expenses oflien and title searches; (d) taxes, fees, and other charges for filing thisAgreement at the United States Patent and Trademark Office, or for filingfinancing statements, and continuations, and other actions to perfect, protect,and continue the security interest created hereunder; (e) sums paid or incurredto pay any amount or take any action required of Grantor under this Agreementthat Grantor fails to pay or take; (f) costs and expenses of preserving andprotecting the Collateral; and (g) costs and expenses (including reasonableattorneys' and paralegals' fees and disbursements) paid or incurred to enforcethe security interest created hereunder, sell or otherwise realize upon theCollateral, and otherwise enforce the provisions of this Agreement, or to defendany claims made or threatened against the TBCC arising out of the transactionscontemplated hereby (including preparations for the consultations concerning anysuch matters). The foregoing shall not be construed to limit any otherprovisions of this Agreement or the Loan Documents regarding costs and expensesto be paid by Grantor. The parties agree that reasonable attorneys' andparalegals' fees and costs incurred in enforcing any judgment are recoverable asa separate item in addition to fees and costs incurred in obtaining the judgmentand that the recovery of such attorneys' and paralegals' fees and costs isintended to survive any judgment, and is not to be deemed merged into anyjudgment. 9.9 Indemnity. Grantor shall protect, defend, indemnify, and hold harmless TBCC and TBCC's assigns from all liabilities, losses, and costs(including without limitation reasonable attorneys' fees) incurred or imposed onTBCC relating to the matters in this Agreement. 9.10 Further Assurances. At TBCC's request, Grantor shall execute anddeliver to TBCC any further instruments or documentation, and perform any acts,that may be reasonably necessary or appropriate to implement this Agreement, theLoan Agreement or any other agreement, and the documents relating thereto,including without limitation any instrument or documentation reasonablynecessary or appropriate to create, maintain, perfect, or effectuate TBCC'ssecurity interests in the Collateral. 9.11 Release. At such time as Grantor shall completely satisfy all of theObligations and the Loan Agreement shall be terminated, TBCC shall execute anddeliver to Grantor all assignments and other instruments as may be reasonablynecessary or proper to terminate TBCC's security interest in the Collateral,subject to any disposition of the Collateral which may have been made by TBCCpursuant to this Agreement. For the purpose of this Agreement, the Obligationsshall be deemed to continue if Grantor enters into any bankruptcy or similarproceeding at a time when any amount paid to TBCC could be ordered to be repaidas a preference or pursuant to a similar theory, and shall continue until it isfinally determined that no such repayment can be ordered. 9.12 Governing Law. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THISAGREEMENT AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT,WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR -6- OTHERWISE, SHALL BE GOVERNED BY THE INTERNAL LAWS AND DECISIONS OF THE STATE OFILLINOIS. ALL DISPUTES BETWEEN THE GRANTOR AND TBCC, WHETHER SOUNDING INCONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERALCOURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO WHICH AN APPEAL THEREFROMMAY BE TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVE THE RIGHT, TO THE EXTENTPERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE GRANTOR OR ITS PROPERTY INANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD FAITH TO ENABLE TBCC TO REALIZEON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OFTBCC. THE GRANTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS,SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY TBCC. THE GRANTOR WAIVESANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH TBCC HASCOMMENCED A PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THELAYING OF VENUE OR BASED ON FORUM NON CONVENIENS. 9.13 Waiver of Right to Jury Trial. TBCC AND GRANTOR EACH HEREBY WAIVETHE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUTOF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT ORFUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND GRANTOR; OR (III) ANY CONDUCT,ACTS OR OMISSIONS OF TBCC OR GRANTOR OR ANY OF THEIR DIRECTORS, OFFICERS,EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC ORGRANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OROTHERWISE. IN WITNESS WHEREOF, the parties have executed this Agreement on the datefirst written above.TRANSAMERICA BUSINESS CREDIT ODETICS, INC.CORPORATION By /s/ By /s/ Gregory A. Miner ------------------------ --------------------Title ________________________ Title CFO -------------------- -7- EXHIBIT 10.9TBCC Cross-Corporate Continuing GuarantyGuarantors: Odetics, Inc. Odetics ITS, Inc. Gyyr Incorporated Mariner Networks, Inc. Meyer, Mohaddes Associates, Inc.Borrowers: Odetics, Inc. Odetics ITS, Inc. Gyyr Incorporated Mariner Networks, Inc. Meyer, Mohaddes Associates, Inc.Date: December 28, 1998THIS CROSS-CORPORATE CONTINUING GUARANTY dated as of the above date (the"Guaranty"), is made by the above guarantors (jointly and severally, the"Guarantor") in favor of TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delawarecorporation, ("TBCC") having its principal office at 9399 West Higgins Road,Suite 600, Rosemont, Illinois 60018 and having an office at 15260 Ventura Blvd.,Suite 1240, Sherman Oaks, California 91403, with respect to the "Indebtedness"(as defined below) of the above Borrowers (jointly and severally, the"Borrower").1. Guaranty. In order to induce TBCC to enter into a Loan and Security -------- Agreement with the Borrower or to continue to provide financing thereunder, andfor other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged, the Guarantor hereby (a) unconditionally andirrevocably guarantees the payment and performance when due (whether at statedmaturity, by acceleration or otherwise) of all of the Indebtedness, and (b)agrees to pay any and all reasonable costs and expenses (including reasonableattorneys' fees and related expenses) incurred by TBCC in enforcing any rightsunder this Guaranty or in enforcing any of the Indebtedness against theBorrower. As used herein, "Indebtedness" means and includes all present andfuture loans (including the Loans), advances, debts, liabilities, obligations,guarantees, covenants and duties now or hereafter owing by Borrower to TBCC ofany kind or nature, present or future, absolute or contingent, liquidated orunliquidated, certain or uncertain, determined or undetermined, monetary ornonmonetary, written or oral, whether Borrower may be liable individually orjointly with others, whether incurred directly to TBCC or acquired by TBCC byassignment or otherwise, or held by TBCC on behalf of others, and regardless ofwhether recovery thereon may be or hereafter become barred by any statute oflimitations, discharged or uncollectible in any bankruptcy, insolvency or otherproceeding, or otherwise unenforceable, including without limitation allindebtedness, liabilities and obligations which may arise under, out of, or inconnection with, any present or future Loan and Security Agreement betweenBorrower and TBCC (the "Loan Agreement"), any other Loan Document or any otheragreement executed in connection herewith or therewith, whether or not for thepayment of money, whether arising by reason of an extension of credit, opening,guaranteeing or confirming of a letter of credit, loan, guaranty,indemnification or in any other manner, whether direct or indirect (includingthose acquired by assignment, purchase, discount or otherwise), whether absoluteor contingent, due or to become due, now due or hereafter arising and howeveracquired. The term "Indebtedness" includes, without limitation, all interest(including interest accruing on or after an Insolvency Event, whether or not anallowed claim), charges, expenses, commitment, facility, closing and collateralmanagement fees, letter of credit fees, reasonable attorneys' fees, and anyother sum chargeable to Borrower under the Loan Agreement or the other LoanDocuments. (Capitalized terms used in this Guaranty, which are not defined,shall have the meanings set forth in the Loan Agreement.) As used herein, theterm "Borrower" shall include any successor to the business and assets ofBorrower, and shall also include Borrower in its capacity as a debtor or debtorin possession under the federal Bankruptcy Code, and any trustee, custodian orreceiver for Borrower or any of its assets, should Borrower hereafter become thesubject of any bankruptcy or insolvency proceeding, voluntary or TBCC Cross-Corporate Continuing Guaranty -----------------------------------------------------------------involuntary; and all indebtedness, liabilities and obligations incurred by anysuch person shall be included in the Indebtedness guaranteed hereby. ThisGuaranty is given in consideration for credit and other financial accommodationswhich may, from time to time, be given by TBCC to Borrower in TBCC's solediscretion, but Guarantor acknowledges and agrees that acceptance by TBCC ofthis Guaranty shall not constitute a commitment of any kind by TBCC to extendsuch credit or other financial accommodation to Borrower or to permit Borrowerto incur Indebtedness to TBCC. All sums due under this Guaranty shall bearinterest from the date due until the date paid at the highest rate charged withrespect to any of the Indebtedness2. Guaranty Absolute. The Guarantor guarantees that the Indebtedness will be ----------------- paid and performed strictly in accordance with its terms regardless of any law,regulation or order now or hereafter in effect in any jurisdiction affecting anyof the terms or the rights of TBCC with respect thereto. The liability of theGuarantor under this Guaranty shall be absolute and unconditional irrespectiveof: (a). any lack of validity or enforceability of the Loan Agreement orany other document agreement or instrument relating to Borrower (whether or notrelating to the Loan Agreement), including, without limitation, this Guaranty(collectively, the "Loan Documents"); (b). any change in the time, manner or place of payment of, or in anyother term of, all or any of the Indebtedness, or any amendment or waiver of anyterm of, or any consent to departure from, the terms of the Loan Agreement orany other Loan Document or any other document or agreement; (c). any exchange, release or non-perfection of any collateral, orany release, amendment or waiver of any term of, or consent to departure from,any other guaranty for all or any of the Indebtedness; (d). any failure on the part of TBCC or any other person or entity toexercise, or any delay in exercising, any right under the Loan Agreement or anyother Loan Document; or (e). any other circumstance which might otherwise constitute adefense available to, or a discharge of, the Borrower, the Guarantor or anyother guarantor with respect to the Indebtedness (including, without limitation,all defenses based on suretyship or impairment of collateral, and all defensesthat the Borrower may assert to the repayment of the Indebtedness, including,without limitation, failure of consideration, breach of warranty, fraud, statuteof frauds, bankruptcy, lack of legal capacity, statute of limitations, lenderliability, accord and satisfaction, and usury) or which might otherwiseconstitute a defense to this Guaranty and the obligations of the Guarantor underthis Guaranty.The Guarantor hereby agrees that if the Borrower or any other guarantor of allor a portion of the Indebtedness is the subject of a bankruptcy proceeding underTitle 11 of the United States Code, it will not assert the pendency of suchproceeding or any order entered therein as a defense to the timely payment ofthe Indebtedness. If any claim is ever made upon TBCC for repayment or recoveryof any amount or amounts received by TBCC in payment of or on account of any ofthe Indebtedness, because of any claim that any such payment constituted apreferential transfer or fraudulent conveyance, or for any other reasonwhatsoever, and TBCC repays all or part of said amount by reason of anyjudgment, decree or order of any court or administrative body havingjurisdiction over TBCC or any of its property, or by reason of any settlement orcompromise of any such claim effected by TBCC with any such claimant (includingwithout limitation the Borrower), then and in any such event, Guarantor agreesthat any such judgment, decree, order, settlement and compromise shall bebinding upon Guarantor, notwithstanding any revocation or release of thisGuaranty or the cancellation of any note or other instrument evidencing any ofthe Indebtedness, or any release of any of the Indebtedness, and the Guarantorshall be and remain liable to TBCC under this Guaranty for the amount so repaidor recovered, to the same extent as if such amount had never originally beenreceived by TBCC, and the provisions of this sentence shall survive, andcontinue in effect, notwithstanding any revocation or release of this Guaranty.3. Waiver. The Guarantor hereby waives promptness, diligence, notice of ------ acceptance protest, notice of protest, and any other notice with respect to anyof the Indebtedness and this Guaranty and any requirement that TBCC protect,secure, perfect or insure any security interest or lien or any property subjectthereto or exhaust any right to take any action against the Borrower or anyother person or any collateral. Guarantor further waives: (a) all other noticesand demands to which Guarantor might be entitled, including without limitationnotice of all of the following: the creation, existence, or acquisition of anyIndebtedness; the amount of the Indebtedness from time to time outstanding; anyforeclosure sale or other disposition of any property which secures any or allof the Indebtedness or which secures the obligations of any other guarantor ofany or all of the Indebtedness; any adverse change in Borrower's financialposition; any other fact which might increase Guarantor's risk; any default,partial payment or non-payment of all or any part of the Indebtedness; theoccurrence of any other Event of Default (as hereinafter defined); any and allagreements and arrangements between TBCC and Borrower and any changes,modifications, or extensions thereof, and any revocation, modification orrelease of any guaranty of any or all of the Indebtedness by any person(including without limitation any other person signing this Guaranty); (b) anyright to require TBCC to institute suit against, or to exhaust its rights andremedies against, Borrower or any other person, or to proceed against anyproperty of any kind which secures all or any part of the Indebtedness, or toexercise any right of offset or other right with respect to any reserves,credits or deposit accounts held by or maintained with TBCC or any indebtednessof TBCC to Borrower, or to exercise any other right or power, or pursue anyother remedy TBCC may have.4. Subrogation. The Guarantor hereby irrevocably waives, to the fullest extent ----------- permitted by law, any and all claims, rights or remedies which it may now haveor hereafter acquire against the Borrower that arise hereunder or from theperformance by it hereunder including, without limitation, any claims, rights or -2- TBCC Cross-Corporate Continuing Guaranty -----------------------------------------------------------------remedies of subrogation, reimbursement, exoneration, contribution,indemnification or participation in any claims, rights or remedies of TBCCagainst the Borrower or in any security which TBCC now has or hereafteracquires, whether or not the claims, rights or remedies arise in equity, undercontract, by statute, under common law or otherwise.5. Representations and Warranties. The Guarantor hereby represents and ------------------------------ warrants as follows: (a). Power and Authority. The Guarantor has full power, authority, -------------------capacity and legal right to execute and deliver and to perform its obligationsunder this Guaranty and the other Loan Documents to which the Guarantor is aparty. (b). Enforceability. This Guaranty and the other Loan Documents to --------------which the Guarantor is a party have been duly executed and delivered by theGuarantor and constitute a legal, valid and binding obligation of the Guarantor,enforceable against the Guarantor, its successors and assigns (and, in the caseof Guarantors who are individuals, their heirs, estate, personalrepresentatives, executors and administrators) in accordance with theirrespective terms, except as enforceability may be limited by applicablebankruptcy, insolvency, reorganization, moratorium or similar laws affecting theenforcement of creditors' rights generally. (c). No Conflicts. The execution, delivery and performance of this ------------Guaranty and the other Loan Documents to which the Guarantor is a party will notviolate any requirement of law or contractual obligation of the Guarantor orresult in the creation or imposition of any lien on any of the property orassets of the Guarantor, except for liens (if any) granted in favor of TBCCpursuant to the Loan Documents. (d). No Consents. No consent of any other Person and no consent, ----------- license, permit, approval or authorization, of, exemption by, notice or reportto, or registration, filing or declaration with, and governmental authority isrequired in connection with the execution, delivery, performance, validity orenforceability of this Guaranty and the other Loan Documents to which theGuarantor is a party. (e). Solvency. The fair value of the property of the Guarantor --------exceeds the total amount of liabilities (including, without limitation,contingent liabilities) of the Guarantor; the present fair saleable value of theassets of the Guarantor exceeds the amount that will be required to pay theprobable liability of the Guarantor on its existing debts as they becomeabsolute and matured; the Guarantor is able to realize upon its assets and payits debts and other liabilities, contingent obligations and other commitments asthey mature and the Guarantor does not intend to, and does not believe that itwill, incur debts or liabilities beyond the Guarantor's ability to pay as thedebts and liabilities mature. In computing the amount of contingent liabilitiesat any time, it is intended that the liabilities will be computed at the amountwhich, in light of all facts and circumstances existing at such time, representsthe amount that can reasonably be expected to become an actual or maturedliability.6. Acceleration. Notwithstanding the terms of all or any part of the ------------ Indebtedness, the obligations of the Guarantor hereunder to pay and perform allof the Indebtedness shall, at the option of TBCC, immediately become due andpayable, without notice, and without regard to the expressed maturity of any ofthe Indebtedness, in the event any default or Event of Default under, or asdefined in any Loan Document, occurs and is continuing; or (b) Guarantor shallrevoke this Guaranty or contest or deny liability under this Guaranty. All ofthe foregoing are hereinafter referred to as "Events of Default".7. Revocation. This is a Continuing Guaranty relating to all of the ---------- Indebtedness, including Indebtedness arising under successive transactions whichfrom time to time continue the Indebtedness or renew it after it has beensatisfied. Guarantor agrees that the obligations of Guarantor hereunder may notbe terminated or revoked in any manner except by giving 90 days' advance writtennotice of revocation to TBCC at its address above by registered first-class U.S.mail, postage prepaid, return receipt requested, and only as to new Loans madeby TBCC to Borrower more than 90 days after actual receipt of such writtennotice by TBCC. No termination or revocation of this Guaranty shall be effectiveuntil 90 days following the date of actual receipt of said written notice ofrevocation by TBCC. Notwithstanding such written notice of revocation or anyother act of Guarantor or any other event or circumstance, Guarantor agrees thatthis Guaranty and all consents, waivers and other provisions hereof shallcontinue in full force and effect as to any and all Indebtedness which isoutstanding on or before the 90th day following actual receipt of said writtennotice of revocation by TBCC, and all extensions, renewals and modifications ofsaid Indebtedness (including without limitation amendments, extensions, renewalsand modifications which are evidenced by new or additional instruments,documents or agreements executed before or after expiration of said 90-dayperiod), and all interest thereon, accruing before or after expiration of said90-day period, and all attorneys' fees, court costs and collection charges,incurred before or after expiration of said 90-day period, in endeavoring tocollect or enforce any of the foregoing against Borrower, Guarantor or any otherperson liable thereon (whether or not suit be brought) and any other expensesof, for or incidental to collection thereof.8. Financial Condition of Borrower. Guarantor warrants that it is fully aware ------------------------------- of the financial condition of Borrower and is executing and delivering thisGuaranty at Borrower's request and based solely upon its own independentinvestigation of all matters pertinent hereto, and Guarantor is not relying inany manner upon any representation or statement of TBCC with respect thereto.Guarantor represents and warrants that it is in a position to obtain, andGuarantor hereby assumes full responsibility for obtaining, any additionalinformation concerning Borrower's financial condition and any other matterpertinent hereto as Guarantor may desire, and Guarantor is not relying upon orexpecting TBCC to furnish to it any information now or hereafter in TBCC'spossession concerning the same or any other matter. By executing this Guaranty,Guarantor knowingly accepts the full range of risks encompassed within acontract of continuing guaranty, which risks Guarantor acknowledges -3- TBCC Cross-Corporate Continuing Guaranty -----------------------------------------------------------------include without limitation the possibility that Borrower will incur additionalIndebtedness for which Guarantor will be liable hereunder after Borrower'sfinancial condition or ability to pay such Indebtedness has deteriorated and/orafter bankruptcy or insolvency proceedings have been commenced by or againstBorrower. Guarantor shall have no right to require TBCC to obtain or discloseany information with respect to the Indebtedness, the financial condition orcharacter of Borrower, the existence of any collateral or security for any orall of the Indebtedness, the existence of any other guaranties of all or anypart of the Indebtedness, any action or non-action on the part of TBCC,Borrower, or any other person, or any other matter, fact, or occurrence.9. Amendments, Etc. No amendment or waiver of any provision of this Guaranty ---------------or consent to any departure by the Guarantor therefrom shall in any event beeffective unless the same shall be in writing and signed by TBCC, and then suchwaiver or consent shall be effective only in the specific instance and for thespecific purpose for which given.10. Addresses for Notices. All notices and other communications provided for --------------------- hereunder shall be in writing (including by telecopier) and, if to theGuarantor, mailed or delivered to it at its address specified in the LoanAgreement between Guarantor and TBCC, if to TBCC, mailed or delivered to it atthe address of TBCC specified on the first page of this Guaranty, or as to eachparty at such other address as shall be designated by the party in a writtennotice to the other party. All the notices and other communications shall, ifmailed, be effective when deposited in the mail addressed as aforesaid (exceptfor notice of revocation, which shall be governed by Section 7 of thisGuaranty). TBCC and Guarantor may change their address for purposes of receivingnotices hereunder by giving written notice thereof to the other party inaccordance herewith. Guarantor shall give TBCC immediate written notice of anychange in its address.11. No Waiver; Remedies. No failure on the part of TBCC to exercise, and no ------------------- delay in exercising, any right hereunder shall operate as a waiver thereof. Nosingle or partial exercise of any right hereunder shall preclude any other orfurther exercise thereof or the exercise of any other right. The remedies hereinprovided are cumulative and not exclusive of any remedies provided by law.12. Right of Set-off. TBCC is hereby authorized at any time and from time-to- ---------------- time following an Event of Default, to the fullest extent permitted by law, toset off and apply any and all deposits (general or special, time or demand,provisional or final) at any time held and other indebtedness at any time owingby TBCC to or for the credit or the account of the Guarantor against any and allof the obligations of the Guarantor now or hereafter existing under thisGuaranty, irrespective of whether or not TBCC shall have made any demand underthis Guaranty and although such obligations may be contingent and unmatured.TBCC agrees promptly to notify the Guarantor after any such set-off andapplication, provided that the failure to give such notice shall not affect thevalidity of such set-off and application. The rights of TBCC under this Sectionare in addition to the other rights and remedies (including, without limitation,other rights of set-off) which TBCC may have.13. Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty -------------------------------- and shall (a) remain in full force and effect until the indefeasible payment infull of the Indebtedness and all other amounts payable under this Guaranty, (b)be binding upon the Guarantor and its successors, assigns, beneficiaries andindorsees (including, without limitation, the heirs, administrators, executorsand estate of the Guarantor), except that no Guarantor shall assign or transferany of its rights or obligations hereunder without the prior written consent ofTBCC, and (c) inure to the benefit of and be enforceable by TBCC and itssuccessors, transferees and assigns. Without limiting the generality of theforegoing clause (c), TBCC may assign or otherwise transfer any of theIndebtedness to any other person or entity, and such other person or entityshall thereupon become vested with all the rights in respect thereof granted toTBCC herein or otherwise. This Guaranty and the obligations of the Guarantorhereunder shall terminate upon the indefeasible payment in full of all of theIndebtedness and all other amounts payable under this Guaranty. 14. Subordination. Any and all payments on all indebtedness and obligations of ------------- the Borrower now or hereafter owing to the Guarantor other than in respect ofsalaries or wages (the "Junior Debt") is hereby subordinated and junior in rightof payment and exercise of remedies to the prior payment in full in cash of theIndebtedness. Upon the written request of TBCC, the Junior Debt shall becollected, enforced and received by the Guarantor as trustee for TBCC and paidover to TBCC on account of the Indebtedness but without reducing or affecting inany manner the liability of the Guarantor under the other provisions of thisGuaranty. So long as any of the Indebtedness is outstanding, no payments shallbe made on any of the Junior Debt without the prior written consent of TBCC15. Telecopier; Counterparts. This Guaranty may be executed and delivered by ------------------------ telecopier or other facsimile transmission with the same force and effect as ifthe same was a fully executed and delivered original counterpart. This Guarantymay be executed by the parties in one or more counterparts, each of which shallbe an original and all of this shall constitute one and the same agreement.16. Security. This Guaranty is secured by all present and future security -------- interests granted to TBCC by Guarantor, including without limitation thesecurity interests granted in the Loan Agreement and the other Loan Documents.17. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS WITHOUTGIVEN EFFECT TO CONFLICTS OF LAW PRINCIPLES THEREOF.18. CONSENT TO JURISDICTION. ----------------------- (a). THE GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OFANY ILLINOIS STATE OR FEDERAL COURT SITTING IN ILLINOIS IN ANY ACTION ORPROCEEDING ARISING OUT OF OR RELATING TO -4- TBCC Cross-Corporate Continuing Guaranty -----------------------------------------------------------------THIS GUARANTY OR ANY OTHER LOAN DOCUMENTS, AND THE GUARANTOR HEREBY IRREVOCABLYAGREES THAT ALL CLAIMS IN RESPECT OF THE ACTION OR PROCEEDING MAY BE HEARD ANDDETERMINED IN SUCH ILLINOIS STATE OR FEDERAL COURT. THE GUARANTOR HEREBYIRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANYOBJECTION TO THE LAYING OF VENUE OR ANY DEFENSE OF AN INCONVENIENT FORUM WHICHIT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF SUCH ACTION OR PROCEEDING. THEGUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCHACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE GUARANTORAT ITS ADDRESS SPECIFIED ON THE FIRST PAGE OF THIS GUARANTY. THE GUARANTORAGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BECONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT ORIN ANY OTHER MANNER PROVIDED BY LAW. (b). NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF TBCC TO SERVELEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF TBCCTO BRING ANY ACTION OR PROCEEDING AGAINST THE GUARANTOR OR ITS PROPERTY IN THECOURTS OF ANY OTHER JURISDICTIONS.19. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. TBCC AND GUARANTOR HEREBY WAIVE THE ------------------------------------ RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, LAWSUIT OR PROCEEDING BASED UPON,ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS GUARANTEE OR ANY OTHER LOANDOCUMENTS OR ANY SUPPLEMENT OR AMENDMENT THERETO; OR (ii) ANY OTHER PRESENT ORFUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND GUARANTOR; OR (iii) ANY BREACH,CONDUCT, ACTS OR OMISSIONS OF TBCC OR GUARANTOR OR ANY OF THEIR RESPECTIVEDIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATEDWITH OR REPRESENTING TBCC OR GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHERSOUNDING IN CONTRACT OR TORT OR OTHERWISE. IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the datefirst above written. Guarantors:Odetics, Inc.By /s/ Gregory A. Miner ---------------------Title COO ---------------------Odetics ITS, Inc.By /s/ Gregory A. Miner ---------------------Title CFO ---------------------Gyyr IncorporatedBy /s/ Gregory A. Miner ---------------------Title CFO ---------------------Mariner Networks, Inc.By /s/ Gregory A. Miner ---------------------Title CFO ---------------------Meyer, Mohaddes Associates, Inc.By /s/ Gregory A. Miner ---------------------Title CFO --------------------- -5- EXHIBIT 21 LIST OF SUBSIDIARIES STATE OR OTHER JURISDICTION OF INCORPORATION OWNERSHIP NAME OF ENTITY OR ORGANIZATION INFORMATION -------------- --------------- ----------- Gyyr Incorporated......................... California 100% ownedMariner Networks, Inc..................... Delaware 100% ownedMeyer, Mohaddes Associates, Inc........... California 100% owned by Odetics ITS, Inc.Odetics ITS, Inc. (formerly known as Centro Corporation).. California 93% ownedOdetics Europe Limited.................... England and Wales 100% ownedOdetics Asia Pacific Pte. Ltd............. Singapore 100% owned Exhibit 23.1 Consent of Independent AuditorsWe consent to the incorporation by reference in the Registration Statements(Form S-3 Nos. 033-63983, 333-63911, 333-66717, 333-69677 and 333-74509 and 333-40555) of Odetics, Inc. and in the related Prospectuses, and in the RegistrationStatements (Form S-8 Nos. 333-05735 and 333-44907) of our report dated May 11,1999, except for Note 1, as to which the date is June 24, 1999, with respect tothe consolidated financial statements and schedule of Odetics, Inc. included inthis Annual Report (Form 10-K) for the year ended March 31, 1999.Orange County, CaliforniaJune 24, 1999
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