-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2RyBvIHy+rumCzROfNr0015Edl93pDIl105NtwHg3ML+eoFxnpBnod5QyPILJYo dQhReTSC908dPIDbJ7a/Jg== 0001047469-98-009010.txt : 19980310 0001047469-98-009010.hdr.sgml : 19980310 ACCESSION NUMBER: 0001047469-98-009010 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980309 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ODS NETWORKS INC CENTRAL INDEX KEY: 0000736012 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 751911917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20191 FILM NUMBER: 98559862 BUSINESS ADDRESS: STREET 1: 1101 E ARAPAHO ROAD CITY: RICHARDSON STATE: TX ZIP: 75081 BUSINESS PHONE: 2142346400 MAIL ADDRESS: STREET 1: 1101 E ARAPAHO ROAD CITY: RICHRICHARDSON STATE: TX ZIP: 75081 FORMER COMPANY: FORMER CONFORMED NAME: OPTICAL DATA SYSTEMS INC DATE OF NAME CHANGE: 19950517 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to _______ Commission file number 0-20191 ODS Networks, Inc. (Exact name of registrant as specified in its charter) DELAWARE 75-1911917 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1101 EAST ARAPAHO ROAD RICHARDSON, TEXAS 75081 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 234-6400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 2, 1998, the aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant was approximately $67,780,937. As of March 2, 1998, 16,527,587 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997 are incorporated by reference into Items 5, 6, 7 and 8 under Part II and Item 14 under Part IV hereof. Portions of the Registrant's definitive Proxy Statement filed in connection with the Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 13 under Part III hereof. PART I ITEM 1. BUSINESS. GENERAL ODS Networks, Inc. ("ODS", the "Company" or the "Registrant") develops, manufactures, markets and supports switches, intelligent hubs, sophisticated management and security software and related computer networking and internetworking products for application in local area networks ("LANs"). The Company's products are designed to support the four major industry standards currently applicable in the LAN industry: Ethernet, Token Ring, Fiber Distributed Data Interface ("FDDI") and Asynchronous Transfer Mode ("ATM"). These products allow customers to integrate a wide variety of computer equipment in numerous flexible configurations into enterprise-wide computer networks. The Company's strategy is to provide a wide variety of technologically advanced LAN products to satisfy an ever expanding range of customer requirements. To accomplish its objectives, the Company engages in ongoing efforts to (i) enhance and expand its existing products in response to rapidly changing customer preferences and evolving industry standards and technologies, and (ii) develop and introduce, in a timely manner, products which incorporate new technologies, comply with industry standards and achieve market acceptance. The Company markets and distributes its products primarily through a direct sales force to end-users and by numerous domestic and international system integrators and value added resellers. The Company's end-user customers include manufacturing, telecommunications, retail, transportation, health care, insurance, entertainment, utilities and energy companies; government agencies; financial institutions; and academic institutions. The Company was organized in Texas in September 1983 and reincorporated in Delaware in October 1995. The Company changed its name in April 1997 from Optical Data Systems, Inc. to ODS Networks, Inc. The Company's principal executive offices are located at 1101 E. Arapaho Road, Richardson, Texas 75081, and its telephone number is (972) 234-6400. THE LAN INDUSTRY The power of personal computers ("PCs"), workstations and network servers has increased dramatically during the past decade. The rapid proliferation of these devices has created a demand for an effective method to enable users to communicate with each other to access common databases, software and peripheral devices. The LAN industry has evolved to provide a means by which computers and related devices ("nodes") located within a limited geographical area, such as a single office building or a campus, can be interconnected by means of a common cabling system to permit communication and the sharing of data and resources. These LANs can then be interconnected into wide area networks ("WANs") that enable all of the client and server devices in an enterprise to communicate with each other. In the past, LAN technologies such as Ethernet and Token Ring have required networked devices to take turns communicating on a singe LAN. Such technologies are often referred to as shared-media or shared-bandwidth technologies because they require computers to contend for the total capacity or "bandwidth" of a LAN. Until recent years, intelligent shared-media hubs, each of which functions as a single LAN, interconnected with routers have represented the most widely used network architecture. The Company's Infinity intelligent hub product family, introduced during the fourth quarter of 1992, represents one of the industry's most reliable, flexible and manageable intelligent hubs. However, the performance of these shared-bandwidth LANs has declined in recent years due to the increased processor speeds of computers, increased size of LANs and higher bandwidth requirements of software applications such as document image processing, medical imaging, video and the World Wide Web. In recent years, a new generation of LAN technology has emerged utilizing "switching" to relieve the performance issues experienced in shared-bandwidth LANs. Some switches have been designed to enhance the performance of existing shared-bandwidth LANs by reducing the number of devices taking 2 turns and sharing the capacity of a single LAN Ethernet segment or token ring. More recently, switches such as the Company's InfiniteSwitch and LANBlazer product lines have been designed to replace the traditional hub and router architecture. In a totally switched network, each PC, workstation and server has its own dedicated network connection; thus, networked devices do not experience the performance constraints of taking turns transmitting information over the LAN. The migration of data from tightly controlled mainframe computers onto LANs, workstations and PCs and connectivity of an organization's network to the Internet have created security issues. In the past, an organization could rely on tight mainframe access controls to restrict access to sensitive data. However, many networks now contain proprietary, intellectual property and other sensitive data being carried by insecure network protocols. Today, firewalls represent the most common form of network security, forming barriers to entry into an organization's network. However, the hacker community has developed innovative techniques for circumventing firewalls. Furthermore, firewalls do not adequately address the security issues related to disgruntled employees or those who would commit corporate espionage. Thus, a need has evolved in the industry for the implementation of comprehensive monitoring of installed networks and real-time response to security violations. Recently, products such as the Company's SecureDetector and SecureSwitch have been designed to improve data security by implementing real-time network intrusion detection and response technology. THE ODS STRATEGY The Company's strategy is to provide a wide variety of technologically advanced LAN products to satisfy evolving customer requirements. Currently, the Company's objective is to be a market leader in the migration of LAN technology to switched, dedicated bandwidth connections by offering a family of LAN switching products that lead the industry in price/performance, features, flexibility, reliability, management, security and investment protection. The key elements of the Company's strategy are outlined below. LAN MARKET LEADERSHIP. The Company has focused on the high end of the LAN market. The Company believes that high-end customers tend to be early adopters of new technology. The Company works closely with selected large end users to identify market needs and define product specifications early in the development process. This approach results in a thorough understanding of end-user requirements prior to commencement of the design process. The Company believes that its InfiniteSwitch and LANBlazer product lines meet the high-end LAN market requirements to provide switched, dedicated bandwidth, high-speed connections in modular, flexible and reliable chassis systems with competitive pricing. NETWORK MANAGEMENT AND SECURITY. As LANs become more diverse and complex and provide increased bandwidth capacity, organizations require more sophisticated network management systems. The Company has developed advanced network management systems to allow network administrators to monitor and control all of the physical layer components of a network, including third-party products. Further, security issues created by unauthorized access to sensitive data within an organization's intranet by employees, or by competitors, thieves and vandals through the Internet, have created the need for additional network security capabilities. By working closely with selected large organizations with stringent requirements for network security, the Company gains a thorough understanding of security requirements and develops products to address those requirements. The Company intends to continue to differentiate itself from its competitors by enhancing its current advanced network management and security systems and developing new technology to meet evolving end-user specifications. INDUSTRY STANDARDS. A LAN is based on "protocols" or rules that govern access to and communication over the network. To facilitate communication with each other, connected nodes must obey protocols to access the network and communicate with other nodes. The Company's diverse product lines include products compliant with Ethernet, Token Ring, FDDI, ATM and other industry standards. The Company intends to continue its strategy of compliance with industry standards rather than develop proprietary networking solutions. The Company's research and development efforts are, in significant part, devoted to the continued introduction and development of new products and enhancement of existing products based on existing as well as emerging industry standards. 3 SALES, MARKETING AND SUPPORT. The Company plans to increase its sales in North America by expanding its direct sales and marketing programs and by expanding the number of system integrators, original equipment manufacturers, and value added resellers supported by the Company's direct sales force. Internationally, the Company intends to expand the number of third-party resellers supported by the Company's direct sales force. The Company's sales force and its field sales engineers are knowledgeable in a wide variety of hardware and software networking environments and provide valuable consulting services to ODS customers and partners. ODS intends to continue to assist its partners and end-user customers to design LAN solutions, develop a migration path to implement advanced LAN solutions while leveraging a customer's existing investment and provide numerous other valuable technical services for LAN applications. ODS PRODUCTS NETWORK MANAGEMENT. As networks evolve from shared media to purely switched architectures, network management requirements are also evolving beyond the traditional device-oriented management tools. The ODS InfiniteView suite of network management software applications provides a robust platform for proactively managing a complex, switched-only environment. The InfiniteView family includes the following network management products: Domain Director, Health Monitor, Switch Manager and ProtoCop. The InfiniteView family is a set of modular, yet interoperable, products which provide a powerful view and management capability supporting fault monitoring, security monitoring, performance measurements, accounting and configuration management. The InfiniteView Domain Director is a network management application which simplifies a network manager's job of maintaining the network by discovering all manageable devices in the network and creating logical groupings of those devices. Customized graphical user interfaces ("GUIs") are provided by the Domain Director along with real-time status of each network device. The InfiniteView Health Monitor is a network management application that monitors segments, rings and switches in a network and efficiently isolates problems down to a specific address and port to allow a user to evaluate the health of the network. Health Monitor uses a drill down technique to quickly and effectively isolate problems and minimizes the time reviewing screens and tables. The InfiniteView Switch Manager is the primary mechanism for managing and controlling configurations of the switches in a network. The Switch Manager features a customized GUI to provide simple point and click management and control of LAN switches and other networking components. Switch Manager allows the user to configure all aspects of the switch, including enabling and disabling ports, setting up security for the switch, real-time monitoring of the state of all switch interfaces and presenting a unified view of all agents in a chassis. The InfiniteView ProtoCop is a unique network investigative tool which offers a proactive model for analyzing, filtering and viewing network management data. With ProtoCop, network managers can better plan and secure their network from outside invaders, internal configuration and performance problems and track against performance-based service level agreements. NETWORK SECURITY. In addition to the security features of the InfiniteView ProtoCop network management software application, the ODS SecureDetector and SecureSwitch products are designed to improve network security by implementing comprehensive network monitoring, intrusion detection and response technologies. The SecureDetector can be connected simultaneously to multiple Ethernet segments to passively monitor and audit data traversing the network, and can identify network conversations that fit known attack profiles and enable tracking, logging and termination of unauthorized network conversations. The SecureSwitch combines the security capabilities of the SecureDetector into a wire-speed, high-performance, modular switching implementation. Consistent with ODS' strategy to provide a high level of investment protection to its customers, the installed base of ODS InfiniteSwitches can be upgraded to fully support the SecureSwitch capabilities. 4 INFINITESWITCH. The expansion of bandwidth intensive operating systems and applications, coupled with rapid advancement in client/server computing, is driving the transition from shared-bandwidth architectures to switched architectures. Switched architectures, which began as high-speed switching in the network backbone, are now extending to users' desktops to maximize network performance and the productivity of each individual user. The ODS InfiniteSwitch product family, introduced in 1996, comprises flexible, competitively priced, switched connectivity while providing scaleable, high-speed ATM, FDDI and Fast Ethernet uplinks that fully integrate each LAN device into more complex, enterprise networks. The ODS InfiniteSwitch product family includes modular chassis, switch and uplink modules, and network management software. The modular chassis are available with 12, 7, 4 and 2 slots. Each switch, uplink and management module is re-deployable across these modular chassis platforms, including the Company's prior generation Infinity intelligent hub chassis, thereby reducing the operating costs associated with spare units and enabling a cost-effective migration from shared-bandwidth network architectures and small work groups to large switched networks. The ODS InfiniteSwitch product family offers numerous configurations of dedicated 10 megabit per second ("Mbps") Ethernet and 100 Mbps Fast Ethernet connections to every device in a network using unshielded twisted pair cabling or fiber optic transmission media. The InfiniteSwitch utilizes a single 1.28 Gbps backplane with a dual bus architecture. Each bus is independent of the other, providing both load balancing capabilities and a high degree of fault tolerance. By separating the management function from the switching operation and providing distributed memory architecture, fault tolerance is enhanced. Additionally, every ODS InfiniteSwitch module can operate in stand-alone mode over its own 640 Mbps of bandwidth. The dual bus architecture, number of possible Ethernet and Fast Ethernet module configurations, modular stand-alone mode capabilities and range of uplink options enable flexible network configurations by network administrators using the ODS InfiniteView network management system. LANBLAZER. For very high bandwidth server farms, corporate backbone switching and high-end applications at the individual user level, ODS introduced the LANBlazer 7000 Gigabit Ethernet switch in January 1998. The LANBlazer 7000 includes a modular 7-slot chassis that supports over 45 Gbps of bandwidth and connects up to 24 separate Gigabit Ethernet ports or up to 120 Fast Ethernet ports. One implementation of the LANBlazer 7000 is as a backbone network for users of ODS' InfiniteSwitches, high- density Ethernet switches. Additional features of the LANBlazer include high-speed Layer 3 switching, VLAN management and flexible network management capabilities. TURBOACCESS SWITCHES. The TurboAccess family of workgroup switches and managed workgroup switches allow workgroups to migrate from conventional 10 Mbps shared Ethernet domains to multiple dedicated switched Ethernet segments. These switches deliver dedicated 10 Mbps links to each attached LAN segment or attached workstation with no need to upgrade existing cabling, hubs or network adapters. The TurboAccess switches include optional Fast Ethernet uplinks, allowing a migration to higher speed networks while preserving a customer's existing investment in network infrastructure. INFINITY INTELLIGENT HUBS. The ODS Infinity intelligent hub product family, introduced in 1992, was designed to be used in large or multi-story buildings and campus settings. The ODS Infinity series has a flexible backplane that supports Ethernet, Token Ring, ATM and FDDI modules in a single chassis platform and features a large number of modules and options designed to create highly manageable and reliable network architectures. Each intelligent hub ranges in size from 4 to 12 modular slots and supports up to 528 Ethernet ports with up to 44 separate Ethernet segments or up to 352 Token Ring ports with up to 44 managed Token Rings. The Company's ATM and FDDI products are used by customers in several applications such as metropolitan area networks ("MANs"), campus backbones, interconnections for high performance workstations and file servers, and direct connections between host computers. Certain third-party products, such as segment switching and router modules, can also be integrated in Infinity intelligent hubs. MICRO-INFINITY. The ODS Micro-Infinity product family features a micro-modular design for growing businesses, remote branch offices and work groups within organizations. This product family supports Ethernet, Token Ring, ATM and FDDI modules, third-party segment switching and remote access router modules. 5 NANO HUB. The ODS Nano Hub product line features a managed, fixed-port configuration with 12 to 24 ports of shared Ethernet connections. The Nano Hub is available with integrated Frame Relay Access Device ("FRAD") or Integrated Service Digital Network ("ISDN") to provide reliable LAN connectivity with remote access for branches and remote offices. THIRD-PARTY PRODUCTS. The Company believes that it is beneficial to work with third parties with complementary technologies to broaden the appeal of the Company's switches and intelligent hub products. These alliances allow ODS to provide integrated solutions to its customers, combining ODS developed technology with third-party products such as certain routers from Cisco Systems, Inc., ATM switches from FORE Systems, Inc. and Gigabit Ethernet switch technology from Lucent Technologies. As the Company also competes with these technology partners in certain segments of the market, there can be no assurance that the Company will have access to all of the third-party products which may be desirable in order to offer fully integrated solutions to ODS customers. CUSTOMER SERVICES. In addition to manufacturing broad lines of LAN products, the Company also offers a wide range of services for LANs, including consulting, design and configuration, project planning and management, performance analysis and installation and maintenance. PRODUCT DEVELOPMENT The LAN industry is characterized by rapidly changing technology, standards and customer demands. Management believes that the Company's future success depends in large part upon the timely enhancement of existing products as well as the development of technologically advanced new products which meet industry standards, perform successfully and achieve market acceptance. The Company is currently developing and marketing next-generation LAN switching products that will support data applications, video and audio applications as well as intranet and Internet applications. The Company is also investing in the development of products which comply with emerging industry standards and is continuously engaged in testing to ensure that the Company's products interoperate with other manufacturers' products which comply with industry standards. However, there can be no assurance that the Company will be successful in enhancing its existing products or in selecting, developing, manufacturing and marketing new products which will perform satisfactorily and achieve market acceptance. Nor can there be any assurance that the Company will be able to respond effectively to technological changes or new product announcements by competitors, which could render portions of the Company's inventory obsolete. During 1997, 1996 and 1995, the Company's research and development expenditures were $10.8 million, $10.4 million and $8.0 million, respectively. All of the Company's expenditures for hardware and software research and development costs have been expensed as incurred. At December 31, 1997, the Company had 63 employees engaged in research and product development. The Company intends to continue to increase its research and development staff and expenditures. MANUFACTURING AND SUPPLIERS The Company's manufacturing operations consist primarily of final assembly, testing and quality control of subassemblies and finished units. Materials used by the Company in its manufacturing processes include semiconductors such as microprocessors, memory chips and application specific integrated circuits ("ASICs"), printed circuit boards, power supplies and enclosures. All of the materials used in the Company's products are purchased under contracts or purchase orders with third parties. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain key components such as microprocessors and ASICs are available from one or a limited number of suppliers. For example, certain ASICs designed into the Company's InfiniteSwitch products are supplied by FORE Systems (see "Competition"). The lead times for delivery of components vary significantly and exceed twelve weeks for certain components. If the Company should fail to forecast its requirements accurately for components, it may experience excess inventory or shortages of certain components which could have an adverse effect on the Company's business and operating results. Further, any interruption in the supply of any of these components, or the 6 inability of the Company to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse effect on the Company's business and operating results. The Company's operational strategy relies on outsourcing of printed circuit board assembly and certain other operations to reduce fixed costs and to provide flexibility in meeting market demand. The Company inserts the printed circuit board-based modules, assembled by a variety of domestic third-party contract assembly companies, into product enclosures in combination with power supplies, ODS software and other components to configure systems to meet the needs of end-user customers. There can be no assurance that the Company will effectively manage its third-party contractors or that these contractors will meet the Company's future requirements for timely delivery of products of sufficient quality and quantity. Further, the Company intends to introduce a number of new products and product enhancements in 1998 which will require that the Company rapidly achieve volume production of those new products by coordinating its efforts with those of its suppliers and contractors. The inability of the third-party contractors to provide ODS with adequate supplies of high-quality products could cause a delay in the Company's ability to fulfill orders and could have an adverse effect on the Company's business and operating results. INTELLECTUAL PROPERTY AND LICENSES The Company's success and its ability to compete is dependent, in part, upon its proprietary technology. The Company does not hold any issued patents and currently relies on a combination of contractual rights, trade secrets and copyright laws to establish and protect its proprietary rights in its products. The Company has also entered into confidentiality agreements with its employees and enters into non-disclosure agreements with its suppliers, resellers and certain customers to limit access to and disclosure of proprietary information. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. There are many patents held by companies which relate to the design and manufacture of networking systems. Potential claims of infringement could be asserted by the holders of those patents. The Company could incur substantial costs in defending itself and its customers against any such claim regardless of the merits of such claims. In the event of a successful claim of infringement, the Company may be required to obtain one or more licenses from third parties. There can be no assurance that the Company could obtain the necessary licenses on reasonable terms. The Company has entered into several software and product license agreements. These license agreements provide the Company with additional software and hardware components that add value to its intelligent hub, switch and management products. These license agreements do not provide proprietary rights which are unique or exclusive to the Company and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license fees and royalties. SALES, MARKETING AND CUSTOMERS The Company markets and distributes its products primarily through a direct sales force to end users and through numerous domestic and international system integrators and value added resellers. The Company's direct sales and marketing organization currently consists of 143 individuals, including managers, sales representatives, marketing personnel and technical support personnel. FIELD SALES FORCE. The Company's direct sales organization focuses on major account sales, promotes the Company's products to current and potential customers, and monitors evolving customer requirements. The field sales and technical support force provides training and technical support to the Company's resellers and end users and assists ODS customers to design LAN solutions and to develop a migration path to implement advanced LAN solutions while leveraging an end user's existing investment. 7 The Company currently conducts its direct sales and marketing efforts from its principal office in Richardson (Dallas), Texas; through domestic field offices located in the following metropolitan areas: Atlanta, Boston, Chicago, Cleveland, Denver, Detroit, Houston, Los Angeles, Minneapolis, New York City, Philadelphia, San Francisco, Seattle and Washington, D.C.; and through its foreign sales offices located in the following regions: Australia, Canada, England, France, Germany, Malaysia, Singapore, South Korea and Taiwan. RESELLERS. Domestic and international system integrators and value added resellers (collectively, "resellers") sell ODS products as stand-alone solutions to end users and integrate ODS products with products sold by other LAN and WAN vendors into networking systems that are sold to end users. The Company's field sales force and technical support organization provide support to these resellers. Historically, resellers have sold the Company's products to large corporations and government agencies. The Company has initiated a "Partners Plus" program targeted at resellers who serve medium sized organizations. The Company's agreements with resellers are non-exclusive, and the Company's resellers generally sell other products which may compete with ODS products. Resellers may place higher priority on products of other suppliers who are larger than and have more name recognition than ODS, and there can be no assurance that resellers will continue to sell and support the Company's products. FOREIGN SALES. The Company believes that rapidly evolving international markets are important sources of future net sales for the Company. The Company's export sales are currently being made through international resellers in Europe, Asia, Latin America and Canada supported by ODS' international sales and technical support organization. Export sales accounted for approximately 27.2%, 14.4% and 11.6% of net sales in 1997, 1996 and 1995, respectively. See Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference and included in this report for a geographic breakdown of the Company's product revenue from sales to customers outside the United States for the years ended December 31, 1997, 1996 and 1995. Sales to foreign customers and resellers generally have been made in United States dollars. The Company's international operations may be affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand, as well as by risks such as increases in duty rates, difficulties in distribution, regulatory approvals and other constraints upon international trade. For example, the fluctuations in currency exchange rates and adverse economic developments in Malaysia, South Korea and certain other countries adversely affected demand for the Company's products in those countries in the fourth quarter of 1997 and may continue to adversely affect demand for the Company's products in those countries in 1998. MARKETING. The Company has implemented several methods to market its products, including regular participation in trade shows and seminars, advertisement in trade journals, telemarketing, distribution of sales literature and product specifications and ongoing communications with its resellers and installed base of end-user customers. CUSTOMERS. The Company's end-user customers include manufacturing, telecommunications, retail, transportation, health care, entertainment, insurance, utilities and energy companies; government agencies; financial institutions; and academic institutions. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval cycles, and sales to customers within certain geographic regions can be subject to seasonal fluctuations in demand. 8 Although the Company sells its products to many customers, direct sales to three such resellers and end-user customers, Electronic Data Systems Corporation ("EDS"), AT&T Corp. ("AT&T") and various agencies of the U. S. Government (aggregated as one), have each accounted for 10% or more of the Company's net sales in at least one of the past three fiscal years as indicated in the following schedule.
- -------------------------------------------------------------------------------- CUSTOMER PERCENTAGE OF NET SALES ------------------------------------------------------------ 1997 1996 1995 - -------------------------------------------------------------------------------- EDS 16.1% 19.4% 28.3% AT&T 1.6 12.1 12.0 U. S. Government 11.7 13.5 9.6 - --------------------------------------------------------------------------------
A large portion of the products sold to EDS during the periods shown were integrated with other products or services and sold to end users by EDS. A large portion of sales to AT&T in 1995 were attributable to a major U.S. Army customer of AT&T. No other customer accounted for as much as 10% of the Company's net sales in 1997, 1996 or 1995, respectively. The loss of any of these customers could have a material adverse effect on the Company and its operating results if not replaced. Most of the Company's business with the U.S. Government is on a fixed-price basis. Government contracts customarily include provisions which provide for cancellation at the convenience of the Government. In addition, upon cancellation by the Government, the Company generally would be entitled to reimbursement of costs incurred, plus a pro rata share of profit. The Company has never received a cancellation of a material government contract and has no reason to anticipate any such cancellation. The products sold, characteristics and business risks associated with the Company's sales to U.S. Government agencies do not differ materially from those associated with sales of the Company's products to commercial customers. BACKLOG. The Company believes that only a small portion of its order backlog is noncancelable and that the dollar amount associated with the noncancelable portion is immaterial. The Company manufactures its products based upon its forecast of customers' demand and maintains inventories of sub-assemblies and finished products in advance of receiving firm orders from customers. Orders are generally fulfilled by the Company within one to four weeks following receipt of an order. Because of the generally short cycle between order and shipment and occasional customer-initiated changes in delivery schedules or cancellation of orders which are made without significant penalty, the Company does not believe that its backlog as of any particular date is indicative of future net sales. CUSTOMER SUPPORT, SERVICE AND WARRANTY. The Company services, repairs and provides technical support for its products. The ODS field sales and technical support force work closely with resellers and end-user customers on-site and by telephone to assist with pre- and post-sales support services such as network design, system installation and technical consulting. By working closely with the Company's customers, ODS employees gain a thorough understanding of end-user requirements and provide input to the product development process. The Company warrants all its products against defects in materials and workmanship for periods ranging from 90 days to 12 months. Before and after expiration of the product warranty period, the Company offers both on-site and factory-based support, parts replacement and repair services. Extended warranty services are separately invoiced on a time and materials basis or on an annual maintenance contract. COMPETITION The market for network intelligent hubs and switches is intensely competitive and subject to frequent product introductions with improved price/performance characteristics. Networking suppliers compete in areas such as conformity to existing and emerging industry standards, interoperability with other networking products, network management capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support. The Company believes that its solutions-oriented approach to networking (combining network design services, ODS products and third-party 9 products to provide superior networking systems to customers) provides the Company a competitive advantage with large organizations with complex networking requirements. There are numerous companies competing in various segments of the intelligent hub and switch markets. The Company's principal competitors include Cisco Systems, Inc., Cabletron Systems, Inc., Bay Networks, Inc., 3Com Corporation, FORE Systems, Inc., Xylan Corporation and International Business Machines Corporation. Several of the Company's competitors have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than the Company. In addition, many of the Company's competitors offer customers a broader product line which provides a more comprehensive networking solution than the Company currently offers. Certain companies in the networking industry have expanded their product lines or technologies in recent years as a result of acquisitions. Further, more companies have developed products which conform to existing and emerging industry standards and have sought to compete on the basis of price. Increased competition in the networking industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully in the future with current or new competitors. EMPLOYEES As of December 31, 1997, the Company employed a total of 384 persons, including 143 in sales, marketing and technical support, 160 in manufacturing and operations, 63 in research and product development, and 18 in administration and finance. None of the Company's employees are represented by a labor organization, and the Company is not a party to any collective bargaining agreement. The Company has not experienced any work stoppages and considers its relations with its employees to be good. Competition in the recruiting of personnel in the computer and communications industry is intense. The Company believes that its future success will depend in part on its continued ability to hire, motivate and retain qualified management, sales and marketing, and technical personnel. To date, the Company has not experienced significant difficulties in attracting and retaining qualified employees. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS This report may include forward-looking statements that involve risks and uncertainties. In addition to those factors discussed elsewhere in this Form 10-K and other filings with the Securities and Exchange Commission, the Company identifies the following factors which could affect the Company's actual results and cause actual results to differ materially from those in the forward-looking statements. TECHNOLOGICAL CHANGES. The market for the Company's products is characterized by frequent product introductions, rapidly changing technology and continued evolution of new industry standards. The market for network intelligent hubs and switches requires the Company's products to be compatible and interoperable with products and architectures offered by various vendors, including other networking products, workstation and personal computer architectures and computer and network operating systems. The Company's success will depend to a substantial degree upon its ability to develop and introduce in a timely manner new products and enhancements to its existing products that meet changing customer requirements and evolving industry standards. The development of technologically advanced products is a complex and uncertain process requiring high levels of innovation as well as the accurate anticipation of technological and market trends. There can be no assurance that the Company will be able to identify, develop, manufacture, market and support new or enhanced products successfully in a timely manner. Further, the Company or its competitors may introduce new products or product enhancements that shorten the life cycle of or obsolete the Company's existing product lines which could have a material adverse effect on the Company's business, operating results and financial condition. 10 COMPETITION AND MARKET ACCEPTANCE. The market for network intelligent hubs and switches is intensely competitive and subject to frequent product introductions with improved price/performance characteristics. Even if the Company does introduce advanced products which meet evolving customer requirements in a timely manner, there can be no assurance that the new Company products will gain market acceptance. Many networking companies, including Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. ("Cabletron"), Bay Networks, Inc. ("Bay Networks"), FORE Systems, Inc. ("FORE Systems"), Xylan Corporation ("Xylan") and others, have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than the Company. Many of the Company's large competitors offer customers a broader product line which provides a more comprehensive networking solution than the Company currently offers. The Company anticipates increased competition from large telecommunication equipment vendors which are expanding their capabilities in the data networking market. For example, Lucent Technologies has acquired several networking companies to enhance its capabilities in data networking. Further the Company anticipates increased competition from private "start-up" companies that have developed or are developing advanced network switching products. Increased competition in the networking industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. The Company is pursuing a strategy to increase the percentage of its revenue generated through indirect sales channels including value added resellers, system integrators, original equipment manufacturers and network service providers. There can be no assurance that the Company's products will gain market acceptance in these indirect sales channels. Further, competition among networking companies to sell products through these indirect sales channels could result in significant price competition and reduced profit margins. The Company is also pursuing a strategy to broaden and further differentiate its product line by introducing complementary network switching, management and security products and incorporating new technologies into its existing product line. There can be no assurance that the Company will successfully introduce these products or that such products will gain market acceptance. The Company anticipates competition from networking companies, network security companies and others in each of its product lines. The Company anticipates that profit margins will vary among its product lines and that product mix fluctuations could have an adverse effect on the Company's overall profit margins. ACQUISITIONS. Cisco, Cabletron, Bay Networks, FORE Systems, Lucent Technologies and other competitors have recently acquired several networking companies with complementary technologies, and the Company anticipates that such acquisitions will continue in the future. These acquisitions may permit such competitors to accelerate the development and commercialization of broader product lines and more comprehensive networking solutions than the Company currently offers. In the past, the Company has relied upon a combination of internal product development and partnerships with other networking vendors to provide competitive networking solutions to customers. Certain of the recent and future acquisitions by the Company's competitors may have the effect of limiting the Company's access to commercially significant technologies. Further, the business combinations and acquisitions in the networking industry are creating companies with larger market shares, customer bases, sales forces, product offerings and technology and marketing expertise. There can be no assurance that the Company will be able to compete successfully in such an environment. The Company may, in the future, acquire or invest in another company, business unit, product line, or technology to accelerate the development of products and sales channels complementary to the Company's existing products and sales channels. Acquisitions involve numerous risks, including difficulties in assimilation of operations, technologies, and products of the acquired companies; risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions; the potential loss of key employees of the acquired company; and the diversion of management's attention from normal daily operation of the Company's business. 11 PRODUCT TRANSITIONS. Once current networking products have been in the market place for a period of time and begin to be replaced by higher performance products (whether of the Company's or a competitor's design), the Company expects the net sales of such networking products to decrease. In order to achieve revenue growth in the future the Company will be required to design, develop and successfully commercialize higher performance products in a timely manner. For example, the market for shared bandwidth intelligent hubs, sales of which represented the majority of the Company's net sales over the past several years, decreased in 1997 and may continue to decrease as switching products with enhanced price/performance characteristics gain market acceptance. There can be no assurance that the Company will be able to introduce new products and gain market acceptance quickly enough to avoid adverse revenue transition patterns during current or future product transitions. MANUFACTURING AND AVAILABILITY OF COMPONENTS. Factors relating to Manufacturing and Availability of Components that could affect the Company's actual results and cause actual results to differ materially from those in forward-looking statements are discussed in the section above entitled "Business--Manufacturing and Suppliers". THIRD-PARTY PRODUCTS. The Company believes that it is beneficial to work with third parties with complementary technologies to broaden the appeal of the Company's switches, intelligent hub and network security products. These alliances allow ODS to provide integrated solutions to its customers, combining ODS developed technology with third-party products such as certain routers from Cisco, ATM switches from FORE systems and Gigabit Ethernet switch technology from Lucent Technologies. As the Company also competes with these technology partners in certain segments of the market, there can be no assurance that the Company will have access to all of the third-party products which may be desirable in order to offer fully integrated solutions to ODS customers. DEPENDENCE ON KEY CUSTOMERS. A relatively small number of customers have accounted for a significant portion of the Company's revenue. U.S. Government agencies and strategic network integrators, such as EDS, which purchase the Company's products for internal use and offer the Company's products for resale, are expected to continue to account for a substantial portion of the Company's net revenue. The Company continuously faces competition from Cisco, Cabletron, Bay Networks, FORE Systems, Xylan and others for U.S. Government networking projects and corporate networking installations. Any reduction or delay in sales of the Company's products to these customers could have a material adverse effect on the Company's operating results. INTERNATIONAL OPERATIONS. Export sales accounted for approximately 27.2% of the Company's revenue in 1997. The Company expects that export sales will represent a significant portion of its business in the future. The Company's international operations may be affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand, as well as by risks such as increases in duty rates, difficulties in distribution and other constraints upon international trade. For example, the fluctuations in currency exchange rates and adverse economic developments in Malaysia, South Korea and certain other countries adversely affected demand for the Company's products in those countries in the fourth quarter of 1997 and may continue to adversely affect demand for the Company's products in those countries in 1998. Additionally, while the Company's current products are designed to meet relevant regulatory requirements of the foreign markets in which they are sold, any inability to obtain any required foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's operating results. INTELLECTUAL PROPERTY. Factors relating to Intellectual Property that could affect the Company's actual results and cause actual results to differ materially from those in forward-looking statements are discussed in the section above entitled " Business--Intellectual Property and Licenses". IMPACT OF YEAR 2000. Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. 12 The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated to be immaterial. The Company has initiated communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company has determined it has immaterial exposure to contingencies related to the Year 2000 Issue for the products it has sold. The Year 2000 project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continuous availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. GENERAL. Sales of networking products fluctuate, from time to time, based on numerous factors, including customers' capital spending levels and general economic conditions. While certain industry analysts believe that there is a significant market for network intelligent hubs, switches, management and security products there can be no assurance as to the rate or extent of the growth of such market or the potential adoption of alternative technologies. Future declines in networking product sales as a result of general economic conditions, adoption of alternative technologies or any other reason could have a material adverse effect on the Company's business, operating results and financial condition. Due to the factors noted above and elsewhere in this Form 10-K and other filings with the Securities and Exchange Commission, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue and earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. Also, the Company participates in a highly dynamic industry which often results in volatility of the Company's common stock price. ITEM 2. PROPERTIES. The Company's headquarters is located in a modern, two-story building in Richardson, Texas, with an aggregate of approximately 95,000 square feet of floor space. This facility includes the Company's corporate administration, manufacturing, marketing, sales and technical support personnel. The Company occupies this facility under a lease, the base term of which expires in February 2005, with two seven-year options to extend the lease term, subject to compliance with certain conditions. The Company owns a one-story building consisting of approximately 50,000 square feet of floor space adjacent to the Company's headquarters, and the Company's research and development staff are located in this facility. The Company also leases a separate warehouse facility consisting of approximately 8,000 square feet adjacent to its headquarters under a lease which expires in June 2000. 13 In addition, the Company and its subsidiaries lease small amounts of office space for sales and technical support personnel domestically in California, Colorado, Georgia, Illinois, Massachusetts, Michigan, Minnesota, New York, Ohio, Pennsylvania, Texas, Virginia and Washington, and internationally in Australia, Canada, England, France, Germany, Malaysia, Singapore, South Korea and Taiwan R.O.C. The Company believes that these existing facilities will be adequate to meet its requirements through 1998. See Note 5 of Notes to Consolidated Financial Statements for additional information regarding the Company's obligations under leases. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any material litigation and is not aware of any threatened litigation which would have a material adverse effect on the Company, its operating results or its financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders of the Company during the fourth quarter of 1997. PART II The information required by Items 5 through 8, inclusive, of this report is contained in the Company's Annual Report to Stockholders for its fiscal year ended December 31, 1997 (the "1997 Annual Report"), selected portions of which are incorporated herein by reference, as described below. With the exception of the material incorporated by reference herein, the 1997 Annual Report is not deemed filed as a part of this Annual Report on Form 10-K. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the caption "Stock Market Information" on page 34 of the 1997 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information appearing in the "Selected Consolidated Financial Data" table on page 1 of the 1997 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 17 through 20, inclusive, of the 1997 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of ODS Networks, Inc. and Subsidiaries and Notes thereto appearing on pages 22 through 33, inclusive, the Report of Independent Auditors thereon appearing on page 21, and the Supplemental Financial Data appearing on page 34 of the 1997 Annual Report are incorporated herein by reference. 14 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. DIRECTORS The information regarding Directors of the Company appearing under the captions "Election of Directors" and "Compliance with Section 16 Reporting Requirements" contained in the Company's definitive Proxy Statement filed in connection with the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference. EXECUTIVE OFFICERS The following table sets forth the names and ages of all executive officers of the Company, their respective positions with the Company, and the period during which each has served as an executive officer.
SERVED AS EXECUTIVE NAME AGE POSITION(S) OFFICER SINCE ---- --- ----------- ------------- G. Ward Paxton 62 Chairman of the Board of Directors, President and Chief Executive Officer 1983 T. Joe Head 41 Senior Vice President and Director 1983 Timothy W. Kinnear 34 Vice President and Chief Financial Officer 1996 Billie J. Cottongim 67 Vice President - Manufacturing Engineering 1987 Gregory E. Geiger 39 Vice President - Hardware Engineering 1992 Eric H. Gore 44 Vice President - Strategic Business Development 1994 Garry L. Hemphill 49 Vice President - Operations 1987 Joseph V. Howard 39 Vice President - North American Sales 1994 Jerry W. Pate 45 Vice President - Chief Engineer 1987 Michael L. Paxton 37 Vice President and Secretary 1987 Stephen D. Thompson 34 Vice President - Software Engineering 1997 Joe W. Tucker, Jr. 55 Vice President - International Sales 1992 D. Keith Willette 41 Vice President - Chief Technologist 1992 Timothy E. Woods 37 Vice President - Technical Customer Services 1992 Kandis L. Tate Thompson 31 Controller - Finance and Accounting 1995 Donna J . Combs 49 Assistant Secretary and Director of Administration 1987
G. WARD PAXTON is a co-founder of the Company and has served as Chairman of the Board of Directors, President and Chief Executive Officer since the Company's inception in September 1983 and served as Chief Financial Officer from 1983 until 1994. Prior to founding the Company, Mr. Paxton was Vice President of Honeywell Optoelectronics, a division of Honeywell, Inc., from 1978 to 1983. From 1969 to 1978, Mr. Paxton was Chairman of the Board of Directors, President, Chief Executive Officer and founder of Spectronics, Inc., which was acquired by Honeywell, Inc. in 1978. Prior to founding Spectronics, Inc., Mr. Paxton held various managerial and technical positions at Texas Instruments 15 Incorporated from 1959 to 1969. Mr. Paxton holds Ph.D., M.S. and B.S. degrees in Physics from the University of Oklahoma. T. JOE HEAD is co-founder of the Company and has served as Senior Vice President and a director since the Company's inception in September 1983. Prior to co-founding the Company, Mr. Head held the positions of Product Marketing Manager and Marketing Engineer at Honeywell Optoelectronics from 1980 to 1983. Mr. Head holds a B.S. degree in Electrical Engineering from Texas A & M University. TIMOTHY W. KINNEAR has served as Vice President and Chief Financial Officer of the Company since September of 1996. Prior to joining the Company, Mr. Kinnear held various managerial positions, including Vice President of Finance, at Cyrix Corporation from 1992 to 1996. Prior to joining Cyrix Corporation, Mr. Kinnear held various positions, including Audit Manager, at Ernst & Young from 1986 to 1992. Mr. Kinnear holds a B.B.A. degree in Accounting from Texas Tech University. BILLIE J. COTTONGIM has served as Vice President - Manufacturing Engineering of the Company since 1987 and previously served as its Director of Manufacturing Engineering from 1983 to 1987. Prior to joining the Company, Mr. Cottongim held the position of Senior Engineer at Honeywell Optoelectronics from 1982 to 1983. GREGORY E. GEIGER has served the Company as Vice President - Hardware Engineering since February 1992. Mr. Geiger previously held positions with the Company as Director of Hardware Engineering in 1991 and Design Engineer from 1987 to 1990. Prior to joining the Company, Mr. Geiger held the position of Design Engineer at E-Systems, Inc. from 1985 to 1987. ERIC H. GORE has served the Company as Vice President - Strategic Business Development since February 1994. Mr. Gore previously held positions with the Company as Director of Strategic Business Development from 1992 to 1994, Area Sales Manager from 1989 to 1992 and Regional Sales Manager from 1984 to 1989. Prior to joining the Company, Mr. Gore served Texas Instruments Incorporated as Marketing Manager - Eastern United States from 1982 to 1983 and Product Marketing Representative from 1979 to 1982. GARRY L. HEMPHILL has served the Company as Vice President - Operations since 1987 and previously served as its Manager of Operations from 1984 to 1987. Prior to joining the Company, Mr. Hemphill held the position of Supervisor of Military Products at Honeywell Optoelectronics from 1979 to 1983. JOSEPH V. HOWARD has served the Company as Vice President - North American Sales since October 1996. Mr. Howard previously held positions with the Company as Vice President - Federal Systems from 1994 to 1996, Manager of the Federal Systems Group from 1991 to 1994 and National Accounts Manager from 1988 to 1991. Prior to joining the Company, Mr. Howard held the position of Account Representative for May-Craft Information Systems from 1986 to 1988. JERRY W. PATE has served the Company as Vice President - Chief Engineer since February 1992 and previously served as its Vice President from 1987 to February 1992 and Director of Engineering from 1983 to 1987. Prior to joining the Company, Mr. Pate served as an independent consultant for Honeywell Optoelectronics and Siemens AG from 1980 to 1983. MICHAEL L. PAXTON has served the Company as Vice President and Secretary of the Company since June 1995 and previously served as its Controller of Finance and Accounting from 1987 to 1995 and Accounting Manager from 1986 to 1987. Prior to joining the Company, Mr. Paxton held the position of Staff Accountant for Clifford E. Wall, Certified Public Accountant, from 1984 to 1986. STEVE D. THOMPSON has served the Company as Vice President - Software Engineering since July 1997. Mr. Thompson previously held positions with the Company as Lead Software Engineer in 1996 and Software Engineer from 1989 to 1995. Prior to joining the Company, Mr. Thompson held the position of Software Engineer at E-Systems, Inc. from 1985 to 1989. 16 JOE W. TUCKER, JR. has served the Company as Vice President - International Sales since June 1996 and previously served as its Vice President - - North American Sales from 1992 to 1996. Prior to joining the Company, Mr. Tucker held the positions of Vice President - U. S. Operations of Datapoint, Inc. from 1990 to 1992; Vice President and General Manager of United Detector Technology, a division of ILC, Inc., from 1988 to 1990; Worldwide Marketing and Sales Director from 1986 to 1988 and various sales management positions from 1980 to 1986 at Honeywell Optoelectronics; and various marketing and sales management positions at Texas Instruments Incorporated from 1969 to 1980. D. KEITH WILLETTE has served the Company as Vice President - Chief Technologist since July 1997. Mr. Willette previously held positions with the Company as Vice President - Software Engineering from 1992 to 1997, Director of Software Engineering from 1991 to 1992 and Software Engineer from 1990 to 1991. Prior to joining the Company, Mr. Willette held the positions of Lead Software Engineer from 1989 to 1990 and Software Engineer from 1988 to 1989 at Harris Adacom Corporation, and Senior Software Engineer at Ascom Timeplex, Inc. from 1987 to 1988. TIMOTHY E. WOODS has served the Company as Vice President - Customer Technical Services since February 1992 and previously held positions with the Company as Manager of Technical Support and Product Support Engineer from 1990 to 1991. Prior to joining the Company, Mr. Woods held the position of Systems Design Engineer at Jaycor Technical Services, Incorporated from 1987 to 1990. KANDIS L. TATE THOMPSON has served the Company as Controller of Finance and Accounting since June 1995 and previously held positions as Accounting Manager for the Company from 1991 to June 1995 and Staff Accountant from 1989 to 1991. Prior to joining the Company, Ms. Thompson held the position of Staff Accountant for Armstrong and Associates, Certified Public Accountants, from 1988 to 1989. Ms. Thompson has been a Certified Public Accountant since 1990. DONNA J. COMBS has served as Assistant Secretary of the Company since 1994 and previously served as its Secretary from 1987 to 1994. Ms. Combs has held the position of Director of Administration since joining the Company in 1984. Neither the Company nor any of its subsidiaries has employment agreements with any of its executives. All executive officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board. G. Ward Paxton is the father of Michael L. Paxton. There are no other family relationships between any director or executive officer and any other such person. ODS 401(k) SAVINGS PLAN The Company has adopted the ODS 401(k) Savings Plan, as amended, (the "Savings Plan"), which is intended to comply with Sections 401(a) and 401(k) of the Internal Revenue Code, as amended (the "Code"), and the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended. Amounts contributed to the Savings Plan are held under a trust intended to be exempt from income tax pursuant to Section 501(a) of the Code. All employees of the Company (except nonresident aliens who receive no earned income from the Company within the United States) who have completed three months of service are eligible to participate in the Savings Plan. Participating employees may make pre-tax contributions to their accounts of not less than 1% nor more than 19% of their compensation each year, subject to certain maximum limits imposed by law ($9,500 in 1997). In its discretion, the Company may make (i) annual matching contributions to the accounts of participating employees not to exceed 4% of their annual base compensation and (ii) annual employer contributions. The accounts of participating employees are 100% vested immediately as to salary reduction amounts contributed to the Savings Plan and vest at the rate of 20% per year of service as to all other benefits, with all rights being 100% vested under the Savings Plan after five years of service or upon death, disability or normal retirement. 17 1997 EMPLOYEE STOCK PURCHASE PLAN The Company has adopted the 1997 Employee Stock Purchase Plan of ODS Networks, Inc. (the Purchase Plan), which is intended to comply with Section 423(b) of the Code. The Purchase Plan reserves and otherwise provides for the grant of options to purchase a maximum of 500,000 shares of the Company's Common Stock, subject to certain adjustments to reflect changes in the Company's capitalization such as stock splits, stock dividends and similar events. The Purchase Plan is implemented by an offering during each six-month period ending January 31 and July 31, respectively, and is administered by the Compensation Committee of the Board of Directors. Employees who have worked for the Company or a subsidiary of the Company for at least 90 days before the beginning of an offering period are eligible to participate in the Purchase Plan if they are customarily employed by the Company or a subsidiary of the Company, as defined in the Purchase Plan. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee's compensation. Each participating employee is granted at the start of a period an option to purchase shares of Common Stock exercisable at the end of the period. The number of shares subject to an option is that number of full shares that can be purchased with the total amount of payroll deductions for such employee during the period at the exercise price equal to 85% of the lower of (i) the closing selling price of Common Stock on the first day of the purchase period or (ii) the closing selling price on the last day of the purchase period. Not more than 60,000 shares, plus any unissued shares available from prior offerings under the Purchase Plan, may be issued each purchase period. No participating employee may be granted an option under the Purchase Plan if such employee, immediately after the option is granted, would own, directly or indirectly, stock (including the stock to be acquired upon exercise of the option) representing 5% or more of the total combined voting power of all classes of capital stock of the Company. No participating employee may be granted an option under the Purchase Plan that would permit the purchase of shares of Common Stock at a rate exceeding $25,000 of fair market value of stock (determined at the time the option is granted) for each calendar year in which the option is outstanding. No participating employee may purchase more than 250 shares per purchase period. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "Executive Compensation" contained in the Company's definitive Proxy Statement filed in connection with the 1998 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Company's definitive Proxy Statement filed in connection with the 1998 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "Certain Transactions" contained in the Company's definitive Proxy Statement filed in connection with the 1998 Annual Meeting of Stockholders is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. PAGE IN 1997 (a)1. CONSOLIDATED FINANCIAL STATEMENTS. ANNUAL REPORT* -------------- Report of Independent Auditors . . . . . . . . . . . . . . . 21 Consolidated Balance Sheets at December 31, 1997 and 1996. . . . . . . . . . . . . . . 22 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 . . . 23 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 . . . 24 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . 26-33 * Pages 21-33 referenced above of the 1997 Annual Report are incorporated herein by reference, and appear in Exhibit 13, herein. 2. FINANCIAL STATEMENT SCHEDULES. PAGE NO. -------- Schedule II - Valuation and Qualifying Accounts . . . . . . S-l All other schedules are omitted because they are either not required or not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed during the fourth quarter of 1997. (c) EXHIBITS. The following Exhibits are filed herewith pursuant to Item 601 of Regulation S-K or are incorporated herein by reference to previous filings as noted: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 3.1(1) . . . . Certificate of Incorporation of the Registrant. 3.2(1) . . . . Bylaws of the Registrant. 4.1(2) . . . . Specimen of Common Stock Certificate. 10.1(3) . . . . Lease Agreement, dated September 12, 1989, between G.D.A.F. Associates and the Registrant for the Registrant's headquarters and executive office building. 10.2(3) . . . . 1983 Incentive Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.), as amended. 10.3(3) . . . . 1987 Incentive Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.), as amended. 10.4(3) . . . . Copy of Stock Option granted to Robert Anderson. 19 10.5(3) . . . . Form of Indemnification Agreement. 10.6(7) . . . . Amended and Restated ODS 401(k) Savings Plan, effective April 1, 1997. 10.7(7) . . . . Amendment to the ODS 401(K) Savings Plan, effective November 1, 1997. 10.8(4) . . . . 1995 Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.) 10.9(4) . . . . 1995 Non-Employee Directors Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.) 10.10(7) . . . . Third Amended and Restated Revolving Credit Loan Agreement, dated December 31, 1997, between NationsBank of Texas, N.A. (formerly, NCNB Texas National Bank) and the Registrant. 10.11(5) . . . . Supplemental Lease Agreement, dated March 7, 1995, between G.D.A.F. Associates, subsequently assigned to CIIF Associates II Limited Partnership, Landlord, and the Registrant, as Tenant, relative to the Registrant's headquarters and executive office building. 10.12(6) . . . . 1997 Employee Stock Purchase Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.) 13(7) . . . . Annual Report to Stockholders of the Registrant for the fiscal year ended December 31, 1997, to the extent specified in Parts II, III and IV hereof. 21(7) . . . . Subsidiaries of the Registrant. 23(7) . . . . Consent of Independent Auditors. 27(7) . . . . Financial Data Schedule. - ------------------------------ (1) Filed as an Exhibit in the Registrant's Current Report on Form 8-K dated November 6, 1995 (Date of Earliest Event Reported: October 31, 1995; Commission File No. 0-20191), which Exhibit is incorporated herein by reference. (2) Filed as an Exhibit in the Registrant's Current Report on Form 8-K dated May 7, 1997 (Date of Earliest Event Reported: April 24, 1997; Commission File No. 0-20191), which Exhibit is incorporated herein by reference. (3) Filed as an Exhibit in the Registrant's Registration Statement on Form S-1, as amended (File No. 33-6899) which was declared effective on May 21, 1992, by the Securities and Exchange Commission, which Exhibit is incorporated herein by reference. (4) Filed as an Exhibit to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1995 Annual Meeting of Stockholders (File No. 0-20191), which Exhibit is incorporated herein by reference. (5) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995 (File No. 0-20191), which Exhibit is incorporated herein by reference. (6) Filed as an Exhibit in the Registrant's definitive Proxy Statement filed in connection with the solicitation of proxies for its 1997 Annual Meeting of Stockholders (File No. 0-20191), which Exhibit is incorporated herein by reference. (7) Filed herewith. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 6, 1998 ODS NETWORKS, INC. (Registrant) By: /s/ G. Ward Paxton ------------------------------------------ G. Ward Paxton Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ G. Ward Paxton Chairman of the Board of Directors, March 6, 1998 - ---------------------------- President and Chief Executive Officer G. Ward Paxton (Principal Executive Officer) /s/ Timothy W. Kinnear Vice President and Chief Financial Officer March 6, 1998 - ---------------------------- (Principal Financial Officer) Timothy W. Kinnear /s/ Kandis Tate Thompson Controller - Finance and Accounting March 6, 1998 - ---------------------------- (Principal Accounting Officer) Kandis Tate Thompson /s/ T. Joe Head Senior Vice President March 6, 1998 - ---------------------------- and Director T. Joe Head /s/ Robert Anderson Director March 6, 1998 - ---------------------------- Robert Anderson /s/ J. Fred Bucy Director March 6, 1998 - ---------------------------- J. Fred Bucy /s/ Donald M. Johnston Director March 6, 1998 - ---------------------------- Donald M. Johnston
21 SCHEDULE II ODS NETWORKS, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Balance at Charged to Balance Beginning Costs and at End of Description of Period Expenses Deductions Period ----------- ---------- ---------- ---------- --------- Year ended December 31, 1995: Deducted from asset accounts: Allowance for Doubtful Accounts and Returns $ 356 $ 382 $ 121** $ 617 Inventory Obsolescence Reserve $ 306 $ 1,989 $ 1,664* $ 631 Year ended December 31, 1996: Deducted from asset accounts: Allowance for Doubtful Accounts and Returns $ 617 $ 227 $ 22** $ 822 Inventory Obsolescence Reserve $ 631 $ 2,421 $ 1,067* $ 1,985 Year ended December 31, 1997: Deducted from asset accounts: Allowance for Doubtful Accounts and Returns $ 822 $ 86 $ 150** $ 758 Inventory Obsolescence Reserve $ 1,985 $ 7,693 $ 7,484* $ 2,194
- -------------------------------------------------------------------------------- * Obsolete inventory written off. ** Uncollectible accounts written off. S-1
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3.1(1) Certificate of Incorporation of the Registrant. 3.2(1) Bylaws of the Registrant. 4.1(2) Specimen of Common Stock Certificate. 10.1(3) Lease Agreement, dated September 12, 1989, between G.D.A.F. Associates and the Registrant for the Registrant's headquarters and executive office building. 10.2(3) 1983 Incentive Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.), as amended. 10.3(3) 1987 Incentive Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.), as amended. 10.4(3) Copy of Stock Option granted to Robert Anderson. 10.5(3) Form of Indemnification Agreement. 10.6(7) Amended and Restated ODS 401(k) Savings Plan, effective April 1, 1997. 10.7(7) Amendment to the ODS 401(K) Savings Plan, effective November 1, 1997. 10.8(4) 1995 Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.) 10.9(4) 1995 Non-Employee Directors Stock Option Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.) 10.10(7) Third Amended and Restated Revolving Credit Loan Agreement, dated December 31, 1997, between NationsBank of Texas, N.A. (formerly, NCNB Texas National Bank) and the Registrant. 10.11(5) Supplemental Lease Agreement, dated March 7, 1995, between G.D.A.F. Associates, subsequently assigned to CIIF Associates II Limited Partnership, Landlord, and the Registrant, as Tenant, relative to the Registrant's headquarters and executive office building. 10.12(6) 1997 Employee Stock Purchase Plan of ODS Networks, Inc. (formerly Optical Data Systems, Inc.). 13(7) Annual Report to Stockholders of the Registrant for the fiscal year ended December 31, 1997, to the extent specified in Parts II, III and IV hereof. 21(7) Subsidiaries of the Registrant. 23(7) Consent of Independent Auditors. 27(7) Financial Data Schedule. - -----------------------------------
(1) Filed as an Exhibit in the Registrant's Current Report on Form 8-K dated November 6, 1995 (Date of Earliest Event Reported: October 31, 1995; Commission File No. 0-20191), which Exhibit is incorporated herein by reference. (2) Filed as an Exhibit in the Registrant's Current Report on Form 8-K dated May 7, 1997 (Date of Earliest Event Reported: April 24, 1997; Commission File No. 0-20191), which Exhibit is incorporated herin by reference. (3) Filed as an Exhibit in the Registrant's Registration Statement on Form S-1, as amended (File No. 33-6899) which was declared effective on May 21, 1992, by the Securities and Exchange Commission, which Exhibit is incorporated herein by reference. (4) Filed as an Exhibit to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1995 Annual Meeting of Stockholders (File No. 0-20191), which Exhibit is incorporated herein by reference. (5) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995 (File No. 0-20191), which Exhibit is incorporated herein by reference. (6) Filed as an Exhibit in the Registrant's definitive Proxy Statement filed in connection with the solicitation of proxies for its 1997 Annual Meeting of Stockholders (File No. 0-20191), which Exhibit is incorporated herein by reference. (7) Filed herewith. EX-10.6 2 EXHIBIT 10.6 EXHIBIT 10.6 ODS 401(k) SAVINGS PLAN WHEREAS, ODS Networks, Inc. (hereinafter referred to as the "Employer") heretofore adopted the ODS 401(k) Savings Plan (hereinafter referred to as the "Plan") for the benefit of its eligible Employees; and WHEREAS, the Employer reserved the right to amend the Plan; and WHEREAS, the Employer desires to amend the Plan; and WHEREAS, it is intended that the Plan is to continue to be a qualified plan under Section 401(a) of the Internal Revenue Code for the exclusive benefit of the Participants and their Beneficiaries; NOW, THEREFORE, the Plan is hereby amended by restating the Plan in its entirety as follows: TABLE OF CONTENTS
ARTICLE ONE--DEFINITIONS 1.1 Account 1.2 Administrator 1.3 Beneficiary 1.4 Break in Service 1.5 Code 1.6 Compensation 1.7 Disability 1.8 Effective Date 1.9 Employee 1.10 Employer 1.11 Employment Date 1.12 Highly-Compensated Employee 1.13 Hour of Service 1.14 Leased Employee 1.15 Nonhighly-Compensated Employee 1.16 Normal Retirement Date 1.17 Participant 1.18 Plan 1.19 Plan Year 1.20 Trust 1.21 Trustee 1.22 Valuation Date 1.23 Year of Service ARTICLE TWO--SERVICE DEFINITIONS AND RULES 2.1 Year of Service 2.2 Break in Service 2.3 Leave of Absence 2.4 Hours of Service on Return to Employment 2.5 Service in Excluded Job Classifications or with Related Companies ARTICLE THREE--PLAN PARTICIPATION 3.1 Participation 3.2 Re-employment of Former Participant 3.3 Termination of Eligibility ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS, ROLLOVERS AND TRANSFERS FROM OTHER PLANS 4.1 Elective Deferrals 4.2 Employer Contributions 4.3 Rollovers and Transfers of Funds from Other Plans 4.4 Timing of Contributions ARTICLE FIVE--ACCOUNTING RULES 5.1 Investment of Accounts and Accounting Rules 5.2 Participants Omitted in Error ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS
6.1 Vesting 6.2 Forfeiture of Nonvested Balance 6.3 Return to Employment Before Distribution of Vested Account Balance 6.4 Normal Retirement 6.5 Disability ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS 7.1 Manner of Payment 7.2 Time of Commencement of Benefit Payments 7.3 Furnishing Information 7.4 Minimum Distribution Rules for Installment Payments 7.5 Amount of Death Benefit 7.6 Designation of Beneficiary 7.7 Distribution of Death Benefits 7.8 Eligible Rollover Distributions ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS 8.1 Loans 8.2 Hardship Distributions 8.3 Withdrawals After Age 59-1/2 ARTICLE NINE--ADMINISTRATION OF THE PLAN 9.1 Plan Administration 9.2 Claims Procedure 9.3 Trust Agreement ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS 10.1 Distribution of Excess Elective Deferrals 10.2 Limitations on 401(k) Contributions 10.3 Nondiscrimination Test for Employer Matching Contributions 10.4 Limitation on the Multiple Use Alternative ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS 11.1 Rules and Definitions ARTICLE TWELVE--AMENDMENT AND TERMINATION 12.1 Amendment 12.2 Termination of the Plan ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS 13.1 Applicability 13.2 Definitions 13.3 Allocation of Employer Contributions and Forfeitures for a Top-Heavy Plan Year 13.4 Vesting ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS 14.1 Plan Does Not Affect Employment 14.2 Successor to the Employer 14.3 Repayments to the Employer
14.4 Benefits not Assignable 14.5 Merger of Plans 14.6 Investment Experience not a Forfeiture 14.7 Distribution to Legally Incapacitated 14.8 Construction 14.9 Governing Documents 14.10 Governing Law 14.11 Headings 14.12 Counterparts 14.13 Location of Participant or Beneficiary Unknown ARTICLE FIFTEEN--MULTIPLE EMPLOYER PROVISIONS 15.1 Adoption of the Plan 15.2 Service 15.3 Plan Contributions 15.4 Transferring Employees 15.5 Delegation of Authority 15.6 Termination
ARTICLE ONE--DEFINITIONS For purposes of the Plan, unless the context or an alternative definition specified within another Article provides otherwise, the following words and phrases shall have the definitions provided: 1.1 "ACCOUNT" shall mean the individual bookkeeping accounts maintained for a Participant under the Plan which shall record (a) the Participant's allocations of Employer contributions, (b) amounts of Compensation deferred to the Plan pursuant to the Participant's election, (c) any amounts transferred to this Plan under Section 4.3 from another qualified retirement plan, and (d) the allocation of Trust investment experience. 1.2 "ADMINISTRATOR" shall mean the Plan Administrator appointed from time to time in accordance with the provisions of Article Nine hereof. 1.3 "BENEFICIARY" shall mean any person, trust, organization, or estate entitled to receive payment under the terms of the Plan upon the death of a Participant. 1.4 "BREAK IN SERVICE" shall mean the twelve (12)-month computation period specified in Article Two. 1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.6 "COMPENSATION" shall mean the compensation paid to a Participant by the Employer for the Plan Year, but exclusive of stock options, car allowances, relocation reimbursements, any program of deferred compensation or additional benefits payable other than in cash and any compensation received prior to his becoming a Participant in the Plan. Compensation shall include any amounts deferred under a salary reduction agreement in accordance with Section 4.1 or under a Code Section 125 plan maintained by the Employer. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Compensation of each Participant taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Secretary of the Treasury or his delegate for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding twelve (12) months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than twelve (12) months, the OBRA '93 annual compensation limit shall be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve (12). Any reference in the Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining a Participant's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For purposes of determining who is a Highly-Compensated Employee, Compensation shall mean compensation as defined in Code Section 414(q)(7). 1.7 "DISABILITY." Disability shall mean a "permanent and total" disability incurred by a Participant while in the employ of the Employer. For this purpose, a permanent and total disability shall mean suffering from a physical or mental condition that, in the opinion of the Administrator and based upon appropriate medical advice and examination, can be expected to result in death or can be expected to last for a continuous period of no less than twelve (12) months. The condition must be determined by the Administrator to prevent the Participant from engaging in substantial gainful employment. Receipt of a Social Security disability award shall be deemed proof of disability. 1.8 "EFFECTIVE DATE." The Effective Date of this restated Plan, on and after which it supersedes the terms of the existing Plan document, is April 1, 1997, except where the provisions of the Plan shall otherwise specifically provide. The rights of any Participant who separated from the Employer's Service prior to this date shall be established under the terms of the Plan and Trust as in effect at the time of the Participant's separation from Service, unless the Participant subsequently returns to Service with the Employer. Rights of spouses and Beneficiaries of such Participants shall also be governed by those documents. 1.9 "EMPLOYEE" shall mean a common law employee of the Employer who, for the entire period of his employment, was also treated as a common law employee on the payroll records of the Employer. 1.10 "EMPLOYER" shall mean ODS Networks, Inc. and any subsidiary or affiliate which is a member of its "related group" (as defined in Section 2.5) which has adopted the Plan (a "Participating Affiliate"), and shall include any successor(s) thereto which adopt this Plan. Any such subsidiary or affiliate of ODS Networks, Inc. may adopt the Plan with the approval of its board of directors (or noncorporate counterpart) subject to the approval of ODS Networks, Inc. The provisions of this Plan shall apply equally to each Participating Affiliate and its Employees except as specifically set forth in the Plan; provided, however, notwithstanding any other provision of this Plan, the amount and timing of contributions under Article 4 to be made by any Employer which is a Participating Affiliate shall be made subject to the approval of ODS Networks, Inc. For purposes hereof, each Participating Affiliate shall be deemed to have appointed ODS Networks, Inc. as its agent to act on its behalf in all matters relating to the administration, amendment, termination of the Plan and the investment of the assets of the Plan. For purposes of the Code and ERISA, the Plan as maintained by ODS Networks, Inc. and the Participating Affiliates shall constitute a single plan rather than a separate plan of each Participating Affiliate. All assets in the Trust shall be available to pay benefits to all Participants and their Beneficiaries. 1.11 "EMPLOYMENT DATE" shall mean the first date as of which an Employee is credited with an Hour of Service, provided that, in the case of a Break in Service, the Employment Date shall be the first date thereafter as of which an Employee is credited with an Hour of Service. 1.12 "HIGHLY-COMPENSATED EMPLOYEE" shall mean any Employee of the Employer who: (a) was a five percent (5%) owner of the Employer (as defined in Code Section 416(i)(1)) during the "determination year" or "look-back year"; or (b) earned more than $80,000 (as increased by cost-of-living adjustments) of Compensation from the Employer during the "look-back year" and, if the Employer elects, was in the top twenty percent (20%) of Employees by Compensation for such year. An Employee who separated from Service prior to the "determination year" shall be treated as a Highly-Compensated Employee for the "determination year" if such Employee was a Highly-Compensated Employee when such Employee separated from Service, or was a Highly-Compensated Employee at any time after attaining age fifty-five (55). For purposes of this Section, the "determination year" shall be the Plan Year for which a determination is being made as to whether an Employee is a Highly-Compensated Employee. The "look-back year" shall be the twelve (12) month period immediately preceding the "determination year". However, if permitted by applicable law and if the Employer shall elect, the "look-back year" shall be the calendar year ending with or within the Plan Year for which testing for the determination of which Employees are Highly-Compensated Employees is being performed, and the "determination year" (if applicable) shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which such testing is being performed (the "lag period"). If the "lag period" is less than twelve (12) months, the dollar threshold amounts specified in (b) above shall be pro-rated based upon the number of months in the "lag period". 1.13 "HOUR OF SERVICE" shall mean: (a) each hour for which an Employee is paid or entitled to payment for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed; and (b) each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, involuntary military duty, or leave of absence. No more than five hundred and one (501) Hours of Service shall be credited under this subsection for any single continuous period during which no duties are performed (whether or not such period occurs in a single computation period). Hours under this subsection shall be calculated and credited pursuant to Section 2530.200b-2(b) and (c) of the Department of Labor Regulations which are incorporated herein by this reference; and (c) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under subsection (a) or subsection (b), as the case may be, and under this subsection (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement, or payment is made. In crediting Hours of Service for Employees who are paid on an hourly basis, the "actual" method shall be utilized. For this purpose, the "actual" method shall mean the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer, subject to the limitations enumerated above. In crediting Hours of Service for Employees who are not paid on an hourly basis, the "weeks of employment" method shall be utilized. Under this method, an Employee shall be credited with forty-five (45) Hours of Service for each week for which the Employee would be required to be credited with at least one (1) Hour of Service pursuant to the provisions enumerated above. 1.14 "LEASED EMPLOYEE" shall mean any person who, pursuant to an agreement between the Employer and any other person or organization, has performed services for the Employer (determined in accordance with Code Section 414(n)(6)) on a substantially full-time basis for a period of at least one (1) year and where such services are performed under the primary direction and control of the Employer. A person shall not be considered a Leased Employee if the total number of Leased Employees does not exceed twenty percent (20%) of the Nonhighly-Compensated Employees employed by the Employer, and if any such person is covered by a money purchase pension plan providing (a) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in Section 11.1(b)(2) of the Plan but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Code Sections 125, 402(g) or 403(b), (b) immediate participation, and (c) full and immediate vesting. 1.15 "NONHIGHLY-COMPENSATED EMPLOYEE" shall mean an Employee of the Employer who is not a Highly-Compensated Employee. 1.16 "NORMAL RETIREMENT DATE" shall mean a Participant's sixty-fifth (65th) birthday or, if later, the fifth (5th) anniversary of the Participant's commencement of initial Plan participation. 1.17 "PARTICIPANT" shall mean any Employee who has satisfied the eligibility requirements of Article Three and who is participating in the Plan. 1.18 "PLAN" shall mean ODS 401(k) Savings Plan, as set forth herein and as may be amended from time to time. 1.19 "PLAN YEAR" shall mean the twelve (12)-consecutive month period beginning January 1 and ending December 31. 1.20 "TRUST" shall mean the Trust Agreement entered into between the Employer and the Trustee forming part of this Plan, together with any amendments thereto. "Trust Fund" shall mean any and all property held by the Trustee pursuant to the Trust Agreement, together with income therefrom. 1.21 "TRUSTEE" shall mean the Trustee or Trustees appointed by the Employer, and any successors thereto. 1.22 "VALUATION DATE" shall mean the date or dates established by the Administrator for the valuation of the assets of the Plan. In no event shall the assets of the Plan be valued less frequently than once each Plan Year. 1.23 "YEAR OF SERVICE" OR "SERVICE" and the special rules with respect to crediting Service are in Article Two of the Plan. ARTICLE TWO--SERVICE DEFINITIONS AND RULES Service is the period of employment credited under the Plan. Definitions and special rules related to Service are as follows: 2.1 YEAR OF SERVICE. An Employee shall be credited with a Year of Service for each Plan Year in which he is credited with at least one thousand (1,000) Hours of Service. 2.2 BREAK IN SERVICE. A Break in Service shall be a twelve (12)-month computation period (as used for measuring Years of Service) in which an Employee or Participant is not credited with at least five hundred and one (501) Hours of Service. 2.3 LEAVE OF ABSENCE. A Participant on an unpaid leave of absence pursuant to the Employer's normal personnel policies shall be credited with Hours of Service at his regularly-scheduled weekly rate while on such leave, provided the Employer acknowledges in writing that the leave is with its approval. These Hours of Service shall be credited only for purposes of determining if a Break in Service has occurred and, unless specified otherwise by the Employer in writing, shall not be credited for eligibility to participate in the Plan, vesting, or qualification to receive an allocation of Employer contributions. Hours of Service during a paid leave of absence shall be credited as provided in Section 1.13. For any individual who is absent from work for any period by reason of the individual's pregnancy, birth of the individual's child, placement of a child with the individual in connection with the individual's adoption of the child, or by reason of the individual's caring for the child for a period beginning immediately following such birth or adoption, the Plan shall treat as Hours of Service, solely for determining if a Break in Service has occurred, the following Hours of Service: (a) the Hours of Service which otherwise normally would have been credited to such individual but for such absence; or (b) in any case where the Administrator is unable to determine the Hours of Service, on the basis of an assumed eight (8) hours per day. In no event shall more than five hundred and one (501) of such hours be credited by reason of such period of absence. The Hours of Service shall be credited in the computation period (used for measuring Years of Service) which starts after the leave of absence begins. However, the Hours of Service shall instead be credited in the computation period in which the absence begins if it is necessary to credit the Hours of Service in that computation period to avoid the occurrence of a Break in Service. 2.4 HOURS OF SERVICE ON RETURN TO EMPLOYMENT. An Employee who returns to employment after a Break in Service shall retain credit for his pre-Break Years of Service; provided, however, that if a Participant incurs five (5) or more consecutive Breaks in Service, any Years of Service performed thereafter shall not be used to increase the nonforfeitable interest in his Account accrued prior to such five (5) or more consecutive Breaks in Service. 2.5 SERVICE IN EXCLUDED JOB CLASSIFICATIONS OR WITH RELATED COMPANIES. (a) SERVICE WHILE A MEMBER OF AN INELIGIBLE CLASSIFICATION OF EMPLOYEES. An Employee who is a member of an ineligible classification of Employees shall not be eligible to participate in the Plan while a member of such ineligible classification. However, if any such Employee is transferred to an eligible classification, such Employee shall be credited with any prior periods of Service completed while a member of such an ineligible classification both for purposes of determining his Years of Service and his "Months of Service" under Section 3.1. For this purpose, an Employee shall be considered a member of an ineligible classification of Employees for any period during which: (i) he is a Leased Employee; or (ii) he is employed in a job classification which is excluded from participating in the Plan under Section 3.1 below. (b) SERVICE WITH RELATED GROUP MEMBERS. For each Plan Year in which the Employer is a member of a "related group", as hereinafter defined, all Service of an Employee with any one or more members of such related group shall be treated as employment by the Employer for purposes of determining the Employee's Years of Service under Section 2.1 and his Months of Service under Section 3.1. The transfer of employment by any such Employee to another member of the related group shall not be deemed to constitute a retirement or other termination of employment by the Employee for purposes of the Plan, but the Employee shall be deemed to have continued in employment with the Employer for purposes hereof. For purposes of this subsection (b), "related group" shall mean the Employer and all corporations, trades or businesses (whether or not incorporated) which constitute a controlled group of corporations with the Employer, a group of trades or businesses under common control with the Employer, or an affiliated service group which includes the Employer, within the meaning of Section 414(b), Section 414(c), or Section 414(m), respectively, of the Code or any other entity required to be aggregated under Code Section 414(o). (c) CONSTRUCTION. This Section is included in the Plan to comply with the Code provisions regarding the crediting of Service, and not to extend any additional rights to Employees in ineligible classifications other than as required by the Code and regulations thereunder. ARTICLE THREE--PLAN PARTICIPATION 3.1 PARTICIPATION. All Employees participating in the Plan prior to the Plan's restatement shall continue to participate, subject to the terms hereof. Each other Employee shall become a Participant under the Plan effective as of the January 1, April 1, July 1 or October 1 coincident with or next following the Employee's completion of three (3) Months of Service. For purposes of this Section 3.1, an Employee shall be credited with three (3) Months of Service for each three (3) month period commencing on his Employment Date and the three (3) month anniversaries of that date and ending on the date he retires, dies or otherwise separates from Service. Fractional periods of a month shall be expressed in terms of days, with thirty (30) days being equal to one (1) month. In no event, however, shall any Leased Employee, or any Employee who is a non-resident alien, or an independent contractor, participate under the Plan. 3.2 RE-EMPLOYMENT OF FORMER PARTICIPANT. A Participant whose participation ceased because of termination of employment with the Employer shall participate as soon as administratively possible following his re-employment. 3.3 TERMINATION OF ELIGIBILITY. In the event a Participant is no longer a member of an eligible class of Employees and he becomes ineligible to participate, such Employee shall participate as soon as administratively possible following his return to an eligible class of Employees. In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee shall participate as soon as administratively possible thereafter, if such Employee has satisfied the eligibility requirements of Section 3.1 and would have otherwise previously become a Participant. ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS, ROLLOVERS AND TRANSFERS FROM OTHER PLANS 4.1 ELECTIVE DEFERRALS. (a) ELECTIONS. A Participant may elect to defer a portion of his Compensation for a Plan Year. The amount of a Participant's Compensation that is deferred in accordance with the Participant's election shall be withheld by the Employer from the Participant's Compensation on a ratable basis throughout the Plan Year. The amount deferred on behalf of each Participant shall be contributed by the Employer to the Plan and allocated to the Participant's Account. (b) CHANGES IN ELECTION. A Participant may prospectively elect to change or revoke the amount (or percentage) of his elective deferrals during the Plan Year by filing a written election with the Employer, or via a telephone "voice response" system designated by the Administrator, provided that a written confirmation is forwarded in response to such oral request. (c) LIMITATIONS ON DEFERRALS. No Participant shall defer an amount which exceeds $9,500 (or such amount as adjusted for cost-of-living increases under Section 402(g) of the Code) for any calendar year ending with or within the Plan Year. (d) ADMINISTRATIVE RULES. All elections made under this Section 4.1, including the amount and frequency of deferrals, shall be subject to the rules of the Administrator which shall be consistently applied and which may be changed from time to time. 4.2 EMPLOYER CONTRIBUTIONS. (a) EMPLOYER MATCHING CONTRIBUTIONS. For each Plan Year, the Employer may contribute to the Plan, on behalf of each Participant, a discretionary matching contribution equal to a percentage (as determined by the Employer's board of directors) of the elective deferrals made by each such Participant. The amount, if any, of the Employer matching contribution for any Plan Year shall be made at the discretion of the board of directors of the Employer. The Employer's board of directors may also determine to suspend or reduce its contributions under this Section for any Plan Year or any portion thereof. Allocations under this Section shall be subject to the special rules of Section 13.3 in any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)). (b) ADDITIONAL EMPLOYER CONTRIBUTIONS. Additional Employer contributions may be made at the discretion of the Employer's board of directors for any Plan Year, subject to limits for tax deductions under the Code and provided that the special allocation in Section 13.3 has been satisfied if the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)). (c) ELIGIBILITY FOR ADDITIONAL EMPLOYER CONTRIBUTIONS. To be eligible for an allocation of additional Employer contributions under Section 4.2(b) for a Plan Year, a Participant must have been credited with at least one thousand (1,000) Hours of Service in the Plan Year; provided, however, that if the Participant's failure to be credited with at least one thousand (1,000) Hours of Service is due to the Participant's Disability, death or retirement on or after his Normal Retirement Date during the Plan Year, such Participant shall nevertheless be entitled to share in the allocation of any additional Employer contributions for such Plan Year. (d) ALLOCATION OF ADDITIONAL EMPLOYER CONTRIBUTIONS. Any contribution made under Section 4.2(b) shall be allocated among the Accounts of eligible Participants in accordance with the ratio that each such eligible Participant's Compensation bears to the total Compensation of all such eligible Participants for the Plan Year. (e) Notwithstanding anything herein to the contrary, in any situation where the exclusion of certain Participants from receiving an allocation of any additional Employer contributions hereunder would result in the Plan failing to satisfy minimum coverage requirements under applicable provisions of the Code or income tax regulations, then the following shall apply: (1) Such affected Participants shall receive an allocation of additional Employer contributions in order of priority based upon the number of Hours of Service rendered during the Plan Year by each Participant, so that an individual Participant who has rendered more Hours of Service during the Plan Year shall be first deemed an eligible Participant, and so on, until the minimum required number of eligible Participants is reached to satisfy the requirements for qualification of this Plan. (2) If two individuals referred to in subsection (1) have the same number of Hours of Service, then they shall be deemed eligible Participants in order of a priority based upon the earliest Employment Date with the Employer. 4.3 ROLLOVERS AND TRANSFERS OF FUNDS FROM OTHER PLANS. With the approval of the Administrator, there may be paid to the Trustee amounts which have been held under other plans qualified under Code Section 401 either (a) maintained by the Employer which have been discontinued or terminated with respect to any Employee, or (b) maintained by another employer with respect to which any Employee has ceased to participate. Any such transfer or rollover may also be made by means of an Individual Retirement Account qualified under Section 408 of the Code, where the Individual Retirement Account was used as a conduit from the former plan. Any amounts so transferred on behalf of any Employee shall be nonforfeitable and shall be maintained under a separate Plan account, to be paid in addition to amounts otherwise payable under this Plan. The amount of any such account shall be equal to the fair market value of such account as adjusted for income, expenses, gains, losses, and withdrawals attributable thereto. Notwithstanding anything contained herein to the contrary, in no event shall the Administrator accept on behalf of any Employee a transfer of funds from a qualified plan which would subject the Plan to the provisions of Section 401(a)(11) of the Code. An Employee who would otherwise be eligible to participate in the Plan but for the failure to satisfy the age and/or service requirement for participation as set forth under Section 3.1, shall be eligible to complete a rollover to the Plan. Such an Employee shall also be eligible to obtain a loan or withdrawal in accordance with the provisions of Article Eight prior to satisfying such age and/or service requirement. 4.4 TIMING OF CONTRIBUTIONS. Employer contributions shall be made to the Plan no later than the time prescribed by law for filing the Employer's Federal income tax return (including extensions) for its taxable year ending with or within the Plan Year. Elective deferrals under Section 4.1 shall be paid to the Plan as soon as administratively possible, but no later than the time prescribed by applicable law, following receipt of such deferrals by the Administrator. ARTICLE FIVE--ACCOUNTING RULES 5.1 INVESTMENT OF ACCOUNTS AND ACCOUNTING RULES. (a) INVESTMENT FUNDS. The investment of Participants' Accounts shall be made in a manner consistent with the provisions of the Trust. The Administrator, in its discretion, may allow the Trust to provide for separate funds for the directed investment of each Participant's Account, including an Employer stock fund. (b) PARTICIPANT DIRECTION OF INVESTMENTS. In the event Participants' Accounts are subject to their investment direction, each Participant may direct how his Account is to be invested among the available investment funds in the percentage multiples established by the Administrator. In the event a Participant fails to make an investment election, with respect to all or any portion of his Account, the Trustee shall invest all or such portion of his Account in the investment fund to be designated by the Administrator. A Participant may change his investment election, with respect to future contributions and, if applicable, forfeitures, and/or amounts previously accumulated in the Participant's Account, in writing, on such form as the Administrator shall specify, or via a telephone "voice response" system designated by the Administrator, provided that a written confirmation is forwarded in response to such oral request. Any such change in a Participant's investment election shall be effective at such time as may be prescribed by the Administrator. If the Plan's recordkeeper or investment manager is changed, the Administrator may suspend the Participants' investment direction of their Accounts. (c) ALLOCATION OF INVESTMENT EXPERIENCE. As of each Valuation Date, the investment fund(s) of the Trust shall be valued at fair market value, and the income, loss, appreciation and depreciation (realized and unrealized), and any paid expenses of the Trust attributable to such fund shall be apportioned among Participants' Accounts within the fund based upon the value of each Account within the fund as of the preceding Valuation Date. (d) ALLOCATION OF CONTRIBUTIONS. Employer contributions shall be allocated to the Account of each eligible Participant as of the last day of the period for which the contributions are made or as soon as administratively practical thereafter. Elective deferrals shall be allocated to the Account of each Participant as soon as administratively practical following receipt of such contributions by the Administrator. (e) MANNER AND TIME OF DEBITING DISTRIBUTIONS. For any Participant who is entitled to receive a distribution from his Account, such distribution shall be made in accordance with the provisions of Section 7.2. The amount distributed shall be based upon the fair market value of the Participant's vested Account as of the Valuation Date preceding the distribution. 5.2 PARTICIPANTS OMITTED IN ERROR. In the event a Participant is not allocated a share of the Employer contribution as a result of an administrative error in any Plan Year, the Employer may elect to either (a) make an additional contribution on behalf of such omitted Participant in an appropriate amount, or (b) deduct the appropriate amount from the next succeeding Employer contribution and/or forfeitures and allocate such amount to the Participant's Account prior to making the allocations set forth under Section 5.1(d). ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS 6.1 VESTING. A Participant shall at all times have a nonforfeitable (vested) right to his Account derived from elective deferrals, Employer "fail-safe" contributions under Section 10.2, and rollovers or transfers from other plans, as adjusted for investment experience. Except as otherwise provided with respect to Normal Retirement, Disability, or death, a Participant shall have a nonforfeitable (vested) right to a percentage of the value of his Account derived from Employer matching contributions under Section 4.2(a) and additional Employer contributions under Section 4.2(b) as follows:
YEARS OF SERVICE VESTED PERCENTAGE LESS THAN 1 YEAR 0% 1 YEAR BUT LESS THAN 2 20% 2 YEARS BUT LESS THAN 3 40% 3 YEARS BUT LESS THAN 4 60% 4 YEARS BUT LESS THAN 5 80% 5 YEARS AND THEREAFTER 100%
6.2 FORFEITURE OF NONVESTED BALANCE. The nonvested portion of a Participant's Account, as determined in accordance with Section 6.1, shall be forfeited as of the earlier of (i) the date on which the Participant receives distribution of his vested Account or (ii) the last day of the Plan Year in which the Participant incurs five (5) consecutive Breaks in Service. The amount forfeited shall be used to reduce Employer contributions under Section 4.2. If the Participant returns to the employment of the Employer prior to incurring five (5) consecutive Breaks in Service, and prior to receiving distribution of his vested Account, the nonvested portion shall be restored. However, if the nonvested portion of the Participant's Account was allocated as a forfeiture as the result of the Participant receiving distribution of his vested Account balance, the nonvested portion shall be restored if: (a) the Participant resumes employment prior to incurring five (5) consecutive Breaks in Service; and (b) the Participant repays to the Plan, as of the earlier of (i) the date which is five (5) years after his reemployment date or (ii) the date which is the last day of the period in which the Participant incurs five (5) consecutive Breaks in Service, an amount equal to the total distribution derived from Employer contributions under Section 4.2 and, if applicable, Section 13.3. The nonvested amount shall be restored to the Participant's Account, without interest or adjustment for interim Trust valuation experience, by a special Employer contribution or from the next succeeding Employer contribution and forfeitures, as appropriate. 6.3 RETURN TO EMPLOYMENT BEFORE DISTRIBUTION OF VESTED ACCOUNT BALANCE. If distribution is made to an Employee of less than the Employee's entire vested Account, and if the Employee returns to Service, a separate record shall be maintained of said Account balance. The Employee's vested interest at any time in this separate account shall be an amount equal to the formula P(AB+D)-D, where P is the vested percentage at the relevant time, AB is the Account balance at the relevant time, and D is the amount of the distribution made to the Employee. 6.4 NORMAL RETIREMENT. A Participant who is in the employment of the Employer at his Normal Retirement Date shall have a nonforfeitable interest in one hundred percent (100%) of his Account, if not otherwise one hundred percent (100%) vested under the vesting schedule in Section 6.1. A Participant who continues employment with the Employer after his Normal Retirement Date shall continue to participate under the Plan. 6.5 DISABILITY. If a Participant incurs a Disability, the Participant shall have a nonforfeitable interest in one hundred percent (100%) of his Account, if not otherwise one hundred percent (100%) vested under the vesting schedule in Section 6.1. Payment of such Participant's Account balance shall be made at the time and in the manner specified in Article Seven, following receipt by the Administrator of the Participant's written distribution request. ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS 7.1 MANNER OF PAYMENT. The Participant's vested Account shall be distributed to the Participant (or to the Participant's Beneficiary in the event of the Participant's death) by any of the following methods, as elected by the Participant or, when applicable, the Participant's Beneficiary: (a) in a single lump-sum payment; or (b) provided the Participant's vested Account exceeds $3,500, in monthly, quarterly, semi-annual or annual installments, subject to the minimum distribution rules of Section 7.4. However, if any portion of a Participant's vested Account is invested in the Employer stock fund, the Participant may elect to receive such portion of his Account, in a single sum payment, in the form of shares of stock; provided, however, that fractional shares and the cash equivalent portions of such fund shall be distributed in cash. 7.2 TIME OF COMMENCEMENT OF BENEFIT PAYMENTS. Distribution of the Participant's Account balance for a Participant who terminates employment on or after his Normal Retirement Date, or as a result of his Disability, may be made or commence as soon as administratively possible thereafter; provided, however, that if the amount required to be distributed cannot be ascertained by such date, distribution shall be made no later than sixty (60) days after the earliest date on which such amount can be ascertained; and provided, further, that, subject to the following provisions of this Section 7.2, distribution shall not be made or commence unless the Participant otherwise requests in writing. In such event, distribution shall commence as soon as administratively practical following receipt by the Administrator of the Participant's written request. Subject to the following provisions of this Section 7.2, if a Participant terminates employment for any reason other than Normal Retirement, Disability or death, distribution of his vested Account shall not be made or commence unless the Participant otherwise requests in writing. Notwithstanding any provision contained herein to the contrary, a Participant who is not vested in any portion of his Account balance attributable to Employer contributions shall be deemed to have received distribution of such portion of his Account as of the end of the Plan Year in which he incurs a Break in Service. A Participant who terminates employment after his Normal Retirement Date may elect to defer receipt of his Account. In no event, however, shall distribution under the Plan be made or commence later than the April 1st following the end of the calendar year in which the Participant attains age seventy and one-half (70-1/2) or, except for a Participant who is a five percent (5%) owner of the Employer (within the meaning of Section 401(a)(9) of the Code), if later, the April 1st following the calendar year in which the Participant retires or otherwise separates from Service. 7.3 FURNISHING INFORMATION. Prior to the payment of any benefit under the Plan, each Participant or Beneficiary may be required to complete such administrative forms and furnish such proof as may be deemed necessary or appropriate by the Employer, Administrator, and/or Trustee. 7.4 MINIMUM DISTRIBUTION RULES FOR INSTALLMENT PAYMENTS. If a distribution is made in installments the following rules shall apply: (a) PAYMENTS TO PARTICIPANT OR TO PARTICIPANT AND SURVIVING SPOUSE. Payment shall commence no later than a date provided for in Section 7.2. The amount to be distributed each year shall be at least equal to the vested balance in the Participant's Account as of the preceding Valuation Date multiplied by the following fraction: the numerator shall be one (1) and the denominator shall be the life expectancy of the Participant (or the joint life expectancies of the Participant and the Participant's spouse) determined as of the Valuation Date preceding the first payment and reduced by one for each succeeding year. (b) PAYMENTS TO PARTICIPANT AND NON-SPOUSE BENEFICIARY. Payment shall commence no later than a date provided for in Section 7.2. The amount to be distributed each year shall be at least equal to the vested balance in the Participant's Account as of the preceding Valuation Date multiplied by the following fraction: the numerator shall be one (1) and the denominator shall be the joint life expectancies of the Participant and the Participant's Beneficiary computed as of the Valuation Date preceding the first payment and reduced by one (1) for each succeeding year. Payments shall be restricted under this option to insure compliance with the minimum distribution incidental death benefit requirement of Section 401(a)(9) of the Code and the regulations promulgated thereunder. (c) PAYMENTS TO BENEFICIARY. Payment shall commence no later than a date provided for in Section 7.7. The amount to be distributed each year shall be at least equal to the vested balance in the Participant's Account as of the preceding Valuation Date multiplied by the following fraction: the numerator shall be one (1) and the denominator shall be the life expectancy of the Participant's Beneficiary computed as of the Valuation Date preceding the first payment and reduced by one (1) for each succeeding year. (d) RECALCULATION OF LIFE EXPECTANCY. If distribution is to be made over the life expectancy of the Participant or, where the Participant's spouse is his Beneficiary, the life expectancy of the Participant's surviving spouse, or the joint life expectancies of the Participant and his spouse, such life expectancy or joint life expectancies, at the election of the Participant or his surviving spouse, as the case may be, may be recalculated annually. Any such election shall be irrevocable as to the Participant (and spouse, if applicable) and shall apply to all subsequent years. In no event, however, shall the life expectancy of a non-spouse Beneficiary be recalculated. 7.5 AMOUNT OF DEATH BENEFIT. (a) DEATH BEFORE TERMINATION OF EMPLOYMENT. In the event of the death of a Participant while in the employ of the Employer, vesting in the Participant's Account shall be one hundred percent (100%), if not otherwise one hundred percent (100%) vested under Section 6.1, with the credit balance of the Participant's Account being payable to his Beneficiary. (b) DEATH AFTER TERMINATION OF EMPLOYMENT. In the event of the death of a former Participant after termination of employment, but prior to the complete distribution of his vested Account balance under the Plan, the undistributed vested balance of the Participant's Account shall be paid to the Participant's Beneficiary. 7.6 DESIGNATION OF BENEFICIARY. Each Participant shall file with the Administrator a designation of Beneficiary to receive payment of any death benefit payable hereunder if such Beneficiary should survive the Participant. However, no Participant who is married shall be permitted to designate a Beneficiary other than his spouse unless the Participant's spouse has signed a written consent witnessed by a Plan representative or a notary public, which provides for the designation of an alternate Beneficiary. Subject to the above, Beneficiary designations may include primary and contingent Beneficiaries, and may be revoked or amended at any time in similar manner or form, and the most recent designation shall govern. In the absence of an effective designation of Beneficiary, or if the Beneficiary dies before complete distribution of the Participant's vested Account, all amounts shall be paid to the surviving spouse of the Participant, if living, or otherwise to the Participant's estate. Notification to Participants of the death benefits under the Plan and the method of designating a Beneficiary shall be given at the time and in the manner provided by regulations and rulings under the Code. 7.7 DISTRIBUTION OF DEATH BENEFITS. Distribution of any death benefit hereunder shall be made within one (1) year of the Participant's death or, in the case of a surviving spouse, within a reasonable time after the Participant's death or, if the surviving spouse so elects and if the Participant's vested Account exceeds $3,500, no later than the date on which the Participant would have reached age seventy and one-half (70-1/2). If a surviving spouse dies before distributions to the spouse begin, this paragraph shall be applied as if the surviving spouse were the Participant. To the extent payments are not designated to or for the benefit of a natural person, or if payments commence after the required time, the following distribution modes shall be available: (a) a lump sum payable at any time within five (5) years of the Participant's death; and (b) payments of installments at such time and in such amount as determined by the Beneficiary, provided that all amounts must be paid from the Trust within five (5) years of the Participant's death. If a Participant dies after payments have commenced, any survivor's benefit must be paid no less rapidly than the method of payment in effect at the time of the Participant's death. 7.8 ELIGIBLE ROLLOVER DISTRIBUTIONS. Notwithstanding the foregoing provisions of this Article Seven, the provisions of this Section 7.8 shall apply to distributions made under the Plan. (a) A distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) Definitions: (i) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) DISTRIBUTEE. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (iv) DIRECT ROLLOVER. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. (c) If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (i) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS 8.1 LOANS. (a) PERMISSIBLE AMOUNT AND PROCEDURES. Upon the application of a Participant, the Administrator may, in accordance with a uniform and nondiscriminatory policy, direct the Trustee to grant a loan to the Participant, which loan shall be secured by the Participant's vested Account balance. The Participant's signature shall be required on a promissory note. In determining a rate of interest on such loan, the Administrator may refer to the rate of interest used for obligations of a comparable nature by commercial lending institutions within a radius of fifty (50) miles of the Employer's principal place of business. Participant loans shall be treated as segregated investments, and interest repayments shall be credited only to the Participant's Account. (b) LIMITATION ON AMOUNT OF LOANS. A Participant's loan shall not exceed the lesser of: (1) $50,000, which amount shall be reduced by the highest outstanding loan balance during the preceding twelve (12)-month period; or (2) one-half (1/2) of the vested value of the Participant's Account (excluding any portion thereof invested in the Employer stock fund), determined as of the Valuation Date preceding the date of the Participant's loan. Any loan must be repaid within five (5) years, unless made for the purpose of acquiring the primary residence of the Participant, in which case such loan may be repaid over a longer period of time not to exceed fifteen (15) years. The repayment of any loan must be made in at least quarterly installments of principal and interest. If a Participant defaults on any outstanding loan, the unpaid balance, and any interest due thereon, shall become due and payable in accordance with the terms of the underlying promissory note; provided, however, that such foreclosure on the promissory note and attachment of security shall not occur until a distributable event occurs in accordance with the provisions of Article Seven. If a Participant terminates employment while any loan balance is outstanding, the unpaid balance, and any interest due thereon, shall become due and payable in accordance with the terms of the underlying promissory note. If such amount is not paid to the Plan, it shall be charged against the amounts that are otherwise payable to the Participant or the Participant's Beneficiary under the provisions of the Plan. In the case of a Participant who has loans outstanding from other plans of the Employer (or a member of the Employer's related group (within the meaning of Section 2.5(b)), the Administrator shall be responsible for reporting to the Trustee the existence of said loans in order to aggregate all such loans within the limits of Section 72(p) of the Code. 8.2 HARDSHIP DISTRIBUTIONS. In the case of a financial hardship resulting from a proven immediate and heavy financial need, a Participant may receive a distribution not to exceed the lesser of (i) the vested value of the Participant's Account, without regard to earnings on his elective deferrals, and excluding any amounts invested in the Employer stock fund, determined as of the Valuation Date immediately preceding such withdrawal request, or (ii) the amount necessary to satisfy the financial hardship. The amount of any such immediate and heavy financial need may include any amounts necessary to pay Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. Such distribution shall be made in accordance with nondiscriminatory and objective standards consistently applied by the Administrator. Hardship distributions under this Section shall be deemed to be the result of an immediate and heavy financial need if such distribution is to (a) pay expenses for medical care (as described in Section 213(d) of the Code) previously incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Section 152 of the Code), or to permit the Participant, the Participant's spouse, or any dependents of the Participant to obtain such medical care, (b) purchase the principal residence of the Participant (excluding mortgage payments), (c) pay tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, Participant's spouse, or any of the Participant's dependents or (d) prevent the eviction of the Participant from his principal residence or foreclosure on the Participant's principal residence. Distributions paid pursuant to this Section shall be deemed to be made as of the Valuation Date immediately preceding the hardship distribution, and the Participant's Account shall be reduced accordingly. The provisions of this Section (relating to hardship distributions) are intended to comply with Treasury Regulations issued under Section 401(k) of the Code, and shall be so interpreted. No hardship distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that the following conditions are satisfied: (a) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant; and (b) The Participant has obtained all distributions, other than hardship distributions, and all non-taxable loans currently available under all plans maintained by the Employer. Following a hardship distribution, the Participant's elective deferrals shall be suspended under the Plan, and all other plans maintained by the Employer, for at least twelve (12) months after receipt of the hardship distribution. In addition, the Participant's elective deferrals under the Plan, and all other plans maintained by the Employer, for the Participant's taxable year immediately following the taxable year of the hardship distribution shall not exceed an amount equal to the applicable limit under Code Section 402(g) for such next taxable year, less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution. 8.3 WITHDRAWALS AFTER AGE 59-1/2. After attaining age fifty-nine and one-half (59-1/2), a Participant, by giving written notice to the Administrator, may withdraw from the Plan a sum (a) not in excess of the credit balance of his vested Account, excluding any amounts invested in the Employer stock fund, as of the Valuation Date preceding such notice and (b) not less than such minimum amount as the Administrator may establish from time to time to facilitate administration of the Plan. Any such withdrawals shall be made in accordance with nondiscriminatory and objective standards consistently applied by the Administrator. ARTICLE NINE --ADMINISTRATION OF THE PLAN 9.1 PLAN ADMINISTRATION. The Employer shall be the Plan Administrator, hereinbefore and hereinafter called the Administrator, and "named fiduciary" (for purposes of Section 402(a)(1) of the Employee Retirement Income Security Act of 1974, as amended from time to time) of the Plan, unless the Employer, by action of its board of directors, shall designate a person or committee of persons to be the Administrator and named fiduciary. The administration of the Plan, as provided herein, including a determination of the payment of benefits to Participants and their Beneficiaries, shall be the responsibility of the Administrator; provided, however, that the Administrator may delegate any of its powers, authority, duties or responsibilities to any person or committee of persons. In the event more than one party shall act as Administrator, all actions shall be made by majority decisions. In the administration of the Plan, the Administrator may (a) employ agents to carry out nonfiduciary responsibilities (other than Trustee responsibilities), (b) consult with counsel, who may be counsel to the Employer, and (c) provide for the allocation of fiduciary responsibilities (other than Trustee responsibilities) among its members. Actions dealing with fiduciary responsibilities shall be taken in writing and the performance of agents, counsel and fiduciaries to whom fiduciary responsibilities have been delegated shall be reviewed periodically. The expenses of administering the Plan and the compensation of all employees, agents, or counsel of the Administrator, including accounting fees, recordkeeper's fees, and the fees of any benefit consulting firm, shall be paid by the Plan, or shall be paid by the Employer if the Employer so elects. To the extent required by applicable law, compensation may not be paid by the Plan to full-time Employees of the Employer. In the event the Employer pays the expenses of administering the Plan, the Employer may seek reimbursement from the Plan for the payment of such expenses. Reimbursement shall be permitted only for Plan expenses paid by the Employer within the last twelve (12)-month period. The Administrator shall obtain from the Trustee, not less often than annually, a report with respect to the value of the assets held in the Trust Fund, in such form as may be required by the Administrator. The Administrator shall administer the Plan and adopt such rules and regulations as, in the opinion of the Administrator, are necessary or advisable to implement and administer the Plan and to transact its business. 9.2 CLAIMS PROCEDURE. Pursuant to procedures established by the Administrator, adequate notice in writing shall be provided to any Participant or Beneficiary whose claim for benefits under the Plan has been denied within ninety (90) days of receipt of such claim. Such notice shall be written in a manner calculated to be understood by the claimant, shall advise the claimant the right to administrative review, and shall set forth the specific reason for such denial, the specific references to the pertinent Plan provisions on which the denial is based, and a description of any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary. If such review is requested by the claimant or his authorized representative within ninety (90) days after receipt by the claimant of written notification of denial of his claim, the Administrator shall afford a reasonable opportunity for a full and fair review by the Administrator of the decision denying the claim. The review shall focus on the additional facts, legal interpretations or material, if any, presented by the claimant. A hearing at its place of business may be scheduled by the Administrator, but a hearing is not required under the review procedure. 9.3 TRUST AGREEMENT. The Trust Agreement entered into by and between the Employer and the Trustee, including any supplements or amendments thereto, or any successor Trust Agreement, is incorporated by reference herein. ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS 10.1 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS. If the amount of any elective deferrals made by a Participant exceeds the dollar limitation of Section 4.1(c), then the excess amount, and any income allocable thereto, shall be distributed to such Participant subject to the requirements of applicable law. 10.2 LIMITATIONS ON 401(k) CONTRIBUTIONS. (a) AVERAGE ACTUAL DEFERRAL PERCENTAGE TEST. Amounts contributed as elective deferrals under Section 4.1(a), and any "fail-safe" contributions made under this Section, are considered to be amounts deferred pursuant to Section 401(k) of the Code. For purposes of this Article, these amounts are referred to as the "deferred amounts." For purposes of the "average actual deferral percentage test" described below, such deferred amounts must be made before the last day of the twelve (12)-month period immediately following the Plan Year to which the contributions relate. The Employer shall maintain records sufficient to demonstrate satisfaction of the average actual deferral percentage test and the deferred amounts used in such test. As of the last day of each Plan Year, the deferred amounts for the Plan Year for the Participants who are Highly-Compensated Employees shall satisfy either of the following tests: (1) The average actual deferral percentage for the eligible Participants who are Highly-Compensated Employees shall not exceed the average actual deferral percentage for eligible Participants who are Nonhighly-Compensated Employees multiplied by 1.25; or (2) The average actual deferral percentage for eligible Participants who are Highly-Compensated Employees shall not exceed the average actual deferral percentage of eligible Participants who are Nonhighly-Compensated Employees multiplied by two (2), provided that the average actual deferral percentage for eligible Participants who are Highly-Compensated Employees does not exceed the average actual deferral percentage for eligible Participants who are Nonhighly-Compensated Employees by more than two (2) percentage points, or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly-Compensated Employee. For purposes of the above tests, the "actual deferral percentage" shall mean the ratio (expressed as a percentage) that the deferred amounts, which are allocated to the Participant's Account as of any day in the Plan Year, on behalf of each eligible Participant for the Plan Year bears to the eligible Participant's compensation, as defined in Code Section 414(s) and the regulations promulgated thereunder. The "average actual deferral percentage" shall mean the average (expressed as a percentage) of the actual deferral percentages of the eligible Participants in each group. "Eligible Participant" shall mean each Employee who is eligible to participate in the Plan under Section 3.1. For purposes of this Section 10.2, the actual deferral percentage for any eligible Participant who is a Highly-Compensated Employee for the Plan Year and who is eligible to have elective deferrals allocated to his account under two (2) or more plans or arrangements described in Code Section 401(k) that are maintained by the Employer or any employer who is a related group member (within the meaning of Section 2.5(b)) shall be determined as if all such deferrals were made under a single arrangement. In the event that this Plan satisfies the requirements of Code Section 410(b) only if aggregated with one (1) or more other plans, or if one (1) or more other plans satisfy the requirements of Code Section 410(b) only if aggregated with this Plan, then the provisions of this Section 10.2 shall be applied by determining the actual deferral percentage of eligible Participants as if all such plans were a single plan. The determination and treatment of deferred amounts and the actual deferral percentage of any Participant shall be subject to the prescribed requirements of the Secretary of the Treasury. In the event the average actual deferral percentage test is not satisfied for a Plan Year, the Employer, in its discretion, may make a special "fail-safe" contribution for certain eligible Participants who are Nonhighly Compensated Employees, to be allocated among their Accounts in proportion to their Compensation for the Plan Year (b) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS. (1) IN GENERAL. If the average actual deferral percentage test of Section 10.2(a) is not satisfied for a Plan Year, then the "excess contributions", and income allocable thereto, shall be distributed, to the extent required under Treasury regulations, no later than the last day of the Plan Year following the Plan Year for which the excess contributions were made. However, if such excess contributions are distributed later than two and one-half (2-1/2) months following the last day of the Plan Year in which such excess contributions were made, a ten percent (10%) excise tax shall be imposed upon the Employer with respect to such excess contributions. Notwithstanding the foregoing, to the extent otherwise required to comply with the requirements of Section 401(a)(4) of the Code and the regulations thereunder, vested matching contributions may be forfeited. (2) EXCESS CONTRIBUTIONS. For purposes of this Section, "excess contributions" shall consist of the excess of the aggregate amount of deferred amounts made by or on behalf of the affected Highly-Compensated Employee over the maximum amount of all such contributions permitted under the test under Section 10.2(a). In reducing the excess contribution hereunder, the reduction shall be first applied to the Highly-Compensated Employee with the highest percentage under Section 10.2(a). If reductions are further required to comply with Section 10.2(a), such reductions shall be applied to the Highly-Compensated Employee with the next highest percentage, and so forth until the nondiscrimination test of Section 10.2(a) is satisfied. (3) DETERMINATION OF INCOME. The income allocable to excess contributions shall be determined by multiplying the income allocable to the Participant's deferred amounts for the Plan Year by a fraction, the numerator of which is the excess contributions made on behalf of the Participant for the Plan Year, and the denominator of which is the sum of the Participant's Account balances attributable to the Participant's deferred amounts on the last day of the Plan Year. (4) MAXIMUM DISTRIBUTABLE AMOUNT. The excess contributions to be distributed to a Participant shall be adjusted for income and, if there is a loss allocable to the excess contribution, shall in no event be less than the lesser of the Participant's Account under the Plan or the Participant's deferred amounts for the Plan Year. Excess contributions shall be distributed from that portion of the Participant's Account attributable to such deferred amounts to the extent allowable under Treasury regulations. 10.3 NONDISCRIMINATION TEST FOR EMPLOYER MATCHING CONTRIBUTIONS. (a) AVERAGE CONTRIBUTION PERCENTAGE TEST. The provisions of this Section shall apply if Employer matching contributions are made in any Plan Year under Section 4.2(a). As of the last day of each Plan Year, the average contribution percentage for Highly-Compensated Employees for the Plan Year shall satisfy either of the following tests: (1) The average contribution percentage for eligible Participants who are Highly-Compensated Employees shall not exceed the average contribution percentage for eligible Participants who are Nonhighly-Compensated Employees for the Plan Year multiplied by 1.25; or (2) The average contribution percentage for eligible Participants who are Highly-Compensated Employees shall not exceed the average contribution percentage for eligible Participants who are Nonhighly-Compensated Employees for the Plan Year multiplied by two (2), provided that the average contribution percentage for eligible Participants who are Highly-Compensated Employees does not exceed the average contribution percentage for eligible Participants who are Nonhighly-Compensated Employees by more than two (2) percentage points or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly-Compensated Employee. For purposes of the above tests, the "average contribution percentage" shall mean the average (expressed as a percentage) of the contribution percentages of the "eligible Participants" in each group. The contribution percentage" shall mean the ratio (expressed as a percentage) that the sum of Employer matching contributions and elective deferrals (to the extent such elective deferrals are not used to satisfy the average actual deferral percentage test of Section 10.2) under the Plan on behalf of the eligible Participant for the Plan Year bears to the eligible Participant's compensation (as defined in Code Section 414(s) and the regulations promulgated thereunder) for the Plan Year. "Eligible Participant" shall mean each Employee who is eligible to participate in the Plan under Section 3.1. For purposes of this Section 10.3, the contribution percentage for any eligible Participant who is a Highly-Compensated Employee for the Plan Year and who is eligible to have Employer matching contributions or elective deferrals allocated to his account under two (2) or more plans described in Section 401(a) of the Code or under arrangements described in Section 401(k) of the Code that are maintained by the Employer or any member of the Employer's related group (within the meaning of Section 2.5(b)), shall be determined as if all such contributions and elective deferrals were made under a single plan. In the event that this Plan satisfies the requirements of Section 410(b) of the Code only if aggregated with one (1) or more other plans, or if one (1) or more other plans satisfy the requirements of Section 410(b) of the Code only if aggregated with this Plan, then the provisions of this Section 10.3 shall be applied by determining the contribution percentages of eligible Participants as if all such plans were a single plan. The determination and treatment of the contribution percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (b) DISTRIBUTION OF EXCESS EMPLOYER MATCHING CONTRIBUTIONS. (1) IN GENERAL. If the nondiscrimination tests of Section 10.3(a) are not satisfied for a Plan Year, then the "excess contributions", and any income allocable thereto, shall be forfeited, if otherwise forfeitable, no later than the last day of the Plan Year following the Plan Year for which the nondiscrimination tests are not satisfied, and shall be used to reduce Employer contributions under Section 4.2(a). To the extent that such "excess contributions" are nonforfeitable, such excess contributions shall be distributed to the Participant on whose behalf the excess contributions were made no later than the last day of the Plan Year following the Plan Year for which such "excess contributions" were made. However, if such excess contributions are distributed later than two and one-half (2-1/2) months following the last day of the Plan Year in which such excess contributions were made, a ten percent (10%) excise tax shall be imposed upon the Employer with respect to such excess contributions. For purposes of the limitations of Section 11.1(b)(1) of the Plan, excess contributions shall be considered annual additions. (2) EXCESS CONTRIBUTIONS. For purposes of this Section, "excess contributions" shall consist of the excess of the amount of Employer matching contributions and elective deferrals (to the extent not used to satisfy the average actual deferral percentage test of Section 10.2) made on behalf of the affected Highly-Compensated Employee over the maximum amount of all such contributions permitted under the nondiscrimination tests under Section 10.3(a). In reducing the excess contribution hereunder, the reduction shall be first applied to the Highly-Compensated Employee with the highest percentage under Section 10.3(a). If reductions are further required to comply with Section 10.3(a), such reductions shall be applied to the Highly-Compensated Employee with the next highest percentage, and so forth until the nondiscrimination tests of Section 10.3(a) are satisfied. (3) DETERMINATION OF INCOME. The income allocable to excess contributions shall be determined by multiplying the income allocable to the Employer matching contributions and such elective deferrals by a fraction, the numerator of which is the excess contributions on behalf of the Participant for the Plan Year, and the denominator of which is the sum of the Participant's Account balances attributable to Employer matching contributions and such elective deferrals, on the last day of the Plan Year. 10.4 LIMITATION ON THE MULTIPLE USE ALTERNATIVE. The sum of the average actual deferral percentage of Highly-Compensated Employees under Section 10.2(a) and the average contribution percentage of Highly-Compensated Employees under Section 10.3(a) shall not exceed the "aggregate limit", as defined in Section 401(m)(9) of the Code and the regulations promulgated thereunder. If the aggregate limit is exceeded, the average contribution percentage of the Highly-Compensated Employees shall be reduced in accordance with the provisions of Section 10.3(b). In lieu of reducing the average contribution percentage, the Administrator may reduce the average actual deferral percentage of the Highly-Compensated Employees in accordance with the provisions of Section 10.2(b). The reductions under this Section shall be made only to the extent necessary to comply with the restrictions on the multiple use of the "alternative limitation" within the meaning of Code Section 401(m)(9). ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS 11.1 RULES AND DEFINITIONS. (a) RULES. The following rules shall limit additions to Participants' Accounts: (1) If the Participant does not participate, and has never participated, in another qualified plan maintained by the Employer, the amount of annual additions which may be credited to the Participant's Account for any limitation year shall not exceed the lesser of the "maximum permissible" amount (as hereafter defined) or any other limitation contained in this Plan. If the Employer contribution that would otherwise be allocated to the Participant's Account would cause the annual additions for the limitation year to exceed the maximum permissible amount, the amount allocated shall be reduced so that the annual additions for the limitation year shall equal the maximum permissible amount. (2) Prior to determining the Participant's actual compensation for the limitation year, the Employer may determine the maximum permissible amount for a Participant on the basis of a reasonable estimation of the Participant's compensation for the limitation year, uniformly determined for all Participants similarly situated. (3) As soon as is administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year shall be determined on the basis of the Participant's actual compensation for the limitation year. (4) If there is an excess amount, the excess shall be disposed of as follows: (A) Any nondeductible voluntary Employee after-tax contributions and, to the extent elected by the Administrator pursuant to a nondiscriminatory procedure, elective deferrals under Section 4.1(a), and any earnings thereon, to the extent they would reduce the excess amount, shall be returned to the Participant. (B) If an excess amount still exists after the application of subparagraph (A), and the Participant is covered by the Plan at the end of the limitation year, the excess amount in the Participant's Account shall be used to reduce Employer contributions (including any allocation of forfeitures, if applicable) for such Participant in the next limitation year, and each succeeding limitation year if necessary; (C) If an excess amount still exists after the application of subparagraphs (A) and (B), and the Participant is not covered by the Plan at the end of the limitation year, the excess amount shall be held unallocated in a suspense account and applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary. (D) If a suspense account is in existence at any time during the limitation year pursuant to this Section 11.1(a)(4), it shall not participate in the allocation of the Trust's investment gains and losses. In addition, all amounts held in the suspense account shall be allocated and reallocated to Participants' Accounts before any Employer or Employee contributions may be made for the limitation year. (5) If, in addition to this Plan, the Participant is covered under another defined contribution plan maintained by the Employer, or a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, or an individual medical account, as defined in Code Section 415(1)(2), maintained by the Employer which provides an annual addition, the annual additions which may be credited to a Participant's account under all such plans for any such limitation year shall not exceed the maximum permissible amount. Benefits shall be reduced under any discretionary defined contribution plan before they are reduced under any defined contribution pension plan. If both plans are discretionary contribution plans, they shall first be reduced under this Plan. Any excess amount attributable to this Plan shall be disposed of in the manner described in Section 11.1(a)(4). (6) If the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's defined benefit plan fraction and defined contribution plan fraction shall not exceed 1.0 in any limitation year. The annual additions which may be credited to the Participant's Account under this Plan for any limitation year shall be limited so that if the limitations of Code Section 415(e) become applicable, benefits under a defined benefit plan shall have first been provided before benefits under a defined contribution plan are provided. (7) In any Plan Year in which the Plan becomes a Super Top-Heavy Plan (as defined in Section 13.2(b)), the denominators of the defined benefit fraction and defined contribution fraction shall be computed using one hundred percent (100%) of the maximum dollar limitation instead of one hundred and twenty-five percent (125%). (8) In any year in which the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)) (but not a Super Top-Heavy Plan), the limitations shall be similarly reduced, subject to the special provisions of Section 13.3, which provide for the use of the one hundred and twenty-five percent (125%) limitation subject to the added minimum allocations. (b) DEFINITIONS. (1) ANNUAL ADDITIONS: The following amounts credited to a Participant's Account for the limitation year shall be treated as annual additions: (A) Employer contributions; (B) Elective deferrals; (C) Employee after-tax contributions, if any; (D) Forfeitures, if any; and (E) Amounts allocated after March 31, 1984 to an individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a defined benefit plan maintained by the Employer. Also, amounts derived from contributions paid or accrued after December 31, 1985 in taxable years ending after such date which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in Section 419A(d)(3), and amounts under a welfare benefit fund, as defined in Section 419(e), maintained by the Employer, shall be treated as annual additions to a defined contribution plan. For this purpose, any excess amount applied under Section 11.1(a)(4) in the limitation year to reduce Employer contributions shall be considered annual additions for such limitation year. (2) COMPENSATION: For purposes of determining maximum permitted benefits under this Section, compensation shall include all of a Participant's earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Employer, including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses, and excluding the following: (A) Employer contributions to a plan of deferred compensation which are not included in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan (funded with individual retirement accounts or annuities) to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (B) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (C) Amounts realized from the sale, exchange, or other disposition of stock acquired under a qualified stock option; and (D) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) toward the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludable from the gross income of the Employee). Compensation shall be measured on the basis of compensation paid in the limitation year. (3) DEFINED BENEFIT FRACTION: This shall mean a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans maintained or previously maintained by the Employer, and the denominator of which is the lesser of one hundred and twenty-five percent (125%) of the dollar limitation in effect for the limitation year under Section 415(b)(1)(A) of the Code or one hundred and forty percent (140%) of the highest average compensation including any adjustment under Code Section 415(b). (4) DEFINED CONTRIBUTION FRACTION: This shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's account under all the defined contribution plans (whether or not terminated), welfare benefit funds, and individual medical accounts maintained by the Employer for the current and all prior limitation years, and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation years of Service with the Employer, regardless of whether a defined contribution plan was maintained by the Employer. The maximum aggregate amount in any limitation year is the lesser of one hundred and twenty-five percent (125%) of the dollar limitation then in effect under Section 415(c)(1)(A) of the Code or thirty-five (35%) of the Participant's compensation for such year. If the Employee, as of the end of the first day of the first limitation year beginning after December 31, 1986, was a participant in one (1) or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction shall be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 and (ii) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The annual addition for any limitation year beginning before January 1, 1987, shall not be recomputed to treat all Employee contributions as annual additions. (5) DEFINED CONTRIBUTION DOLLAR LIMITATION: This shall mean the greater of $30,000 or one-fourth (1/4) of the defined benefit dollar limitation of Section 415(b)(1) of the Code in effect for the limitation year. (6) EMPLOYER: This term refers to the Employer that adopts this Plan, and all members of a controlled group of corporations (as defined in Section 414(b) of the Code, as modified by Section 415(h)), commonly-controlled trades or businesses (as defined in Section 414(c), as modified by Section 415(h)), or affiliated service groups (as defined in Section 414(m)) of which the Employer is a part, or any other entity required to be aggregated with the Employer under Code Section 414(o). (7) HIGHEST AVERAGE COMPENSATION: This means the average compensation for the three (3) consecutive limitation years with the Employer that produces the highest average. (8) LIMITATION YEAR: This shall mean the Plan Year. (9) MAXIMUM PERMISSIBLE AMOUNT: This shall mean an amount equal to the lesser of the defined contribution dollar limitation or twenty-five percent (25%) of the Participant's compensation for the limitation year. If a short limitation year is created because of an amendment changing the limitation year to a different twelve (12)-consecutive month period, the maximum permissible amount shall not exceed the defined contribution dollar limitation multiplied by the following fraction: NUMBER OF MONTHS IN THE SHORT LIMITATION YEAR --------------------------------------------- 12 (10) PROJECTED ANNUAL BENEFIT: This is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) to which the Participant would be entitled under the terms of the plan, assuming: (A) the Participant will continue employment until normal retirement age under the plan (or current age, if later), and (B) the Participant's compensation for the current limitation year and all other relevant factors used to determine benefits under the plan will remain constant for all future limitation years. ARTICLE TWELVE--AMENDMENT AND TERMINATION 12.1 AMENDMENT. The Employer, by resolution of its board of directors, (or, to the extent permitted by resolution of such board of directors, by action of a duly authorized officer of the Employer) shall have the right to amend, alter or modify the Plan at any time, or from time to time, in whole or in part. Any such amendment shall become effective under its terms upon adoption by the Employer. However, no amendment affecting the duties, powers or responsibilities of the Trustee may be made without the written consent of the Trustee. No amendment shall be made to the Plan which shall: (a) make it possible (other than as provided in Section 14.3) for any part of the corpus or income of the Trust Fund (other than such part as may be required to pay taxes and administrative expenses) to be used for or diverted to purposes other than the exclusive benefit of the Participants or their Beneficiaries; (b) decrease a Participant's account balance or eliminate an optional form of payment with respect to benefits accrued as of the later of (i) the date such amendment is adopted, or (ii) the date the amendment becomes effective; or (c) alter the schedule for vesting in a Participant's Account with respect to any Participant with three (3) or more Years of Service without his consent or deprive any Participant of any nonforfeitable portion of his Account. Notwithstanding the other provisions of this Section or any other provisions of the Plan, any amendment or modification of the Plan may be made retroactively if necessary or appropriate to conform to or to satisfy the conditions of any law, governmental regulation, or ruling, and to meet the requirements of the Employee Retirement Income Security Act of 1974, as it may be amended. 12.2 TERMINATION OF THE PLAN. The Employer, by resolution of its board of directors, reserves the right at any time and in its sole discretion to discontinue payments under the Plan and to terminate the Plan. In the event the Plan is terminated, or upon complete discontinuance of contributions under the Plan by the Employer, the rights of each Participant to his Account on the date of such termination or discontinuance of contributions, to the extent of the fair market value under the Trust Fund, shall become fully vested and nonforfeitable. The Employer shall direct the Trustee to distribute the Trust Fund in accordance with the Plan's distribution provisions to the Participants and their Beneficiaries, each Participant or Beneficiary receiving a portion of the Trust Fund equal to the value of his Account as of the date of distribution. These distributions may be implemented by the continuance of the Trust and the distribution of the Participants' Account shall be made at such time and in such manner as though the Plan had not terminated, or by any other appropriate method, including rollover into Individual Retirement Accounts. Upon distribution of the Trust Fund, the Trustee shall be discharged from all obligations under the Trust and no Participant or Beneficiary shall have any further right or claim therein. If a partial termination of the Plan is deemed to have occurred, this Section shall apply only to those Participant's affected by such partial termination. ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS 13.1 APPLICABILITY. The provisions of this Article shall become applicable only for any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)). The determination of whether the Plan is a Top-Heavy Plan shall be made each Plan Year by the Administrator. 13.2 DEFINITIONS. For purposes of this Article, the following definitions shall apply: (a) "KEY EMPLOYEE": "Key Employee" shall mean any Employee or former Employee (and the Beneficiaries of such Employee) who, at any time during the determination period, was (1) an officer of the Employer earning compensation (as defined in Section 416(i) of the Code) in excess of fifty percent (50%) of the dollar limitation under Section 415(b)(1)(A) of the Code, (2) an owner (or considered an owner under Section 318 of the Code) of both more than a one-half percent (1/2%) interest in the Employer and one of the ten (10) largest interests in the Employer if such individual's compensation exceeds the dollar limitation under Section 415(c)(1)(A) of the Code, (3) a five percent (5%) owner of the Employer, or (4) a one percent (1%) owner of the Employer who has an annual compensation of more than $150,000. For purposes of this Section, annual compensation shall mean compensation as defined in Code Section 415(c)(3), but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's income under Code Sections 125, 402(g), 402(h) or 403(b). The determination period of the Plan is the Plan Year containing the "determination date" as defined in Section 13.2(c)(4) and the four (4) preceding Plan Years. The determination of who is a Key Employee (including the terms "5% owner" and "1% owner") shall be made in accordance with Section 416(i)(1) of the Code and the regulations thereunder. (b) "SUPER TOP-HEAVY PLAN": The Plan shall constitute a "Super Top-Heavy Plan" if it meets the test for status as a Top-Heavy Plan, where "90%" is substituted for "60%" at each place in Section 13.2(c). (c) "TOP-HEAVY PLAN": (1) The Plan shall constitute a "Top-Heavy Plan" if any of the following conditions exist: (A) The top-heavy ratio for the Plan exceeds sixty percent (60%) and the Plan is not part of any required aggregation group or permissive aggregation group of plans; or (B) The Plan is part of a required aggregation group of plans (but is not part of a permissive aggregation group) and the top-heavy ratio for the group of plans exceeds sixty percent (60%); or (C) The Plan is a part of a required aggregation group of plans and part of a permissive aggregation group and the top- heavy ratio for the permissive aggregation group exceeds sixty percent (60%). (2) If the Employer maintains one (1) or more defined contribution plans (including any simplified employee pension plan funded with individual retirement accounts or annuities) and the Employer maintains or has maintained one (1) or more defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of account balances under the defined contribution plans for all Key Employees and the actuarial equivalents of accrued benefits under the defined benefit plans for all Key Employees, and the denominator of which is the sum of the account balances under the defined contribution plans for all Participants and the actuarial equivalents of accrued benefits under the defined benefit plans for all Participants. Both the numerator and denominator of the top-heavy ratio shall include any distribution of an account balance or an accrued benefit made in the five (5)-year period ending on the determination date and any contribution due to a defined contribution pension plan but unpaid as of the determination date. In determining the accrued benefit of a non-Key Employee who is participating in a plan that is part of a required aggregation group, the method of determining such benefit shall be either (i) in accordance with the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer or any member of the Employer's related group (within the meaning of Section 2.5(b)), or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C). (3) For purposes of (1) and (2) above, the value of account balances and the actuarial equivalents of accrued benefits shall be determined as of the most recent Valuation Date that falls within or ends with the twelve (12)-month period ending on the determination date. The account balances and accrued benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior year shall be disregarded. The accrued benefits and account balances of Participants who have performed no Hours of Service with any Employer maintaining the plan for the five (5)-year period ending on the determination date shall be disregarded. The calculations of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account shall be made under Section 416 of the Code and regulations issued thereunder. Deductible Employee contributions shall not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans, the value of account balances and accrued benefits shall be calculated with reference to the determination dates that fall within the same calendar year. (4) DEFINITION OF TERMS FOR TOP-HEAVY STATUS: (A) "TOP-HEAVY RATIO" shall mean the following: (1) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan funded with individual retirement accounts or annuities) and the Employer has never maintained any defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the determination date (including any part of any account balance distributed in the five (5)-year period ending on the determination date), and the denominator of which is the sum of the account balances (including any part of any account balance distributed in the five (5)-year period ending on the determination date) of all Participants as of the determination date. Both the numerator and the denominator shall be increased by any contributions due but unpaid to a defined contribution pension plan as of the determination date. (B) "PERMISSIVE AGGREGATION GROUP" shall mean the required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Section 401(a)(4) and/or 410 of the Code. (C) "REQUIRED AGGREGATION GROUP" shall mean (i) each qualified plan of the Employer (including any terminated plan) in which at least one Key Employee participates, and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Section 401(a)(4) and/or 410 of the Code. (D) "DETERMINATION DATE" shall mean, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, "determination date" shall mean the last day of that Plan Year. (E) "VALUATION DATE" shall mean the last day of the Plan Year. (F) Actuarial equivalence shall be based on the interest and mortality rates utilized to determine actuarial equivalence when benefits are paid from any defined benefit plan. If no rates are specified in said plan, the following shall be utilized: pre- and post-retirement interest -- five percent (5%); post-retirement mortality based on the Unisex Pension (1984) Table as used by the Pension Benefit Guaranty Corporation on the date of execution hereof. 13.3 ALLOCATION OF EMPLOYER CONTRIBUTIONS AND FORFEITURES FOR A TOP-HEAVY PLAN YEAR. (a) Except as otherwise provided below, in any Plan Year in which the Plan is a Top-Heavy Plan, the Employer contributions and forfeitures allocated on behalf of any Participant who is a non-Key Employee shall not be less than the lesser of three percent (3%) of such Participant's compensation (as defined in Section 11.1(b)(2)) or the largest percentage of Employer contributions and forfeitures as a percentage of the Key Employee's Compensation, allocated on behalf of any Key Employee for that Plan Year. This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation or would have received a lesser allocation for the Plan Year because of insufficient Employer contributions under Section 4.2, the Participant's failure to complete one thousand (1,000) Hours of Service or the Participant's failure to make elective deferrals under Section 4.1. (b) The minimum allocation under this Section shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (c) The minimum allocation under this Section shall be offset and reduced by any allocation of contributions and forfeitures under Section 4.2, and under any other defined contribution plan (if such contributions are not matching contributions under Code Section 401(m)) with a Plan Year ending in the same calendar year as the Valuation Date. (d) For purposes of the Plan, a non-Key Employee shall be any Employee or Beneficiary of such Employee, any former Employee, or Beneficiary of such former Employee, who is not or was not a Key Employee during the Plan Year ending on the determination date, nor during the four (4) preceding Plan Years. (e) If no defined benefit plan has ever been part of a permissive or required aggregation group of plans of the Employer, the contributions and forfeitures under this step shall be offset by any allocation of contributions and forfeitures under any other defined contribution plan of the Employer with a Plan Year ending in the same calendar year as this Plan's Valuation Date. (f) There shall be no duplication of the minimum benefits required under Code Section 416. Benefits shall be provided under defined contribution plans before under defined benefit plans. If a defined benefit plan (active or terminated) is part of the permissive or required aggregation group of plans, the allocation method of subparagraph (a) above shall apply, except that "3%" shall be increased to "5%." (g) There shall be no duplication of the minimum benefits required under Code Section 416. Benefits shall be provided under defined contribution plans before defined benefit plans. If a defined benefit plan (active or terminated) is part of the permissive or required aggregation group of plans, and if any Participant in the Plan would have his benefits limited due to the application of the Code limitation rule in Section 11.1 in a Plan Year in which the Plan is a Top-Heavy Plan but not a Super Top-Heavy Plan, the allocation method of subparagraph (f) above shall apply, except that "5%" shall be increased to "7.5%." 13.4 VESTING. The provisions contained in Section 6.1 relating to vesting shall continue to apply in any Plan Year in which the Plan is a Top-Heavy Plan, and apply to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to Employee contributions and elective deferrals under Section 4.1, including benefits accrued before the effective date of Section 416 and benefits accrued before the Plan became a Top-Heavy Plan. Further, no reduction in vested benefits may occur in the event the Plan's status as a Top-Heavy Plan changes for any Plan Year and the vesting schedule is amended. In addition, if a Plan's status changes from a Top-Heavy Plan to that of a non-Top-Heavy Plan, a Participant with three (3) Years of Service shall continue to have his vested rights determined under the schedule which he selects, in the event the vesting schedule is subsequently amended. Payment of a Participant's vested Account balance under this Section shall be made in accordance with the provisions of Article Seven. ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS 14.1 PLAN DOES NOT AFFECT EMPLOYMENT. Neither the creation of this Plan, any amendment thereto, the creation of any fund nor the payment of benefits hereunder shall be construed as giving any legal or equitable right to any Employee or Participant against the Employer, its officers or Employees, or against the Trustee. All liabilities under this Plan shall be satisfied, if at all, only out of the Trust Fund held by the Trustee. Participation in the Plan shall not give any Participant any right to be retained in the employ of the Employer, and the Employer hereby expressly retains the right to hire and discharge any Employee at any time with or without cause, as if the Plan had not been adopted, and any such discharged Participant shall have only such rights or interests in the Trust Fund as may be specified herein. 14.2 SUCCESSOR TO THE EMPLOYER. In the event of the merger, consolidation, reorganization or sale of assets of the Employer, under circumstances in which a successor person, firm, or corporation shall carry on all or a substantial part of the business of the Employer, and such successor shall employ a substantial number of Employees of the Employer and shall elect to carry on the provisions of the Plan, such successor shall be substituted for the Employer under the terms and provisions of the Plan upon the filing in writing with the Trustee of its election to do so. 14.3 REPAYMENTS TO THE EMPLOYER. Notwithstanding any provisions of this Plan to the contrary: (a) Any monies or other Plan assets attributable to any contribution made to this Plan by the Employer because of a mistake of fact shall be returned to the Employer within one (1) year after the date of contribution. (b) Any monies or other Plan assets attributable to any contribution made to this Plan by the Employer shall be refunded to the Employer, to the extent such contribution is predicated on the deductibility thereof under the Code and the income tax deduction for such contribution is disallowed. Such amount shall be refunded within one (1) taxable year after the date of such disallowance or within one (1) year of the resolution of any judicial or administrative process with respect to the disallowance. All Employer contributions hereunder are expressly contributed based upon such contributions' deductibility under the Code. However, the provisions of this Section shall not apply to elective deferrals made by a Participant under Section 4.1. 14.4 BENEFITS NOT ASSIGNABLE. Except as provided in Section 414(p) of the Code with respect to "qualified domestic relations orders," the rights of any Participant or his Beneficiary to any benefit or payment hereunder shall not be subject to voluntary or involuntary alienation or assignment. With respect to any "qualified domestic relations order" relating to the Plan, the Plan shall permit distribution to an alternate payee under such order at any time, irrespective of whether the Participant has attained his "earliest retirement age" (within the meaning of Section 414(p)(4)(B) of the Code) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of his earliest retirement age shall, however, be available only if: (1) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee's benefit under the Plan exceeds $3,500, the order requires the alternate payee to consent to any distribution occurring prior to the Participant's attainment of his earliest retirement age. Nothing in this paragraph shall, however, give a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not otherwise permitted under the Plan or under said Section 414(p) of the Code. 14.5 MERGER OF PLANS. In the case of any merger or consolidation of this Plan with, or transfer of the assets or liabilities of the Plan to, any other plan, the terms of such merger, consolidation or transfer shall be such that each Participant would receive (in the event of termination of this Plan or its successor immediately thereafter) a benefit which is no less than what the Participant would have received in the event of termination of this Plan immediately before such merger, consolidation or transfer. 14.6 INVESTMENT EXPERIENCE NOT A FORFEITURE. The decrease in value of any Account due to adverse investment experience shall not be considered an impermissible "forfeiture" of any vested balance. 14.7 DISTRIBUTION TO LEGALLY INCAPACITATED. In the event any benefit is payable to a minor or to a person deemed to be incompetent or to a person otherwise under legal disability, or who is by sole reason of advanced age, illness, or other physical or mental incapacity incapable of handling the disposition of his property, the Administrator, may direct the Trustee to apply all or any portion of such benefit directly to the care, comfort, maintenance, support, education or use of such person or to pay or distribute the whole or any part of such benefit to (a) the spouse of such person, (b) the parent of such person, (c) the guardian, committee, or other legal representative, wherever appointed, of such person, (d) the person with whom such person shall reside, (e) any other person having the care and control of such person, or (f) such person. The receipt of any such payment or distribution shall be a complete discharge of liability for Plan obligations. 14.8 CONSTRUCTION. Wherever appropriate, the use of the masculine gender shall be extended to include the feminine and/or neuter or vice versa; and the singular form of words shall be extended to include the plural; and the plural shall be restricted to mean the singular. 14.9 GOVERNING DOCUMENTS. A Participant's rights shall be determined under the terms of the Plan as in effect at the Participant's date of separation from Service. 14.10 GOVERNING LAW. The provisions of this Plan shall be construed under the laws of the state of the situs of the Trust, except to the extent such laws are preempted by Federal law. 14.11 HEADINGS. The Article headings and Section numbers are included solely for ease of reference. If there is any conflict between such headings or numbers and the text of the Plan, the text shall control. 14.12 COUNTERPARTS. This Plan may be executed in any number of counterparts, each of which shall be deemed an original; said counterparts shall constitute but one and the same instrument, which may be sufficiently evidenced by any one counterpart. 14.13 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN. In the event that all or any portion of the distribution payable to a Participant or to a Participant's Beneficiary hereunder shall, at the expiration of five (5) years after it shall become payable, remain unpaid solely by reason of the inability of the Administrator to ascertain the whereabouts of such Participant or Beneficiary, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, the amount so distributable shall be treated as a forfeiture under the Plan. In the event a Participant or Beneficiary is located subsequent to the reallocation of his Account balance, such Account balance shall be restored in accordance with the provisions of Section 6.2. ARTICLE FIFTEEN--MULTIPLE EMPLOYER PROVISIONS 15.1 ADOPTION OF THE PLAN. With the consent of the board of directors of ODS Networks, Inc., this Plan may be adopted by any other corporation or entity that is not a member of the Employer's "related group" (as defined in Section 2.5) for its employees, which adopting employer shall be known as a "Participating Employer." All assets may either be held within the Trust Fund, or each Participating Employer may maintain a separate trust fund attributable to its portion of Plan assets. Separate accounting shall be maintained for the Accounts of Employees of each adopting Participating Employer. 15.2 SERVICE. For purposes of vesting, eligibility to participate in the Plan, and determining eligibility for allocation of Participating Employer contributions, an Employee shall be credited with all of his Hours of Service with any Participating Employer which has adopted the Plan after the effective date of that adoption. Pre-adoption service will be credited in accordance with the rules in Article Two for such periods of time when the Employees were part of a controlled group of corporations, trades or businesses under common control or affiliated service group. These rules may be modified by an instrument of adoption. 15.3 PLAN CONTRIBUTIONS. All contributions made by a Participating Employer, as provided for in this Plan and unless modified by an instrument of adoption, shall be determined separately by each Participating Employer, and shall be paid to and held by the Trustee for the exclusive benefit of the Employees of such Participating Employer and the Beneficiaries of such Employees, subject to all the terms and conditions of this Plan. Any forfeiture by an Employee of a Participating Employer subject to allocation during each Plan Year shall be allocated only for the exclusive benefit of the Participants of such Participating Employer in accordance with the provisions of this Plan, unless modified by an instrument of adoption]. 15.4 TRANSFERRING EMPLOYEES. The Administrator shall adopt equitable procedures whereby contributions and forfeitures are equitably allocated in the case of Employees transferring from the employment of one Participating Employer to another Participating Employer. Similarly, rules shall be adopted whereby Account records may be transferred from the records of one Participating Employer to another Participating Employer. 15.5 DELEGATION OF AUTHORITY. Each Participating Employer shall be deemed to have appointed ODS Networks, Inc. as its agent to act on its behalf in all matters relating to the administration, amendment, termination of the Plan and the investment of the assets of the Plan. 15.6 TERMINATION. Any termination of the Plan or discontinuance of contributions by any one Participating Employer shall operate with regard only to the Participants employed by that Participating Employer. All Employees affected thereby shall have a one hundred percent (100%) nonforfeitable interest in their Accounts. In the event any Participating Employer terminates its participation in this Plan, or in the event that any such Participating Employer shall cease to exist through sale, reorganization or bankruptcy, the Trust fund shall be allocated by the Trustee, in accordance with the direction of the Administrator, into separate Trust funds. The amount to be allocated to the Trust of the terminating Participating Employer shall be equal to the value of the Account balances of its Participants as of the most recent date as of which Plan assets were valued under Article Five, unless a special valuation is agreed to by the Administrator and the terminating Participating Employer. IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has caused this Plan to be executed on the 29TH day of OCTOBER , 1997. ODS NETWORKS, INC. By: /S/ KANDIS TATE THOMPSON ----------------------------- Authorized Officer EX-10.7 3 EXHIBIT 10.7 EXHIBIT 10.7 AMENDMENT TO THE ODS 401(k) SAVINGS PLAN WHEREAS, ODS Networks, Inc. (the "Employer") heretofore adopted the ODS 401(k) Savings Plan (the "Plan"); and WHEREAS, the Employer reserved the right to amend the Plan; and WHEREAS, the Employer heretofore amended the Plan and desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended, effective as of November 1, 1997, as follows: 1. Section 4.2(a) of the Plan shall be amended by adding the following paragraph to the conclusion of said Section: Notwithstanding the foregoing provisions of this Section 4.2(a), if a Participant's elective deferrals for a Plan Year reach the maximum amount set out in Section 4.1(c) and, as a result, the Participant is not eligible to make elective deferrals to the Plan for the balance of such Plan Year, if such Participant is employed by the Employer on the last day of such Plan Year, such Participant shall receive a supplemental matching contribution following the close of such Plan Year in an amount equal to the percentage (as determined by the Employer's board of directors for such Plan Year) of the Participant's Compensation contributed to the Plan as elective deferrals for such Plan Year, minus the amount of the Employer matching contribution previously made on behalf of such Participant for such Plan Year. 2. Except as hereinabove amended, the provisions of the Plan shall continue in full force and effect. IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has caused this Amendment to be executed as of the 29th day of October , 1997. ODS NETWORKS, INC. By: /s/ Kandis Tate Thompson ----------------------------------- EX-10.10 4 EXHIBIT 10.10 EXHIBIT 10.10 THIRD AMENDED AND RESTATED REVOLVING CREDIT LOAN AGREEMENT This Third Amended and Restated Revolving Credit Loan Agreement (the "LOAN AGREEMENT") dated as of the 31st day of December, 1997, is entered into by and between ODS Networks, Inc. (formerly known as Optical Data Systems, Inc.), a Texas corporation (the "BORROWER") and NationsBank of Texas, N.A., formerly known as NCNB Texas National Bank (the "BANK"). W I T N E S S E T H: WHEREAS, Borrower and Bank have entered into that certain Second Amended and Restated Revolving Credit Loan Agreement dated as of April 12, 1997 (as amended by the First Amendment Agreement dated as of September 29, 1997, the "PRIOR LOAN AGREEMENT"), pursuant to which Bank agreed to loan Borrower up to $15,000,000 to fund working capital needs (the "PRIOR LOAN"), which Prior Loan matures April 12, 1999; and WHEREAS, Borrower and Bank wish to amend and restate in its entirety the Prior Loan Agreement as set forth herein; NOW, THEREFORE, in consideration of the mutual promises herein contained and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Prior Loan Agreement is hereby restated in its entirety and the parties hereto do hereby agree as follows: SECTION 1 DEFINITIONS 1.1 DEFINED TERMS. As used in this Loan Agreement, and in any note, certificate, report or other document made or delivered pursuant to this Loan Agreement, the following terms shall have the following meanings; "ADVANCE" shall have the meaning set forth in SECTION 2.1. "AFFILIATE" shall mean any Person directly or indirectly controlling, controlled by, or under common control with, another Person. "BOARD OF GOVERNORS" means the Board of Governors of the Federal Reserve System. "BORROWER SECURITY AGREEMENT" shall mean the Security Agreement dated as of December 31, 1997, executed by the Borrower in favor of the Bank in the form attached as EXHIBIT "E" as the same may be amended or otherwise modified from time to time. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or day on which national banks are authorized to be closed under the laws of the State of Texas. "CONSOLIDATED NET WORTH" shall mean, as of any date, the total shareholders' equity (including capital stock, additional paid in capital, retained earnings after deducting treasury stock, accumulated foreign currency translation adjustments, and deferred income tax calculation adjustments) which would appear on a consolidated balance sheet of Borrower and its Consolidated Subsidiaries. "CONSOLIDATED SUBSIDIARIES" shall mean, as of any date, Optical Data Systems, Texas, Inc., Optical Data Systems, GmbH, Optical Data Systems Ltd., Optical Data Systems SARL, Optical Data Systems Ltda., ODS Ltd. and Optical Data Systems (Barbados) Ltd., and any other Subsidiary included as of such date in the consolidated financial statements of Borrower. "CONSOLIDATED TANGIBLE NET WORTH" shall mean, as of any date, Consolidated Net Worth less the aggregate book value of Intangible Assets shown on such balance sheet. "CONSOLIDATED TOTAL LIABILITIES" shall mean, as of any date, all liabilities which would be reflected on a consolidated balance sheet of Borrower and its Consolidated Subsidiaries. "ELIGIBLE RECEIVABLES" means, as to the Borrower and the Granting Subsidiaries at any date of determination, without duplication, the aggregate of each Receivable owned by such Person created in the ordinary course of business which satisfies each of the following conditions: (a) Such Receivable complies with all applicable laws and regulations, including, without limitation to the extent applicable, usury laws, the Federal Truth in Lending Act and Regulation Z of the Board of Governors of the Federal Reserve System; (b) Such Receivable, at the date of issuance of its invoice, was payable not more than 90 days after the original date of issuance of the invoice therefor; (c) Such Receivable has not been outstanding for more than 60 days past the due date of the invoice; (d) Such Receivable was created in connection with (i) the sale of inventory in the ordinary course of business and such sale has been fully consummated and such inventory has been shipped and delivered and received by the account debtor or, if such inventory has not been so shipped, delivered and received, such inventory (A) is being stored by the Borrower or applicable Granting Subsidiary pursuant to a request from the account debtor and (B) has been ordered by the account debtor pursuant to a valid purchase order, or (ii) the performance of services by the Borrower or applicable Granting Subsidiary in the ordinary course of business and such services have been completed and accepted by the account debtors; (e) Such Receivable represents a legal, valid and binding payment obligation of the account debtor enforceable in accordance with its terms and arising from an enforceable contract, the performance of which contract, insofar as it relates to such Receivable, has been completed; (f) Such Receivable does not arise from the sale of any inventory on a bill-and-hold (except as permitted in CLAUSE (d)(i) preceding), guaranteed sale, sale-or-return, sale on approval, consignment or any other repurchase or return basis; (g) Either the Borrower or the applicable Granting Subsidiary has good and indefeasible title to such Receivable, the Bank holds a perfected first priority Lien on such Receivable pursuant to the Security Documents, and such Receivable is not subject to any Liens except Liens in favor of the Bank pursuant to the Loan Documents; (h) Such Receivable does not arise out of a contract with, or an order from, an account debtor that, by its terms (other than terms which are invalid under applicable law), prohibits or makes void or unenforceable the grant of a security interest to the Bank in and to such Receivable; (i) Such Receivable is not subject to any setoff, counterclaim, defense, dispute, recoupment or adjustment other than normal discounts for prompt payment; (j) The account debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due or suffered a receiver or trustee to be appointed for any of its assets or affairs; (k) Such Receivable is not evidenced by chattel paper or instruments unless the Lien on such chattel paper or instrument is a perfected first priority Lien on such chattel paper or instrument in favor of the Bank pursuant to the Security Documents; (l) The account debtor has not returned or refused to retain, or otherwise notified the Borrower or any Subsidiary of the Borrower of any dispute concerning, or claimed nonconformity of, any of the inventory or services relating to such Receivable; (m) The account debtor of such Receivable is not an Affiliate of the Borrower or any Subsidiary of the Borrower; (n) Such Receivable is payable in United States Dollars; (o) The account debtor with respect to such Receivable is not domiciled in or organized under the laws of any country other than the United States of America, PROVIDED THAT the limitation imposed by this CLAUSE (o) shall not apply to Receivables from the account debtors identified in PART (a) of EXHIBIT "H" attached hereto; (p) Such Receivable is not owed by an account debtor as to which more than 20 percent of the aggregate balances then outstanding on Receivables owed by such account debtor thereon and/or its Affiliates to the Borrower are more than 90 days past due from the dates of their original invoices; (q) The account debtor with respect to such Receivable is not the United States of America or any department, agency or instrumentality thereof unless, with respect to the Lien on such Receivable in favor of the Bank, there has been compliance with the Federal Assignment of Claims Act of 1940, as amended to the satisfaction of the Bank; (r) The account debtor with respect to such Receivable is not located in New Jersey, Minnesota, West Virginia or any other state denying creditors access to its courts in the absence of a notice of business activities report or other similar filing, unless the Borrower or the applicable Granting Subsidiary has either qualified as a foreign corporation authorized to transact business in such state or has filed a notice of business activities report or similar appropriate filing with the applicable state agency for the then-current year; and (s) Such Receivable is not owed by an account debtor as to which the aggregate of all Receivables owing by such account debtor or an Affiliate of such account debtor exceeds ten percent of the aggregate of all Receivables at such date, PROVIDED THAT the amount of Receivables owing by such account debtor that does not exceed ten percent of the aggregate of all Receivables at such date shall not be excluded pursuant to this CLAUSE (s), and PROVIDED FURTHER that the limitation imposed by this CLAUSE (s) shall not apply to the account debtors identified in PART (b) of EXHIBIT "H" attached hereto. The amount of the Eligible Receivables owed by an account debtor to the Borrower or applicable Granting Subsidiary shall be net of, and shall be reduced by (if and to the extent not already so reduced by virtue of the preceding clauses of this definition), the amount of all contra accounts, reserves, credits, rebates and (subject to the proviso below) other indebtedness, liabilities or obligations owed by the Borrower or its Subsidiaries to such account debtor; PROVIDED, HOWEVER, that the existence of any such other indebtedness, liabilities or obligations owed by the Borrower or its Subsidiaries to such account debtor shall not, in and of itself, reduce the amount of Eligible Receivables owed by such account debtor by the amount of such other indebtedness, liabilities or obligations (for purposes of this sentence or CLAUSE (I) preceding of this definition) except to the extent that such other indebtedness, liabilities or obligations are then due. "EURODOLLAR ADVANCE" means that portion of any Advance which bears interest at a rate of interest determined by reference to the Eurodollar Rate. "EURODOLLAR ADVANCE FAILURE" shall have the meaning set forth in the definition of Eurodollar Consequential Loss. "EURODOLLAR BUSINESS DAY" means a Business Day on which dealings in United States Dollars are carried out in the London interbank market. "EURODOLLAR CONSEQUENTIAL LOSS" means such amount or amounts as shall compensate Bank for any loss, cost or expense incurred by Bank as a result of (a) any payment or prepayment of any portion of any Eurodollar Advance on a date other than the last day of the Interest Period applicable thereto (a "EURODOLLAR PREPAYMENT"), (b) the conversion of the rate of interest on any Eurodollar Advance from the Eurodollar Rate to another rate of interest available hereunder (subject to the provisions of this Loan Agreement applicable to the selection of any such interest rate) with respect to any portion of the Eurodollar Advance on a date other than the last day of the Interest Period applicable thereto (a "EURODOLLAR CONVERSION"), (c) the rescinding of a Rollover Notice to another Interest Period or notice of a conversion from another interest rate to the Eurodollar Rate prior to the commencement of the Interest Period (a "EURODOLLAR RESCISSION"), or (d) the failure of all or any portion of a Eurodollar Advance to be made under this Agreement (a "EURODOLLAR ADVANCE FAILURE") due to the action or inaction of Borrower, including Borrower's failure to satisfy any condition to any Advance that would otherwise have been a Eurodollar Advance. Compensation owing to Bank as a result of any such loss, cost or expense shall include, without limitation, an amount equal to the excess, if any, of (i) the amount of the interest that would have accrued at the Eurodollar Rate on the amount which was the subject of the Eurodollar Prepayment, the Eurodollar Conversion, the Eurodollar Rescission or the Eurodollar Advance Failure, as the case may be, for the period from the date of occurrence to the last day of the applicable Interest Period over (ii) the amount of interest (as determined by Bank) that Bank could have bid on a Eurodollar deposit, for an amount comparable to the amount which was the subject of the Eurodollar Prepayment, the Eurodollar Conversion, the Eurodollar Rescission or the Eurodollar Advance Failure, as the case may be, for the period from the date of occurrence to the last day of the applicable Interest Period, placed by Bank with prime banks in the London interbank market. "EURODOLLAR CONVERSION" shall have the meaning set forth in the definition of the term "EURODOLLAR CONSEQUENTIAL LOSS." "EURODOLLAR PREPAYMENT" shall have the meaning set forth in the definition of the term "EURODOLLAR CONSEQUENTIAL LOSS." "EURODOLLAR RATE" means, with respect to each Eurodollar Advance for each Interest Period, a rate per annum equal to (a) the Interbank Offered Rate, divided by (b) 1.00 minus the Eurodollar Reserve Requirement. "EURODOLLAR RESCISSION" shall have the meaning set forth in the definition of the term "EURODOLLAR CONSEQUENTIAL LOSS." "EURODOLLAR RESERVE REQUIREMENT" means, on any day, that percentage (expressed as a decimal fraction) which is in effect on such day, as prescribed by the Board of Governors (or any successor), for determining the maximum reserve requirements (including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to "eurocurrency liabilities" as currently defined in Regulation D of the Board of Governors or under any other then applicable similar or successor regulation which prescribes reserve requirements applicable to eurocurrency liabilities or eurocurrency fundings. Each determination by Bank of the Eurodollar Reserve Requirement shall be conclusive in the absence of manifest error. "EVENT OF DEFAULT" shall mean the occurrence and continuation of any of the events specified in SECTION 8.1. "FINAL INTEREST PAYMENT DATE" means, with respect to any Eurodollar Advance, the last day of the Interest Period of such Advance. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" shall mean those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards of committees thereof and which are consistently applied for all periods after the date hereof so as to properly reflect the financial condition, and the results of operations and changes in financial position, of Borrower and its Consolidated Subsidiaries. "GOVERNMENTAL AUTHORITY" shall mean any government (or any political division or jurisdiction thereof), court, bureau, agency or other governmental authority having jurisdiction over Borrower or any of its Subsidiaries or any of its or their business, operations or properties. "GRANTING SUBSIDIARY" shall mean any Subsidiary of the Borrower that is organized under the laws of the United States of America or one of the States thereof. "INDEBTEDNESS" shall mean with respect to any Person, all indebtedness, obligations and liabilities, contingent or otherwise of such Person which are (i) liabilities which would be reflected on a balance sheet of such Person, prepared in accordance with Generally Accepted Accounting Principles, (ii) obligations of such Person in respect of any guaranty or letter of credit, or (iii) obligations of such Person in respect of any capital lease. "INTANGIBLE ASSETS" of any Person shall mean those assets of such Person which are (i) deferred assets, other than prepaid insurance and prepaid taxes; and (ii) patents, copyrights, trademarks, tradenames, franchises, goodwill, non-compete agreements, experimental expenses and other similar assets which would be classified as intangible assets on a balance sheet of such Person, prepared in accordance with Generally Accepted Accounting Principles. "INTERBANK OFFERED RATE" means, with respect to each Interest Period, the rate of interest per annum at which deposits in immediately available freely transferable funds in United States Dollars are offered by Bank (at approximately 1:00 p.m. Dallas, Texas time, two (2) Eurodollar Business Days prior to the first day of such Interest Period) to first class banks in the London interbank market for delivery on the first day of such Interest Period, such deposits being for a period of time equal or comparable to such Interest Period and in an amount equal or comparable to the principal amount of the Eurodollar Advance to which such Interest Period relates. Each determination of the Interbank Offered Rate by Bank shall be conclusive in the absence of manifest error. "INTEREST PAYMENT DATE" means (a) with respect to any Prime Rate Advance, the first day of each calendar quarter commencing on the first of such days to occur after such Advance is made or any Eurodollar Advance is converted to a Prime Rate Advance, and (b) with respect to any Eurodollar Advance, (i) the last day of each ninety (90) day period following the date on which such Advance is made or converted, commencing on the first of such days to occur after such Advance is made or any Prime Rate Advance is converted to a Eurodollar Advance, and (ii) the last day of such Interest Period. "INTEREST PERIOD" means, with respect to a Eurodollar Advance, a period commencing: (a) on the borrowing date of such Eurodollar Advance; or (b) on the conversion date pertaining to such Eurodollar Advance, if such Eurodollar Advance is made pursuant to a conversion as described in SECTION 2.6(a) hereof; or (c) on the day following the last day of the Interest Period during which Borrower gives a Rollover Notice in the case of a rollover to a successive Interest Period as described in SECTION 2.6(c) hereof; and in the case of (a), (b) and (c) preceding, ending on the numerically corresponding day of the calendar month that is one (1), two (2), three (3) or six (6) months after the commencement date of the Interest Period, as Borrower shall elect in accordance with SECTION 2.3 or SECTION 2.6(c) of this Loan Agreement; PROVIDED that (i) any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day UNLESS such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (ii) any Interest Period that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (i) above, end on the last Eurodollar Business Day of the calendar month in which the Interest Period terminates; and (iii) if the Interest Period for any Eurodollar Advance would otherwise end after the final maturity of all Advances (whether by the lapse of time or acceleration of the maturity or otherwise), as the case may be, under which such Eurodollar Advance is outstanding, such Interest Period shall end on the final maturity date of such Advance. "INVESTMENT" in any Person shall mean any investment, whether by means of share purchase, loan, advance, extension of credit, capital contribution or otherwise, in or to such Person, the guarantee of any Indebtedness of such Person, or the subordination of any claim against such Person to other Indebtedness of such Person; excluding, however, the amount of any Receivables owing from such Person and incurred in the ordinary course of such Person's business. "LIEN" shall mean any mortgage, deed of trust, pledge, security interest, encumbrance, lien, option, easement or charge of any kind (including any conditional sale or other title retention agreement, or any financing lease having substantially the same economic effect as any of the foregoing) upon or with respect to any assets or properties of a Person, arising by agreement or under any statute or law, or otherwise. "LOAN" shall mean the revolving credit loan made or to be made hereunder to Borrower by Bank pursuant to SECTION 2.1. "LOAN AGREEMENT" shall mean this Third Amended and Restated Revolving Credit Loan Agreement, as same may from time to time be amended, supplemented, renewed and/or restated. "LOAN PAPERS" shall mean (i) this Loan Agreement, (ii) the Prior Loan Agreement, (iii) the Note, (iv) any Letters of Credit or Letter of Credit Applications, (v) the Security Documents, and (vi) any and all other agreements or instruments now existing or hereafter executed and delivered by Borrower or any Subsidiary or any other Person in connection with, or as security for the payment or performance of any or all of the Note, the Obligation, the Letters of Credit or this Loan Agreement, as such agreements and instruments may be amended, supplemented, renewed, extended and/or restated from time to time. "NOTE" shall have the meaning assigned to that term in SECTION 2.2 hereof. "OBLIGATION" shall mean all present and future indebtedness, obligations, and liabilities of Borrower to Bank, and all renewals and extensions thereof, or any part thereof, arising pursuant to this Loan Agreement, any Letter of Credit, any Letter of Credit Application, or represented by the Note, and all interest accruing thereon, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, joint, several or joint and several; together with all indebtedness, obligations and liabilities of Borrower evidenced or arising pursuant to any of the other Loan Papers, and all renewals and extensions thereof, or a part thereof. "OFFICER'S CERTIFICATE" shall mean a certificate in the form of EXHIBIT "B" attached hereto, signed by the President or principal financial officer of Borrower and each Subsidiary which certificate shall: (A) state that, at the time such certificate is executed and as of the end of the fiscal period for which such certificate is delivered, to the best of his knowledge, Borrower (i) has fulfilled each and every covenant and condition contained in the Note and the other Loan Papers including this Loan Agreement and (ii) is not in default in the performance, observance or fulfillment of any of the covenants and conditions of the Note or the Loan Papers, including , without limitation, this Loan Agreement or, if Borrower shall be in default, specifying all such defaults and the nature and status thereof and (B) contain a computation of and showing compliance with each of the financial ratios specified in SECTION 7 of this Loan Agreement. "PERSON" shall mean and include an individual, partnership, corporation, trust, incorporated association, joint venture, union, business association or firm, trustee, or a government or any agency or political subdivision thereof, or any other form of entity. "POTENTIAL DEFAULT" shall mean any event which, with the giving of notice or lapse of time or both, would constitute an Event of Default. "PRIME RATE" shall mean the variable rate of interest per annum then most recently announced or published by Bank as its Base Rate or Prime Interest Rate (which rate may not be the lowest rate charged by Bank on similar loans). "RECEIVABLES" shall mean all present and future (i) accounts, receivables, contract rights, chattel paper, documents, tax refunds, or payments of, or owned by, Borrower or any Subsidiary; (ii) insurance proceeds, patent rights, license rights, rights to refunds or indemnification, and other general intangibles of every kind or nature of, or owned by, Borrower or any Subsidiary; and (iii) all forms of obligations whatsoever owing to Borrower or any Subsidiary together with all instruments and all documents of title representing any of the foregoing and all right, title, and interest in, and all securities and guaranties with respect to, each Receivable. "ROLLOVER NOTICE" shall have the meaning set forth in SECTION 2.6(c). "SECURITY DOCUMENTS" shall mean the Borrower Security Agreement and the Subsidiaries Security Agreement. "SHAREHOLDERS" shall mean, at any specific date, the owners of any of the capital stock of Borrower at such date. "SUBSIDIARY" shall mean, with respect to any Person (herein referred to as the "PARENT"), any corporation, association or other business entity of which more than 50% of the securities or other ownership interests having ordinary voting power is, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "SUBSIDIARIES SECURITY AGREEMENT" shall mean the Subsidiaries Security Agreement dated as of December 31, 1997 executed by each Granting Subsidiary in favor of the Bank in the form attached as EXHIBIT "F", as the same may be amended or otherwise modified from time to time. "TERMINATION DATE" shall mean the earlier of: (i) April 12, 1999, or (ii) the date the Revolving Credit Commitment is terminated in accordance with SECTION 8.2 hereof. 1.2 ACCOUNTING TERMS. As used in this Loan Agreement, the Note, and in any certificate, report or other document made or delivered pursuant to this Loan Agreement, accounting terms not defined in SECTION 1.1 hereof, and accounting terms partly defined in SECTION 1.1 hereof to the extent not defined, shall have the respective meanings given to them under Generally Accepted Accounting Principles and all references to balance sheets or other financial statements shall mean such statements, prepared in accordance with Generally Accepted Accounting Principles. SECTION 2 REVOLVING CREDIT COMMITMENT; AMOUNT AND TERMS OF REVOLVING CREDIT LOAN 2.1 THE REVOLVING CREDIT LOAN AND REVOLVING CREDIT COMMITMENT. Subject to the terms and conditions of this Loan Agreement, Bank agrees to extend to Borrower, from the date hereof through the Termination Date (the "AVAILABILITY PERIOD") a revolving line of credit which shall not exceed at any one time outstanding $15,000,000.00 (the "REVOLVING CREDIT COMMITMENT"). Within the limits of this SECTION 2.1, during the Availability Period, Borrower may borrow, prepay and reborrow under this SECTION 2.1. Each advance hereunder is called an "ADVANCE" and all advances hereunder are collectively referred to as the "LOAN." 2.2 NOTE. From and after the date hereof, the Loan shall be evidenced by a renewal promissory note made by Borrower, in the form attached hereto as EXHIBIT "A" (together with any and all renewals, extensions for any period, rearrangements or increases thereof, and notes given in substitution therefor, the "NOTE") representing the obligation of Borrower to pay the lesser of: (i) the Revolving Credit Commitment or (ii) the aggregate unpaid principal amount of the Loan, with interest thereon as prescribed in the Note, which note is given in renewal and extension of a promissory note, dated April 12, 1997, in the original principal amount of $15,000,000 executed by Borrower and payable to the order of Bank. The unpaid principal of the Note shall bear interest at a rate per annum which shall be equal to the lesser of (a) at the election of Borrower as specified in the request for an Advance given in accordance with SECTION 2.3 below, (i) the Prime Rate as in effect from day to day, or (ii) the Eurodollar Rate plus one and three-quarters of one percent (1.75%), or (b) the Maximum Rate (as defined in the Note). All past due principal of, and to the extent permitted by applicable law, interest on, the Note shall bear interest until paid at an annual rate equal to the lesser of (i) (a) for Prime Rate Advances, the Prime Rate from time to time in effect, plus two percent (2%), (b) for Eurodollar Advances, the Eurodollar Rate applicable to such Advances plus four percent (4%), or (ii) the Maximum Rate (such rate being referred to hereinafter as the "DEFAULT RATE"). The date and amount of each Advance made by Bank, and each payment of principal and interest, shall be maintained by Bank in its records, and the aggregate unpaid principal amount shown on such records shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Note. The failure to record any such amount on such records shall not, however, limit or otherwise affect the obligations of Borrower hereunder or under the Note to repay the principal amount of the Advance together with all interest accruing thereon. 2.3 PROCEDURE FOR ADVANCES. Borrower shall give Bank prior verbal notice on or before 12:00 noon (Dallas, Texas time) on any day a Prime Rate Advance is requested. Not later than 2:00 p.m., Dallas, Texas time, on the date specified, subject to the terms and conditions of this Loan Agreement, Bank shall make available to Borrower at Bank's offices in Dallas, Texas, the amount of such requested Prime Rate Advance in immediately available funds. Borrower shall give Bank prior written notice on or before 12:00 noon (Dallas, Texas time) at least two Eurodollar Business Days prior to the day a Eurodollar Advance is requested. The notice shall specify the requested amount of the Advance, the duration of the Interest Period applicable to the Advance, and the requested date of the Advance, which shall be a Eurodollar Business Day. Not later than 2:00 p.m., Dallas, Texas time, on the date specified, subject to the terms and conditions of this Loan Agreement, Bank shall make available to Borrower at Bank's offices in Dallas, Texas, the amount of such requested Eurodollar Advance in immediately available funds. Notice of a requested Eurodollar Advance shall be irrevocable upon receipt thereof by Bank. 2.4 COMMITMENT FEES. Borrower agrees to pay Bank a commitment fee of two-tenths of one percent (0.20%) per annum on the daily unused portion of the Revolving Credit Commitment. Such commitment fee shall be payable quarterly in arrears on the last day of each June, September, December and March, commencing March 31, 1998 (which payment shall cover the period from January 1, 1998 through March 31, 1998), and continuing regularly thereafter so long as the Revolving Credit Commitment is in effect, and shall also be payable at the maturity of the Note and upon the date of prepayment in full of the Note if the Revolving Credit Commitment is thereupon terminated. Borrower acknowledges and agrees that the commitment fees payable hereunder are bona fide commitment fees and are intended as reasonable compensation to Bank for committing to make funds available to Borrower as described herein and for no other purpose. 2.5 LETTERS OF CREDIT. At the request of Borrower, and upon execution of letter of credit documentation satisfactory to Bank (including, without limitation, an Application and Agreement for Commercial Letter of Credit [for documentary letters of credit] or Standby Letter of Credit Application and Agreement [for standby letters of credit] for each such letter of credit in the form attached hereto as EXHIBIT "D") (the "APPLICATION"), Bank shall issue documentary or standby letters of credit ("LETTERS OF CREDIT") from time to time for the account of Borrower in a face amount not exceeding in the aggregate at any time outstanding the lesser of (a) $5,000,000, or (b) $15,000,000 MINUS the aggregate outstanding principal balance of all Advances. The Revolving Credit Commitment shall at all times be reduced by the aggregate face amount of outstanding Letters of Credit. The Letters of Credit shall be on terms mutually acceptable to Bank and Borrower and no Letter of Credit shall have an expiration date later than one hundred eighty days after the Termination Date. Any amount paid by Bank on any Letter of Credit which is not immediately reimbursed by Borrower shall be treated as an Advance without the necessity for any request by Borrower. Borrower shall pay to Bank, at the time of issuance of each documentary Letter of Credit, a fee equal to one and one-quarter of one percent (1.25%) per annum times the face amount of the Letter of Credit for the period the Letter of Credit is to be outstanding. Borrower shall pay to Bank, at the time of issuance of each standby Letter of Credit, a fee equal to two percent (2%) per annum times the face amount of the Letter of Credit for the period the Letter of Credit is to be outstanding. In connection with the issuance of any Letters of Credit, Borrower shall pay to Bank its standard fees and charges, including the standard fees and charges provided for in the Application. The obligations and indebtedness of Borrower to Bank under this SECTION 2.5, the Letters of Credit, and the Applications, shall be part of the Obligations. 2.6 EURODOLLAR ADVANCES: CONVERSION, ROLLOVER, MINIMUM AMOUNTS, ETC. (a) CONVERSION FROM PRIME RATE ADVANCES. Provided that no Event of Default shall have occurred and be continuing, upon three (3) Eurodollar Business Days' prior written notice from Borrower to Bank specifying the commencement date and length of the applicable Interest Period selected by Borrower, Borrower may convert an amount equal to $500,000 or an integral multiple of $50,000 in excess thereof, of any outstanding Prime Rate Advance into a Eurodollar Advance. (b) CONVERSION FROM EURODOLLAR ADVANCES. Unless Bank shall have actually received written notice from Borrower requesting otherwise, delivered in accordance with SECTION 2.6(c) below, at least three (3) Eurodollar Business Days prior to the Final Interest Payment Date with respect to a Eurodollar Advance, then on such Final Interest Payment Date the outstanding Eurodollar Advance shall be converted to a Prime Rate Advance. (c) ROLLOVER. Provided that no Event of Default shall have occurred and be continuing, at least three (3) Eurodollar Business Days prior to the Final Interest Payment Date of each Eurodollar Advance, Borrower may give to Bank written notice that all or any portion of such Eurodollar Advance shall continue as a Eurodollar Advance upon the expiration of the then-current Interest Period (the "ROLLOVER NOTICE"). Such Rollover Notice shall also specify the length of the succeeding Interest Period selected by Borrower with respect thereto. Each Rollover Notice shall be effective and irrevocable upon receipt thereof by Bank. If the required Rollover Notice shall not have been timely received by Bank, then Borrower shall be deemed to have elected to have such Eurodollar Advance be a Prime Rate Advance as provided in SECTION 2.6(b). (d) MINIMUM AMOUNTS AND NUMBER OF EURODOLLAR ADVANCES. Notwithstanding any provision to the contrary contained herein, (i) each Eurodollar Advance shall be in an amount equal to $500,000, or an integral multiple of $50,000 in excess thereof, and (ii) there shall not exist or be outstanding at any time more than an aggregate of five (5) Eurodollar Advances. (e) LENDING OFFICE. Bank may cause any Eurodollar Advance to be made by its principal office or by a foreign or domestic subsidiary, affiliate, branch or correspondent. Notwithstanding the right of Bank to fund all or any portion of a Eurodollar Advance in any manner that it deems appropriate, Bank shall, regardless of the actual means of funding, be deemed to have funded the Eurodollar Advance in accordance with the interest option from time to time selected by Borrower. 2.7 PROTECTION OF YIELD. (a) INCREASED COSTS, ETC. Subject to SECTION 9.8, if at any time, and from time to time, Bank determines that the adoption, modification or implementation of, or compliance with, any applicable law, rule or regulation regarding taxation, required levels of reserves, deposits, insurance or capital (including any allocation of capital requirements or conditions), or similar requirements applicable to Bank, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation, administration or compliance of or with any of such requirements, has or would have the effect of (i) increasing Bank's costs relating to the Loan, the Revolving Credit Commitment, or any part thereof or (ii) reducing the yield or rate of return of Bank on the Loan, the Revolving Credit Commitment, or any part thereof, to a level below that which Bank could have achieved but for the adoption, modification or implementation of, or compliance with, any such requirements, Borrower shall, within ten (10) days after any request by Bank, pay to Bank such additional amounts as (in Bank's sole judgment, after good faith and reasonable computation) will compensate Bank for such increase in costs or reduction in yield or rate of return of Bank. No failure by Bank to demand immediately payment of any additional amounts payable under this SECTION 2.7(a) shall constitute a waiver of Bank's right to demand payment of such amounts at any subsequent time. If Bank requests that Borrower pay additional amounts pursuant to this SECTION 2.7(a), Bank shall submit to Borrower a certificate, executed by Bank, as to such additional amounts, which certificate shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such claim for additional amounts, the additional amounts to be paid to Bank hereunder, and the method by which such amounts were determined. In determining such amounts, Bank may use any reasonable averaging and attribution methods. Any portion of the additional amounts required to be paid under this SECTION 2.7(a) remaining unpaid ten (10) days after the due date thereof shall bear interest at the Default Rate. (b) SUBSTITUTE INTEREST RATE. If, on or before any date on which a Eurodollar Rate is to be determined hereunder, Bank determines that deposits of United States Dollars in the appropriate amount for the appropriate period are not being offered in the interbank Eurodollar market for United States Dollars, or that by reason of circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, then Bank shall promptly give notice of such determination to Borrower and such determination shall be conclusive and binding. During the ten (10) days next following the giving of such notice, Borrower and Bank shall negotiate in good faith in order to arrive at a mutually satisfactory alternative interest rate (the "SUBSTITUTE RATE") to replace the rate otherwise applicable to the pertinent Eurodollar Advances of Borrower during the applicable Interest Period. If, within such ten (10) day period, Borrower and Bank agree in writing upon a Substitute Rate, such rate shall be effective from the first day of such Interest Period. If Bank and Borrower fail to agree upon a Substitute Rate within such ten (10) day period, the Substitute Rate applicable to the pertinent Eurodollar Advance during such Interest Period shall be the interest rate applicable to a Prime Rate Advance under SECTION 2.2. Bank shall inform Borrower of such rate as promptly as practicable, and, if requested by Borrower, Bank shall deliver to Borrower a statement reflecting the computations made in determining such Substitute Rate. (c) CHANGES IN LAW RENDERING LOAN UNLAWFUL. In the event that (i) any change in applicable law, treaty or regulation or the interpretation thereof (whether or not having the force of law) shall make it unlawful or impossible for Bank to make or continue to maintain all or any portion of a Eurodollar Advance contemplated hereunder, or (ii) any central bank or other fiscal, monetary or other authority having jurisdiction over Bank or all or any portion of a Eurodollar Advance shall request Bank in writing to comply with restrictions (whether or not having the force of law) which seek to prohibit Bank from making or continuing to maintain such a Eurodollar Advance, then Bank shall so notify Borrower, and Borrower shall, upon demand by Bank, either, at the option of Borrower, prepay such Eurodollar Advance or convert such Eurodollar Advance to a Prime Rate Advance in accordance with SECTION 2.6(b) hereof, except that, subject to the provisions of SECTION 2.7 hereof, such prepayment or conversion need not be effected on a Final Interest Payment Date, and upon such demand or upon notice by Bank, the obligation of Bank to make such Eurodollar Advance hereunder shall terminate. Failure to prepay any such portion of a Eurodollar Advance shall be deemed an election to convert to a Prime Rate Advance. Such demand or notice shall be accompanied by a certificate of Bank provided to Borrower as to the reasons why it is no longer feasible for Bank to make or continue to maintain such Eurodollar Advance hereunder and such certificate shall, in the absence of manifest error in calculation, be conclusive and binding. (d) EURODOLLAR CONSEQUENTIAL LOSS. Borrower agrees to indemnify and hold harmless Bank from and against any Eurodollar Consequential Loss. Borrower shall pay, within five (5) Business Days following demand therefor, the amount of any Eurodollar Consequential Loss incurred by Bank. (e) REASONABLE EFFORTS. Borrower and Bank will use all reasonable efforts to avoid or to minimize the obligation of Borrower to pay any amounts under this SECTION 2.7 or the subjecting of any payment by Borrower to any withholding tax, and Borrower will, as promptly as practical, notify Bank, and Bank will, as promptly as practicable, notify Borrower, of the existence of any event which will require the payment by Borrower of any such amounts or the subjecting of any payment by Borrower to any withholding tax; PROVIDED, HOWEVER, that any failure to give such prompt notification shall not in any way affect the rights of Bank or the obligations of Borrower hereunder. SECTION 3 PAYMENTS; COMPUTATIONS; USE OF PROCEEDS 3.1 OPTIONAL PREPAYMENTS. Borrower shall have the right, from time to time, to prepay the Note, in whole or in part, without premium or penalty, upon the payment of accrued interest on the amount prepaid to and including the date of payment. Prepayments of the Note shall not reduce the Revolving Credit Commitment. 3.2 PAYMENTS. Principal and interest shall be due and payable as provided in the Note and this Loan Agreement. All payments (including prepayments) by Borrower on account of principal, interest, and fees hereunder shall be made in immediately available funds. All such payments shall be made to Bank at its principal office in Dallas, not later than 12:00 noon, Dallas, Texas time, on the date due and funds received after that hour shall be deemed to have been received by Bank on the next following Business Day. If any payment is scheduled to become due and payable on a day which is not a Business Day, such payment shall instead become due and payable on the immediately following Business Day and interest thereon shall be payable at the then applicable rate during such extension. 3.3 COMPUTATION OF INTEREST AND FEES. Interest on the Note and the fees shall be calculated on the basis of a year of 360 days, as the case may be, for the actual number of days (including the first but excluding the last) elapsed. Any change in the interest rate on the Note resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate becomes effective. 3.4 USE OF PROCEEDS. Borrower represents, warrants and covenants that it is not engaged and shall not engage in the business of extending credit for the purposes of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, and no part of the proceeds of the Loan shall be used to purchase or carry any such margin stock or to reduce or retire any indebtedness incurred for any such purposes. If requested by Bank, Borrower will furnish to Bank a statement in conformity with the requirements of the Federal Reserve Form U-1 referred to in said Regulation U to the foregoing effect. No part of the proceeds of the Loan will be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X of said Board of Governors. Portions of the Loan will be advanced from time to time by Borrower to one or more of its Subsidiaries. SECTION 4 CONDITIONS PRECEDENT TO FUNDING LOANS 4.1 CONDITIONS PRECEDENT TO FUNDING INITIAL ADVANCE. The obligation of Bank to fund the initial Advance under this Loan Agreement or issue the initial Letter of Credit shall be subject to the fulfillment of the following conditions precedent in a manner satisfactory to the Bank on or before date of such Advance: (a) Bank shall have received the following: (i) The duly executed Note; (ii) A certificate signed by a duly authorized officer of Borrower, stating that, to the best knowledge and belief of such officer, after reasonable and due investigation and review of matters pertinent to the subject matter of such certificate): (1) All of the representations and warranties contained in SECTION 5 hereof, and the other Loan Papers are true and correct as of the date of the Advance; and (2) No event has occurred and is continuing which constitutes an Event of Default or Potential Default. (iii) A signed certificate of the Secretary of Borrower which shall certify the names of the officers of Borrower authorized to sign each of the Loan Papers and the other documents or certificates to be delivered pursuant to the Loan Papers by Borrower, together with the true signatures of each such officers. Bank may conclusively rely on such certificate until it shall receive a further certificate of the Secretary of Borrower canceling or amending the prior certificate and submitting the signatures of the officers named in such further certificate; (iv) Resolutions of Borrower approving the execution, delivery and performance of this Loan Agreement, the Note, and the other Loan Papers, as appropriate, and the transactions contemplated herein and therein, duly adopted by Borrower's Board of Directors and accompanied by a certificate of the Secretary of Borrower stating that such resolutions are true and correct, have not been altered or repealed and are in full force and effect; (v) A duly executed Officer's Certificate; (vi) The Security Documents, each duly executed; and (vii) Such other information and documents as may be reasonably required by Bank. (b) All corporate and legal proceedings and all documents required to be completed and executed by the provisions of, and all instruments to be executed in connection with the transactions contemplated by, this Loan Agreement shall be in form and substance satisfactory to Bank and its counsel. (c) The representations and warranties of Borrower contained in this Loan Agreement shall be true and correct in all material respects when made; Borrower shall have complied with all of the terms and conditions of this Loan Agreement to be performed or observed by it and no Event of Default or Potential Default shall be in existence on the date the Advance is made or after giving effect to the Advance, and Bank shall have received a certificate of Borrower, dated the date the Advance is made, to the foregoing effect. 4.2 CONDITIONS TO ANY SUBSEQUENT ADVANCES. In addition to the conditions precedent specified in SECTION 4.1 of this Loan Agreement, the obligation of Bank to make any subsequent Advance shall also be subject to the fulfillment of the following conditions precedent on or before the date of such Advance in a manner satisfactory to Bank: (i) the representations and warranties of Borrower contained in this Loan Agreement shall be true and correct in all material respects when made and as of the date of such Advance with the same effect as if made on and as of such date, (ii) Borrower shall have complied with all of the terms and conditions of this Loan Agreement to be performed or observed by it, and (iii) no Event of Default or Potential Default shall be in existence on such date or after giving effect to the Advance to be made on such date. 4.3 EFFECT OF REQUEST FOR ANY SUBSEQUENT ADVANCE. Any request by Borrower for a subsequent Advance shall be deemed to be a representation and warranty that the matters set forth in SECTION 4.2 hereof are true and correct as of the date of such request and the date of such Advance. SECTION 5 REPRESENTATIONS AND WARRANTIES In order to induce Bank to enter into this Loan Agreement and to make the Loan and issue the Letters of Credit, Borrower hereby represents and warrants to and agrees with Bank that: 5.1 ORGANIZATION AND GOOD STANDING. Borrower and each Subsidiary is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to carry on its business as presently conducted and to own or hold under lease its properties; Borrower and each Subsidiary is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which the failure to so qualify would have an adverse material effect on either the Borrower or such Subsidiary; and Borrower has full corporate power and authority to execute and deliver the Loan Papers to which it is a party, and to perform its obligations thereunder. 5.2 AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Note and the other Loan Papers to which Borrower is a party have been duly authorized and have been or will be duly executed and delivered by Borrower and each such Subsidiary, as applicable, and constitute or will constitute, when executed and delivered, the legal, valid and binding obligations of Borrower and such Subsidiary, as applicable, enforceable against Borrower and such Subsidiary in accordance with their respective terms (except to the extent that enforcement thereof may be limited by any applicable bankruptcy, reorganization, moratorium or similar laws affecting creditors' rights generally or general equitable principles), 5.3 NO CONFLICTS. The execution, delivery and performance by Borrower of the Note and the other Loan Papers to which it is a party are not and will not be in violation of the certificate of incorporation or by-laws of Borrower, are not and will not be in violation of or conflict with any material law or governmental rule or regulation, judgment, writ, order, injunction, award or decree of any court, arbitrator, administrative agency or other governmental authority applicable to Borrower; are not and will not conflict or be inconsistent with, or result in any breach of, any of the terms, covenants, conditions or provisions of or constitute a material default under any indenture, mortgage, contract, deed of trust, debenture, agreement or other undertaking or instrument to which Borrower or any Subsidiary is a party or by which any of its or their material assets may be bound or affected; and do not and will not result in the creation or imposition of (or obligation to create or impose) any Lien on any of its or their material assets pursuant to the provisions of any such indenture, mortgage, contract, deed of trust, debenture, agreement or other undertaking or instrument. 5.4 NO CONSENTS. The execution, delivery and performance by Borrower of the Note and other Loan Papers to which it is a party do not and will not require any consent of any other Person or any consent, license, permit, authorization or other approval of, any giving of notice to, any exemption by, any registration, recording, publication, declaration or filing with, or any taking of any other action in respect of, any court, arbitrator, administrative agency or other Governmental Authority. 5.5 PAYMENT OF TAXES. Borrower and each Subsidiary have filed all material federal, state and other tax returns and reports required to be filed, and have paid all taxes as shown on said returns and reports and all assessments received by it to the extent that such taxes and assessments have become due (except to the extent that the same are being contested in good faith by appropriate proceedings diligently prosecuted and as to which adequate reserves have been set aside in conformity with Generally Accepted Accounting Principles). 5.6 LITIGATION. There is no action, suit, investigation or proceeding by or before any court, arbitrator, administrative agency or other governmental authority pending or threatened (a) which involves any of the transactions contemplated presently by this Loan Agreement which, if adversely determined, would materially and adversely affect the present financial condition, business, or operations of Borrower or any Subsidiary, or (b) against or affecting Borrower or any Subsidiary which, if adversely determined, would materially adversely affect the present financial condition, business, or operations of Borrower or any Subsidiary. 5.7 NO DEFAULT. Neither the Borrower nor any Subsidiary is in default under any material order, writ, injunction, award or decree of any court, arbitrator, administrative agency or other governmental authority binding upon or affecting it or by which any of its assets may be bound or affected, or under any agreement or other undertaking or instrument to which it is a party or by which it is bound (including, without limitation, this Loan Agreement), and nothing has occurred which would materially and adversely affect the ability of Borrower or any Subsidiary to carry on its business or perform its obligations under any such order, writ, injunction, award, decree, agreement or other undertaking or instrument. 5.8 PROPERTIES. The Borrower has good and defensible title to all of the assets reflected as owned in the financial statements referred to in SECTION 5.9 hereof. There are no Liens on any of the Collateral, except for the Liens otherwise permitted pursuant to SECTION 7.3 hereof. 5.9 FINANCIAL STATEMENTS AND CONDITION. Borrower has delivered to Bank copies of the consolidated balance sheet of Borrower and its Consolidated Subsidiaries as of December 31, 1997, and the related consolidated statements of income, stockholders equity and changes in financial position for the year ending such date, certified by Ernst & Young L.L.P., independent certified public accountants; such financial statements are true and correct, fairly present the financial condition of Borrower and its Consolidated Subsidiaries as of such date and there has been no material change in Borrower's financial condition since such date. 5.10 SUBSIDIARY. Borrower presently has no Subsidiaries other than Optical Data Systems, Texas, Inc., Optical Data Systems, GmbH, Optical Data Systems Ltd., Optical Data Systems SARL, Optical Data Systems Ltda., ODS Ltd., Optical Data Systems (Barbados) Ltd. and Optical Data Systems sdn.bhd. As of the date hereof, Optical Data Systems, Texas, Inc. is the only Granting Subsidiary. 5.11 EVENT OF DEFAULT. No Event of Default or Potential Default has occurred and is continuing. 5.12 LOCATION OF ASSETS. All assets of Borrower and each Subsidiary are located at the addresses listed on EXHIBIT "C" attached hereto and made a part hereof and at other locations disclosed in Borrower's annual reports, copies of which have been delivered to the Bank prior to the date hereof, and without the prior written consent of Bank, no asset of Borrower or any Subsidiary will be kept at any other address. 5.13 COMPLIANCE WITH LAWS. Borrower and its Subsidiaries are in compliance with all material laws, rules, regulations, orders and decrees which are applicable to Borrower or any Subsidiary, or its or their properties. 5.14 LEASES. Neither Borrower nor any Subsidiary is the lessee of any material real or personal property except as has been disclosed in writing to Bank. 5.15 SURVIVAL OF REPRESENTATIONS. All representations and warranties by Borrower herein shall survive delivery of the Note and the making of the Loan, and any investigation at any time made by or on behalf of Bank shall not diminish Bank's right to rely thereon. SECTION 6 AFFIRMATIVE COVENANTS Borrower covenants and agrees that (unless Bank otherwise consents in writing) so long as any part of the Revolving Credit Commitment shall be in effect or any Letter of Credit or any portion of the Obligation shall be outstanding, Borrower will, and where applicable will cause each of its Subsidiaries to: 6.1 EXISTENCE; COMPLIANCE WITH LAWS; ETC. (a) Preserve and keep in full force and effect its existence, and all material licenses, privileges, franchises, permits and other rights of any kind which are necessary to the proper conduct of its business, (b) comply with all applicable, material laws and duly observe all valid requirements of Governmental Authorities, (c) continue to conduct and operate its business, substantially as currently conducted and operated, and (d) maintain, preserve and protect such of its material properties, whether owned or leased, which are necessary or useful in its business, and keep the same in satisfactory operating condition and from time to time make, or cause to be made, all needed repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times and will comply with the material provisions of all leases to which it is a party or under which it occupies property so as to prevent any material loss or forfeiture thereunder. 6.2 PAYMENT OF CHARGES. File all material federal, state and other tax returns and reports which are required by law to be filed, and pay and discharge promptly all taxes as shown on said returns and reports and all assessments received by it and all governmental charges and other indebtedness to third parties imposed upon its income and its properties to the extent that such taxes, assessments, and other charges and indebtedness become due, except to the extent the validity or amount of such are being contested in good faith by appropriate proceedings diligently prosecuted and as to which adequate reserves have been set aside in conformity with Generally Accepted Accounting Principles. 6.3 INSURANCE. Keep all insurable property, real and personal, adequately insured at all times in such amounts and against such risks as are customary for Persons in similar businesses operating in the same vicinity, specifically to include a policy of hazard, casualty, fire and extended coverage insurance covering all assets, business interruption insurance, liability insurance and worker's compensation insurance, in every case under a policy with a financially sound and reputable insurance company and only with such deductibles as are customary. 6.4 RIGHTS OF INSPECTION. Permit any representative of Bank, upon reasonable notice, to visit and inspect any of its properties, books and records and to take copies thereof and to discuss its affairs with its officers and accountants, all at such times during normal business hours, in such detail, and as often as Bank may reasonably request and Borrower will pay the reasonable fees and disbursements of any accountants or other agents of Bank for the foregoing purposes. 6.5 FINANCIAL STATEMENTS, REPORTS AND INFORMATION. Furnish to Bank: (a) As soon as practicable and in any event within one hundred twenty (120) days after the end of each fiscal year of Borrower, consolidated and consolidating balance sheets of Borrower and its Consolidated Subsidiaries as at such date, and the statements of operations and retained earnings and of changes in financial position for the year then ended, all in reasonable detail, prepared in conformity with Generally Accepted Accounting Principles, the statements to be accompanied by an unqualified opinion of independent certified public accountants acceptable to Bank, which opinion shall be to the effect that such statements have been prepared in accordance with Generally Accepted Accounting Principles consistently followed throughout the period indicated, except for such changes in such principles with which the independent public accountants shall have concurred, and which shall also state that no Event of Default or Potential Default has come to the knowledge of such accountants, or if such is not the case, the details of such Event of Default or Potential Default, and the statements to be certified by the President or principal financial officer of Borrower. (b) As soon as practicable and in any event within thirty (30) days after the last day of each fiscal quarter of Borrower the consolidated and consolidating balance sheets of Borrower and its Consolidated Subsidiaries as at such date and the related statements of operations and retained earnings, and a statement of changes in financial position (including statement of sources and uses of funds) for the elapsed portion of the fiscal year of Borrower ended with the last day of such month, all in reasonable detail prepared in conformity with Generally Accepted Accounting Principles (subject to routine audit and normal year-end adjustments) and certified by the President or principal financial officer of Borrower. (c) Concurrently with the delivery of each of the financial statements of Borrower and its Consolidated Subsidiaries pursuant to paragraphs (a) and (b) above, an Officer's Certificate, signed by the President or principal financial officer of Borrower and each Subsidiary which certificate shall: (A) state that to the best of his knowledge, Borrower has fulfilled each and every covenant and condition contained in the Note and the Loan Papers including this Loan Agreement, and at the end of such fiscal period is not in default in the performance, observance or fulfillment of any of the covenants and conditions of the Note or the Loan Papers, including this Loan Agreement, or, if Borrower shall be in default, specifying all such defaults and the nature and status thereof; and (B) containing a computation of and showing compliance with each of the financial ratios specified in SECTION 7 of this Loan Agreement. (d) Promptly, after knowledge thereof, written notice of (i) the occurrence of any Event of Default or Potential Default or (ii) any action, suit, investigation or proceeding against Borrower or any Subsidiary, which, if adversely determined, would have a material adverse effect upon Borrower or (iii) the existence of any actual or potential liability of Borrower or any Subsidiary (direct or contingent) in excess of $500,000. (e) Promptly, such additional, reasonable financial and other information concerning the operation, financial condition, business, operations or property of Borrower as Bank may from time to time reasonably request. 6.6 PAYMENT OF EXPENSES AND TAXES. Borrower agrees to pay or reimburse Bank for all of its reasonable costs and expenses incurred in connection with the preparation, execution, consummation, amendment, modification or enforcement of the Note and the Loan Papers, including this Loan Agreement, including the reasonable fees and expenses of its counsel. 6.7 FURTHER ASSURANCES AND COLLATERAL MATTERS. (a) FURTHER ASSURANCE AND EXCEPTIONS TO PERFECTION. Borrower will, and will cause each Subsidiary to, execute and deliver such further documentation and take such further action as may be requested by the Bank to carry out the provisions and purposes of the Loan Papers and to create, preserve, and perfect the Liens of the Bank created pursuant to the Security Documents. (b) GRANTING SUBSIDIARY PLEDGE. Upon the creation or acquisition of any Granting Subsidiary, Borrower shall cause such Granting Subsidiary to execute and deliver a joinder agreement to the Subsidiaries Security Agreement, in substantially the form of EXHIBIT "G", and such other documentation as the Bank may request to cause such Granting Subsidiary to evidence, perfect, or otherwise implement the security for repayment of the Obligations contemplated by the Subsidiaries Security Agreement. SECTION 7 NEGATIVE COVENANTS Borrower covenants and agrees from and after the date of this Loan Agreement, that so long as any part of the Revolving Credit Commitment shall be in effect or any Letter of Credit or any portion of the Obligation shall be outstanding, without the prior written consent of Bank: 7.1 DISTRIBUTIONS. Borrower will not and will not permit any Subsidiary to make any distribution (other than dividends) to Shareholders. 7.2 INDEBTEDNESS. Borrower will not and will not permit any Subsidiary to, incur or permit to exist, Indebtedness in an aggregate amount greater than $1,000,000, excluding, however, (i) the Loan hereunder, (ii) loans from any Subsidiary to Borrower, (iii) loans from Borrower to any Subsidiary which would not violate the $5,000,000 limit set forth in SECTION 7.4, (iv) current accounts payable arising in the ordinary course of business, and (v) Indebtedness for current taxes not delinquent or for taxes being contested in good faith and by appropriate proceedings. 7.3 LIENS. Borrower will not and will not permit any Subsidiary to, create or permit to exist any Lien with respect to any of its properties or assets now owned or hereafter acquired, except (i) for current taxes not delinquent or for taxes being contested in good faith by appropriate proceedings, and (ii) Liens arising in the ordinary course of business for sums not due or sums being contested in good faith and by appropriate proceedings and not involving any deposits or advances or borrowed money or the deferred purchase price of property or services. 7.4 LOANS OR ADVANCES. Borrower will not and will not permit any Subsidiary to make or permit to exist any loans or advances to any other Person, except (i) the enforcement, in the ordinary course of collection, of instruments payable to it or to its order, (ii) in connection with Indebtedness owing to Bank, (iii) loans from any Subsidiary to Borrower, and (iv) loans from Borrower to any Subsidiary; provided, however, that all intercompany loans, advances, distributions or transfers or dispositions of assets from Borrower to its Subsidiaries shall not exceed $5,000,000 in aggregate amount during any calendar year, regardless of whether any of such loans, advances, distributions, transfers or dispositions have been repaid. 7.5 MERGERS, CONSOLIDATIONS, SALES. Borrower will not, and will not permit any Subsidiary to, be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or securities of any class of, or any partnership or joint venture interest in, any other Person or, except in the ordinary course of its business, sell, transfer, convey or lease its properties, rights, assets, or business or sell or assign (except to the Bank), with or without recourse, any receivables. 7.6 INVESTMENTS. Borrower will not, and will not permit any Subsidiary to, make or suffer to exist any Investment, except (i) Borrower's ownership of stock of Subsidiaries, (ii) Investments outstanding on the date hereof and disclosed to Bank, (iii) loans or advances permitted by SECTION 7.4 hereof, (iv) Investments in U.S. Government obligations or (iv) Investments in commercial paper and other short-term obligations having a credit quality rating equal to Aa or A1/P1 or better. 7.7 LINES OF BUSINESS. Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly engage in any business other than those in which it is presently engaged, or discontinue any of its existing lines of business or substantially alter its method of doing business. 7.8 AFFILIATE TRANSACTIONS. Borrower will not, and will not permit any of its Subsidiaries to, enter into any transaction with, or pay any management fees to, any Affiliate; provided, however, that Borrower and its Subsidiaries may enter into transactions with Affiliates upon terms not less favorable to Borrower and its Subsidiaries than would be obtainable at the time in comparable transactions of Borrower and its Subsidiaries in arms-length dealings with Persons other than Affiliates. 7.9 ISSUANCE OF SHARES. Borrower will not, and will not permit any of its Subsidiaries to, issue, sell or otherwise dispose of, any shares of its capital stock or other securities, or rights, warrants or options to purchase or acquire any shares of securities, except for any capital stock or other securities or rights, warrants or options to purchase or acquire any shares of securities granted in connection with the 1983 ODS Incentive Stock Option Plan, the 1987 ODS Incentive Stock Option Plan, the 1995 ODS Stock Option Plan, the 1995 ODS Non-Employee Directors Stock Option Plan, the 1997 ODS Employee Stock Purchase Plan or an employee stock option plan approved by the Bank in writing. 7.10 EXECUTIVE PERSONNEL. Borrower will not, and will not permit any Subsidiary to, substantially change its present executive or management personnel. 7.11 CHANGE IN OWNERSHIP. There will be no change in the existing control of either Borrower or any of its Subsidiaries (as used herein, "control" means ownership or control sufficient to control election or designation of executive management functions or the personnel performing such functions). Promptly upon receiving knowledge thereof (and in any event within three (3) days of first receiving such knowledge), Borrower shall notify Bank in writing of any change, or pending change, in the control of Borrower or any Subsidiary. At Bank's request at any time following receipt of such notice, Borrower agrees to prepay to Bank all of the Obligations in full. Such prepayment shall be made at or prior to the effective time of any such change, or upon demand by Bank in the event any such change has already become effective at the time of such notice. 7.12 CONSOLIDATED TANGIBLE NET WORTH. Borrower will not permit, as of the last day of any calendar quarter, the Consolidated Tangible Net Worth for such day to be less than the amount opposite the applicable date in the following chart:
Minimum Consolidated Date Tangible Net Worth December 31, 1997 $66,000,000 March 31, 1998 $63,000,000 June 30, 1998 $61,000,000 September 30, 1998 $60,300,000 December 31, 1998 and the last day of each fiscal quarter thereafter $59,500,000
7.13 CURRENT RATIO. Borrower will at all times maintain a Current Ratio of not less than 1.75 to 1.00. "Current Ratio" means, with respect to the Borrower and the Consolidated Subsidiaries, as of any date, the ratio of (a) all unencumbered cash (including cash held in deposit accounts that are not subject to a Lien) and unencumbered investments that can be converted to cash within 1 Business Day PLUS 80% of Eligible Receivables to (b) current liabilities (as set forth on a consolidated balance sheet prepared in conformity with Generally Accepted Accounting Principles) PLUS the portion of the outstanding principal amount of the Loan not included in current liabilities. 7.14 CASH BALANCE. Borrower will not at any time permit the balance of all unencumbered cash (including cash held in deposit accounts that are not subject to a Lien) and unencumbered investments that can be converted into cash within 1 Business Day, each as set forth on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in conformity with Generally Accepted Accounting Principles, to be less than $10,000,000. SECTION 8 EVENTS OF DEFAULT 8.1 NATURE OF EVENT. An Event of Default shall exist hereunder if any one or more of the following occurs and is continuing: (a) Borrower fails to make, when due, any payment or prepayment of (i) principal or interest on the Note or (ii) any fee or other Obligation; (b) Default is made in the due observance or performance by Borrower or any Subsidiary of any of the covenants or agreements contained in this Loan Agreement or in any other Security Instrument (other than those set forth in SECTIONS 7.12, 7.13 and 7.14 hereof); (c) Default is made in the observance or performance by Borrower of any of the covenants set forth in SECTIONS 7.12, 7.13 or 7.14 hereof and such default shall continue for thirty days; (d) Any Loan Paper shall in any way whatsoever cease to give Bank the rights, interests, remedies, powers or privileges intended to be created thereby; (e) Any statement, warranty or representation by or on behalf of Borrower or any Subsidiary contained in this Loan Agreement or in any other Loan Paper or any certificate furnished in connection with this Loan Agreement, proves to have been incorrect in any material respect as of the date made or deemed made; (f) Borrower or any Subsidiary shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall make a general assignment for the benefit of creditors; (g) Borrower or any Subsidiary shall commence any case, proceeding or other action seeking reorganization, rearrangement, adjustment, liquidation, dissolution or composition of it or him or its or his debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official of it or him or of all or any substantial part of its or his property; (h) Any case, proceeding or other action against Borrower or any Subsidiary shall be commenced seeking to have an order for relief entered against it as debtor, seeking reorganization, rearrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it or him which is not fully stayed within seven (7) Business Days after the entry thereof or (ii) remains undismissed for a period of sixty (60) days; (i) Any judgment against Borrower or any attachment or other levy against the property of Borrower with respect to a claim remains unpaid, unstayed on appeal, undischarged, not bonded or not dismissed for a period of thirty days; (j) The occurrence of a "default" or an "event of default" pursuant to the provisions of any Loan Paper; or (k) Default in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any other Indebtedness (which in the aggregate is in excess of the principal amount of $500,000) for borrowed money of Borrower and such default shall continue for a period of thirty (30) days or Borrower fails to perform or observe in any material manner any material provision contained in any such Indebtedness for borrowed money or any agreement securing or relating to such Indebtedness (or any other material breach or material default under such indebtedness or agreement occurs) if the effect of such failure to perform or observe such provision (or breach or default) is to permit such Indebtedness to become due prior to its stated maturity or prior to its regularly scheduled dates of payment and such failure continues for a period of thirty (30) days. 8.2 DEFAULT REMEDIES. If an Event of Default shall have occurred, Bank may, at its option, take one or more of the following actions: (a) declare the entire principal and all interest accrued on the Note to be due and payable, and such Note shall thereupon become, forthwith due and payable, without any presentment, demand, protest, notice of protest and nonpayment, notice of intention to accelerate, notice of acceleration, notice of default or other notice of any kind, all of which hereby are expressly waived, (b) terminate the Revolving Credit Commitment, (c) reduce any claim to judgment and/or (iv) without notice of default or demand, pursue and enforce any of Bank's rights and remedies under the Loan Papers, or otherwise provided under or pursuant to any applicable law or agreement; provided, however, that if an Event of Default specified in SECTION 8.1(g) or (h) above occurs, the Revolving Credit Commitment shall be immediately terminated and the Note shall become immediately due and payable, both as to principal and interest, without any action by Bank and without presentment, demand, protest, notice of protest and nonpayment, notice of intention to accelerate, notice of acceleration, notice of default or any other notice of any kind or character, all of which are hereby expressly waived; anything contained herein or in the Note to the contrary notwithstanding. If Borrower fails to pay when due the principal of, or interest on, the Note, Borrower shall pay to the holder of such Note, to the extent permitted by applicable law, such further amount as shall be sufficient to cover the cost and expense of collection, including (but not limited to) reasonable attorneys' fees. Bank shall be entitled to exercise any and all rights and remedies granted to it herein and in any of the other Loan Papers and under applicable law. SECTION 9 GENERAL PROVISIONS 9.1 AMENDMENT AND WAIVER. The provisions of the Note and the other Loan Papers, including this Loan Agreement, may not be amended, and the observance of any term thereof may not be waived, without the express written consent of Bank and Borrower and/or the other Person which is a party thereto. 9.2 DELAY NOT A WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of Bank in exercising any right, power or privilege under the Note or the Loan Papers, including this Loan Agreement, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in the Note and the Loan Papers, including this Loan Agreement, are cumulative and not exclusive of any rights or remedies provided by law, and shall include the right to set off against the Note and all of the other obligations of Borrower to Bank, all money or property in Bank's possession, held for, or owed to, Borrower. 9.3 NOTICES. Any notice hereunder to Borrower shall be in writing and, if mailed, shall be deemed to be given when sent by mail, return receipt requested, postage prepaid, and addressed to Borrower or any Subsidiary, as appropriate, at the following address: 1101 Arapaho Road Richardson, Texas 75081 Attention: Mr. Timothy Kinnear or at such other address as Borrower may designate by written notice. Any notice hereunder to Bank shall be in writing and, if mailed, shall be deemed to be given when sent by mail, return receipt requested, postage prepaid, and addressed to Bank at the address set forth opposite Bank's signature line or at such other address as Bank may designate by written notice to Borrower. 9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in the Note and in the other Loan Papers, including this Loan Agreement, and in any certificates delivered pursuant hereto and thereto shall survive the execution and delivery of this Loan Agreement and the Notes and the making of the Loans. 9.5 SUCCESSORS AND ASSIGNS. This Loan Agreement shall be binding upon and inure to the benefit of Borrower and Bank and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights under this Loan Agreement without the prior written consent of Bank. 9.6 COUNTERPARTS. This Loan Agreement may be executed in any number of separate counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. 9.7 GOVERNING LAW. THE NOTE AND THE OTHER LOAN PAPERS, INCLUDING THIS LOAN AGREEMENT, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS, AND SHALL BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS. 9.8 USURY. It is the intention of the parties hereto to conform strictly to usury laws applicable to Bank. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the United States of America and the State of Texas or any other jurisdiction whose laws may be mandatorily applicable, notwithstanding the other provisions of this Loan Agreement), then, in that event, notwithstanding anything to the contrary in the Note, this Loan Agreement or in any other Loan Paper or agreement entered into in connection with or as security for the Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to Bank that is contracted for, taken, reserved, charged or received under the Note, this Loan Agreement or under any of the other aforesaid Loan Papers or agreements or otherwise in connection with the Note, shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be credited by Bank on the principal amount of the Obligation (or, if the principal amount of the Obligation shall have been paid in full, refunded to Borrower); and (ii) in the event that the maturity of any or all Note is accelerated by reason of an election of Bank resulting from any Event of Default under this Loan Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to Bank may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Loan Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by Bank on the principal amount of the Obligation (or, if the principal amount of the Indebtedness shall have been paid in full, refunded by Bank to Borrower). To the extent that Article 5069-1.04, as amended, of the Texas Revised Civil Statutes is relevant to Bank for the purpose of determining the maximum lawful rate, Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Bank's right subsequently to change such method in accordance with applicable law. 9.9 NON-APPLICABILITY OF CHAPTER 346 OF THE TEXAS FINANCE CODE. The provisions of Chapter 346 of the Texas Finance Code shall not apply to the Loan or any of the Loan Papers. 9.10 DESCRIPTIVE HEADINGS. The captions in this Loan Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 9.11 TERM OF LOAN AGREEMENT. This Loan Agreement shall continue until the Note shall have been paid in full and until all other liabilities and obligations of Borrower under this Loan Agreement shall have been fully satisfied and the Revolving Credit Commitment and all Letters of Credit terminated in full. 9.12 CAPITAL ADEQUACY. If, after the date hereof, Bank shall have determined that either (i) the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, of (ii) compliance by Bank (or any lending office of Bank) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Bank's capital as a consequence of its obligations hereunder to a level below that which bank could have achieved but for such adoption, change or compliance (taking into consideration Bank's policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within ten (10) days after demand by Bank Borrower shall pay to Bank such additional amount of amounts as will compensate Bank for such reduction. Bank will promptly notify Borrower of any event of which it has actual knowledge, occurring after the date thereof, which will entitle Bank to compensation pursuant to this SECTION 9.12. A certificate of Bank claiming compensation under this SECTION 9.12 and setting forth the additional amount of amounts to be paid to it hereunder, together with the description of the manner in which such amounts have been calculated, shall be conclusive in the absence of manifest error. In determining such amount, Bank may use any reasonable averaging and attribution methods. 9.13 RENEWAL, EXTENSION, AMENDMENT AND RESTATEMENT. This Loan Agreement is entered into for purposes of amending and restating the Prior Loan Agreement. This Agreement shall not constitute a novation of all or any portion of the Borrower's indebtedness or obligations evidenced by or arising under or otherwise existing with respect to the Prior Loan Agreement or any instrument, agreement or other documents executed or delivered in connection therewith (herein collectively referred to as the "ORIGINAL LOAN PAPERS"). All Indebtedness and Obligations that are owed to the Bank under the Prior Loan Agreement or under any Original Loan Paper shall continue to exist in full force and effect. The Loan outstanding under the Prior Loan Agreement as of the date hereof shall be deemed to be, and shall be, the initial outstanding Loan under this Loan Agreement and shall be subject to this Loan Agreement. 9.14 NO ORAL AGREEMENTS. THIS AGREEMENT AND THE OTHER LOAN PAPERS AS WRITTEN REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. BORROWER: ODS NETWORKS, INC., formerly known as Optical Data Systems, Inc. By: /s/ Timothy W. Kinnear ------------------------------------------ Timothy W. Kinnear, Vice President and Treasurer BANK: Address: NATIONSBANK OF TEXAS, N.A. 901 Main Street, 7th Floor By: /s/ Frank Izzo P. O. Box 831000 ------------------------------- Dallas, Texas 75283-1000 Name: Frank Izzo ----------------------------- Title: Senior Vice President ---------------------------- LIST OF EXHIBITS EXHIBIT "A". . . . . . . . . . . . . . . . . . . . . . . . . . . . .Form of Note EXHIBIT "B". . . . . . . . . . . . . . . . . . . . . . . . Officer's Certificate EXHIBIT "C". . . . . . . . . . . . . . . . . . . . . . . . . .Location of Assets EXHIBIT "D". . . . . . . . . . . . . . . . . . . . . . . . . Form of Application EXHIBIT "E". . . . . . . . . . . . . . . . . Form of Borrower Security Agreement EXHIBIT "F". . . . . . . . . . . . . . . Form of Subsidiaries Security Agreement EXHIBIT "G". . . . . . . . . . . . . . . . . . . . . . Form of Joinder Agreement EXHIBIT "H". . . . . . . . . . . . . . . . . . . . . . . List of Account Debtors EXHIBIT "A" ODS NETWORKS, INC. Form of Note NINTH PROMISSORY NOTE $15,000,000.00 Dallas, Texas December 31, 1997 FOR VALUE RECEIVED, the undersigned, ODS NETWORKS, INC., formerly known as OPTICAL DATA SYSTEMS, INC., a Texas corporation ("Maker") hereby unconditionally promises to pay to the order of NATIONSBANK OF TEXAS, N.A., formerly known as NCNB Texas National Bank ("Payee"), at 901 Main Street, Dallas Texas, or at such other address given to Maker by Payee, the principal sum of Fifteen Million and No/100 Dollars ($15,000,000.00), or so much thereof as may be advanced prior to maturity, in lawful money of the United States of America, together with interest (calculated on the basis of a 360 day year), on the unpaid principal balance from day-to-day remaining, computed from the date of advance until maturity at the rate per annum which shall from day-to-day be equal to the lesser of (a) the Maximum Rate, or (b) at the election of the Maker as provided in the Loan Agreement, as amended (as hereinafter defined), (i) the Prime Rate (hereinafter defined) in effect from day-to-day, or (ii) the Eurodollar Rate (as defined in the Loan Agreement, as amended) plus one and three-quarters percent (1.75%). If at any time and from time to time the rate of interest calculated pursuant to item (b) above would exceed the Maximum Rate, thereby causing the interest payable hereon to be limited to the Maximum Rate, then any subsequent reduction in the rate specified in item (b) above shall not reduce the rate of interest hereon below the Maximum Rate until the total amount of interest accrued hereon from and after the date of the first advance hereunder equals the amount of interest which would have accrued hereon if the rate specified in item (b) above had at all times been in effect. The term "Maximum Rate," as used herein, shall mean, with respect to the holder hereof, the maximum nonusurious interest rate, if any, that at any time, or from time to time, may be contracted for, taken, reserved, charged, or received on the indebtedness evidenced by this Note. To the extent that Article 5069-1.04, Title 79, Texas Revised Civil Statutes, as amended, is relevant to any holder of this Note for the purposes of determining the Maximum Rate, the Payee hereby notifies Maker that the "applicable rate ceiling" shall be the "indicated rate ceiling" referred to in Article 5069-1.04(a)(1) from time to time in effect, as limited by Article 5069-1.04(b); provided, however, that to the extent permitted by applicable law, Payee reserves the right to change the "applicable rate ceiling" from time to time by further notice and disclosure to Maker; and, provided further, that the "Maximum Rate" for purposes of this Note shall not be limited to the applicable rate ceiling under Article 5069-1.04 if federal laws or other state laws now or hereafter in effect and applicable to this Note (and the interest contracted for, charged and collected hereunder) shall permit a higher rate of interest. As used herein, the term "Prime Rate" means the variable rate of interest established from time to time by Payee as its Prime Interest Rate or Base Rate, each change in the rate charged hereunder to become effective, without notice to Maker, on the effective date of each change in the Prime Rate. Maker acknowledges that Payee may, from time to time, extend credit to other borrowers at rates of interest varying from, and having no relationship to, such Prime Interest Rate or Base Rate. This Note has been executed and delivered pursuant to, and is subject to certain terms and conditions set forth in, that certain Third Amended and Restated Revolving Credit Loan Agreement (the "LOAN AGREEMENT") between Maker and Payee, dated as of December 31, 1997, and is the "Note" referred to in the Loan Agreement. The Holder of this Note shall be entitled to the benefits provided in the Loan Agreement. Reference is made to the Loan Agreement for a statement of (i) the obligation of Payee to advance funds hereunder, (ii) the events upon which the maturity of this Note may be accelerated, and (iii) Maker's right to cure certain events of default, if any, as more fully set forth therein. The entire unpaid principal balance of this Note shall be due and payable in full on April 12, 1999. Accrued and unpaid interest on this Note shall be due and payable on each Interest Payment Date (as defined in the Loan Agreement, as amended) and on the Termination Date (as defined in the Loan Agreement). All past due principal and, to the extent permitted by applicable law, interest upon this Note shall bear interest at the Default Rate (as defined in the Loan Agreement). Maker and each surety, endorser, guarantor and other party ever liable for payment of any sums of money payable on this Note, jointly and severally waive presentment, protest, notice of protest and non-payment, or other notice of default, notice of acceleration and intention to accelerate, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or any indulgences, or by any release or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes. No waiver by Payee of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise shall be considered a waiver of any other subsequent right or remedy of Payee; no delay or omission in the exercise or enforcement by Payee of any rights or remedies shall ever be construed as a waiver of any right or remedy of Payee; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Payee. Maker reserves the right to prepay the outstanding principal balance of this Note, in whole or in part, at any time and from time to time (subject to the provisions of the Loan Agreement, as amended, relating to the prepayment of Eurodollar Advances), without premium or penalty. Any such prepayment shall be made together with payment of interest accrued on the amount of principal being prepaid through the date of such prepayment, and shall be applied to the installments of principal due hereunder in the inverse order of maturity. Any prepayment of a Eurodollar Advance may be made only on the terms contained in the Loan Agreement (as amended). Regardless of any provision contained in this Note, the Loan Agreement or any other document executed or delivered in connection therewith, Payee shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on this Note, any amount in excess of the Maximum Rate, and, in the event that Payee ever receives, collects or applies as interest any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full, any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout such term; provided, that if this Note is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, if any, Payee or any holder hereof shall refund to Maker the amount of such excess, or credit the amount of such excess against the aggregate unpaid principal balance of all advances made by the Payee or any holder hereof under this Note at the time in question. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. In the event of a dispute involving this Note or any other instruments executed in connection herewith, the undersigned irrevocably agrees that venue for such dispute shall lie in any court of competent jurisdiction in Dallas County, Texas. This Note modifies in its entirety that certain Eighth Renewal Promissory Note dated April 12, 1997, executed by Maker and payable to the order of Payee in the original principal amount of $15,000,000.00, but does not extinguish the indebtedness evidenced thereby. The indebtedness evidenced hereby was originally evidenced by that certain Promissory Note dated April 30, 1990, executed by Maker and payable to the order of Payee in the original principal amount of $10,000,000.00. ODS NETWORKS, INC., formerly known as Optical Data Systems, Inc. By: /S/ TIMOTHY W. KINNEAR ------------------------------------ Timothy W. Kinnear, Vice President and Treasurer EXHIBIT "B" ODS NETWORKS, INC. Officer's Certificate In accordance with the terms and provisions of that certain Second Amended and Restated Revolving Credit Loan Agreement (as amended, the "LOAN AGREEMENT") dated as of April 12, 1997, between Optical Data Systems, Inc., now known as ODS Networks, Inc. ("BORROWER"), and NationsBank of Texas, N.A. ("BANK"), pursuant to which Bank has agreed to extend to Borrower a $15 million revolving line of credit, Borrower is in compliance as indicated below: A. Consolidated Tangible Net Worth of: ________________ Not less than: ________________ B. Total loans, advances, distributions, ________________ transfers or dispositions from ________________ Borrower to its Subsidiaries shall not exceed $5,000,000 in aggregate amount during any calendar year C. Current Ratio of: ________________ Not less than: 1.75 to 1.00 D. Cash Balance of: Not less than: ________________ $10,000,000 Pursuant to the Loan Agreement, the undersigned certifies that Borrower: 1. Has not formed any Subsidiaries without the approval of Bank. 2. Has not incurred any federal tax liens. 3. Has provided Bank with quarterly financial statements within 30 days of quarter-end and annual audited financial statements within 120 days of each fiscal year-end. 4. Has not had a significant change in ownership or control. I certify that Borrower's financial statements as of and for the period ended __________ were prepared in accordance with GAAP and present fairly the financial condition and the results of operations of Borrower for the period then ended. To the best of my knowledge, during the subject quarter Borrower has fulfilled each and every covenant and condition contained in the Loan Papers, and no Event of Default or Potential Default (as such terms are defined in the Loan Agreement) has occurred or is continuing except as noted below: BY: ____________________________________________ TITLE: _________________________________________ DATE: __________________________________________ FOR THE QUARTER/YEAR OF: _______________________ EXHIBIT "C" ODS NETWORKS, INC. Location of Assets U.S. OFFICES Irvine (Los Angeles), CA 714/476-7677 San Ramon (San Francisco), CA 510/831-4780 Denver, CO 303/220-5666 Tampa, FL 813/287-5063 Norcross (Atlanta), GA 770/279-5470 Ewa Beach (Honolulu), HI 808/833-8829 Arlington Heights (Chicago), IL 847/818-1868 Burlington (Boston), MA 617/270-0649 Troy (Detroit), MI 810/524-4046 Minnetonka (Minneapolis), MN 612/449-3008 Saint Louis, MO 314/957-6341 New York, NY 212/432-9261 Cleveland, OH 216/449-8001 Malvern (Philadelphia), PA 610/640-3149 Houston, TX 713/964-2770 Vienna (Washington; DC), VA 703/506-1167 Bellevue (Seattle), WA 206/451-4074 INTERNATIONAL OFFICES ASIA Kuala Lumpur, Malaysia - 011.60.3.206.6888 Yongdeungpo-ku, Seoul Korea - 011.82.2.783.9715 Ngee Ann City, Singapore - 011.65.838.5214 Taipei, Taiwan R.O.C. - 011.886.2.577.4352 ext. 627 Tokyo, Japan - 011.81.3.5322.2053 CANADA Markham (Toronto), Ontario - 905/415-0384 EUROPE Fleet Hants (London), England - 011.44.1.252.812030 Saint-Mande (Paris), France - 011.33.148.087820 Eching (Munich), Germany - 011.49.89.327.1400 LATIN AMERICA Sao Paulo, Brazil - 011.55.11.532.2858 CORPORATE HEADQUARTERS Optical Data Systems, Inc. 1101 East Arapaho Road Richardson, Texas 75081 Tel: 972/234-6400 Fax: 972/234-1467 Technology Center 1001 East Arapaho road Richardson, Texas 75081 Warehouse 1241 N. Glenville Drive Richardson, Texas 75081 Subcontractors/Assembly Sites: ODS inventory is located at and processed by various subcontractors who assemble products for ODS. Customers/Potential Customers: ODS inventory is located at various customers' sites and potential customers' sites for demonstration and evaluation purposes. EXHIBIT "E" ODS NETWORKS, INC. BORROWER SECURITY AGREEMENT BORROWER SECURITY AGREEMENT THIS BORROWER SECURITY AGREEMENT (the "AGREEMENT") dated as of December 31, 1997, is by and between ODS NETWORKS, INC. ("DEBTOR") and NATIONSBANK OF TEXAS, N.A. (the "SECURED PARTY"). R E C I T A L S: Debtor, a Texas corporation, is entering into that certain Third Amended and Restated Revolving Credit Loan Agreement (the "Credit Agreement") dated of even date herewith with the Secured Party (which amends and restates that certain Second Amended and Restated Revolving Credit Loan Agreement dated as of April 12, 1997). The execution and delivery of this Agreement is a condition to the Secured Party's entering into the Credit Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the adequacy, receipt and sufficiency of which are hereby acknowledged, and in order to induce the Secured Party to make the Loans and issue the Letters of Credit under the Credit Agreement, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS Section 1.1 DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "ACCOUNT" means any "account," as such term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by Debtor: (a) all rights of Debtor to payment for goods sold or leased, services rendered or the license of Intellectual Property, whether or not earned by performance, (b) all accounts receivable of Debtor, (c) all rights of Debtor to receive any payment of money or other form of consideration, (d) all security pledged, assigned or granted to or held by Debtor to secure any of the foregoing, (e) all guaranties of, or indemnifications with respect to, any of the foregoing, (f) all rights of Debtor as an unpaid seller of goods or services, including, but not limited to, all rights of stoppage in transit, replevin, reclamation and resale; and (g) all rights to brokerage commissions. "COLLATERAL" has the meaning specified in SECTION 2.1 of this Agreement. "DOCUMENT" means any "document," as term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by Debtor, including, without limitation, all documents of title and all receipts covering, evidencing or representing goods now owned or hereafter acquired by Debtor. "INSTRUMENT" means any "instrument," as term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by Debtor, and, in any event, shall include all promissory notes, drafts, bills of exchange and trade acceptances of Debtor, whether now owned or hereafter acquired. "INTELLECTUAL PROPERTY" means all copyrights, copyright licenses, patents, patent licenses, trademarks and trademark licenses. "INVENTORY" means any "inventory," as term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by Debtor: (a) all goods and other personal property of Debtor that are held for sale or lease or to be furnished under any contract of service; (b) all raw materials, work-in-process, finished goods, inventory, supplies and materials of Debtor; (c) all wrapping, packaging, advertising and shipping materials of Debtor; (d) all goods that have been returned to, repossessed by or stopped in transit by Debtor; and (e) all Documents evidencing any of the foregoing. "OBLIGATIONS" means all present and future indebtedness, liabilities, and obligations of Debtor to the Secured Party and the Lenders. "PROCEEDS" means any "proceeds," as such term is defined in Article or Chapter 9 of the UCC and, in any event, shall include, but not be limited to, (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtor from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting, or purporting to act, for or on behalf of any Governmental Authority), and (c) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "UCC" means the Uniform Commercial Code as in effect in the State of Texas PROVIDED, that if, by applicable law, the perfection or effect of perfection or non-perfection of the security interest created hereunder in any Collateral is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or the effect of perfection or non-perfection. Section 1.2 OTHER DEFINITIONAL PROVISIONS. Terms used herein that are defined in the Credit Agreement and are not otherwise defined herein shall have the meanings therefor specified in the Credit Agreement. References to "Sections," "subsections," "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. All references to statutes and regulations shall include any amendments of the same and any successor statutes and regulations. References to particular sections of the UCC should be read to refer also to parallel sections of the Uniform Commercial Code as enacted in each state or other jurisdiction where any portion of the Collateral is or may be located. Terms used herein, which are defined in the UCC, unless otherwise defined herein or in the Credit Agreement, shall have the meanings determined in accordance with the UCC. ARTICLE 2 SECURITY INTEREST Section 2.1 SECURITY INTEREST. As collateral security for the prompt payment and performance in full when due of its Obligations (whether at stated maturity, by acceleration or otherwise), Debtor hereby pledges and assigns to the Secured Party, and grants to the Secured Party a continuing lien on and security interest in, all of the Debtor's right, title and interest in and to the following, whether now owned or hereafter arising or acquired and wherever located (collectively the "COLLATERAL"): .1 all Accounts; .2 all Instruments, including, without limitation, or in addition, all instruments evidencing indebtedness from time to time owed to Debtor by the Subsidiaries of Debtor, and all interest, cash and other property from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of such indebtedness; .3 all Documents; .4 all Inventory; .5 all products and Proceeds, in cash or otherwise, of any of the property described in the foregoing CLAUSES (a) THROUGH (d). Section 2.2 DEBTOR REMAINS LIABLE. Notwithstanding anything to the contrary contained herein, (a) Debtor shall remain liable under the documentation included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of its rights or remedies hereunder shall not release Debtor from any of its duties or obligations under such documentation, (c) the Secured Party shall not have any obligation under any of such documentation included in the Collateral by reason of this Agreement, and (d) the Secured Party shall not be obligated to perform any of the obligations of Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE 3 REPRESENTATIONS AND WARRANTIES To induce the Secured Party to enter into this Agreement and the Credit Agreement, Debtor represents and warrants to the Secured Party that: Section 3.1 LOCATION OF INVENTORY; THIRD PARTIES IN POSSESSION. All of its Inventory is located at the places specified in SCHEDULE 3.1. Except as described on SCHEDULE 3.1, no Person other than Debtor has possession of any of the Collateral. None of its Collateral has been located in any location within the past four months other than as set forth on SCHEDULE 3.1. Section 3.2 OFFICE LOCATIONS; FICTITIOUS NAMES; TAX I.D. NUMBER. Its principal place of business and its chief executive office is located at the place identified on SCHEDULE 3.1. SCHEDULE 3.1 also sets forth all other places where it keeps its books and records and all other locations where it has a place of business. It does not do business and has not done business during the past five years under any trade-name or fictitious business name except as disclosed on SCHEDULE 3.2. Debtor's United States Federal Income Tax I.D. Number is identified on SCHEDULE 3.2. Section 3.3 DELIVERY OF COLLATERAL. Except as provided by SECTION 4.2, it has delivered to Secured Party all Collateral the possession of which is necessary to perfect the security interest of Secured Party therein. ARTICLE 4 COVENANTS Debtor covenants and agrees with the Secured Party that until its Obligations are paid and performed in full, all commitments of the Secured Party under the Credit Agreement have expired or have been terminated and no Letter of Credit remains outstanding: Section 4.1 ACCOUNTS. It shall, in accordance with its customary business practices, endeavor to collect or cause to be collected from each account debtor under its Accounts, as and when due, any and all amounts owing under such Accounts. Without the prior written consent of the Secured Party, it shall not, except in the ordinary course of business and in no event when an Event of Default exists, (a) grant any extension of time for any payment with respect to any of its Accounts beyond 120 days after such payment's due date, (b) compromise, compound, or settle any of its Accounts for less than the full amount thereof, (c) release, in whole or in part, any Person liable for payment of any of its Accounts, (d) allow any credit or discount for payment with respect to any of its Accounts other than trade or other customary discounts granted in the ordinary course of business, or (e) release any Lien or guaranty securing any of its Accounts unless the Account has been paid. Section 4.2 FURTHER ASSURANCES; EXCEPTIONS TO PERFECTION. At any time and from time to time, upon the request of the Secured Party, and at its sole expense, it shall promptly execute and deliver all such further agreements, documents and instruments and take such further action as the Secured Party may reasonably deem necessary or appropriate to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Agreement or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any of the Collateral. Without limiting the generality of the foregoing, it shall upon reasonable request by the Secured Party (a) execute and deliver to the Secured Party such financing statements as the Secured Party may from time to time require; (b) deliver to the Secured Party all Collateral the possession of which is necessary to perfect the security interest therein, duly endorsed and/or accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party; EXCEPT THAT, prior to the occurrence of a Default, a Debtor may (i) retain for collection, in the ordinary course of business, checks representing Proceeds of Accounts received in the ordinary course of business; (ii) retain any letters of credit received in the ordinary course of business; and (iii) retain any Documents received and further negotiated in the ordinary course of business; and (c) execute and deliver to the Secured Party such other agreements, documents and instruments as the Secured Party may reasonably require to perfect and maintain the validity, effectiveness and priority of the Liens intended to be created by the Loan Documents. Section 4.3 THIRD PARTIES IN POSSESSION OF COLLATERAL. Debtor shall not permit any third Person (including any warehouseman, bailee, agent, consignee or processor) to hold any Collateral, unless it shall: (i) notify such third Person of the security interests created hereby; (ii) instruct such Person to hold all such Collateral for Secured Party's account subject to Secured Party's instructions; and (iii) take all other actions the Secured Party reasonably deems necessary to perfect and protect its and the Debtor's interests in such Collateral pursuant to the requirements of the UCC of the applicable jurisdiction where the warehouseman, bailee, consignee, agent, processor or other third Person is located (including the filing of a financing statement in the proper jurisdiction naming the applicable third Person as debtor and it as secured party and notifying the third Person's secured lenders of its interest in such Collateral before the third Person receives possession of the Collateral in question). Section 4.4 CORPORATE CHANGES. It shall not change its name, identity, or corporate structure in any manner that might make any financing statement filed in connection with this Agreement seriously misleading or its United States Federal Tax I.D. Number unless it shall have given the Secured Party thirty (30) days prior written notice thereof and shall have taken all action reasonably deemed necessary or desirable by the Secured Party to protect its Liens with the perfection and priority thereof required by the Loan Documents. It shall not change its principal place of business, chief executive office or the place where it keeps its books and records unless it shall have given the Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by the Secured Party to cause its security interest in the Collateral to be perfected with the priority required by the Loan Documents. Section 4.5 INVENTORY. It shall keep its Inventory at (or in transit to) any of its locations specified on SCHEDULE 3.1 hereto or, upon thirty (30) days prior written notice to the Secured Party, at such other places within the United States of America where all action required to perfect the Secured Party's security interest in such Collateral with the priority required by the Loan Documents shall have been taken. Section 4.6 WAREHOUSE RECEIPTS NON-NEGOTIABLE. It agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued in respect of any portion of the Collateral, such warehouse receipt or receipt in the nature thereof shall not be "negotiable" (as such term is used in Section 7.104 of the UCC) unless such warehouse receipt or receipt in the nature thereof is delivered to the Secured Party. ARTICLE 5 RIGHTS OF THE SECURED PARTY Section 5.1 POWER OF ATTORNEY. DEBTOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS THE SECURED PARTY AND ANY OFFICER OR AGENT THEREOF, WITH FULL POWER OF SUBSTITUTION, AS ITS TRUE AND LAWFUL ATTORNEY-IN-FACT WITH FULL IRREVOCABLE POWER AND AUTHORITY IN THE NAME OF DEBTOR OR IN ITS OWN NAME, TO TAKE, WHEN A DEFAULT EXISTS, ANY AND ALL ACTIONS AND TO EXECUTE ANY AND ALL DOCUMENTS AND INSTRUMENTS WHICH THE SECURED PARTY AT ANY TIME AND FROM TIME TO TIME DEEMS NECESSARY OR DESIRABLE TO ACCOMPLISH THE PURPOSES OF THIS AGREEMENT AND, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT HEREBY GIVES THE SECURED PARTY THE POWER AND RIGHT ON ITS BEHALF AND IN ITS OWN NAME TO DO ANY OF THE FOLLOWING WHEN A DEFAULT EXISTS, WITH NOTICE TO BORROWER BUT WITHOUT THE CONSENT OF DEBTOR: (i) to demand, sue for, collect or receive, in the name of it or in its own name, any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse checks, notes, drafts, acceptances, money orders, documents of title or any other instruments for the payment of money under the Collateral or any policy of insurance; (ii) to pay or discharge taxes, Liens or other encumbrances levied or placed on or threatened against the Collateral; (iii) to notify post office authorities to change the address for delivery of mail of the Debtor to an address designated by the Secured Party and to receive, open, and dispose of mail addressed to the Debtor; (iv) (A) to direct account debtors and any other parties liable for any payment under any of the Collateral to make payment of any and all monies due and to become due thereunder directly to the Secured Party or as the Secured Party shall direct (Debtor agrees that if any Proceeds of any Collateral (including payments made in respect of Accounts) shall be received by it while a Default exists, it shall promptly deliver such Proceeds to the Secured Party with any necessary endorsements, and until such Proceeds are delivered to the Secured Party, such Proceeds shall be held in trust by it for the benefit of the Secured Party and shall not be commingled with any other funds or property of it); (B) to receive payment of and receipt for any and all monies, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, proxies, stock powers, verifications and notices in connection with accounts and other documents relating to the Collateral; (D) to commence and prosecute any suit, action or proceeding at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against it with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Secured Party may deem appropriate; (G) to exchange any of the Collateral for other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms as the Secured Party may determine; (H) to add or release any guarantor, indorser, surety or other party to any of the Collateral; (I) to renew, extend or otherwise change the terms and conditions of any of the Collateral; (J) to make, settle, compromise or adjust any claims under or pertaining to any of the Collateral (including claims under any policy of insurance); and (K) to sell, transfer, pledge, convey, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Secured Party's option and the Debtor's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve, maintain, or realize upon the Collateral and the Secured Party's security interest therein. THIS POWER OF ATTORNEY IS A POWER COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE UNTIL TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH SECTION 7.11. The Secured Party shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Secured Party in this Agreement, and shall not be liable for any failure to do so or any delay in doing so. Neither the Secured Party nor any Person designated by the Secured Party shall be liable for any act or omission or for any error of judgment or any mistake of fact or law, except any of the same resulting from its or their gross negligence or willful misconduct. This power of attorney is conferred on the Secured Party solely to protect, preserve, maintain and realize upon its security interest in the Collateral. The Secured Party shall not be responsible for any decline in the value of the Collateral and shall not be required to take any steps to preserve rights against prior parties or to protect, preserve or maintain any Lien given to secure the Collateral. Section 5.2 ASSIGNMENT BY THE SECURED PARTY. The Secured Party may at any time assign or otherwise transfer all or any portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, the Obligations) to any other Person, to the extent permitted by, and upon the conditions contained in, the Credit Agreement, and such Person shall thereupon become vested with all the benefits thereof granted to the Secured Party herein or otherwise. Section 5.3 POSSESSION; REASONABLE CARE. The Secured Party may, from time to time, in its sole discretion, appoint one or more agents to hold physical custody, for the account of the Secured Party, of any or all of the Collateral that the Secured Party has a right to possess. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Secured Party accords its own property, it being understood that the Secured Party shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. ARTICLE 6 DEFAULT Section 6.1 RIGHTS AND REMEDIES. If an Event of Default shall have occurred and be continuing, the Secured Party shall have the following rights and remedies: (i) In addition to all other rights and remedies granted to the Secured Party in this Agreement or in any other Loan Document or by applicable law, the Secured Party shall have all of the rights and remedies of a secured party under the UCC (whether or not the UCC applies to the affected Collateral). Without limiting the generality of the foregoing, the Secured Party may (A) without demand or notice to it, collect, receive or take possession of the Collateral or any part thereof and for that purpose the Secured Party may enter upon any premises on which the Collateral is located and remove the Collateral therefrom or render it inoperable, and/or (B) sell, lease or otherwise dispose of the Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable or otherwise as may be permitted by law. The Secured Party shall have the right at any public sale or sales, and, to the extent permitted by applicable law, at any private sale or sales, to bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) and become a purchaser of the Collateral or any part thereof free of any right or equity of redemption on the part of Debtor, which right or equity of redemption is hereby expressly waived and released by Debtor. Upon the request of the Secured Party, Debtor shall assemble the Collateral and make it available to the Secured Party at any place designated by the Secured Party that is reasonably convenient to it and the Secured Party. Debtor agrees that the Secured Party shall not be obligated to give more than ten (10) days prior written notice of the time and place of any public sale or of the time after which any private sale may take place and that such notice shall constitute reasonable notice of such matters. The Secured Party shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale of Collateral may have been given. The Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. Debtor shall be liable for all reasonable expenses of retaking, holding, preparing for sale or the like, and all reasonable attorneys' fees, legal expenses and other costs and expenses incurred by the Secured Party in connection with the collection of the Obligations and the enforcement of the Secured Party's rights under this Agreement. Debtor shall remain liable for any deficiency if the Proceeds of any sale or other disposition of the Collateral applied to the Obligations are insufficient to pay the Obligations in full. The Secured Party may apply the Collateral against the Obligations as provided in the Credit Agreement. Debtor waives all rights of marshalling, valuation and appraisal in respect of the Collateral. Any cash held by the Secured Party as Collateral and all cash proceeds received by the Secured Party in respect of any sale of, collection from or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and then or at any time thereafter applied in whole or in part by the Secured Party against, the Obligations in the order permitted by the Credit Agreement. Any surplus of such cash or cash proceeds and interest accrued thereon, if any, held by the Secured Party and remaining after payment in full of all the Obligations shall be promptly paid over to the Debtor entitled thereto or to whomsoever may be lawfully entitled to receive such surplus; PROVIDED THAT the Secured Party shall have no obligation to invest or otherwise pay interest on any amounts held by it in connection with or pursuant to this Agreement. (ii) The Secured Party may cause any or all of the Collateral held by it to be transferred into the name of the Secured Party or the name or names of the Secured Party's nominee or nominees. (iii) The Secured Party may exercise any and all of the rights and remedies of Debtor under or in respect of the Collateral, including, without limitation, any and all rights of it to demand or otherwise require payment of any amount under, or performance of any provision of, any of the Collateral and any and all voting rights and corporate powers in respect of the Collateral. Debtor shall execute and deliver (or cause to be executed and delivered) to the Secured Party all such proxies and other instruments as the Secured Party may reasonably request for the purpose of enabling the Secured Party to exercise the voting and other rights which it is entitled to exercise pursuant to this clause (iii) and to receive the dividends, interest and other distributions which it is entitled to receive hereunder. (iv) The Secured Party may collect or receive all money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so. (v) On any sale of the Collateral, the Secured Party is hereby authorized to comply with any limitation or restriction with which compliance is necessary, in the view of the Secured Party's counsel, in order to avoid any violation of applicable law or in order to obtain any required approval of the purchaser or purchasers by any applicable Governmental Authority. ARTICLE 7 MISCELLANEOUS Section 7.1 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of the Secured Party to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement are cumulative and not exclusive of any rights and remedies provided by law. Section 7.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Debtor and the Secured Party and respective successors and assigns, except that Debtor may not assign any of its rights or obligations under this Agreement without the prior written consent of the Secured Party. SECTION 7.3 AMENDMENT; ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto and the Secured Party. Section 7.4 NOTICES. All notices and other communications provided for in this Agreement shall be given or made in accordance with the Credit Agreement. Section 7.5 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas and applicable laws of the United States of America. ANY ACTION OR PROCEEDING AGAINST DEBTOR UNDER OR IN CONNECTION WITH ANY LOAN DOCUMENT MAY BE BROUGHT IN ANY STATE COURT LOCATED IN DALLAS, TEXAS OR ANY FEDERAL COURT IN THE NORTHERN DISTRICT OF TEXAS. DEBTOR HEREBY IRREVOCABLY (a) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (b) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN SUCH COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. DEBTOR AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 7.4. NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL AFFECT THE RIGHT OF THE SECURED PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE SECURED PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST DEBTOR OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTION. ANY ACTION OR PROCEEDING BY DEBTOR AGAINST THE SECURED PARTY SHALL BE BROUGHT ONLY IN A COURT LOCATED IN DALLAS, TEXAS. Section 7.6 HEADINGS. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 7.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by the Secured Party shall affect the representations and warranties or the right of the Secured Party to rely upon them. Section 7.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Section 7.9 WAIVER OF BOND. In the event the Secured Party seeks to take possession of any or all of the Collateral by judicial process, Debtor hereby irrevocably waives any bonds and any surety or security relating thereto that may be required by applicable law as an incident to such possession, and waives any demand for possession prior to the commencement of any such suit or action. Section 7.10 SEVERABILITY. Any provision of this Agreement which is determined by a court of competent jurisdiction to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 7.11 TERMINATION. If all of the Obligations shall have been paid and performed in full, all Commitments of the Secured Party shall have expired or terminated and no Letters of Credit shall remain outstanding, the Secured Party shall, upon the written request of it, execute and deliver to it a proper instrument or instruments acknowledging the release and termination of the security interests created by this Agreement, and shall duly assign and deliver to Debtor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Secured Party and has not previously been sold or otherwise applied pursuant to this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. DEBTORS: ODS NETWORKS, INC., formerly known as Optical Data Systems, Inc. By: /S/ Timothy W. Kinnear --------------------------------- Timothy W. Kinnear, Vice President and Treasurer SECURED PARTY: NATIONSBANK OF TEXAS, N.A. By: /S/ Frank Izzo --------------------------------- Name: Frank Izzo --------------------------- Title: Senior Vice President -------------------------- SCHEDULE 3.1 TO SECURITY AGREEMENT LOCATIONS I. PRINCIPAL PLACE OF BUSINESS ADDRESS 1101 East Arapaho Road Richardson, Texas 75081 II. OTHER LOCATIONS OF INVENTORY ADDRESS U.S. OFFICES INTERNATIONAL OFFICES Technology Center Asia 1001 East Arapaho road Richardson, Texas 75081 Kuala Lumpur, Malaysia Yongdeungpo-ku, Seoul Korea Warehouse Ngee Ann City, Singapore 1241 N. Glenville Drive Taipei, Taiwan R.O.C. Richardson, Texas 75081 Tokyo, Japan Irvine (Los Angeles), CA Canada San Ramon (San Francisco), CA Markham (Toronto), Ontario Denver, CO Europe Tampa, FL Fleet Hants (London), England Saint-Mande (Paris), France Norcross (Atlanta), GA Eching (Munich), Germany Ewa Beach (Honolulu), HI Latin America Arlington Heights (Chicago), IL Sao Paulo, Brazil Burlington (Boston), MA Troy (Detroit), MI Minnetonka (Minneapolis), MN Saint Louis, MO New York, NY Cleveland, OH Malvern (Philadelphia), PA Houston, TX Vienna (Washington; DC), VA Bellevue (Seattle), WA SUBCONTRACTORS/ASSEMBLY SITES: Debtor inventory is located at and processed by various subcontractors who assemble products for Debtor. CUSTOMERS/POTENTIAL CUSTOMERS: Debtor inventory is located at various customers' sites and potential customers' sites for demonstration and evaluation purposes. SCHEDULE 3.2 TO SECURITY AGREEMENT TRADE AND OTHER NAMES; TAX I.D. NUMBER TRADE AND OTHER NAMES: None TAX I.D. NUMBER 75-1911917 EXHIBIT "F" ODS NETWORKS, INC. SUBSIDIARIES SECURITY AGREEMENT SUBSIDIARIES SECURITY AGREEMENT THIS SUBSIDIARIES SECURITY AGREEMENT (the "AGREEMENT") dated as of December 31, 1997, is by and among the undersigned Subsidiaries and any Subsidiary who may become a party hereto pursuant to the execution and delivery of a Subsidiary Joinder Agreement (each a "DEBTOR" and collectively the "DEBTORS") and NATIONSBANK OF TEXAS, N.A. (the "SECURED PARTY"). R E C I T A L S: ODS Networks, Inc. (formerly known as Optical Data Systems, Inc.), a Texas corporation, is entering into that certain Second Amendment Agreement dated of even date herewith with the Secured Party (which amends that certain Second Amended and Restated Revolving Credit Loan Agreement dated as of April 12, 1997, such agreement as it has been and may be amended or otherwise modified from time to time, the "CREDIT AGREEMENT"). The execution and delivery of this Agreement is a condition to the Secured Party's entering into the Second Amendment Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the adequacy, receipt and sufficiency of which are hereby acknowledged, and in order to induce the Secured Party to make the Loans and issue the Letters of Credit under the Credit Agreement, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS Section 1.1 DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "ACCOUNT" means any "account," as such term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by any Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by any Debtor: (a) all rights of such Debtor to payment for goods sold or leased, services rendered or the license of Intellectual Property, whether or not earned by performance, (b) all accounts receivable of such Debtor, (c) all rights of such Debtor to receive any payment of money or other form of consideration, (d) all security pledged, assigned or granted to or held by such Debtor to secure any of the foregoing, (e) all guaranties of, or indemnifications with respect to, any of the foregoing, (f) all rights of such Debtor as an unpaid seller of goods or services, including, but not limited to, all rights of stoppage in transit, replevin, reclamation and resale; and (g) all rights to brokerage commissions. "COLLATERAL" has the meaning specified in SECTION 2.1 of this Agreement. "DOCUMENT" means any "document," as such term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by any Debtor, including, without limitation, all documents of title and all receipts covering, evidencing or representing goods now owned or hereafter acquired by such Debtor. "INSTRUMENT" means any "instrument," as such term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by any Debtor, and, in any event, shall include all promissory notes, drafts, bills of exchange and trade acceptances of any such Debtor, whether now owned or hereafter acquired. "INTELLECTUAL PROPERTY" means all copyrights, copyright licenses, patents, patent licenses, trademarks and trademark licenses. "INVENTORY" means any "inventory," as such term is defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by any Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by such Debtor: (a) all goods and other personal property of such Debtor that are held for sale or lease or to be furnished under any contract of service; (b) all raw materials, work-in-process, finished goods, inventory, supplies and materials of such Debtor; (c) all wrapping, packaging, advertising and shipping materials of such Debtor; (d) all goods that have been returned to, repossessed by or stopped in transit by such Debtor; and (e) all Documents evidencing any of the foregoing. "OBLIGATIONS" means, with respect to each Debtor, all present and future indebtedness, liabilities, and obligations of such Debtor to the Secured Party and the Lenders. "PROCEEDS" means any "proceeds," as such term is defined in Article or Chapter 9 of the UCC and, in any event, shall include, but not be limited to, (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to any Debtor from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to any Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting, or purporting to act, for or on behalf of any Governmental Authority), and (c) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "UCC" means the Uniform Commercial Code as in effect in the State of Texas PROVIDED, that if, by applicable law, the perfection or effect of perfection or non-perfection of the security interest created hereunder in any Collateral is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or the effect of perfection or non-perfection. Section 1.2 OTHER DEFINITIONAL PROVISIONS. Terms used herein that are defined in the Credit Agreement and are not otherwise defined herein shall have the meanings therefor specified in the Credit Agreement. References to "Sections," "subsections," "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. All references to statutes and regulations shall include any amendments of the same and any successor statutes and regulations. References to particular sections of the UCC should be read to refer also to parallel sections of the Uniform Commercial Code as enacted in each state or other jurisdiction where any portion of the Collateral is or may be located. Terms used herein, which are defined in the UCC, unless otherwise defined herein or in the Credit Agreement, shall have the meanings determined in accordance with the UCC. ARTICLE 2 SECURITY INTEREST Section 2.1 SECURITY INTEREST. As collateral security for the prompt payment and performance in full when due of its Obligations (whether at stated maturity, by acceleration or otherwise), each Debtor hereby pledges and assigns to the Secured Party, and grants to the Secured Party a continuing lien on and security interest in, all of the Debtor's right, title and interest in and to the following, whether now owned or hereafter arising or acquired and wherever located (collectively with respect to any Debtor or all Debtors, as the context requires, the "COLLATERAL"): .6 all Accounts; .7 all Instruments, including, without limitation, or in addition, all instruments evidencing indebtedness from time to time owed to the Debtor by the Subsidiaries of the Debtor, and all interest, cash and other property from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of such indebtedness; .8 all Documents; .9 all Inventory; .10 all products and Proceeds, in cash or otherwise, of any of the property described in the foregoing CLAUSES (a) THROUGH (d). Section 2.2 LIMITATION OF OBLIGATIONS SECURED. Notwithstanding anything to the contrary contained in this Agreement, the secured Obligations of each Debtor hereunder shall not exceed an aggregate amount equal to the greatest amount that would not render such Debtor's indebtedness, liabilities or obligations under this Agreement subject to avoidance under Sections 544, 548 or 550 of the Federal Bankruptcy Code or subject to being set aside or annulled under any applicable state law relating to fraud on creditors; PROVIDED, HOWEVER, that, for purposes of the immediately preceding clause, it shall be presumed that the secured Obligations of each Debtor under this Agreement do not equal or exceed any aggregate amount which would render such Debtor's indebtedness, liabilities or obligations under this Agreement subject to being so avoided, set aside or annulled, and the burden of proof to the contrary shall be on the party asserting to the contrary. Subject to, but without limiting the generality of, the foregoing sentence, the provisions of this Agreement are severable and, in any legally binding action or proceeding involving any state corporate law or any bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity, if the indebtedness, liabilities or obligations of any Debtor under this Agreement would otherwise be held or determined to be void, invalid or unenforceable on account of the amount of its indebtedness, liabilities or obligations under this Agreement, then, notwithstanding any other provisions of this Agreement to the contrary, the amount of such indebtedness, liabilities or obligations shall, without any further action by such Debtor, Secured Party or any other Person, be automatically limited and reduced to the greatest amount which is valid and enforceable as determined in such action or proceeding. Section 2.3 DEBTOR REMAINS LIABLE. Notwithstanding anything to the contrary contained herein, (a) each Debtor shall remain liable under the documentation included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of its rights or remedies hereunder shall not release any Debtor from any of its duties or obligations under such documentation, (c) the Secured Party shall not have any obligation under any of such documentation included in the Collateral by reason of this Agreement, and (d) the Secured Party shall not be obligated to perform any of the obligations of any Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE 3 REPRESENTATIONS AND WARRANTIES To induce the Secured Party to enter into this Agreement and the Credit Agreement, each Debtor, with respect to itself and the Collateral in which it has rights, represents and warrants to the Secured Party that: Section 3.1 LOCATION OF INVENTORY; THIRD PARTIES IN POSSESSION. All of its Inventory is located at the places specified in SCHEDULE 3.1 for such Debtor. SCHEDULE 3.1 correctly identifies the landlords or mortgagees, if any, of each of its locations identified in SCHEDULE 3.1. No Person other than Debtor has possession of any of the Collateral. None of its Collateral has been located in any location within the past four months other than as set forth on SCHEDULE 3.1 for such Debtor. Section 3.2 OFFICE LOCATIONS; FICTITIOUS NAMES; TAX I.D. NUMBER. Its principal place of business and its chief executive office is located at the place identified for such Debtor on SCHEDULE 3.1. SCHEDULE 3.1 also sets forth all other places where it keeps its books and records and all other locations where it has a place of business. It does not do business and has not done business during the past five years under any trade-name or fictitious business name except as disclosed on SCHEDULE 3.2. Each Debtor's United States Federal Income Tax I.D. Number is identified on SCHEDULE 3.2. Section 3.3 DELIVERY OF COLLATERAL. Except as provided by SECTION 4.2, it has delivered to Secured Party all Collateral the possession of which is necessary to perfect the security interest of Secured Party therein. ARTICLE 4 COVENANTS Each Debtor covenants and agrees with the Secured Party that until its Obligations are paid and performed in full, all commitments of the Secured Party under the Credit Agreement have expired or have been terminated and no Letter of Credit remains outstanding: Section 4.1 ACCOUNTS. It shall, in accordance with its customary business practices, endeavor to collect or cause to be collected from each account debtor under its Accounts, as and when due, any and all amounts owing under such Accounts. Without the prior written consent of the Secured Party, it shall not, except in the ordinary course of business and in no event when an Event of Default exists, (a) grant any extension of time for any payment with respect to any of its Accounts beyond 120 days after such payment's due date, (b) compromise, compound, or settle any of its Accounts for less than the full amount thereof, (c) release, in whole or in part, any Person liable for payment of any of its Accounts, (d) allow any credit or discount for payment with respect to any of its Accounts other than trade or other customary discounts granted in the ordinary course of business, or (e) release any Lien or guaranty securing any of its Accounts unless the Account has been paid. Section 4.2 FURTHER ASSURANCES; EXCEPTIONS TO PERFECTION. At any time and from time to time, upon the request of the Secured Party, and at its sole expense, it shall promptly execute and deliver all such further agreements, documents and instruments and take such further action as the Secured Party may reasonably deem necessary or appropriate to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Agreement or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any of the Collateral. Without limiting the generality of the foregoing, it shall upon reasonable request by the Secured Party (a) execute and deliver to the Secured Party such financing statements as the Secured Party may from time to time require; (b) deliver to the Secured Party all Collateral the possession of which is necessary to perfect the security interest therein, duly endorsed and/or accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party; EXCEPT THAT, prior to the occurrence of a Default, a Debtor may (i) retain for collection, in the ordinary course of business, checks representing Proceeds of Accounts received in the ordinary course of business; (ii) retain any letters of credit received in the ordinary course of business; and (iii) retain any Documents received and further negotiated in the ordinary course of business; and (c) execute and deliver to the Secured Party such other agreements, documents and instruments as the Secured Party may reasonably require to perfect and maintain the validity, effectiveness and priority of the Liens intended to be created by the Loan Documents. Section 4.3 THIRD PARTIES IN POSSESSION OF COLLATERAL. Debtor shall not permit any third Person (including any warehouseman, bailee, agent, consignee or processor) to hold any Collateral, unless it shall: (i) notify such third Person of the security interests created hereby; (ii) instruct such Person to hold all such Collateral for Secured Party's account subject to Secured Party's instructions; and (iii) take all other actions the Secured Party reasonably deems necessary to perfect and protect its and the Debtor's interests in such Collateral pursuant to the requirements of the UCC of the applicable jurisdiction where the warehouseman, bailee, consignee, agent, processor or other third Person is located (including the filing of a financing statement in the proper jurisdiction naming the applicable third Person as debtor and it as secured party and notifying the third Person's secured lenders of its interest in such Collateral before the third Person receives possession of the Collateral in question). Section 4.4 CORPORATE CHANGES. It shall not change its name, identity, or corporate structure in any manner that might make any financing statement filed in connection with this Agreement seriously misleading or its United States Federal Tax I.D. Number unless it shall have given the Secured Party thirty (30) days prior written notice thereof and shall have taken all action reasonably deemed necessary or desirable by the Secured Party to protect its Liens with the perfection and priority thereof required by the Loan Documents. It shall not change its principal place of business, chief executive office or the place where it keeps its books and records unless it shall have given the Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by the Secured Party to cause its security interest in the Collateral to be perfected with the priority required by the Loan Documents. Section 4.5 INVENTORY. It shall keep its Inventory at (or in transit to) any of its locations specified on SCHEDULE 3.1 hereto or, upon thirty (30) days prior written notice to the Secured Party, at such other places within the United States of America where all action required to perfect the Secured Party's security interest in such Collateral with the priority required by the Loan Documents shall have been taken. Section 4.6 WAREHOUSE RECEIPTS NON-NEGOTIABLE. It agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued in respect of any portion of the Collateral, such warehouse receipt or receipt in the nature thereof shall not be "negotiable" (as such term is used in Section 7.104 of the UCC) unless such warehouse receipt or receipt in the nature thereof is delivered to the Secured Party. ARTICLE 5 RIGHTS OF THE SECURED PARTY Section 5.1 POWER OF ATTORNEY. EACH DEBTOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS THE SECURED PARTY AND ANY OFFICER OR AGENT THEREOF, WITH FULL POWER OF SUBSTITUTION, AS ITS TRUE AND LAWFUL ATTORNEY-IN-FACT WITH FULL IRREVOCABLE POWER AND AUTHORITY IN THE NAME OF SUCH DEBTOR OR IN ITS OWN NAME, TO TAKE, WHEN A DEFAULT EXISTS, ANY AND ALL ACTIONS AND TO EXECUTE ANY AND ALL DOCUMENTS AND INSTRUMENTS WHICH THE SECURED PARTY AT ANY TIME AND FROM TIME TO TIME DEEMS NECESSARY OR DESIRABLE TO ACCOMPLISH THE PURPOSES OF THIS AGREEMENT AND, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT HEREBY GIVES THE SECURED PARTY THE POWER AND RIGHT ON ITS BEHALF AND IN ITS OWN NAME TO DO ANY OF THE FOLLOWING WHEN A DEFAULT EXISTS, WITH NOTICE TO BORROWER BUT WITHOUT THE CONSENT OF ANY DEBTOR: (i) to demand, sue for, collect or receive, in the name of it or in its own name, any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse checks, notes, drafts, acceptances, money orders, documents of title or any other instruments for the payment of money under the Collateral or any policy of insurance; (ii) to pay or discharge taxes, Liens or other encumbrances levied or placed on or threatened against the Collateral; (iii) to notify post office authorities to change the address for delivery of mail of the Debtor to an address designated by the Secured Party and to receive, open, and dispose of mail addressed to the Debtor; (iv) (A) to direct account debtors and any other parties liable for any payment under any of the Collateral to make payment of any and all monies due and to become due thereunder directly to the Secured Party or as the Secured Party shall direct (each Debtor agrees that if any Proceeds of any Collateral (including payments made in respect of Accounts) shall be received by it while a Default exists, it shall promptly deliver such Proceeds to the Secured Party with any necessary endorsements, and until such Proceeds are delivered to the Secured Party, such Proceeds shall be held in trust by it for the benefit of the Secured Party and shall not be commingled with any other funds or property of it); (B) to receive payment of and receipt for any and all monies, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, proxies, stock powers, verifications and notices in connection with accounts and other documents relating to the Collateral; (D) to commence and prosecute any suit, action or proceeding at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against it with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Secured Party may deem appropriate; (G) to exchange any of the Collateral for other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms as the Secured Party may determine; (H) to add or release any guarantor, indorser, surety or other party to any of the Collateral; (I) to renew, extend or otherwise change the terms and conditions of any of the Collateral; (J) to make, settle, compromise or adjust any claims under or pertaining to any of the Collateral (including claims under any policy of insurance); and (K) to sell, transfer, pledge, convey, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Secured Party's option and the Debtors' expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve, maintain, or realize upon the Collateral and the Secured Party's security interest therein. THIS POWER OF ATTORNEY IS A POWER COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE UNTIL TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH SECTION 7.11. The Secured Party shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Secured Party in this Agreement, and shall not be liable for any failure to do so or any delay in doing so. Neither the Secured Party nor any Person designated by the Secured Party shall be liable for any act or omission or for any error of judgment or any mistake of fact or law, except any of the same resulting from its or their gross negligence or willful misconduct. This power of attorney is conferred on the Secured Party solely to protect, preserve, maintain and realize upon its security interest in the Collateral. The Secured Party shall not be responsible for any decline in the value of the Collateral and shall not be required to take any steps to preserve rights against prior parties or to protect, preserve or maintain any Lien given to secure the Collateral. Section 5.2 ASSIGNMENT BY THE SECURED PARTY. The Secured Party may at any time assign or otherwise transfer all or any portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, the Obligations) to any other Person, to the extent permitted by, and upon the conditions contained in, the Credit Agreement, and such Person shall thereupon become vested with all the benefits thereof granted to the Secured Party herein or otherwise. Section 5.3 POSSESSION; REASONABLE CARE. The Secured Party may, from time to time, in its sole discretion, appoint one or more agents to hold physical custody, for the account of the Secured Party, of any or all of the Collateral that the Secured Party has a right to possess. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Secured Party accords its own property, it being understood that the Secured Party shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. ARTICLE 6 DEFAULT Section 6.1 RIGHTS AND REMEDIES. If an Event of Default shall have occurred and be continuing, the Secured Party shall have the following rights and remedies: (i) In addition to all other rights and remedies granted to the Secured Party in this Agreement or in any other Loan Document or by applicable law, the Secured Party shall have all of the rights and remedies of a secured party under the UCC (whether or not the UCC applies to the affected Collateral). Without limiting the generality of the foregoing, the Secured Party may (A) without demand or notice to it, collect, receive or take possession of the Collateral or any part thereof and for that purpose the Secured Party may enter upon any premises on which the Collateral is located and remove the Collateral therefrom or render it inoperable, and/or (B) sell, lease or otherwise dispose of the Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable or otherwise as may be permitted by law. The Secured Party shall have the right at any public sale or sales, and, to the extent permitted by applicable law, at any private sale or sales, to bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) and become a purchaser of the Collateral or any part thereof free of any right or equity of redemption on the part of any Debtor, which right or equity of redemption is hereby expressly waived and released by each Debtor. Upon the request of the Secured Party, each Debtor shall assemble its Collateral and make it available to the Secured Party at any place designated by the Secured Party that is reasonably convenient to it and the Secured Party. Each Debtor agrees that the Secured Party shall not be obligated to give more than ten (10) days prior written notice of the time and place of any public sale or of the time after which any private sale may take place and that such notice shall constitute reasonable notice of such matters. The Secured Party shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale of Collateral may have been given. The Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. Each Debtor shall be liable for all reasonable expenses of retaking, holding, preparing for sale or the like, and all reasonable attorneys' fees, legal expenses and other costs and expenses incurred by the Secured Party in connection with the collection of the Obligations and the enforcement of the Secured Party's rights under this Agreement. Each Debtor shall remain liable for any deficiency if the Proceeds of any sale or other disposition of the Collateral applied to the Obligations are insufficient to pay the Obligations in full. The Secured Party may apply the Collateral against the Obligations as provided in the Credit Agreement. Each Debtor waives all rights of marshalling, valuation and appraisal in respect of the Collateral. Any cash held by the Secured Party as Collateral and all cash proceeds received by the Secured Party in respect of any sale of, collection from or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and then or at any time thereafter applied in whole or in part by the Secured Party against, the Obligations in the order permitted by the Credit Agreement. Any surplus of such cash or cash proceeds and interest accrued thereon, if any, held by the Secured Party and remaining after payment in full of all the Obligations shall be promptly paid over to the Debtor entitled thereto or to whomsoever may be lawfully entitled to receive such surplus; PROVIDED THAT the Secured Party shall have no obligation to invest or otherwise pay interest on any amounts held by it in connection with or pursuant to this Agreement. (ii) The Secured Party may cause any or all of the Collateral held by it to be transferred into the name of the Secured Party or the name or names of the Secured Party's nominee or nominees. (iii) The Secured Party may exercise any and all of the rights and remedies of any Debtor under or in respect of the Collateral, including, without limitation, any and all rights of it to demand or otherwise require payment of any amount under, or performance of any provision of, any of the Collateral and any and all voting rights and corporate powers in respect of the Collateral. Each Debtor shall execute and deliver (or cause to be executed and delivered) to the Secured Party all such proxies and other instruments as the Secured Party may reasonably request for the purpose of enabling the Secured Party to exercise the voting and other rights which it is entitled to exercise pursuant to this clause (iii) and to receive the dividends, interest and other distributions which it is entitled to receive hereunder. (iv) The Secured Party may collect or receive all money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so. (v) On any sale of the Collateral, the Secured Party is hereby authorized to comply with any limitation or restriction with which compliance is necessary, in the view of the Secured Party's counsel, in order to avoid any violation of applicable law or in order to obtain any required approval of the purchaser or purchasers by any applicable Governmental Authority. ARTICLE 7 MISCELLANEOUS Section 7.1 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of the Secured Party to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement are cumulative and not exclusive of any rights and remedies provided by law. Section 7.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of each Debtor and the Secured Party and respective successors and assigns, except that no Debtor may assign any of its rights or obligations under this Agreement without the prior written consent of the Secured Party. SECTION 7.3 AMENDMENT; ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. Except as contemplated by the execution and delivery of a Subsidiary Joinder Agreement (which only needs to be signed by the Subsidiary a party thereto), the provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto and the Secured Party. Section 7.4 NOTICES. All notices and other communications provided for in this Agreement shall be given or made in accordance with the Credit Agreement. Section 7.5 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas and applicable laws of the United States of America. ANY ACTION OR PROCEEDING AGAINST ANY DEBTOR UNDER OR IN CONNECTION WITH ANY LOAN DOCUMENT MAY BE BROUGHT IN ANY STATE COURT LOCATED IN DALLAS, TEXAS OR ANY FEDERAL COURT IN THE NORTHERN DISTRICT OF TEXAS. EACH DEBTOR HEREBY IRREVOCABLY (a) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (b) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN SUCH COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. EACH DEBTOR AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 7.4. NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL AFFECT THE RIGHT OF THE SECURED PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE SECURED PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST ANY DEBTOR OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTION. ANY ACTION OR PROCEEDING BY ANY DEBTOR AGAINST THE SECURED PARTY SHALL BE BROUGHT ONLY IN A COURT LOCATED IN DALLAS, TEXAS. Section 7.6 HEADINGS. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 7.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by the Secured Party shall affect the representations and warranties or the right of the Secured Party to rely upon them. Section 7.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Section 7.9 WAIVER OF BOND. In the event the Secured Party seeks to take possession of any or all of the Collateral by judicial process, each Debtor hereby irrevocably waives any bonds and any surety or security relating thereto that may be required by applicable law as an incident to such possession, and waives any demand for possession prior to the commencement of any such suit or action. Section 7.10 SEVERABILITY. Any provision of this Agreement which is determined by a court of competent jurisdiction to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 7.11 TERMINATION. If all of the Obligations shall have been paid and performed in full, all Commitments of the Secured Party shall have expired or terminated and no Letters of Credit shall remain outstanding, the Secured Party shall, upon the written request of it, execute and deliver to it a proper instrument or instruments acknowledging the release and termination of the security interests created by this Agreement, and shall duly assign and deliver to each Debtor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Secured Party and has not previously been sold or otherwise applied pursuant to this Agreement. Section 7.12 OBLIGATIONS ABSOLUTE. All rights and remedies of the Secured Party hereunder, and all obligations of each Debtor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents; (c) any exchange, release, or nonperfection of any Collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Obligations; or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, a third party pledgor. Section 7.13 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH DEBTOR HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF THE SECURED PARTY OR ANY BANK IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. DEBTORS: OPTICAL DATA SYSTEMS, TEXAS, INC. By: /s/ Timothy W. Kinnear --------------------------------------- Timothy W. Kinnear, Vice President and Treasurer SECURED PARTY: NATIONSBANK OF TEXAS, N.A. By: /s/ Frank Izzo ------------------------------------ Name: F Rank Izzo ---------------------------------- Title: Senior Vice President --------------------------------- SCHEDULE 3.1 TO SECURITY AGREEMENT LOCATIONS I. PRINCIPAL PLACE OF BUSINESS ADDRESS LANDLORD/MORTGAGEE 1101 East Arapaho Road None Richardson, Texas 75081 SCHEDULE 3.2 TO SECURITY AGREEMENT TRADE AND OTHER NAMES; TAX I.D. NUMBER TRADE AND OTHER NAMES: None TAX I.D. NUMBER: 75-2125476-7 EXHIBIT "H" ODS NETWORKS, INC. List of Account Debtors (a) Foreign account debtors whose Receivables are included in Eligible Receivables: Hewlett-Packard Company Honeywell Inc. British Telecommunications plc Electronic Data Systems Corporation (b) Account debtors whose Receivables are not subject to 10% limit: AT&T Corp. Bell Atlantic Corp. Compaq Computer Corporation Electronic Data Systems Corporation Fore Systems Inc. G.T.E. Communications Systems Corporation Lockheed Martin Corporation Lucent Technologies, Inc. Motorola Inc. N.C.R. Corporation Norwest Services Inc. Target Stores Division Dayton Hudson Corporation U.S. West Inc. Walmart Stores Incorporated EX-13 5 EXHIBIT 13 Exhibit 13 ODS NETWORKS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- --------- --------- -------- -------- Net sales $ 92,327 $ 117,864 $ 111,450 $ 86,608 $ 55,948 Cost of sales 55,795 60,737 55,499 46,804 29,888 -------- --------- --------- -------- -------- Gross profit 36,532 57,127 55,951 39,804 26,060 Sales and marketing 30,390 25,969 22,555 15,965 10,802 Research and development 10,810 10,417 8,021 7,503 5,668 General and administrative 4,912 3,844 4,215 3,046 2,020 -------- --------- --------- -------- -------- Operating income (loss) (9,580) 16,897 21,160 13,290 7,570 Interest income, net 1,639 944 938 546 280 -------- --------- --------- -------- -------- Income (loss) before income taxes (7,941) 17,841 22,098 13,836 7,850 Income taxes (3,004) 6,790 8,420 5,274 2,946 -------- --------- --------- -------- -------- Net income (loss) $ (4,937) $ 11,051 $ 13,678 $ 8,562 $ 4,904 Diluted earnings (loss) per share $ (0.30) $ 0.66 $ 0.81 $ 0.52 $ 0.30 Weighted average shares outstanding assuming dilution 16,437 16,825 16,876 16,424 16,274 BALANCE SHEET DATA: DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- --------- --------- -------- -------- Working capital $ 51,847 $ 54,529 $ 49,645 $ 38,242 $ 29,610 Total assets 77,178 81,935 71,685 52,551 40,469 Total liabilities 10,799 10,997 12,987 9,190 6,197 Total stockholders' equity 66,379 70,938 58,698 43,361 34,272
See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. TABLE OF CONTENTS
Message to Stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . .14 Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Corporate and Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report, other than historical information, may include forward-looking statements, including statements with respect to financial results, product introductions, market demand, sales channels, industry trends, sufficiency of cash resources and certain other matters. These statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, including those discussed in the section entitled "Factors That May Affect Future Results of Operations" and elsewhere in this Annual Report as well as those discussed in the Company's Form 10-K and other filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, certain financial data as a percentage of net sales.
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 60.4 51.5 49.8 ------- ------ ------ Gross profit 39.6 48.5 50.2 Operating expenses: Sales and marketing 32.9 22.0 20.2 Research and development 11.7 8.8 7.2 General and administrative 5.3 3.3 3.8 ------- ------ ------ Operating income (loss) (10.3) 14.4 19.0 Interest income, net 1.7 0.8 0.8 ------- ------ ------ Income (loss) before income taxes (8.6) 15.2 19.8 Income taxes (3.3) 5.8 7.5 ------- ------ ------ Net income (loss) (5.3)% 9.4% 12.3% ------- ------ ------ ------- ------ ------ 1997 1996 1995 ------- ------ ------ Switching product sales 37.7% 13.4% 5.8% Shared bandwidth hub sales 54.4 80.5 84.9 Other sales 7.9 6.1 9.3 ------- ------ ------ Net sales 100.0% 100.0% 100.0% ------- ------ ------ ------- ------ ------ 1997 1996 1995 ------- ------ ------ Domestic sales 72.8% 85.6% 88.4% Export sales to: Europe 9.6 7.9 6.6 Canada 3.6 2.9 3.3 Asia 11.6 2.9 1.1 Latin America 2.4 0.7 0.6 ------- ------ ------ Net sales 100.0% 100.0% 100.0% ------- ------ ------ ------- ------ ------
1997 COMPARED WITH 1996 NET SALES Net sales in 1997 decreased to $92.3 million from $117.9 million in 1996 as sales of the Company's new network switching products did not increase quickly enough to offset the decrease in sales of its prior generation shared bandwidth intelligent hubs. Demand for prior generation shared bandwidth intelligent hubs may continue to decline as the market transitions to switching products with enhanced price/performance characteristics. Export sales in 1997 increased to $25.1 million, or 27.2% of net sales, compared to $17.1 million, or 14.4% of net sales in 1996 primarily due to growth in export sales to customers in Malaysia and South Korea. Sales to customers in Malaysia and South Korea declined in the fourth quarter of 1997 compared to the preceding quarters in 1997 and may decrease in 1998 compared to 1997 due to the adverse economic developments in these countries. Sales to Electronic Data Systems Corporation ("EDS") in 1997 and 1996 were 16.1% and 19.4%, respectively, of net sales. Sales to AT&T Corp. ("AT&T") in 1997 and 1996 were 1.6% and 12.1%, respectively, of net sales. Direct net sales to various agencies of the U.S. Government (aggregated as one) were 11.7% and 13.5%, respectively, of net sales. In addition, a portion of the Company's sales to EDS, AT&T and other corporations were resold by those organizations to various agencies of the U.S. Government. GROSS PROFIT Gross profit decreased to $36.5 million or 39.6% of net sales in 1997 compared to $57.1 million or 48.5% of net sales in 1996. Gross profit as a percentage of net sales in 1997 was impacted by several factors, including a decline in the net realizable value of certain prior generation products, an increase in reserves for slow-moving inventory of such prior generation products, product mix and lower sales volumes. Gross profit margins in future periods may be affected by several factors such as continued product transition, declining market demand for prior generation products, obsolescence or surplus of inventory, shifts in product mix, changes in channels of distribution, sales volume, fluctuation in manufacturing costs, pricing strategies of the Company and its competitors and fluctuations in sales of integrated third-party products. Gross profit margins are typically lower on sales of integrated third-party products. SALES AND MARKETING Sales and marketing expenses increased to $30.4 million or 32.9% of net sales in 1997 from $26.0 million or 22.0% of net sales in 1996. The increase in sales and marketing expenses was primarily due to higher levels of staffing in sales, marketing and technical support and associated costs. The Company expects sales and marketing expenses to continue to increase in amount, but may vary as a percentage of net sales in the future. RESEARCH AND DEVELOPMENT Research and development expenses increased to $10.8 million or 11.7% of net sales in 1997 compared to $10.4 million or 8.8% of net sales in 1996. The Company's research and development costs are expensed in the period incurred. The increase in research and development expenses was primarily due to an increase in the number of development personnel and increased costs related to the development and testing of switching products, network management products and network security products. The Company expects to continue to invest in research and development activities in the future in an effort to broaden its family of network switching, management and security products. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $4.9 million or 5.3% of net sales in 1997 from $3.8 million or 3.3% of net sales in 1996. As the Company continues to expand its domestic and foreign operations, general and administrative expenses are expected to increase in amount, but may vary as a percentage of net sales in the future. NET INTEREST INCOME Net interest income increased to $1.6 million in 1997 compared to $0.9 million in 1996 primarily due to an increase in the Company's average cash and investment balances during 1997. Net interest income may vary in the future based on the Company's cash flow and rate of return on investments. INCOME TAXES The Company's effective income tax rate decreased to 37.8% in 1997 compared to 38.1% in 1996. See Note 7 of Notes to Consolidated Financial Statements. 1996 COMPARED WITH 1995 NET SALES Net sales in 1996 increased by 5.8% to $117.9 million from $111.5 million in 1995 as sales of the Infinity Intelligent Hub and InfiniteSwitch product line increased. Export sales in 1996 increased to $17.1 million, or 14.4% of net sales, compared to $12.9 million , or 11.6% of net sales in 1995. Export sales increased in 1996 as the Company increased its international sales and marketing efforts, especially in Asia. In 1996, 19.4% of net sales were to EDS compared to 28.3% of net sales in 1995; 13.5% of net sales in 1996 were to various agencies of the U.S. Government (aggregated as one), compared to 9.6% of net sales in 1995; and 12.1% of net sales in 1996 were to AT&T compared to 12.0% of net sales in 1995. GROSS PROFIT Gross profit increased to $57.1 million in 1996 compared to $56.0 million in 1995 but decreased as a percentage of net sales to 48.5% in 1996 from 50.2% in 1995. Gross profit as a percentage of net sales was impacted during 1996 by an increase in reserves for slow-moving inventory, product mix and the market transition to higher performance switch products. SALES AND MARKETING Sales and marketing expenses increased to $26.0 million or 22.0% of net sales in 1996 compared to $22.6 million or 20.2% of net sales in 1995. The increase in sales and marketing expenses was primarily due to expansion of domestic and international sales and marketing personnel and associated costs. RESEARCH AND DEVELOPMENT Research and development expenses increased to $10.4 million or 8.8% of net sales in 1996 compared to $8.0 million or 7.2% of net sales in 1995. The increase in research and development expenses in 1996 was primarily due to an increase in the number of developmental personnel, additional product development expenses and increased costs related to the development and testing of new switching products. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased in amount to $3.8 million in 1996 compared to $4.2 million in 1995 and declined as a percentage of net sales to 3.3% in 1996 from 3.8% in 1995. NET INTEREST INCOME Net interest income remained constant at $0.9 million for both 1996 and 1995. INCOME TAXES The Company's effective tax rate remained unchanged at 38.1% for both 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity at December 31, 1997 were $17.9 million of cash and cash equivalents, $14.7 million of short-term investments, $3.2 million of highly liquid investments with a stated maturity beyond one year and an available line of credit. As of December 31, 1997, working capital was $51.8 million compared to $54.5 million as of December 31, 1996. Cash flows provided by operations in 1997 were $13.4 million, primarily due to a decrease in inventory and accounts receivable balances partially offset by a net loss for the year. Future fluctuations in accounts receivable and inventory balances will be dependent upon several factors, including but not limited to quarterly sales, ability to collect accounts receivable timely, the Company's strategy as to building inventory in advance of receiving orders from customers, and the accuracy of the Company's forecasts of product demand and component requirements. Cash used in investing activities in 1997 consisted of purchases of property and equipment of $3.4 million partially offset by net maturities of investments of $1.0 million. Cash provided by financing activities in 1997 was $0.6 million which consisted of the issuance of common stock relating to the exercise of certain warrants and employee stock options. During 1997, the Company funded its operations solely through cash flow from operations. The Company has a bank line of credit agreement with $15.0 million of maximum available borrowings. Borrowings under this line are secured by the Company's accounts receivable and inventory and are subject to certain limitations and conditions, including the maintenance of certain financial ratios and minimum net tangible worth amounts. Borrowings on this line accrue interest at prime with interest due monthly and principal due April 12, 1999. As of December 31, 1997, the Company had no borrowings outstanding under its bank credit facility, and had $15.0 million available for allowable borrowings at an applicable interest rate of 8.5% per annum. See Note 4 of Notes to Consolidated Financial Statements. The Company believes that its cash, cash equivalents and investment balances and the availability of borrowings under its bank credit facility will provide sufficient cash resources to finance its operations and currently projected capital expenditures through 1998. However, there can be no assurance the Company's cash resources will be sufficient for 1998 or future periods. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS As noted above, the foregoing discussions may include forward-looking statements that involve risks and uncertainties. In addition to those factors discussed elsewhere in this Annual Report and those discussed in the Company's Form 10-K and other filings with the Securities and Exchange Commission, the Company identifies the following factors which could affect the Company's actual results and cause actual results to differ materially from those in the forward-looking statements. TECHNOLOGICAL CHANGES. The market for the Company's products is characterized by frequent product introductions, rapidly changing technology and continued evolution of new industry standards. The market for network intelligent hubs and switches requires the Company's products to be compatible and interoperable with products and architectures offered by various vendors, including other networking products, workstation and personal computer architectures and computer and network operating systems. The Company's success will depend to a substantial degree upon its ability to develop and introduce in a timely manner new products and enhancements to its existing products that meet changing customer requirements and evolving industry standards. The development of technologically advanced products is a complex and uncertain process requiring high levels of innovation as well as the accurate anticipation of technological and market trends. There can be no assurance that the Company will be able to identify, develop, manufacture, market and support new or enhanced products successfully in a timely manner. Further, the Company or its competitors may introduce new products or product enhancements that shorten the life cycle of or obsolete the Company's existing product lines which could have a material adverse effect on the Company's business, operating results and financial condition. COMPETITION AND MARKET ACCEPTANCE. The market for network intelligent hubs and switches is intensely competitive and subject to frequent product introductions with improved price/performance characteristics. Even if the Company does introduce advanced products which meet evolving customer requirements in a timely manner, there can be no assurance that the new Company products will gain market acceptance. Many networking companies, including Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. ("Cabletron"), Bay Networks, Inc. ("Bay Networks"), FORE Systems, Inc. ("FORE Systems"), Xylan Corporation ("Xylan") and others, have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than the Company. Many of the Company's large competitors offer customers a broader product line which provides a more comprehensive networking solution than the Company currently offers. The Company anticipates increased competition from large telecommunication equipment vendors which are expanding their capabilities in the data networking market. For example, Lucent Technologies has acquired several networking companies to enhance its capabilities in data networking. Further the Company anticipates increased competition from private "start-up" companies that have developed or are developing advanced network switching products. Increased competition in the networking industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. The Company is pursuing a strategy to increase the percentage of its revenue generated through indirect sales channels including value added resellers, system integrators, original equipment manufacturers and network service providers. There can be no assurance that the Company's products will gain market acceptance in these indirect sales channels. Further, competition among networking companies to sell products through these indirect sales channels could result in significant price competition and reduced profit margins. The Company is also pursuing a strategy to broaden and further differentiate its product line by introducing complementary network switching, management and security products and incorporating new technologies into its existing product line. There can be no assurance that the Company will successfully introduce these products or that such products will gain market acceptance. The Company anticipates competition from networking companies, network security companies and others in each of its product lines. The Company anticipates that profit margins will vary among its product lines and that product mix fluctuations could have an adverse effect on the Company's overall profit margins. ACQUISITIONS. Cisco, Cabletron, Bay Networks, FORE Systems, Lucent Technologies and other competitors have recently acquired several networking companies with complementary technologies, and the Company anticipates that such acquisitions will continue in the future. These acquisitions may permit such competitors to accelerate the development and commercialization of broader product lines and more comprehensive networking solutions than the Company currently offers. In the past, the Company has relied upon a combination of internal product development and partnerships with other networking vendors to provide competitive networking solutions to customers. Certain of the recent and future acquisitions by the Company's competitors may have the effect of limiting the Company's access to commercially significant technologies. Further, the business combinations and acquisitions in the networking industry are creating companies with larger market shares, customer bases, sales forces, product offerings and technology and marketing expertise. There can be no assurance that the Company will be able to compete successfully in such an environment. The Company may, in the future, acquire or invest in another company, business unit, product line, or technology to accelerate the development of products and sales channels complementary to the Company's existing products and sales channels. Acquisitions involve numerous risks, including difficulties in assimilation of operations, technologies, and products of the acquired companies; risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions; the potential loss of key employees of the acquired company; and the diversion of management's attention from normal daily operation of the Company's business. PRODUCT TRANSITIONS. Once current networking products have been in the market place for a period of time and begin to be replaced by higher performance products (whether of the Company's or a competitor's design), the Company expects the net sales of such networking products to decrease. In order to achieve revenue growth in the future, the Company will be required to design, develop and successfully commercialize higher performance products in a timely manner. For example, the market for shared bandwidth intelligent hubs, sales of which represented the majority of the Company's net sales over the past several years, decreased in 1997 and may continue to decrease as switching products with enhanced price/performance characteristics gain market acceptance. There can be no assurance that the Company will be able to introduce new products and gain market acceptance quickly enough to avoid adverse revenue transition patterns during current or future product transitions. MANUFACTURING AND AVAILABILITY OF COMPONENTS. The Company's manufacturing operations consist primarily of final assembly, testing and quality control of subassemblies and finished units. Materials used by the Company in its manufacturing processes include semiconductors such as microprocessors, memory chips and application specific integrated circuits ("ASICs"), printed circuit boards, power supplies and enclosures. All of the materials used in the Company's products are purchased under contracts and purchase orders with third parties. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain components are available from one or a limited number of suppliers. For example, certain ASICs designed into the Company's InfiniteSwitch products are supplied by FORE Systems (see "Factors That May Affect Future Results of Operations - Competition and Market Acceptance"). The lead times for delivery of components vary significantly and exceed twelve weeks for certain components. If the Company should fail to forecast its requirements accurately for components, it may experience excess inventory or shortages of certain components which could have an adverse effect on the Company's business and operating results. Further, any interruption in the supply of any of these components, or the inability of the Company to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse effect on the Company's business and operating results. THIRD-PARTY PRODUCTS. The Company believes that it is beneficial to work with third parties with complementary technologies to broaden the appeal of the Company's switches, intelligent hub and network security products. These alliances allow ODS to provide integrated solutions to its customers, combining ODS developed technology with third-party products such as certain routers from Cisco, ATM switches from FORE systems and Gigabit Ethernet switch technology from Lucent Technologies. As the Company also competes with these technology partners in certain segments of the market, there can be no assurance that the Company will have access to all of the third-party products which may be desirable in to offer fully integrated solutions to ODS customers. DEPENDENCE ON KEY CUSTOMERS. A relatively small number of customers have accounted for a significant portion of the Company's revenue. U.S. Government agencies and strategic network integrators, such as EDS, which purchase the Company's products for internal use and offer the Company's products for resale, are expected to continue to account for a substantial portion of the Company's net revenue. The Company continuously faces competition from Cisco, Cabletron, Bay Networks, FORE Systems, Xylan and others for U.S. Government networking projects and corporate networking installations. Any reduction or delay in sales of the Company's products to these customers could have a material adverse effect on the Company's operating results. INTERNATIONAL OPERATIONS. Export sales accounted for approximately 27.2% of the Company's revenue in 1997. The Company expects that export sales will represent a significant portion of its business in the future. The Company's international operations may be affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand, as well as by risks such as increases in duty rates, difficulties in distribution and other constraints upon international trade. For example, the fluctuations in currency exchange rates and adverse economic developments in Malaysia, South Korea and certain other countries adversely affected demand for the Company's products in those countries in the fourth quarter of 1997 and may continue to adversely affect demand for the Company's products in those countries in 1998. Additionally, while the Company's current products are designed to meet relevant regulatory requirements of the foreign markets in which they are sold, any inability to obtain any required foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's operating results. INTELLECTUAL PROPERTY. The Company's success and its ability to compete is dependent, in part, upon its proprietary technology. The Company does not hold any issued patents and currently relies on a combination of contractual rights, trade secrets and copyright laws to establish and protect its proprietary rights in its products. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company is also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights of others. The Company could incur substantial costs in defending itself and its customers against any such claim regardless of the merits of such claims. In the event of a successful claim of infringement, the Company may be required to obtain one or more licenses from third parties. There can be no assurance that the Company could obtain the necessary licenses on reasonable terms. IMPACT OF YEAR 2000. Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated to be immaterial. The Company has initiated communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company has determined it has immaterial exposure to contingencies related to the Year 2000 Issue for the products it has sold. The Year 2000 project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continuous availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. GENERAL. Sales of networking products fluctuate, from time to time, based on numerous factors, including customers' capital spending levels and general economic conditions. While certain industry analysts believe that there is a significant market for network intelligent hubs, switches, management and security products, there can be no assurance as to the rate or extent of the growth of such market or the potential adoption of alternative technologies. Future declines in networking product sales as a result of general economic conditions, adoption of alternative technologies or any other reason could have a material adverse effect on the Company's business, operating results and financial condition. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue and earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. Also, the Company participates in a highly dynamic industry which often results in volatility of the Company's common stock price. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders, ODS Networks, Inc. We have audited the accompanying consolidated balance sheets of ODS Networks, Inc., and subsidiaries (the Company) as of December 31, 1997, and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ODS Networks, Inc., and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas January 21, 1998 ODS NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
DECEMBER 31, -------------------- 1997 1996 -------- --------- ASSETS Current Assets: Cash and cash equivalents $ 17,911 $ 6,565 Short-term investments 14,667 13,790 Accounts receivable, net of allowance for doubtful accounts and returns of $758 in 1997 and $822 in 1996 8,668 16,573 Income taxes receivable 3,159 85 Inventories, net (Note 3) 14,671 25,573 Deferred tax assets (Note 7) 1,721 1,499 Other assets 1,221 840 -------- --------- Total current assets 62,018 64,925 Property and Equipment: Land 600 600 Building and building improvements 2,492 2,471 Machinery and equipment 20,649 17,571 Furniture and fixtures 1,048 897 Leasehold improvements 1,068 936 -------- --------- 25,857 22,475 Accumulated depreciation (14,021) ( 10,736) -------- --------- 11,836 11,739 Long-term investments 3,168 5,050 Other assets 156 221 -------- --------- TOTAL ASSETS $ 77,178 $81,935 -------- --------- -------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses (Note 3) $8,709 $ 8,683 Deferred revenue 1,462 1,713 Total current liabilities 10,171 10,396 Deferred tax liabilities (Note 7) 628 601 Commitments (Note 5) - - Stockholders' Equity (Note 8): Preferred stock, $.01 par value: Authorized shares - 5,000 No shares issued and outstanding - - Common stock, $.01 par value: Authorized shares - 80,000 Issued and outstanding shares - 16,486 in 1997 and 16,328 in 1996 165 163 Additional paid-in capital 19,488 18,908 Retained earnings 47,032 51,969 Foreign currency translation adjustments (306) (102) -------- --------- Total stockholders' equity 66,379 70,938 -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,178 $81,935 -------- --------- -------- ---------
See accompanying notes. ODS NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ------- -------- -------- Net sales $92,327 $117,864 $111,450 Cost of sales 55,795 60,737 55,499 ------- -------- -------- Gross profit 36,532 57,127 55,951 Operating expenses: Sales and marketing 30,390 25,969 22,555 Research and development 10,810 10,417 8,021 General and administrative 4,912 3,844 4,215 ------- -------- -------- 46,112 40,230 34,791 ------- -------- -------- Operating income (loss) (9,580) 16,897 21,160 Interest income, net 1,639 944 938 ------- -------- -------- Income (loss) before provision for income taxes (7,941) 17,841 22,098 Provision for income taxes (3,004) 6,790 8,420 ------- -------- -------- Net income (loss) $(4,937) $ 11,051 $ 13,678 ------- -------- -------- ------- -------- -------- Basic earnings (loss) per share $ (0.30) $ 0.68 $ 0.85 ------- -------- -------- ------- -------- -------- Diluted earnings (loss) per share $ (0.30) $ 0.66 $ 0.81 ------- -------- -------- ------- -------- -------- Weighted average common shares outstanding 16,437 16,261 16,037 ------- -------- -------- ------- -------- -------- Weighted average shares outstanding assuming Dilution 16,437 16,825 16,876 ------- -------- -------- ------- -------- --------
See accompanying notes. ODS NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Foreign Additional Currency Number of Common Paid-in Retained Translation Stockholders' Shares Stock Capital Earnings Adjustment Equity --------- ------- --------- --------- ------------ ------------- Balance at December 31, 1994 15,840 $158 $16,056 $27,240 ($93) $43,361 Foreign currency translation adjustment - - - - (18) (18) Exercise of stock warrants 52 1 234 - - 235 Exercise of employee stock options 258 3 615 - - 618 Tax benefit derived from the exercise of employee stock options - - 824 - - 824 Net income for 1995 - - - 13,678 - 13,678 --------- ------- --------- --------- ------------ ------------- Balance at December 31, 1995 16,150 162 17,729 40,918 (111) 58,698 Foreign currency translation adjustment - - - - 9 9 Exercise of stock warrants 5 - 22 - - 22 Exercise of employee stock options 173 1 614 - - 615 Tax benefit derived from the exercise of employee stock options - - 543 - - 543 Net income for 1996 - - - 11,051 - 11,051 --------- ------- --------- --------- ------------ ------------- Balance at December 31, 1996 16,328 163 18,908 51,969 (102) 70,938 FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - - - (204) (204) EXERCISE OF STOCK WARRANTS 59 1 266 - - 267 EXERCISE OF EMPLOYEE STOCK OPTIONS 99 1 287 - - 288 TAX BENEFIT DERIVED FROM THE EXERCISE OF EMPLOYEE STOCK OPTIONS - - 27 - - 27 NET LOSS FOR 1997 - - - (4,937) - (4,937) --------- ------- --------- --------- ------------ ------------- BALANCE AT DECEMBER 31, 1997 16,486 $165 $19,488 $47,032 ($306) $66,379 --------- ------- --------- --------- ------------ ------------- --------- ------- --------- --------- ------------ -------------
See accompanying notes ODS NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- ------- -------- OPERATING ACTIVITIES: Net income (loss) $(4,937) $11,051 $13,678 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 3,285 2,618 2,083 Provision for deferred income taxes (195) (455) (386) Provision for doubtful accounts and returns 86 227 382 Changes in operating assets and liabilities: Accounts receivable 7,715 (1,300) (3,479) Income taxes receivable (3,047) (154) 1,328 Other receivables 104 (262) 48 Inventories 10,902 (6,199) (5,211) Other assets (316) (122) (316) Accounts payable and accrued expenses (225) (1,471) 3,152 Net cash provided by operating activities 13,372 3,933 11,279 INVESTING ACTIVITIES: Purchases of short-term investments (17,967) (23,707) (21,473) Maturities of short-term investments 24,616 25,245 18,130 Sale of short-term investments - - 1,498 Purchases of long-term investments (5,665) (5,050) - Maturities of long-term investments 21 - - Purchases of property and equipment (3,382) (4,899) (6,123) -------- ------- -------- Net cash used in investing activities (2,377) (8,411) (7,968) FINANCING ACTIVITIES: Exercise of stock purchase warrants 267 22 235 Exercise of employee stock options 288 615 618 -------- ------- -------- Net cash provided by financing activities 555 637 853 -------- ------- -------- Effect of foreign currency translation adjustment on cash and cash equivalents (204) 9 (18) Net increase (decrease) in cash and cash equivalents 11,346 (3,832) 4,146 Cash and cash equivalents at beginning of period 6,565 10,397 6,251 -------- ------- -------- Cash and cash equivalents at end of period $17,911 $ 6,565 $10,397 -------- ------- -------- -------- ------- --------
ODS NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS ODS Networks, Inc. and subsidiaries (the Company) develops, manufactures, and markets a full range of local area networking products for large and mid-range organizations. ODS' modular chassis integrate multiple combinations of switched and shared Ethernet, Token Ring, FDDI and ATM while maintaining fault tolerance, interoperability and manageability. The Company's network management and network security products provide management capability for customers' networks including fault monitoring, security monitoring, performance measurements, accounting and configuration management. These products allow customers to integrate efficiently a wide variety of computer equipment in numerous flexible configurations into a single, enterprise-wide computer network. Sales of the Company's products are primarily made directly to major corporations and government agencies for networking their internal computer systems and through domestic and international reseller channels. . 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of ODS Networks, Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers cash and all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. SHORT-TERM INVESTMENTS The Company's short-term investments consist of U.S. government obligations, government agencies, and corporate securities with maximum maturities of one year. Short-term investments are classified as available for sale. These investments are valued at market value, which approximates amortized cost. The difference between fair value and amortized cost is not material. RISK CONCENTRATION Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash-equivalents, investments and accounts receivable. The Company places its investments in U.S. government obligations, corporate securities and money market funds. Substantially all of the Company's cash, cash equivalents and investments are maintained with one major financial institution. The Company sells its products to customers in diversified industries worldwide, primarily in North America, Europe, Asia and Latin America. Fluctuations in currency exchange rates and adverse economic developments in Malaysia, South Korea and certain other countries could adversely effect the Company's operating results. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management expectations. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain components are available from one or a limited number of suppliers. The inability of any supplier or manufacturer to fulfill supply requirements of the Company could impact future results. INVENTORIES Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. Management estimates the allowance required to state inventory at the lower of cost or market. There is a risk that the Company will forecast demand for its products and market conditions incorrectly and produce excess inventories. Therefore, there can be no assurance that the Company will not produce excess inventory and incur inventory lower of cost or market charges in the future. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from 3 to 20 years. Leasehold improvements are amortized over the shorter of their useful lives or the terms of the leases. Repair and maintenance costs are expensed as incurred. LONG-TERM INVESTMENTS Long-term investments consist of U.S. government obligations and corporate obligations with maturities which range up to two years. Long-term investments are classified as available for sale. These investments are valued at market value, which approximates amortized cost. The difference between fair value and amortized cost is not material. FOREIGN CURRENCY TRANSLATION The Company's international subsidiaries use their local currencies as their functional currencies. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date, and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of stockholders' equity. ACCOUNTING FOR STOCK OPTIONS The Company has elected to continue to follow APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, if the exercise price of an employee's stock option equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standard (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which provides for either recognition or disclosure of a hypothetical charge for stock options. The Company did not recognize any charge in its income statement, but has provided the required disclosure in Note 8. NET INCOME PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS), which simplifies existing computational guidelines, revises disclosure requirements, and increases the comparability of earnings per share on an international basis. The Company adopted SFAS No. 128 on December 31, 1997 and has restated all EPS data presented. Under SFAS No. 128 the Company is required to report two separate earnings per share numbers, basic EPS and diluted EPS. Diluted EPS is the same number the Company has previously reported as earnings per share and includes the dilutive impact of employee stock options and warrants. REVENUE RECOGNITION The Company generally recognizes product revenue upon shipment of product. The Company accrues for estimated warranty costs, sales returns and other allowances at the time of shipment based on its experience. Revenue from maintenance contracts is deferred and recognized over the contractual period the services are performed. To date, warranty costs and sales returns have not been material. There is a risk that technical issues on new products could result in unexpected warranty costs and returns. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the accounting for doubtful accounts, sales discounts, sales returns, warranty costs, depreciation and taxes. Actual results could differ from these estimates. INCOME TAXES The income tax provision is based on pretax financial accounting income or loss. The Company accounts for income taxes pursuant to SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which uses the liability method to calculate deferred income taxes. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. RECLASSIFICATION Certain amounts in prior year financial statements have been reclassified to conform with current year presentation. 3. BALANCE SHEET DETAIL (IN THOUSANDS) INVENTORIES
DECEMBER 31, ------------------------------ 1997 1996 --------- ----------- Raw materials $ 4,077 $ 6,138 Work in process 2,004 2,308 Finished products 6,593 13,530 Demonstration systems 1,997 3,597 --------- ----------- $ 14,671 $ 25,573 --------- ----------- --------- ----------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1997 1996 --------- ----------- Trade accounts payable $5,381 $5,440 Accrued sales commissions 563 681 Accrued vacation 724 538 Accrued property taxes 689 631 Accrued warranty expense 475 475 Other (individually less than 5% of current liabilities) 877 918 --------- ----------- $8,709 $8,683 --------- ----------- --------- -----------
4. LINE OF CREDIT The Company has a bank line of credit agreement that allows the Company to borrow amounts up to $15.0 million. Borrowings under this line are secured by the Company's accounts receivable and inventory and are subject to certain limitations and conditions, including the maintenance of certain financial ratios and minimum net tangible worth amounts. The Company is also restricted under this agreement as to the payment of dividends. Borrowings accrue interest at prime (8.5% at December 31, 1997) with interest due monthly and principal due April 12, 1999. A fee of 0.2% is paid quarterly on the average unused portion of the line of credit. At December 31, 1997, the Company had no borrowings outstanding under this line of credit and had $15.0 million available for additional borrowings allowable under this agreement. The Company made no interest payments during 1997, 1996 or 1995. 5. LEASES The Company leases office space for its corporate headquarters in Richardson, Texas under an operating lease, the base term of which expires in February 2005, with two seven-year options to extend the term of the lease, subject to compliance with certain conditions. The Company also leases a separate warehouse facility adjacent to its headquarters under a lease which expires in June 2000. In addition, the Company leases office space for its U.S. and international sales offices. Future minimum lease payments consisted of the following at December 31, 1997 (in thousands):
1998 $1,743 1999 1,234 2000 1,114 2001 1,090 2002 1,048 Thereafter 1,995 ------- $8,224 ------- -------
Total rental expense of $2.1 million, $1.9 million and $1.3 million was charged to operations during 1997, 1996, and 1995, respectively. EMPLOYEE BENEFIT PLANS EMPLOYEE STOCK PURCHASE PLAN On April 24, 1997 the Company adopted an Employee Stock Purchase Plan (the Purchase Plan) under which 0.5 million shares of common stock have been reserved for issuance. Eligible employees may designate not more than 10% of their compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan, and each participant may purchase up to 500 shares in any one calendar year. On January 31 and August 31 of each calendar year, shares of common stock are purchased with the employees' payroll deductions over the immediately preceding six months at a price per share of 85% of the lesser of the market price of the common stock on the purchase date or the market price on the first day of the six-month period. The Purchase Plan will terminate no later than April 24, 2007. Subsequent to December 31,1997, 10,311 shares of stock were issued under the Purchase Plan for an aggregate purchase price of $65,784 related to the purchase period which commenced on August 1, 1997 and ended on January 31, 1998. EMPLOYEE 401(k) PLAN The Company has adopted a plan known as the ODS 401 (k) Savings Plan (the Plan) to provide retirement and incidental benefits for its employees. The Plan covers substantially all employees who meet minimum age and service requirements. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees. Employees may contribute from 1% to 19% of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service. The Company matches employee contributions at the rate of $0.25 per each $1.00 of contribution on the first 4% of deferred compensation. Company matching contributions to the Plan were approximately $121,000, $110,000, and $83,000 in 1997, 1996 and 1995, respectively. 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and December 31, 1996 are as follows (in thousands):
1997 1996 ------- ------- Deferred tax assets: Foreign subsidiaries net operating loss carryforward $ 429 $ 560 Vacation accrual 272 202 Allowance for doubtful accounts and returns 285 309 Warranty accrual 179 178 Inventory allowance 973 745 Other 12 65 ------- ------- Deferred tax assets 2,150 2,059 Valuation allowance for deferred tax assets (429) (560) ------- ------- Deferred tax assets, net of allowance 1,721 1,499 ------- ------- Deferred tax liabilities: Tax over book depreciation 647 535 Other (19) 66 ------- ------- Total deferred tax liabilities 628 601 ------- ------- Net deferred tax assets $1,093 $ 898 ------- ------- ------- -------
Significant components of the provision for income taxes for the years ended 1997, 1996 and 1995 are as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- Income tax provision 1997 1996 1995 --------- --------- ------- Federal: Current $(2,671) $6,437 $7,798 Deferred (176) (403) (336) State: Current (249) 766 988 Deferred (19) (52) (50) Foreign: Current 111 42 20 --------- --------- ------- $(3,004) $6,790 $8,420 --------- --------- ------- --------- --------- -------
The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended 1997, 1996 and 1995 are as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- --------- ------- Reconciliation of income tax provision to statutory rate: Income tax expense at statutory rate $(2,779) $6,244 $7,734 State taxes, less federal benefit (174) 466 620 Other (51) 80 66 --------- --------- ------- $(3,004) $6,790 $8,420 --------- --------- ------- --------- --------- -------
Net operating loss carryforwards of the foreign subsidiaries of $0.9 million at December 31, 1997 is available indefinitely for offset only against taxable income generated by the subsidiary. The Company made income tax payments of $0.4 million, $7.4 million and $7.6 million during 1997, 1996 and 1995, respectively. 8. STOCK OPTIONS AND WARRANTS At December 31, 1997, the Company has four stock-based compensation plans, which are described below. The Company established an Incentive Stock Option Plan in 1983, which provides for the issuance of options to key employees of the Company to purchase common stock of the Company. The 1983 Incentive Stock Option Plan was terminated on November 10, 1993. In 1987, an additional Incentive Stock Option Plan was established with similar provisions to allow for further issuance of options. The 1987 Incentive Stock Option Plan was terminated on January 26,1997. Each plan provides for the issuance of up to 1.2 million shares of common stock upon exercise of options granted pursuant to the plans. In 1995, the Company adopted the 1995 Stock Option Plan (the 1995 Plan) which provides for the issuance of up to 1.6 million shares of common stock upon exercise of options granted pursuant to the 1995 Plan. The 1995 Plan provides for the issuance of both non-qualified and incentive stock options to employees, officers, and employee-directors of the Company. In 1995, the Company adopted the 1995 Non-employee Director Stock Option Plan (the 1995 Non-employee Director Plan) which provides for the issuance of up to 160,000 shares of common stock upon exercise of options granted pursuant to the 1995 Non-employee Director Plan. The Plan provides for the issuance of non-qualified stock options to non-employee directors. In 1995 and 1994, options to purchase 60,000 shares, and 12,000 shares, respectively, were granted to directors. The terms and exercise prices of these options are similar to the incentive stock options. Common shares reserved for future grants under all of the stock option plans described above amounted to 1.1 million shares at December 31, 1997. The Compensation Committee of the Board of Directors determines the term of each option, option exercise price within limits set forth in the plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over five years from grant date). However, the exercise price of any incentive stock option may not be less than the fair market value of the shares on the date granted (or less than 110% of the fair market value in the case of optionees holding more than 10% of the voting stock of the Company), and the term cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of the Company's voting stock). 8. STOCK OPTIONS AND WARRANTS (cont.) A summary of the Company's stock option activity and related information for the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995 ---------------------------- ------------------------- ---------------------------- WEIGHTED Weighted Weighted NUMBER OF AVERAGE Number of Average Number of Average OPTIONS EXERCISE Options Exercise Options Exercise (IN THOUSANDS) PRICE (In thousands) Price (in thousands) Price -------------- ---------- --------------- -------- -------------- --------- Outstanding at beginning of year 1,200 $13.88 1,086 $9.27 1,083 $4.33 Granted 605 13.78 431 22.63 302 21.47 Exercised (99) 2.93 (173) 3.53 (258) 2.40 Cancelled (134) 16.15 (144) 17.80 (41) 11.02 -------------- --------------- -------------- Outstanding at end of year 1,572 14.34 1,200 13.88 1,086 9.27 -------------- --------------- -------------- -------------- --------------- -------------- Options exercisable at end of year 562 481 512
Information related to options outstanding at December 31, 1997, is summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- -------------------------- Weighted Weighted Weighted Range of Outstanding Average Average Exercisable Average Exercise at 12/31/97 Remaining Exercise at 12/31/97 Exercise Prices (in Thousands) Contractual Life Price (in Thousands) Price - ---------------------- ---------------- ------------------ --------- -------------- ----------- $2.50 - $ 8.06 425 3.80 years $ 4.83 365 $ 4.41 8.50 - 13.88 503 8.90 years 13.36 31 9.99 14.25 - 21.00 355 7.20 years 19.22 97 19.99 22.55 - 36.25 289 6.80 years 23.99 69 24.23 ----- --- 1,572 6.75 years 14.34 562 9.86 ----- --- ----- ---
FAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, requires the disclosure of pro forma net income and earnings per share information computed as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method set forth in SFAS 123. The fair value for these options was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions:
EMPLOYEE STOCK OPTIONS ---------------------------- 1997 1996 1995 ------ ------ ------ Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 6.0% 5.1% 5.7% Expected volatility 67.0% 62.0% 62.0% Expected life (in years) 2.0 2.0 2.0
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In addition, because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, the pro forma information does not reflect the pro forma effect of all previous stock option grants of the Company, and thus the pro forma information is not necessarily indicative of future amounts until SFAS 123 is applied to all outstanding stock options. Information relating to the fair value of option grants made during 1997, 1996 and 1995 is as follows:
1997 1996 1995 -------- -------- -------- Options granted with exercise price equal to fair value of common stock: Number of options (in thousands) 550 393 266 Weighted average exercise price per share $13.62 $22.35 $21.36 Weighted average fair value of stock option grants per Black-Scholes option valuation model $ 5.65 $11.32 $10.95 Options granted with exercise price greater than fair value of common stock:
1997 1996 1995 -------- -------- -------- Number of options (in thousands) 55 38 36 Weighted average exercise price per share $ 15.27 $25.57 $22.55 Weighted average fair value of stock option grants per Black-Scholes option valuation model $ 5.17 $10.95 $9.92
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. For purposes of pro forma disclosure, the Company assumed that it would not receive a tax deduction or tax benefit for financial reporting purposes related to incentive stock options. In management's opinion, the pro forma disclosure is not necessarily indicative of the net financial effect assuming the Company was required to expense the fair value of employee stock options because an incentive stock option often generates a tax deduction for the Company because the stock option holder does not comply with the holding period requirements under applicable tax laws. The Company's pro forma information follows (in thousands, except earnings per share information):
1997 1996 1995 --------- -------- -------- Pro forma net income (loss) ($7,535) $8,946 $12,837 Pro forma earnings (loss) per share ($0.46) $ 0.54 $ 0.77
EXCHANGE OF STOCK OPTIONS SUBSEQUENT TO DECEMBER 31, 1997 On January 21, 1998, the Compensation Committee of the Board of Directors approved a stock option exchange program (the Exchange Program), pursuant to which certain employees and officers holding incentive stock options (i) awarded under the Company's 1987 Incentive Stock Option Plan in 1997 and (ii) awarded prior to December 31, 1997, under the Company's 1995 Stock Option Plan (the 1995 Plan), were given the opportunity to exchange such options (Existing Options) for new options (New Options), based on the fair market value of the Company's Common Stock at the close of business on January 30, 1998. All directors of the Company, including the President and Chief Executive Officer, and the Senior Vice President were ineligible to participate in the Exchange Program. As a result of significant declines in the market value of the Company's Common Stock since issuance of the Existing Options, the Existing Options were exercisable at prices which substantially exceeded the market value of the Common Stock. In approving the Exchange Program and in keeping with the Company's philosophy of utilizing equity incentives to motivate and retain qualified employees, the Compensation Committee acknowledged that retention and attraction of qualified employees are critical to the Company's success and its ability to continue to meet its performance objectives. Additionally, recognizing that stock options constitute a significant component of the Company's compensation structure, the Compensation Committee deemed it important to regain the incentive intended to be provided by the New Options to purchase shares of the Company's Common Stock and therefore serve as a significant factor in the Company's ability to continue to attract and retain the services of superior quality personnel. Pursuant to the Exchange Program, holders of the Existing Options were offered the opportunity to exchange, on a share-for-share basis, such options for New Options having an exercise price of $7.50 per share, the fair market value of the Company's Common Stock on the exchange date of January 30, 1998. Each New Option was awarded under the 1995 Plan and vests and is exercisable with respect to 20% of the shares covered thereby on each anniversary date thereof. Eligible employees holding Existing Options for an aggregate of 646,800 shares of Common Stock with an average per share exercise price of approximately $15.87 elected to participate in the Exchange Program and were issued New Options covering the same aggregate number of underlying shares as they had held pursuant to their respective Existing Options. Other than the new exercise price and the commencement of a new vesting schedule, the option agreements relating to the New Options are substantially identical to the option agreements of the Existing Options they replaced. FAS 123 proforma information does not reflect this exchange as approval of the program was not granted until 1998. 9. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION The Company's operations are concentrated in one segment - the design, development and manufacture of local area network products. Sales to customers exceeding 10% of total sales were as follows: 1997 - $14.9 million to EDS and $10.8 million to various agencies of the U.S. Government (aggregated as one). ; 1996 - $22.9 million to EDS, $15.9 million to various agencies of the U.S. Government (aggregated as one) and $14.2 million to AT&T; 1995 - $31.6 million to EDS and $13.4 million to AT&T. A large portion of sales to AT&T in 1995 were attributable to a major U.S. Army customer of AT&T. Export sales, primarily to Europe, Asia, Latin America and Canada, were $25.1 million in 1997, $17.1 million in 1996, and $12.9 million in 1995. SUPPLEMENTAL FINANCIAL DATA SUMMARIZED QUARTERLY DATA (UNAUDITED) (In thousands, except per share amounts)
1997 ----------------------------------------------------------------------------- Q1 Q2 Q3 Q4 TOTAL ---------- ---------- ---------- -------- -------- REVENUE $20,161 $27,868 $26,231 $18,067 $92,327 GROSS PROFIT 8,996 11,792 10,529 5,215 36,532 NET INCOME (loss) (1,178) 129 (431) (4,937) (3,457) DILUTED EARNINGS (loss) PER SHARE (.07) 0.01 (0.03) (0.21) (0.30) 1996 ----------------------------------------------------------------------------- Q1 Q2 Q3 Q4 TOTAL ---------- ---------- ---------- -------- -------- Revenue $29,505 $31,007 $31,303 $26,049 $117,864 Gross profit 14,366 15,366 14,893 12,502 57,127 Net income 3,494 2,976 944 11,051 3,637 Diluted earnings per share 0.21 0.22 0.18 0.06 0.66
STOCK MARKET INFORMATION The Company's common stock is traded on The Nasdaq Stock Market(SM) under the symbol ODSI. As of March 2, 1998, there were approximately 300 holders of record of the common stock. The following table sets forth, for the periods indicated, the high and low sales prices for the common stock, as reported by The Nasdaq Stock Market, after giving retroactive effect to the 2-for-1 stock split in 1995.
1997 1996 1995 ------------------------ ----------------- ------------------ High Low High Low High Low -------- --------- -------- ------- ------- -------- First Quarter $18 1/4 $11 5/16 $28 3/4 $17 1/4 $18 1/4 $13 Second Quarter 16 3/8 11 3/8 27 3/8 19 1/4 26 3/4 17 5/8 Third Quarter 13 3/4 10 1/64 23 1/4 16 7/8 42 1/4 25 Fourth Quarter 13 5 1/2 16 5/8 11 3/8 37 1/8 20 1/8
The Company has not paid any cash dividends on its common stock and currently intends to continue its policy of retaining earnings for the Company's operations and planned expansion of its business. In addition, the Company's bank credit facility restricts the payment of dividends. EX-21 6 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following table lists the subsidiaries of the Registrant as of December 31, 1997, the state or other jurisdiction of incorporation and the names under which such subsidiaries do business. The Registrant owns all of the outstanding voting securities of each subsidiary.
Name Under Jurisdiction of Which Subsidiary Name of Subsidiary Organization Is Doing Business - --------------------------------- --------------- --------------------------------- ODS Networks, Inc. Delaware ODS Networks, Inc. Optical Data Systems, Inc. Nevada Optical Data Systems, Inc. ODS, Inc. Nevada ODS, Inc. Optical Data Systems-Texas, Inc. Texas Optical Data Systems-Texas, Inc. ODS Networks GmbH Germany ODS Networks GmbH ODS Networks Ltd. United Kingdom ODS Networks Ltd. ODS Ltd. United Kingdom ODS Ltd. ODS Networks SARL France ODS Networks SARL Optical Data Systems, Ltda. Brazil Optical Data Systems, Ltda. Optical Data Systems (Barbados) Ltd. Barbados Optical Data Systems (Barbados) Ltd. ODS Networks Sdn. Bhd. Malaysia ODS Networks Sdn. Bhd.
EX-23 7 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of ODS Networks, Inc. and also into the Registration Statement (Form S-8, No. 33-58570) pertaining to the 1983 Incentive Stock Option Plan of ODS Networks, Inc. and the 1987 Incentive Stock Option Plan of ODS Networks, Inc., the Registration Statement (Form S-8, No. 33-34476) pertaining to the 1995 Stock Option Plan of ODS Networks, Inc., the Registration Statement (Form S-8, No. 33-34484) pertaining to the 1995 Non-employee Director Stock Option Plan of ODS Networks, Inc., the Registration Statement (Form S-8, No. 33-42927) pertaining to the 1997 Employee Stock Purchase Plan of ODS Networks, Inc., and the Registration Statement (Form S-8, No. 33-80898) pertaining to the ODS 401(k) Savings Plan of ODS Networks, Inc. of our report dated January 21, 1998, included in the 1997 Annual Report to Stockholders of ODS Networks, Inc. Our audits also included the financial statement schedule of ODS Networks, Inc. listed in Item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Dallas, Texas March 5, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES 22 AND 23 OF THE COMPANY'S ANNUAL REPORT FOR THE YEAR OF 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 17,911 14,667 9,426 758 14,671 62,018 25,857 14,021 77,178 10,171 0 0 0 165 66,214 77,178 92,327 92,327 55,795 55,795 46,112 0 0 (7,941) (3,004) (4,937) 0 0 0 (4,937) (0.30) (0.30)
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