-----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, Lbi/Q6cw3J7flSXFjnErt93UQQYd2WchsHKRe1VZpZYWcTxLXRzr3b9uByfTr3dY 54LeEHmd7hTWTW5cEzntmw== 0000936392-96-001032.txt : 19961118 0000936392-96-001032.hdr.sgml : 19961118 ACCESSION NUMBER: 0000936392-96-001032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED DIGITAL ACCESS INC CENTRAL INDEX KEY: 0000919048 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 680132939 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23698 FILM NUMBER: 96663026 BUSINESS ADDRESS: STREET 1: 9855 SCRANTON RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196232200 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPT. 30, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-23698 APPLIED DIGITAL ACCESS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0132939 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 9855 SCRANTON ROAD, SAN DIEGO, CALIFORNIA 92121 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) (619) 623-2200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 --- --- There were 12,236,383 shares of the registrant's Common Stock, no par value, outstanding on October 31,1996. 2 Page 2 APPLIED DIGITAL ACCESS, INC. INDEX TO FORM 10-Q
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1996 and September 30, 1995 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and September 30, 1995 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Risks and Uncertainties 11-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
3 Item 1. Page 3 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) ASSETS - ------ Current assets: Cash and cash equivalents $ 2,359 $ 1,673 Investments - current 19,030 25,079 Accounts receivable, net 5,872 5,358 Inventory, net 7,449 6,572 Deferred income taxes 750 750 Prepaid expenses and other current assets 1,051 1,296 -------- -------- Total current assets 36,511 40,728 Investments - non-current 1,999 5,095 Property and equipment, net 4,684 3,361 Deferred income taxes 752 752 Other, net 3,056 -- -------- -------- $ 47,002 $ 49,936 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,203 $ 1,820 Accrued expenses 1,490 843 Accrued warranty 1,388 1,305 Current portion of obligations under capital leases 18 32 -------- -------- Total current liabilities 5,099 4,000 Obligations under capital leases, net of current portion 37 49 -------- -------- Total liabilities 5,136 4,049 -------- -------- Shareholders' equity: Preferred stock, no par value, 7,500,000 shares authorized, no shares issued -- -- Common stock, no par value, 30,000,000 shares authorized, 12,231,682 and 11,899,216 shares issued and outstanding at September 30, 1996 and December 31, 1995, respectively 50,564 49,000 Additional paid-in capital 2,421 2,391 Unrealized gain on investments 5 147 Accumulated deficit (11,124) (5,651) -------- -------- Total shareholders' equity 41,866 45,887 -------- -------- $ 47,002 $ 49,936 -------- --------
The accompanying notes are an integral part of the financial statements. 4 Page 4 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1996 1995 1996 1995 ---- ---- ---- ---- (Amounts in thousands (Amounts in thousands except per share data) except per share data) Revenue $ 6,957 $ 2,016 $ 18,110 $ 14,872 Cost of revenue 3,807 1,162 8,874 6,032 -------- -------- -------- -------- Gross profit 3,150 854 9,236 8,840 Operating expenses: Research and development 1,816 1,512 5,388 4,158 In-process research and development related to asset acquisition 2,100 -- 3,286 -- Sales and marketing 1,631 985 4,832 2,995 General and administrative 983 1,133 2,413 2,462 -------- -------- -------- -------- Total operating expenses 6,530 3,630 15,919 9,615 -------- -------- -------- -------- Operating loss (3,380) (2,776) (6,683) (775) Interest income 384 507 1,337 1,532 Other income (expense), net 4 2 46 1 -------- -------- -------- -------- Income (loss) before income taxes (2,992) (2,267) (5,300) 758 Provision (benefit) for income taxes 173 (793) 173 266 -------- -------- -------- -------- Net income (loss) ($ 3,165) ($ 1,474) ($ 5,473) $ 492 ======== ======== ======== ======== Net income (loss) per share ($ 0.26) ($ 0.12) ($ 0.45) $ 0.04 ======== ======== ======== ======== Number of shares used in per share computations 12,175 11,854 12,033 12,826
The accompanying notes are an integral part of the financial statements. 5 Page 5 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 ---- ---- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income (loss) ($ 5,473) $ 492 Adjustments to reconcile net income (loss) to net cash used by operating activities: In-process research and development related to asset acquisitions 3,286 -- Depreciation and amortization 1,192 637 Other 38 37 Changes in assets and liabilities: Accounts receivable (514) (786) Inventory (877) (2,838) Prepaid expenses and other current assets 245 (80) Accounts payable 383 (151) Accrued expenses 639 (494) Accrued warranty 83 (51) Net cash used by operating activities (998) (3,234) Cash flows from investing activities: Purchases of investments (16,016) (26,904) Maturities of investments 24,979 29,752 Purchases of property and equipment (1,372) (1,359) Purchase costs related to asset acquisitions (6,356) -- Net cash provided by investing activities 1,235 1,489 Cash flows from financing activities: Principal payments on capital leases (26) (112) Proceeds from the issuance of common stock under stock option plans 475 595 Net cash provided by financing activities 449 483 Net increase (decrease) in cash and cash equivalents 686 (1,262) Cash and cash equivalents, beginning of period 1,673 2,680 Cash and cash equivalents, end of period $ 2,359 $ 1,418
The accompanying notes are an integral part of the financial statements. 6 Page 6 APPLIED DIGITAL ACCESS, INC. Notes to Condensed Consolidated Financial Statements September 30, 1996 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Applied Digital Access, Inc. ("the Company") and its wholly owned subsidiary, Applied Digital Access - Canada, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements have been prepared in accordance with the interim reporting requirements of Form 10-Q, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, and Risks and Uncertainties, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC. 2. Inventory Inventory is valued at the lower of cost (determined using the first-in, first-out method) or market. Inventory was as follows:
September 30, 1996 December 31, 1995 ------------------ ----------------- (Dollars in thousands) Raw materials $4,561 $3,483 Work-in-process 2,248 2,314 Finished goods 1,109 1,313 ----- ------ 7,918 7,110 Less inventory reserve (469) (538) -------- -------- $7,449 $6,572 ====== ======
3. Per Share Information Per share information is computed using the weighted average number of common shares and common equivalent shares (when the effect is dilutive) outstanding during the periods presented. Common equivalent shares result from outstanding options and warrants to purchase common stock. 4. Acquisitions On July 16, 1996, the Company acquired certain assets of MPR Teltech, a subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR Teltech's operating unit commonly known as the Special Services Network division ("SSN"). The Company and its Canadian subsidiary, Applied Digital Access - Canada, Inc. ("ADA-Canada"), acquired the assets for $4.2 million in cash and 150,000 shares of the Company's common stock, and incurred approximately $.2 million in related costs. SSN was an operations systems software development group with expertise in development of network management systems for public carriers. SSN developed operations systems software primarily for Northern Telecom ("Nortel"). SSN has become part of ADA-Canada and will develop network performance management operations systems software products for the Company and its customers, including Nortel. The transaction, which was accounted for as a purchase, included the acquisition of in-process research and development valued at approximately $2.1 million; property 7 Page 7 and equipment valued at approximately $.9 million; and goodwill and know how valued at approximately $2.6 million. The Company recorded a one-time charge in the third quarter of 1996 for the $2.1 million associated with purchased research and development costs. On February 29, 1996, the Company acquired certain assets of Applied Computing Devices, Inc. ("ACD"), a company that developed and marketed operations systems ("OS") software used primarily by independent telephone companies to manage certain functions in their networks. The customer set and products of ACD complement those of ADA and ADA intends to continue to market and enhance these products. The Company acquired the assets for $1.7 million in cash and incurred approximately $.2 million in related costs. The assets were acquired at an auction held in Federal Bankruptcy Court, Southern District of Indiana. The transaction, which was accounted for as a purchase, included the acquisition of in-process research and development valued at approximately $1.2 million; property and equipment valued at approximately $.4 million; and purchased technology valued at approximately $.3 million. The Company recorded a one-time charge in the first quarter of 1996 for the $1.2 million associated with purchased research and development costs. The following condensed pro forma results of operations information has been presented to give effect to the purchases as if such transactions had occurred at the beginning of each of the periods presented. The historical results of operations have been adjusted to reflect additional depreciation and amortization expense based upon the value allocated to assets acquired in the purchases. The pro forma results of operations information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the beginning of the periods presented, nor is it necessarily indicative of future operating results. CONDENSED PRO FORMA RESULTS OF OPERATIONS (amounts in thousands except per share data) (unaudited)
Nine months Ended September 30, 1996 1995 ---- ---- Revenue $ 23,348 $ 27,962 Net income (loss) (5,827) (5,351) Net income (loss) per share ($ 0.48) ($ 0.45) Weighted average shares used in computation 12,140 11,930
8 Page 8 Item 2. APPLIED DIGITAL ACCESS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1996 Except for the historical information contained herein, the matters discussed in this Form 10-Q may consist of forward-looking statements which involve risk and uncertainties. Factors that may affect the Company's results of operations include but are not limited to customer delays in reengineering programs, capital spending constraints at several of the Company's customers, the impact of reorganizations, restructurings and reductions-in-force at several of the Company's Regional Bell Operating Company ("RBOC") customers; deregulation of the telecommunications industry; and the delay in the receipt of the FCC's informal assessment on the Company's Remote Module product, received in September 1995 following introduction of the product in March 1995. The Company believes that deregulation and the resulting increased number of competitors providing telecommunications services could result in an expansion of the Company's customer base and increased competition with regard to service levels and costs, ultimately causing an increased demand for the Company's products. However, additional delays in the deployment of the Company's products and continued uncertainty surrounding the telecommunications industry may have a material adverse impact on the Company's business, operating results and financial condition. As a result of the uncertainties faced by the Company's customers, the Company continues to have limited visibility with regard to future customer orders and the timing of such orders. Customers have been placing orders quarterly and the Company has been operating in a book and ship mode. With a small customer base and fluctuating order size, this trend has resulted in quarter-to-quarter revenue fluctuations that are likely to continue for the foreseeable future. While the outlook contained in any forward-looking statements represents management's current judgment on the future direction of the business, the risks and uncertainties discussed herein could cause actual results to differ materially from any future performance suggested herein. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof. The following should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risks and Uncertainties", contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the Securities and Exchange Commission. Overview In October 1996, the U.S. Patent and Trademark Office granted the Company a patent for technology used in the Company's Remote Module product, a unique DS1 Network Interface Unit ("NIU"). The Remote Module, when used with the Company's T3AS Performance Monitoring and Test System, and Sectionalizer Operations Systems ("OS") software is intended to provide a full end-to-end network performance management capability. On July 16, 1996, the Company acquired certain assets of MPR Teltech, a subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR Teltech's operating unit commonly known as SSN. The Company and its Canadian subsidiary, ADA-Canada, acquired the assets for $4.2 million in cash and 150,000 shares of the Company's common stock. SSN is an operations systems software development group with expertise in development of network management systems for public carriers. SSN developed operations systems ("OS") software primarily for Nortel. SSN has become part of ADA-Canada and will develop network performance management OS software products for the Company and its customers, including Nortel. The Company incurred a $2.1 million one-time charge in the third quarter for purchased research and development related to the asset acquisition. On February 29, 1996, the Company acquired certain assets of ACD, a company that developed and marketed OS software used primarily by independent telephone companies to manage certain functions in their networks. The customer set and products of ACD complement those of ADA, and ADA has continued to market and enhance these products. The Company acquired the assets for $1.7 million in cash and incurred approximately $.2 million in related costs. The assets were acquired at an auction held in Federal Bankruptcy Court, Southern District of Indiana. Since filing for bankruptcy in September 1995, ACD had not generated significant revenue. The Company recorded a one-time charge of approximately $1.2 million associated with purchased research and development in the first quarter of 1996 as a result of the acquisition. In February 1996, the settlement of a class action lawsuit filed against the Company and two of its officers in March 1995 was finalized and received court approval. The settlement had previously been announced in December 1995. The litigation was settled for approximately $1.5 million, of which the Company was obligated to pay approximately $.4 million with the remainder paid by the Company's directors' and officers' liability insurance carrier. Charges associated with the suit were accrued in 1995. 9 Page 9 Results of Operations Revenue totaled $6,957,000 for the three months ended September 30, 1996, a 245% increase from revenue of $2,016,000 for the three months ended September 30, 1995. The increase is primarily the result of revenue generated from network management OS software design services and products acquired through this year's acquisitions, as well as an increase in sales of the Company's T3AS products compared to the same period in the prior year. Revenue totaled $18,110,000 for the nine months ended September 30, 1996, a 22% increase from revenue of $14,872,000 in the same period last year. This increase resulted from revenue generated by OS services and products acquired through this year's acquisitions. Revenue for the quarter ended September 30, 1996 included approximately $4.3 million from the sale of the Company's T3AS products and services and $2.7 million from OS services and products compared to approximately $2.0 million and $0 in the same period of 1995. Revenue for the nine months ended September 30, 1996 included approximately $14.6 million from the sale of the Company's T3AS products and services and $3.5 million from OS services and products compared to approximately $14.9 million and $0 for the same period in 1995. The Company intends to continue to market and develop OS products and services but is uncertain as to the future level of business related to these products. The majority of the Company's revenue to date has been derived from the sale of T3AS products. The Company expects that revenue from sales of T3AS products will continue to account for the majority of the Company's revenue for the foreseeable future. Gross profit was $3,150,000 for the three months ended September 30, 1996, an increase of 269% from $854,000 in the third quarter of 1995. Gross profit as a percent of revenue was 45% for the three months ended September 30, 1996 compared to 42% for the three months ended September 30, 1995. The increases in gross profit and gross profit as a percent of revenue were primarily the result of increased revenue. Gross profit totaled $9,236,000 for the nine months ended September 30, 1996, a 4% increase from $8,840,000 in the same period of 1995. Gross profit as a percent of revenue was 51% for the nine months ended September 30, 1996 compared to 59% for the same period last year. The decrease in gross profit as a percent of revenue resulted primarily from a product mix weighted toward lower margin T3AS products and services and lower-margin revenue from network management OS software design services. In the quarter ended September 30, 1996, the majority of the Company's Canadian subsidiary operations supported network management OS software design services. Since the cost of design services revenue includes both direct and indirect costs of supplying the services, the majority of the Canadian subsidiary's operating costs are included in cost of revenue. There can be no assurance that the Company will be able to maintain current gross profit or gross profit as a percent of revenue levels. In 1995, the Company implemented price reductions on certain components of the Company's T3AS base system to reduce the cost of initial system deployments in new sites, particularly in low-circuit-density applications of DS1 circuit applications. Future product mix weighted toward price-reduced components may have a negative impact on gross profit. There can be no assurance that past or future price reductions will result in increased orders for the Company's products. In addition to the factors discussed above, other factors which may materially and adversely affect the Company's gross profit in the future include its level of revenue, competitive pricing pressures in the telecommunication network management market, new product introductions by the Company or its competitors, potential inventory obsolescence and scrap, possible recalls, production or quality problems, timing of development expenditures, changes in material costs, disruptions in sources of supply, regulatory changes, seasonal patterns of bookings, capital spending, and changes in general economic conditions. Research and development expenses totaled $1,816,000 for the three months ended September 30, 1996, a 20% increase from $1,512,000 for the three months ended September 30, 1995. Research and development expenses totaled $5,388,000 for the nine months ended September 30, 1996, a 30% increase from $4,158,000 for the same period last year. The increases were primarily due to the additions of research and development personnel as a result of the ACD asset acquisition, increases in depreciation and maintenance expenses, and increases in non-recurring engineering (NRE) expenses due to timing of planned development projects compared to the same periods last year. Research and development personnel expenses for the three and nine month periods ended September 30, 1996 increased 22% and 30%, respectively, compared to the same periods in the prior year. Of these percentage increases, approximately nineteen points and fourteen points, respectively, are attributable to the addition of research and development personnel related to the ACD asset acquisition. The Company believes that its future success depends on its ability to maintain its technological leadership through enhancement of its existing products and development of innovative new products and services that meet customer needs. Therefore, the Company intends to continue to make significant investments in research and product development in association with planned development projects. In the three months ended September 30, 1996, the Company recorded a $2.1 million one-time charge for purchased research and development costs related to the SSN asset acquisition and in the first quarter of 1996, the Company recorded a one-time charge of approximately $1.2 million for purchased research and development costs related to the ACD asset acquisition. Sales and marketing expenses were $1,631,000 for the three months ended September 30, 1996 , a 66% increase from $985,000 for the three months ended September 30, 1995. Sales and marketing expenses totaled $4,832,000 for the nine months ended 10 Page 10 September 30, 1996, a 61% increase from $2,995,000 for the nine months ended September 30, 1995. The increases were primarily the result of the addition of technical customer support personnel, the addition of customer support and marketing personnel related to the ACD asset acquisition, and increased promotional expenses. The Company expects that sales and marketing expenses will continue to increase in absolute dollars as the Company continues to hire additional sales, marketing and technical support personnel to support planned product introductions. General and administrative expenses totaled $983,000 for the three months ended September 30, 1996, a 13% decrease from $1,133,000 for the three months ended September 30, 1995. This decrease is primarily due to lower legal expenses in this year's third quarter compared to last year as a result of lawsuit settlement fees booked in last year's third quarter, offset by increased expenses related to the amortization of goodwill and intangibles related to the SSN asset acquisition. General and administrative expenses totaled $2,413,000 for the nine months ended September 30, 1996, a decrease of 2% from $2,462,000 for the nine months ended September 30, 1995. This decrease is the net result of lower legal expenses this year compared to last year for the same reasons discussed above, offset by increased expenses for goodwill amortization, increased consulting expenses related to the Company's recruiting efforts for additional personnel and increased administrative support. The Company expects that general and administrative expenses will increase in absolute dollars as the administrative support needs of the Company increase. Interest income totaled $384,000 for the third quarter of 1996, a 24% decrease from $507,000 in the same quarter a year ago. Interest income totaled $1,337,000 for the nine months ended September 30, 1996, a 13% decrease from $1,532,000 in the same period last year. The decreases are primarily the result of a decrease in cash investments compared to the same periods last year. For the nine months ended September 30, 1996, the Company provided for income taxes related to the operations of the Company's Canadian subsidiary, based on applicable Canadian statutory rates. The Company did not provide for U.S. income taxes for the nine months ended September 30, 1996 due to an operating loss, compared to an effective rate of 35% for the nine months ended September 30, 1995. The Company expects to provide for foreign, federal and state income taxes for 1996 at applicable statutory rates, after giving effect to net operating losses, remaining available net operating loss carryforwards and any available tax credits. As a result of the factors discussed above, the Company incurred a net loss of $3,165,000, or $.26 per share, for the three months ended September 30, 1996 compared to a net loss of $1,474,000, or $.12 per share for the three months ended September 30, 1995. Excluding the $2.1 million one-time charge for purchased research and development associated with the acquisition of SSN assets, the Company would have recorded a net loss of $1,065,000, or $.09 per share, for the three months ended September 30, 1996. The Company incurred a net loss of $5,473,000, or $.45 per share, for the nine months ended September 30, 1996 compared to net income of $492,000, or $.04 per share for the nine months ended September 30, 1995. Excluding the $2.1 million one-time charge associated with the acquisition of SSN assets and the $1.2 million one-time charge associated with the acquisition of ACD assets, the Company would have recorded a net loss of $2,187,000, or $.18 per share, for the nine months ended September 30, 1996. Liquidity and Capital Resources At September 30, 1996, the Company had approximately $23,388,000 in cash and investments, compared to $31,847,000 at December 31, 1995. The decrease in cash and investments is primarily due to cash payments related to the SSN and ACD asset acquisitions. Working capital decreased approximately 14% from $36,728,000 at December 31, 1995 to $31,412,000 at September 30, 1996. The decrease in working capital was primarily the result of the SSN and ACD asset acquisitions, an increase in accounts payable and an increased inventory level. For the nine months ended September 30, 1996, the Company's operating activities used $998,000 in cash primarily as a result of an operating loss compared to the use of $3,234,000 by operating activities for the nine months ended September 30, 1995. For the nine months ended September 30, 1996, cash used for the ACD and SSN asset acquisitions and related acquisition costs totaled $1,900,000 and $4,456,000, respectively. The majority of tangible assets acquired in the ACD and SSN acquisitions consisted of computer equipment. Cash used for capital expenditures totaled approximately $1,372,000 for the nine months ended September 30, 1996 compared to $1,359,000 for the nine months ended September 30, 1995. Most of the capital equipment additions were for the purchase of computer and lab equipment to support the Company's expanded research and development efforts. The Company expects the level of capital expenditures will increase in 1996 as a result of planned 11 Page 11 facility moves in Terre Haute, Indiana and Vancouver, British Columbia, Canada, planned development projects and increased personnel levels. Assuming no material changes in the Company's current operating plans, the Company believes that cash generated from operations and the total of its cash and investments, will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. Significant additional capital resources, however, may be required to fund acquisitions of complementary businesses, products or technologies. Alternatively, the Company may need to issue additional shares of its capital stock or incur indebtedness in connection with any such acquisitions. At present, the Company does not have any agreements or commitments with respect to any such acquisition. The Company believes the impact of inflation on its business activities has not been significant to date. RISKS AND UNCERTAINTIES Concentration of Major Customers; Telephone Company Qualification Requirements. The market for telephone network test and performance monitoring systems consists primarily of telephone companies, including the seven RBOCs, other local telephone companies and long distance telephone companies. The Company's marketing efforts have focused on the RBOCs. Accordingly, at present the Company's customer base is highly concentrated and there can be no assurance that its customer base will become less concentrated. Further, the Company's customers are significantly larger than the Company and may be able to exert a high degree of influence over the Company. The loss of one or more of the Company's major customers, the reduction of orders, or a delay in deployment of the Company's products could materially and adversely affect the Company's business, operating results and financial condition. Prior to selling products to a telephone company, a vendor must first undergo a product qualification process for its products with the telephone company. Although the qualification process for a new product varies somewhat among these prospective customers, the Company's experience is that the process often takes a year or more. Currently, six of the seven RBOCs have qualified and deployed the Company's T3AS products. Further, any failure on the part of any of the RBOCs or other telephone companies to maintain their qualification of the Company's T3AS products, failure of any of the RBOCs or other telephone companies to deploy the Company's T3AS products, or any attempt by any of the RBOCs or other telephone companies to seek out alternative suppliers could have a material adverse effect on the Company's business, operating results and financial condition. BellSouth, Ameritech, Southwestern Bell and U S West have entered into purchase contracts with the Company. Other RBOCs, independent telephone companies, and other telephone service providers purchase the Company's T3AS products under standard purchase orders. Since the RBOC contracts may be terminated at the convenience of the RBOC, the Company believes that the purchase contracts are not materially different than purchasing under purchase orders. There can be no assurance that the Company's T3AS products will be qualified by new customers, or that such qualification will not be significantly delayed. Furthermore, telephone company work force reductions and staff reassignments have in the past delayed the product qualification process, and the Company expects such reductions and reassignments to continue in the future. There can be no assurance that such reductions and reassignments will not have a material adverse effect on the Company's business, operating results and financial condition. Additionally, the majority of the Company's OS design service business is currently concentrated with one major customer. This customer has the ability to terminate the arrangement immediately so long as the customer pays the Company the amounts forecast for a certain period following such termination and certain wind-down costs associated with the termination of the arrangement. Any such termination could have a material and adverse effect on the Company's business, results of operations and financial condition. High Dependence on Single Product Line. The majority of the Company's revenue to date has been derived from the sale of T3AS products and services and the Company expects that this will continue for the foreseeable future. Failure by the Company to enhance its existing T3AS products and to develop new product lines and new markets could materially and adversely affect the Company's business, operating results and financial condition. There is no assurance that the Company will be able to develop and market new products and technology or otherwise diversify its source of revenue. Competition. The Company believes the principal competitive factors in its markets are conformance with Bellcore and other industry transmission standards and specifications; product features, including price, performance and reliability; technical support; and the maintenance of close working relationships with customers. While the Company believes it has competed favorably to date with respect to each of these factors, there can be no assurance that the Company will compete successfully in the future with respect to these factors and others that may arise. The Company believes there are currently no competitors that provide an integrated comprehensive solution to performance monitoring and testing of the DS3 circuit as does the Company's T3AS system. Although the Company believes that there are fewer than 10 current competitors that provide partial solutions to either performance monitoring or testing of the DS1 or DSO circuits that make up the DS3 circuit, this market is extremely competitive. In each of the Network Interface Unit, Centralized Test System and OS markets, although there are currently a limited number of competitors, each of these markets is fiercely competitive. In each of these markets, the Company expects the competition to increase significantly in the future. For instance, in the OS market, improved technologies and tool sets have made the barriers to entry in this market relatively small. Such current and future competitors have significantly greater technical, financial, manufacturing and marketing resources than the Company, and several of them have long-established relationships with the Company's current and prospective customers. In addition, product price reductions resulting from market share penetration initiatives or competitive pricing pressures could have a material and adverse effect on the Company's business, operating results, and financial condition. There can be no assurance that the Company will have the financial resources, technical expertise or manufacturing, marketing, distribution and support capabilities to compete successfully in the future. Management of Changing Business. In February 1996, the Company acquired certain assets of ACD and in July 1996, the Company acquired certain assets of the SSN division of MPR Teltech. As a result of these acquisitions, the Company obtained additional office space and hired additional personnel in both Indiana and British Columbia, Canada to support the business operations of the new products, services and technologies acquired. The majority of the Company's Canadian subsidiary's operations is currently concentrated on OS design services. The Company has explored transitioning portions of the design service business to a product-oriented business. Any such transition would likely place a significant strain on the Company's management, information systems and operations and there can be no assurance that such transition could be successfully managed. In addition, over the past three years, the Company has experienced significant growth in its infrastructure as the Company seeks to expand its business. Such growth has placed, and is expected to continue to place, a significant strain on the Company's management, information systems and operations. The strain experienced to date has chiefly been in hiring sufficient numbers of qualified personnel to support the expansion of the business. The Company is not able to forecast additional strains that may be placed on the Company's management, information systems and operations as a result of either the ACD and SSN asset acquisitions or in the future in the event that growth continues. The Company's potential inability to manage its changing business effectively could have a material adverse effect on the Company's business, results of operations and financial condition. Rapid Technological Change and Dependence on New Products. The market for the Company's products is characterized by rapid technological advances, evolving industry transmission standards, changes in customer requirements, and frequent new product introductions and enhancements. The introduction of telephone network test and performance-monitoring products involving superior technologies or the evolution of alternative technologies or new industry transmission standards could render the Company's existing products, as well as products currently under development, obsolete and unmarketable. The Company believes its future success will depend in part upon its ability, on a cost-effective and timely basis, to continue to enhance T3AS products, to develop and introduce new products for the telephone network test and performance-monitoring market and other markets, to address new industry transmission standards and changing customer needs, and to achieve broad market acceptance for its products. In particular, the Company anticipates that the SONET and SDH optical transmission standards will become the industry transmission standards over the coming years for the North American and international networks, respectively. The Company's current T3AS products do not address either the SONET or SDH transmission standard. The Company intends to extend its current products and develop new products to accommodate such new transmission standards, as they evolve. The widespread adoption of SONET and/or SDH as industry transmission standards before the Company is able to successfully develop a product which addresses such transmission standards could adversely affect the sale and deployment of the Company's T3AS products. Any failure by the Company to anticipate or respond on a 12 Page 12 cost-effective and timely basis to technological developments, changes in industry transmission standards or customer requirements, or any significant delays in product development or introduction could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to successfully develop new products to address new industry transmission standards and technological changes or to respond to new product announcements by others, or that such products will achieve market acceptance. The Company may acquire from time to time, complementary businesses, products or technologies. In connection with such acquisitions, the Company may be required to commit substantial capital and human resources and may incur increased expenses. In February 1996, the Company acquired certain assets of ACD and in July 1996, the Company acquired certain assets of the SSN division of MPR Teltech. As the Company invests in product development, marketing, and sales support for the acquired assets, the associated expenses could have an adverse effect on the Company's business, operating results and financial condition. Dependence on Suppliers and Subcontractors; Need to Make Advance Purchase Commitments. Certain components used in the Company's T3AS products and Remote Module product, including its VLSI ASICs and other components, are available from a single source or a limited number of sources. The Company has no supply agreements and generally makes its purchases with purchase orders. Further, certain components require an order lead time of up to one year. Other components that currently are readily available may become difficult to obtain in the future. Failure of the Company to order sufficient quantities of these components in advance could prevent the Company from increasing production in response to customer orders in excess of amounts projected by the Company. In the past, the Company has experienced delays in the receipt of certain of its key components, which have resulted in delays in product deliveries. There can be no assurance that delays in key component and part deliveries will not occur in the future. The inability to obtain sufficient key components as required or to develop alternative sources if and as required in the future could result in delays or reductions in product shipments, which in turn could have a material adverse effect on the Company's customer relationships and operating results. Additionally, the Company uses third-party subcontractors for the manufacture of its subassemblies. This reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity, the unavailability of or interruption in access to certain process technologies, and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and could result in increased prices for affected parts. To procure adequate supplies of certain components, the Company must make advance commitments to purchase relatively large quantities of such components in a number of circumstances. A large portion of the Company's purchase commitments consist of custom parts, some of which are sole-source such as VLSI ASICs, for which there is no alternative use or application. The inability of the Company to incorporate such components in its products could have a material adverse effect on the Company's business, operating results and financial condition. Product Recall. Producers of telephone network equipment, including test access and performance monitoring systems such as those being marketed by the Company, are often required to meet rigorous standards imposed by Bellcore, the research and development entity created following the divestiture of AT&T to provide ongoing engineering support to the RBOCs. In addition, the Company must meet specialized standards imposed by its customers. The Company's systems are also required to interface in a complex and changing environment with telecommunication network equipment made by numerous suppliers. In the event there are material deficiencies or defects in the design or manufacture of the Company's systems, or if the Company's systems become incompatible with existing third-party network equipment, the affected products could be subject to a recall. The Company has experienced two significant product recalls in its history and there can be no assurance that the Company will not experience any product recalls in the future. The cost of any subsequent product recall and associated negative publicity could have a material adverse effect on the Company's business, operating results and financial condition. 13 Page 13 Proprietary Technology. The Company relies on a combination of technical leadership, trade secret, copyright and trademark protection and non-disclosure agreements to protect its proprietary rights. Although the Company has pursued and intends to continue to pursue patent protection of inventions that it considers important and for which such protection is available, the Company believes its success will be largely dependent on its reputation for technology, product innovation, affordability, marketing ability and response to customer's needs. Currently, the Company has five U.S. patents granted and three U.S. patent applications allowed. Additionally, the Company has nine pending U.S. patent applications and two international (Patent Cooperation Treaty) applications on file covering various circuit and system aspects of its products. There can be no assurance that the Company will be granted additional patents or that, if any patents are granted, they will provide the Company with significant protection or will not be challenged. As part of its confidentiality procedures, the Company generally enters into non-disclosure agreements with its employees and suppliers, and limits access to and distribution of its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technology without authorization. Accordingly, there can be no assurance that the Company will be successful in protecting its proprietary technology or that ADA's proprietary rights will preclude competitors from developing products or technology equivalent or superior to that of the Company. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. The Company is not aware of infringement by its products or technology of the proprietary rights of others. There can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertions will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to the Company, if at all. Further, litigation, regardless of outcome, could result in substantial cost to and diversion of efforts by the Company. Any infringement claims or litigation against the Company could materially and adversely affect the Company's business, results of operations and financial condition. Moreover, the laws of some foreign countries do not protect the Company's proprietary rights in the products to the same extent as do the laws of the United States. Dependence on Key Personnel. The success of the Company is dependent, in part, on its ability to attract and retain highly qualified personnel. Competition for such personnel is intense and the inability to attract and retain additional key employees or the loss of one or more current key employees could adversely affect the Company. There can be no assurance that the Company will be successful in hiring or retaining requisite personnel. Volatility of Stock Price. The Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by public market analysts and investors could have an immediate and significant adverse effect on the trading price of the Company's common stock. 14 Page 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. For a complete discussion of the legal proceedings settled in the first quarter of 1996, see the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995/Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996. From time to time, ADA may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Quarterly Report, the Company is not a party to any legal proceedings. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit Number Description ------- ----------- 10.1* Asset Purchase Agreement between Applied Digital Access, Inc. and MPR Teltech, Ltd. (Exhibit 2.1) 10.2** Master Agreement between Northern Telecom, Ltd. and Applied Digital Access, Inc. dated July 16, 1996. 10.3 Stock Purchase Agreement between Applied Digital Access, Inc. and MPR Teltech, Ltd. dated July 16, 1996. 10.4** License Agreement between Northern Telecom Ltd. and Applied Digital Access, Inc. 10.5 Second Amendment to Lease between Sorrento Tech Associates and Applied Digital Access, dated August 8, 1996. 10.6 Lease Agreement between Rose Hulman Institute of Technology, through its authorized leasing agent, Ragle and Company, and Applied Digital Access dated September 15, 1996. 10.7 Agreement for Extension of Term, Amendment No. 2 to General Purchasing Agreement between US WEST Communications, Inc. and Applied Digital Access, Inc. dated August 15, 1996. 11.1 Statement regarding computation of net income (loss) per share. 27.1 Financial Data Schedule. * Incorporated by reference to the same numbered exhibit (except as otherwise referenced) in the Company's Form 8-K filed by the Company with the SEC on July 31, 1996 in connection with the Company's acquisition of certain assets of the SSN division of MPR Teltech. ** Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934. (b) Reports on Form 8-K. On July 31, 1996, the Company filed a report on Form 8-K in connection with the acquisition of certain assets of the SSN division of MPR Teltech. On September 30, 1996, the Company filed a report on Form 8-K/A to provide financial statements of the SSN division of MPR Teltech as required by Regulation S-X, along with applicable pro forma financial information required pursuant to Article 11 of Regulation S-X. 15 Page 15 SIGNATURES Pursuant to the requirements 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. Applied Digital Access, Inc. Date: November 14, 1996 /s/ Peter P. Savage ----------------- -------------------- Peter P. Savage Director President and Chief Executive Officer Date: November 14, 1996 /s/ James L. Keefe ----------------- ------------------- James L. Keefe Vice President Finance and Administration and Chief Financial Officer EX-10.2 2 EXHIBIT 10.2 1 CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.8(b), 200.83 AND 230.406 * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST THAT IS FILED SEPARATELY WITH THE COMMISSION EXHIBIT 10.2 MASTER AGREEMENT Between NORTHERN TELECOM LIMITED And APPLIED DIGITAL ACCESS, INC. 2 TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1 - DEFINITIONS .............................................. 2 ARTICLE 2 - CONTRACT DOCUMENTS ....................................... 4 ARTICLE 3 - SCOPE OF WORK ............................................ 6 ARTICLE 4 - PERIOD OF PERFORMANCE .................................... 7 ARTICLE 5 - CONSIDERATION ............................................ 7 ARTICLE 6 - PAYMENT SCHEDULE ......................................... 8 ARTICLE 7 - INVOICES ................................................. 9 ARTICLE 8 - AUDIT .................................................... 9 ARTICLE 9 - INFORMATION FROM NORTEL .................................. 10 ARTICLE 10 - STATUS REPORTS ........................................... 11 ARTICLE 11 - MEETINGS ................................................. 11 ARTICLE 12 - INDEPENDENT CONTRACTOR ................................... 11 ARTICLE 13 - CHANGE CONTROL PROCEDURES AND ACCEPTANCE ................. 11 ARTICLE 14 - FORECASTS ................................................ 13 ARTICLE 15 - TERMINATION FOR CONVENIENCE .............................. 15 ARTICLE 16 - TERMINATION FOR DEFAULT .................................. 16 ARTICLE 17 - CHANGE IN CONTROL ........................................ 18 ARTICLE 18 - INVENTIONS AND IMPROVEMENTS .............................. 18
-i- 3 ARTICLE 19 - RIGHTS NOT CONFERRED ..................................... 19 ARTICLE 20 - ASSIGNMENT ............................................... 19 ARTICLE 21 - COMPLIANCE WITH LAW ...................................... 19 ARTICLE 22 - PUBLICITY RELEASE ........................................ 19 ARTICLE 23 - CONFIDENTIAL INFORMATION ................................. 20 ARTICLE 24 - PATENTS AND INFORMATION .................................. 21 ARTICLE 25 - WARRANTY AND LIABILITY ................................... 22 ARTICLE 26 - SPONSORS AND PRIMES ...................................... 23 ARTICLE 27 - NOTICES .................................................. 23 ARTICLE 28 - APPLICABLE LAW ........................................... 24 ARTICLE 29 - CONTINUING OBLIGATIONS ................................... 25 ARTICLE 30 - WAIVERS .................................................. 25 ARTICLE 31 - TERM OF AGREEMENT ........................................ 25 ARTICLE 32 - ENTIRETY OF CONTRACT ..................................... 25 ARTICLE 33 - APPENDICES ............................................... 26 ARTICLE 34 - FORCE MAJEURE ............................................ 26 ARTICLE 35 - ARBITRATION .............................................. 26 ARTICLE 36 - AMENDMENT ................................................ 27 ARTICLE 37 - WITHHOLDING .............................................. 27
-ii- 4 THIS MASTER AGREEMENT is made as of the __ day of July, 1996. BETWEEN: NORTHERN TELECOM LIMITED, a company incorporated under the laws of Canada, having its head office at 2920 Matheson Boulevard East, [Mississaupa], Ontario (hereinafter called "Nortel"), OF THE FIRST PART AND: APPLIED DIGITAL ACCESS, INC., a company incorporated under the laws of the State of California, having its head office at 9855 Scranton Road, San Diego, California, 92121, USA (hereinafter called "ADA"), OF THE SECOND PART WHEREAS: A. MPR Teltech Ltd. ("MPR Teltech") had previously entered into a Master Agreement with Prism Systems, Inc. ("Prism Systems") dated December 11, 1992 (the "Prior Agreement"), pursuant to which MPR Teltech performed certain research and development activities for Prism Systems from time to time subject to the terms and conditions of such agreement; B. ADA has acquired certain assets from MPR Teltech pursuant to that certain Asset Purchase Agreement dated the date hereof; C. Nortel has previously acquired all of the assets of Prism Systems and integrated such assets into Nortel as the Nortel Network Services Management Division ("NSM"); and D. ADA and Nortel wish to restructure the terms and conditions of the Prior Agreement to provide that: (1) ADA has research and development capabilities and resources which Nortel wishes to draw upon from time to time; and (2) Nortel desires to have ADA perform research and development activities for Nortel from time to time subject to the terms and conditions of this Master Agreement. NOW THEREFORE in consideration of the premises and of the mutual covenants and agreements hereinafter set forth and contained, this agreement witnesseth: -1- 5 ARTICLE 1 - DEFINITIONS In this Master Agreement and any Work Schedule, unless there is something in the subject matter or context inconsistent therewith, the expressions following shall have the meanings indicated below: "ADA Prime" has the meaning ascribed thereto in Section 26.1 hereof. "Acceptance" has the meaning ascribed thereto in Section 13.4 hereof. "Business Day" means each of Monday, Tuesday, Wednesday, Thursday and Friday, except when any such day occurs on a statutory holiday in British Columbia; "Commercial Specifications" means the specifications approved by Nortel for use in developing Custom Software and Custom Hardware and upon which the technical proposal is based; "Contract Amount" means the dollar amount specified in the Work Schedule to be paid to ADA; "Custom Hardware" means the hardware which is to be developed by ADA under the Work Schedule in accordance with the specifications referred to in such Work Schedule, including all related documentation to the extent of ADA's legal right to do so. "Custom Software" means the computer programs which are to be developed by ADA under the Work Schedule in accordance with the Commercial Specifications referred to in such Work Schedule, including all source and object code listings and all related documentation and design data, including but not limited to, design specifications and descriptions, change control documents, calculation formulae and algorithms for such software; "Deliverables" means those items (tangible and/or intangible) which are identified in the Work Schedule and which are to be provided to Nortel by ADA pursuant to the applicable Development Agreement, and shall include items such as, but not be limited to Custom Hardware, Hardware, Custom Software, Software, Services, details of the development environment documentation, reports, schedules and specifications as specified in the applicable Development Agreement; "Development Agreement" means this Master Agreement and any Work Schedule attached hereto pursuant to Section 2.6 hereof; "Full Price" means the full price for Work under a Development Agreement as determined in accordance with the formula set forth in Appendix A or otherwise as set forth in the Work Schedule or Development Agreement. -2- 6 "Hardware" means original equipment manufacture (OEM) equipment which is to be developed or qualified by ADA in accordance with the specifications referred to in the Work Schedule, including all mechanical and electrical drawings for components specified to the extent of ADA's legal right to do so. "Master Agreement" means this document; "Milestones" means the intermediate and final achievement dates specified in the relevant Work Schedule that act as guide-posts for monitoring the progress of the Work by identifying particularly critical portions of the Work and their completion deadlines; "Nortel Customer" means the end user, if any, identified in the Work Schedule to whom Nortel will be providing the Custom Software under such Work Schedule; "Nortel Prime" has the meaning ascribed thereto in Section 26.1 hereof. "Other Arrangements" means other business relationships between Nortel and ADA (or their respective subsidiaries or affiliates), including individual development contracts, that may be conducted on terms and conditions other than the terms and conditions set forth in this Master Agreement, as more fully described in Section 2.8 hereof. "RFQ", or "Request for Quotation" has the meaning ascribed thereto in Section 2.1(b) hereof; "Services" means the services specified in the Work Schedule to be provided by ADA; "Software" means the third-party software which is to be qualified by ADA in accordance with the specifications referred to in the Work Schedule. Where such software is required to be delivered to Nortel, or to be incorporated in a Deliverable, this requirement shall be subject to ADA having the legal right to do so, or to have Nortel's do so; "Technical Proposal" means a systems requirements document, preliminary project plan, quality plan, preliminary design review, high level design document, interface specifications document, trackable schedule and integrated plan based upon a Commercial Specification or equivalent as described in Section 2.1 hereof and as set forth in ADA Document Number 20-0301-0000 (Product Development Overview), for product development phases as follows: project inception phase, systems requirements phase, preliminary design phase and high level design phase. "Work" means the research and development activities, including development of the Custom Software or Hardware, as applicable, specified in the Work Schedule; "Work Schedule" means the added specific details of the Work to be done, attached to or -3- 7 referencing this Master Agreement which is mutually agreed to in writing by the parties, as amended from time to time as set forth in Article 13 below. ARTICLE 2 - CONTRACT DOCUMENTS 2.1 a) When Nortel identifies an opportunity for which it requires ADA's services, Nortel shall prepare a Commercial Specification or equivalent which it will attach to a RFQ with sufficient information to enable ADA to prepare the quotation described in Section 2.2 below. b) All RFQ's shall indicate one of the following; i) If ADA shall only be required to prepare a Technical Proposal, but not be obliged to perform any further Work upon completion of that Technical Proposal, as contemplated in Section 2.4 below. ii) If ADA shall be required to commit to performing the Work identified in the completed Technical Proposal in accordance with Section 2.4 below, if requested to do so by Nortel. iii) If neither i) or ii) above are specified, the parties shall meet, after the Technical Proposal is completed, to determine what further action, if any, they will take with respect to that Technical Proposal. 2.2 Based upon the Commercial Specification and the RFQ, ADA will use its best efforts (if such request can be accomplished within the current resource commitment of Nortel) and its reasonable efforts (if such request must be addressed by resources outside of the current Nortel Commitment) to prepare a quotation for the preparation of a Technical Proposal using the resources that are then committed by ADA under Nortel's Firm Commitment (as defined in Article 14 below). 2.3 If Nortel accepts the quotation within the time frame for acceptance set out in the quotation, if any, it shall signify such acceptance by means of a purchase order approving the preparation of the Technical Proposal by ADA. 2.4 Upon completion of the Technical Proposal and subject to Section 2.1 b) above, Nortel may request ADA to perform certain Work based upon the Technical Proposal, by means of a Work Schedule issued to ADA by Nortel, along with a purchase order. 2.5 ADA shall, within five (5) Business Days of its receipt of the purchase order and attached Work Schedule described in Section 2.4, advise Nortel in writing of ADA's acceptance or rejection of the Work Schedule. For Technical Proposal prepared pursuant to subsection -4- 8 2.1 b) ii), ADA shall acknowledge acceptance of the purchase order and attached Work Schedules, within five (5) Business Days of receipt. 2.6 Upon Nortel's receipt of the written acceptance of the purchase order and attached Work Schedule by ADA, a contract for the performance of the Work described in the Work Schedule will, in each case, be formed. Each such Development Agreement will consist exclusively of the terms and conditions of this Master Agreement and the Work Schedule related thereto. In case of conflict between this Master Agreement and the Work Schedule, this Master Agreement shall govern unless it is specifically provided in the Work Schedule that the Work Schedule is to govern. 2.7 The Work Schedule shall specify the Work to be done and Deliverables to be provided and shall include provisions with respect to the following: - the scope of the Work - the estimated Contract Amount - the project organization - the project schedule including milestones - the payment schedule - Deliverables - delivery dates - the acceptance plan, conditions and specifications - Nortel's responsibilities - the change control procedure and may include provisions with respect to the following: - development process - the decision request procedure - shipping and transit insurance - travel and living - provisions relating to follow-on work - liquidated damages for late delivery - additional ADA responsibilities - assumptions and dependencies - resource allocations - risk assessment - quality and process standards 2.8 The parties acknowledge that from time to time, and notwithstanding anything else in this Master Agreement, they may enter into Other Arrangements, on terms different from those set out in this Master Agreement. To the extent the Other Arrangements are entered -5- 9 into by ADA and Nortel solely on behalf of NSM: (i) if the terms of the Other Arrangements are different from the terms set out in this Master Agreement, the terms of the Other Arrangements shall apply; and (ii) if the terms are not defined by the Other Arrangements, the terms of this Master Agreement shall apply. Other Arrangements entered into on behalf of a Nortel division, subsidiary or affiliate other than NSM shall not be subject to the terms of this Master Agreement. The parties also agree that, due to the requirements of the Nortel Licensing Agreements with its parent companies, for any Other Arrangements to be valid, the Other Arrangement must be executed by two officers of Nortel, failing which the Other Arrangement shall be void and unenforceable by either party. 2.9 ADA shall have the right to subcontract to ADA Canada, Inc. any Services or Work, or portion thereof, and will give Nortel notice of any such subcontract. ARTICLE 3 - SCOPE OF WORK 3.1 ADA shall furnish all personnel, materials and supervision necessary to perform the Work as defined in the Development Agreement, in accordance with the terms of the Work Schedule. 3.2 Nortel shall have the right, at any time while the Work is in progress and after review of progress reports, to order changes in the Work pursuant to Article 13. Unless otherwise agreed to in writing the provisions of this Master Agreement shall apply to all changes in the Work. 3.3 (a) ADA shall have documented an auditable development process prior to the commencement of any Work under any Development Agreement. (b) ADA will be required to maintain its quality program as currently defined by MPR Teltech's QA-QP-940601 and the referenced procedures, as eventually merged into ADA's quality program defined by ADA20-0296-0000 Quality Manual which is based upon the relevant sections of ISO9001 and BellCore TR-NWT-001252, unless deviations are defined in the Development Agreement. ARTICLE 4 - PERIOD OF PERFORMANCE 4.1 Both Nortel and ADA agree that time shall be of the essence herein and ADA shall use its best efforts, within the current resource commitment of Nortel, to commence and complete the Work in accordance with the Work Schedule. ARTICLE 5 - CONSIDERATION -6- 10 5.1 ADA shall be paid the Contract Amount for performance of the Work in accordance with one of the following payment options and the selection of the appropriate payment option for each Development Agreement will be described in the Work Schedule: (A) Time and Material Payment Option, which shall include the following: (i) An estimate of the price to Nortel to perform the Work, together with an estimate of the price to perform that portion of the Work applicable to each Milestone. (ii) ADA will invoice Nortel monthly for the Work on the following basis: a. The actual hours required to perform the Work, in accordance with the provisions of the Work Schedule, multiplied by the hourly rate per employee classification, as agreed to by the parties; b. All materials, contractors, and other preapproved project expenses reasonably incurred by ADA in connection with the performance of the Work, at cost plus a markup as set out in Appendix A; c. All pre-approved travel expenses reasonably incurred by ADA in connection with the performance of the Work, at cost plus a markup as set out in Appendix A. (iii) Changes to the rates set forth in Appendix A hereto will be subject to revision as provided in Appendix A. (iv) ADA shall notify Nortel forthwith upon ADA becoming aware during the course of performance of the Work that the actual price of the Work or any portion of the Work applicable to any Milestone is likely to exceed the estimated price of the Work or portion of the Work, as the case may be (hereinafter called the "Budget Overrun"). In addition to such notice, ADA shall forthwith provide Nortel with a written report setting out ADA's explanation or understanding of the causes of any such Budget Overrun and ADA's estimate of the cost to Nortel to complete the Work or that portion of the Work applicable to the Milestone. (v) At such time as the price of performance of the Work equals the estimated total price of the Work prior to completion of the Work, ADA shall advise Nortel and no further costs shall be incurred by ADA without the prior written consent of Nortel. Nortel will provide such written consent in a timely manner, or will instruct ADA as to what action to take with regard to the unfinished Work. -7- 11 (B) Firm Price Option, which will mean ADA will perform the Work for a firm cost agreed upon in advance and set forth in the Work Schedule. ADA shall be solely responsible for any Budget Overruns. 5.2 The Contract Amount, unless otherwise specifically provided in such Work Schedule, is exclusive of any goods and services tax, custom and excise duties, provincial, sales, use, ad valorem, or franchise taxes, or other similar taxes or duties. Any such amounts billed by ADA to Nortel will be paid promptly 30 days from the date of receipt of the invoice to be paid, however, Nortel shall have 10 days to dispute any invoice, failing which the invoice shall be paid within the aforementioned 30 days. Payment shall not be due until the dispute is settled. 5.3 ADA provides no warranty, actual or implied, that the work performed will qualify as eligible scientific research and experimental development as defined in the Income Tax Act. ADA agrees that it will take all commercially reasonable steps and provide all reasonable assistance to establish such eligibility, at Nortel request and expense. 5.4 The parties acknowledge that certain Work Schedules may contain Work to be carried out partly under both Payment Options. ARTICLE 6 - PAYMENT SCHEDULE 6.1 Any Development Agreement entered into between Nortel and ADA pursuant to the terms of this Master Agreement shall provide for payment to be made pursuant to the following options: (a) Time and Material Payment Option: Under the Time and Material Payment Option, ADA will issue monthly invoices to Nortel in connection with the Work in accordance with the provisions of Section 5.1 (A) (ii) hereof. Prior to the issuance of any invoice, the ADA Prime, shall certify to Nortel in writing that such amounts were calculated according to the formula set forth in Appendix A, to be updated quarterly and as updated, attached hereto and incorporated herein by reference, and were reasonably expended or incurred by ADA in the performance of the Work and attach said writing to the invoice. ADA will be paid the amount so invoiced, as described in Article 7 below. (b) Firm Price Option: Under the Firm Price Option, unless agreed otherwise in the Work Schedule, ADA shall only issue an invoice upon delivery of any of the Deliverables, which invoice shall become due on Acceptance of those Deliverables for the value of those Deliverables, as -8- 12 set out in the Work Schedules. 6.2 An alternative payment arrangement may be negotiated for each project by mutual written agreement of Nortel and ADA. ARTICLE 7 - INVOICES 7.1 A maximum of one invoice per month shall be issued for each purchase order issued by Nortel. Labour will be broken down into total hours and total dollars per invoice and expenses incurred will be broken down by category in accordance with ADA's normal accounting methods. Terms of payment shall be thirty (30) days from date of receipt of invoice by Nortel provided, however, that Nortel shall be entitled to retain twenty (20%) per cent of the aggregate amount of all such invoices under Firm Price Option contracts, until the fortieth (40th) day following Acceptance of the Work. Nortel shall have ten (10) days from receipt of invoice to dispute the accuracy of the invoice, failing which the invoice shall be due as aforesaid. Payment shall not be due until the dispute is settled. 7.2 Nortel shall pay simple interest at the rate of prime plus one percent on all overdue amounts owing to ADA after thirty (30) days. ARTICLE 8 - AUDIT 8.1 ADA agrees to keep and maintain complete and accurate records of costs incurred in connection with the performance of the Work, and maintain books and accounts in accordance with generally accepted accounting procedures, principles and practices, and in accordance with such other procedures, principles and practices as may be specified in the applicable Work Schedule respecting all matters pertinent to this Master Agreement and any Development Agreements formed hereunder. Upon notice in writing, and at its expense, Nortel through its independent auditors shall have access to and the right to audit all accounts and records maintained for the Work during normal business hours. Provided, however, that Nortel independent auditors shall not, unless otherwise provided in the applicable Work Schedule, have such access or right to audit such accounts and records for Work performed under the Firm Price Option, save and except where the Development Agreement for the Work has been terminated by Nortel in accordance with Article 16. Any claims or discrepancies disclosed by such audit shall be made in writing to ADA within a reasonable period of time after completion of such audit for resolution between the Nortel Prime and the ADA Prime or by reference to more senior management. ARTICLE 9 - INFORMATION FROM NORTEL 9.1 ADA shall use its commercially reasonable efforts to identify in the Work Schedule all -9- 13 information or documentation required for it to perform the Work and deliver the Deliverables in the Work Schedule. However, if in execution of the Work, ADA shall require additional information or documents from Nortel, Nortel shall provide same, if possible, promptly upon written request and reasonable notice from ADA. If Nortel fails to respond to any request for information or documents as herein provided and the failure to provide such information or documents results in ADA not being able to meet its Milestones as set forth in the Work Schedule, the Milestones shall be extended by the length of the period of delay so caused. 9.2 In the event any Milestones are extended due to the unavailability of information and documents from Nortel, ADA agrees to use reasonable efforts to allocate its manpower to other Work and to advise Nortel in the event such manpower cannot, after the exercise of reasonable efforts, be allocated to other Work. 9.3 As an alternative to extension of any Milestone, Nortel may direct ADA to make assumptions regarding the information or documents required by ADA from Nortel. Nortel will approve any reasonable assumptions made by ADA and if such assumptions are subsequently shown to be invalid, Nortel will provide ADA written approval to proceed with any necessary re-Work and will treat such re-Work as a change in the Work pursuant to Section 13.2. -10- 14 ARTICLE 10 - STATUS REPORTS 10.1 Status reports shall be detailed periodically or as set forth in the Work Schedule and shall summarize progress, problems, financial expenditure (including ADA's estimate of the price to complete the Work), and highlights in the execution of the Work. ADA shall respond promptly, verbally or in writing, if requested by Nortel to any comments or queries of Nortel resulting from the review of status reports. ADA shall notify Nortel immediately upon the satisfaction or achievement of any Milestone or upon any Deliverable becoming available for evaluation by Nortel or delivery to Nortel. ARTICLE 11 - MEETINGS 11.1 At the request of either party and as specified in the Work Schedule, Nortel and ADA shall meet to discuss matters related to the Work including progress, review of results, analysis of problems, financial expenditures, adequacy of information to be provided by Nortel pursuant to Article 9 of the Development Agreement and changes in the Work. 11.2 Any costs incurred by ADA in participating in such meeting will: (i) in the case of the Time and Material Payment Option, be billed to Nortel as part of the Work, (ii) in the case of Work performed under the Firm Price Payment Option, be included in the Firm Price as an anticipated and reasonable expense in performing the Work. ARTICLE 12 - INDEPENDENT CONTRACTOR 12.1 In the execution of the Work provided for herein, ADA shall operate as an independent contractor, and nothing in this Master Agreement or any Development Agreement formed hereunder shall be construed to constitute ADA or any of its employees as an agent, representative or employee of Nortel. ARTICLE 13 - CHANGE CONTROL PROCEDURES AND ACCEPTANCE 13.1 The Work Schedule shall have a corresponding change control section to accommodate requests by Nortel for changes to the scope of the Work. Such requests for change are subject to the procedures set out in this Article 13. -11- 15 13.2 Nortel-Originated Changes Nortel may request changes to the Work in accordance with the following procedure: (a) Nortel shall advise ADA, in writing, of a desired change specifying the desired change with sufficient details to enable ADA to evaluate the change. (b) Following receipt of a change request ADA will within five (5) Business Days provide Nortel with an estimate (the "Preliminary Estimate") of the estimated time to assess the change and the estimated price of preparing such assessment. If ADA determines that it cannot prepare the Preliminary Estimate within such period, ADA will advise Nortel of the date by which the Preliminary Estimate will be available and ADA will deliver the Preliminary Estimate by such date. (c) Following receipt of the Preliminary Estimate, Nortel will, within five Business Days (the "Response Period"), advise ADA in writing whether or not to proceed with the assessment of the requested change. If Nortel advises ADA not to proceed, the change request shall be deemed withdrawn and ADA shall take no further action in respect of it. If ADA has not received written notice to proceed within the Response Period, Nortel shall be deemed to have advised ADA not to proceed. (d) If Nortel instructs ADA to proceed, ADA will prepare an assessment (the "Assessment") of the impact, if any, of the desired change on the Contract Amount, the Milestones, the time frame for completion, the performance of the Deliverables and any other areas which in the opinion of ADA are likely to be affected by the requested change. (e) The Assessment shall constitute an offer from ADA to carry out changes as requested subject to the provisions of the Assessment. The offer shall be irrevocable for five (5) Business Days following the receipt thereof by Nortel. (f) If Nortel accepts ADA's offer, the Work Schedule shall be deemed to incorporate the change on the terms stated in the Assessment. (g) ADA shall be entitled to recover outside any limit of maximum expenditure specified in the Work Schedule, the price of preparation of the Preliminary Estimate and the Assessment regardless of whether the Assessment or change is proceeded with. (h) Any change which either increases or decreases costs or modifies Milestones or Deliverables, shall be implemented only with the prior written consent of the Nortel Prime and the ADA Prime. -12- 16 13.3 ADA-Originated Changes In the event ADA wishes to request a change it shall notify Nortel in writing of the suggested change and provide Nortel with a Preliminary Estimate and the provisions of 13.2 (c), (d), (e), (f) and (g) shall apply except that ADA shall not be entitled to recover the cost of preparing the Preliminary Estimate. 13.4 Acceptance of Work Performed Under Firm Price Option Acceptance of Work performed under the Firm Price Option ("Firm Price Work") shall only occur after delivery of the Deliverable to Nortel and only in the event that there are no priority 1 and 2 problems, as defined by the MPR classification system dated August 10, 1992, identified during the verification testing stage, which testing is performed by Nortel. The test plan shall be approved by ADA for Firm Price Work where such procedure is not feasible, the alternate acceptance procedure shall be set out in the Work Schedule. Notwithstanding the foregoing, Nortel will accept or reject the Firm Price Work within sixty (60) days after delivery by ADA; failure to give notice of acceptance or rejection within that period by Nortel will constitute acceptance. ARTICLE 14 - FORECASTS 14.1 Nortel shall provide ADA with non-binding written twelve (12) month rolling forecasts ("Non-Binding Forecasts") by month of ADA-resource requirements and associated Development Agreements or Development Agreements Nortel expects to place together with expected funding from Nortel for such Development Agreements. The initial Non-Binding Forecast shall be attached to this Agreement as Appendix B and shall be updated monthly by Nortel by the last business day of the first month included in the twelve (12)-month period covered by the latest Non-Binding Forecast and shall be delivered to ADA no later than the last business day of the month prior to the initial month included in such updated Non-Binding Forecast. The non-binding funding commitment and resource requirement (the "Non-Binding Commitments") shall be set out in the format of the chart used in Appendix B of this Agreement. Such Non-Binding Forecasts shall be solely for the purpose of allowing ADA to allocate and plan for resource requirements in such 12-month period and shall not be considered binding obligations of Nortel. 14.2 Nortel shall also provide ADA with binding written nine (9) month rolling forecasts ("Firm Forecasts") by month of ADA-resource requirements and associated Development Agreements or Development Agreements Nortel expects to place together with expected funding from Nortel for such Development Agreements. The initial Firm Forecast shall be attached to this Agreement as Appendix C, shall provide for a minimum of ** people for each of the nine (9) months and shall be updated monthly by Nortel by the last business day of the first month included in the nine (9)-month period covered by the -13- * CONFIDENTIAL TREATMENT REQUESTED 17 latest Firm Forecast and shall be delivered to ADA no later than the last business day of the month prior to the initial month included in such updated Firm Forecast. The Firm Forecast funding commitment and resource requirement (the "Firm Commitments") shall be set out in the format of the chart used in Appendix C of this Agreement. Subject to Sections 14.4, 14.5 and 14.6 below, such Firm Forecasts shall be binding obligations upon Nortel to issue Development Agreements sufficient to meet such Firm Forecasts or to accept billings by ADA for the Firm Commitments set forth for such month in the most recent Firm Forecast. 14.3 For Development Agreements issued in accordance with this Article 14, ADA shall confirm its acceptance thereof, which acceptance shall include a commitment to staffing levels as set out in the Firm Forecast. Changes to any aspect of the Firm Forecast may be made at any time upon mutual agreement. 14.4 The initial Firm Forecast shall provide for Firm Commitments on a monthly basis for nine (9) months. The Firm Commitments for the last calendar quarter, or months seven, eight and nine, of such initial Firm Forecast and any subsequent Firm Forecast shall be referred to as the "Base Funding Levels." Subject to Sections 14.5 and 14.6 below, the average Firm Commitments (as measured by funding levels) for the last calendar quarter (or months seven, eight and nine) of any three sequential Firm Forecasts may not vary by more or less than ** from the Base Funding Levels of the immediately preceding Firm Forecast. 14.5 In the event that the aggregate Firm Commitments (as measured by funding levels) for the last calendar quarter of any three sequential Firm Forecasts as described in Section 14.4 above increases by more than ** from the Base Funding Levels of the immediately preceding Firm Forecast, ADA may: (a) accept the new Firm Forecast within ten (10) days of receipt thereof; or (b) accept a portion of the additional funding greater than ** of the Base Funding Levels of the immediately preceding Firm Forecast, and instruct Nortel to acquire additional development resources to meet the shortfall. 14.6 In the event that the aggregate Firm Commitments (as measured by funding levels) for the last calendar quarter of any three sequential Firm Forecasts as described in Section 14.4 above decreases by more than **, ADA may: (a) accept the new Firm Forecast within ten (10) days of receipt thereof; or (b) accept a portion of the decreased funding greater than ** of the Base Funding Levels of the immediately preceding Firm Forecast, and instruct Nortel that ADA cannot accept a greater decrease without reimbursement by Nortel to ADA for all actual, directly auditable costs actually incurred as a result of the decreased funding, including without limitation third-party cancellation costs for subcontractors directly involved in the cancelled Work, out-of-pocket expenditures and severance payments to employees that are terminated by ADA as a -14- * CONFIDENTIAL TREATMENT REQUESTED 18 result of Nortel's decreased funding. 14.7 ADA agrees to reduce Nortel's commitment from the then current commitment under this Section 14 to the extent that Nortel transfers commercial relationships to ADA, and ADA accepts such transfer, as contemplated in the Memorandum of Understanding between Nortel and ADA (or its subsidiary) of the same date. ARTICLE 15 - TERMINATION FOR CONVENIENCE 15.1 Subject to the terms and conditions of this Master Agreement, Nortel may, from time to time by giving written notice to ADA, terminate any Development Agreement with respect to all or any portion of the Work. Upon such termination notice being given, ADA shall cease performance of the Work in accordance with and to the extent specified in such notice. Nortel may, at any time, give one or more additional termination notices with respect to all or any portions of the Work not terminated by any previous termination notice. 15.2 Subject to the terms and conditions of this Master Agreement, ADA may, from time to time by giving written notice to Nortel, terminate any Development Agreement with respect to all or a portion of the Work. 15.3 Upon termination by Nortel pursuant to Section 15.1: (a) Nortel's Commitments shall be those contained in the most recently accepted Firm Forecast for the nine month period covered by such forecast; and (b) After the end of the most recently accepted Firm Forecast, Nortel shall pay to ADA each following month an amount equal to (at Nortel's option) (i) the amount per month contained in such most recently accepted Firm Forecast reduced by ** per quarter or (ii) ADA's actual directly auditable cancellation costs actually incurred, which are limited to (A) third-party cancellation costs for subcontractors directly involved in the cancelled Work and (B) out-of-pocket expenditures to employees and severance payments to employees that are terminated by ADA as a result of Nortel's termination hereunder. 15.4 Upon termination by ADA pursuant to Section 15.2, Nortel's Commitments will be those set forth in the most recently accepted Firm Forecast, and ADA will work to such Firm Forecast for the nine month term of the forecast. After the end of such Firm Forecast, ADA agrees that it will not without the consent of Nortel, reduce its commitments from that contained for the last quarter of the most recently accepted Firm Forecast any faster than ** per quarter, subject to Nortel's agreement to fund such activities. 15.5 Neither party shall be held liable for indirect or consequential damages or loss of -15- * CONFIDENTIAL TREATMENT REQUESTED 19 anticipated profits of the other party on account of termination of this Agreement other than as set forth in this Article 15 or in Article 14. ARTICLE 16 - TERMINATION FOR DEFAULT 16.1 Nortel may, at any time and from time to time, by notice of default to ADA, terminate the whole or any part or parts of any Development Agreement if ADA: (i) fails to perform any of the other provisions of the Development Agreement including performing the Work within the time or times specified in the Work Schedule, or so fails to make progress so as to endanger performance of the Development Agreement in accordance with the Work Schedule, and, in either of these circumstances, does not cure or take steps to promptly and diligently cure such failure within a period of thirty (30) days after receipt of written notice from Nortel or such longer period as Nortel may authorize; or (ii)(a) applies for or consents to the appointment of a receiver, trustee or liquidator of itself or of its property; or (b) makes a general assignment for the benefit of creditors; or (c) is adjudicated bankrupt or insolvent; or (d) files a voluntary petition in bankruptcy or a petition or answer seeking re-organization or an arrangement with creditors, or takes advantage of any insolvency law, or admits to the material allegations of a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or initiates a corporate action for the purpose of effecting any of the foregoing. 16.2 ADA may, at any time and from time to time, by notice of default to Nortel, terminate the whole or any part or parts of any Development Agreement if Nortel: (i) fails to perform any of the other provisions of the Development Agreement including payment to ADA of amounts due thereunder, and does not cure or take steps to promptly and diligently cure such failure within a period of thirty (30) days after receipt of written notice from ADA or such longer period as ADA may authorize; or (ii)(a) applies for or consents to the appointment of a receiver, trustee or liquidator of itself or of its property; or (b) makes a general assignment for the benefit of creditors; or -16- 20 (c) is adjudicated bankrupt or insolvent; or (d) files a voluntary petition in bankruptcy or a petition or answer seeking re-organization or an arrangement with creditors, or takes advantage of any insolvency law, or admits to the material allegations of a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or initiates a corporate action for the purpose of effecting any of the foregoing. 16.3 If Nortel terminates any Development Agreement as provided in Section 16.1, ADA shall have no claims for any payment save as hereinafter provided in this Article 16. 16.4 Upon a partial termination pursuant to this Article 16, ADA and Nortel shall continue the performance of the Development Agreement to the extent it is not terminated or otherwise affected by such partial termination and shall not stop, suspend or impair any other aspect or portion of the performance of the Development Agreement. 16.5 Upon a termination of any Development Agreement pursuant to Section 16.1, and subject to Article 18 below, Nortel, in addition to any other rights of Nortel in this Article 16, may require ADA to transfer title and deliver to Nortel, in the manner and to the extent directed by Nortel, any Work which has not been delivered and accepted prior to such termination. 16.6 If, after notice of termination of the Development Agreement under the provisions of this Article 16, it is determined by a court of competent jurisdiction that the party allegedly in default was not in default, such notice of termination shall be deemed to have been issued pursuant to Article 15, TERMINATION FOR CONVENIENCE, and the rights and obligations of ADA and Nortel shall be governed by the provisions of that Article. ARTICLE 17 - CHANGE IN CONTROL 17.1 In the event that ADA becomes majority owned or controlled by an entity which is a direct competitor of Nortel, ADA shall forthwith provide written notification to Nortel of such change in majority ownership or control. Within thirty (30) days of receipt of such notice, Nortel may, in its sole discretion, elect to terminate without cost or penalty whatsoever this Master Agreement provided the acquiring entity is reasonably determined to be a direct competitor of Nortel. ARTICLE 18 - INVENTIONS AND IMPROVEMENTS 18.1 ADA agrees to disclose and cause its employees to disclose promptly to Nortel any inventions, designs or improvements capable of patent, copyright or similar protection, made or conceived by such employees either alone or jointly with others in the course of -17- 21 or as a result of the Work done hereunder, or as a result of information supplied hereunder, directly or indirectly, by Nortel. ADA further agrees that all such inventions, designs or improvements shall without further payment become and remain the sole property of Nortel. The parties acknowledge and agree that they intend to enter into a license agreement whereby certain rights shall be granted to ADA with respect to the inventions, designs or improvements owned by Nortel hereunder (the "License Agreement"). Subject to the provisions of Article 24, it is understood that any technology, inventions, designs or improvements owned by ADA before starting the Work remain the property of ADA, but shall be disclosed by notice in writing to Nortel prior to starting the Work. 18.2 ADA agrees that it shall, at the discretion and expense of Nortel take all steps and will cause its employees to take all steps necessary to apply for and to obtain patents, registered design or similar protection in respect of any inventions, designs or improvements which, by the provisions hereof, belong to Nortel in any part of the world as Nortel may require and shall vest all such patents, registered designs or similar protection in Nortel or as Nortel may direct; provided ADA shall only be required to pursue such protection when the costs associated with such pursuit are covered by the Firm Commitment hereunder or otherwise paid by Nortel. 18.3 ADA will, at the direction and expense of Nortel, render all assistance and cause its employees to render all assistance within their power to obtain and maintain any such patent, registered design or similar protection and any extension thereof. 18.4 Each party warrants that it has and will maintain in effect during the term of this Master Agreement, appropriate agreements with its employees to carry out the obligations as to confidentiality and inventions and improvements. 18.5 ADA shall own any Inventions that may be retained in non-tangible form by ADA employees who had access to the Work. ARTICLE 19 - RIGHTS NOT CONFERRED 19.1 ADA agrees that this Master Agreement does not confer any right to do all or any given proportion of Nortel's work. ARTICLE 20 - ASSIGNMENT 20.1 Neither party may assign all or any portion of this Master Agreement, any Development Agreement formed hereunder or the Work without the other party's prior written consent, such consent not to be unreasonably withheld. Notwithstanding the foregoing, a party may assign and transfer this Master Agreement and its rights and obligations hereunder to -18- 22 its parents, affiliates or subsidiaries. Furthermore, ADA may subcontract to ADA Canada, Inc. any Services or Work, or any portion thereof without obtaining Nortel's consent. In no event shall either party create any contractual relation between any third party and the other. ARTICLE 21 - COMPLIANCE WITH LAW 21.1 ADA shall observe and comply with all applicable laws, ordinances, codes and regulations of governmental agencies, including federal, provincial, municipal and local governing bodies having jurisdiction over the Work or any part thereof. All work performed by ADA must be in accordance with such laws, ordinances, codes and regulations. ARTICLE 22 - PUBLICITY RELEASE 22.1 The parties understand and agree that they may not use each other's name in any advertising or promotional material or publicity release relating to the Work to be performed by the other hereunder without the prior written consent of the other and that no publicity release of the Work shall be made except with the prior written consent of both parties, such consent not to be unreasonably withheld or delayed. -19- 23 ARTICLE 23 - CONFIDENTIAL INFORMATION 23.1 All technical and commercial information, documentation and know-how of every kind and description ("Information") supplied whether before or after execution of this Master Agreement, other information related thereto acquired or developed by either party in connection with this Master Agreement or any Development Agreement, subject to what is hereinafter provided, shall be confidential and the exclusive property of the disclosing party, and the receiving party shall treat and protect such Information as proprietary and confidential information, shall not reproduce or divulge said Information in whole or in part to third parties except as may be required for the performance of its obligations under this Agreement, provided such third parties agree in writing prior to such disclosure to keep such Information confidential upon the same terms as herein contained. The parties shall return each others Information and all copies thereof forthwith upon its request. This confidentiality obligation shall survive termination or expiry of the Development Agreement. 23.2 Notwithstanding the foregoing, ADA shall not be liable for disclosure of the Information if: (a) the Information enters the public domain other than through a breach of the Development Agreement; (b) the Information is lawfully obtained by ADA from a third party without breach of the Development Agreement by ADA; (c) Nortel has provided its prior express written approval for such disclosure by ADA; (d) the Information was known to ADA prior to the commencement of the Development Agreement and so documented; (e) was independently developed by employees or consultants of the receiving party without access to such Information; or (f) is required to be disclosed to governmental agencies in order to complete Work, or disclosure is otherwise required by law, regulation or governmental or court order. -20- 24 ARTICLE 24 - PATENTS AND INFORMATION 24.1 ADA agrees that it will not knowingly incorporate anything in the Work which involves the use of a trade secret or proprietary information of any third party without the prior written approval of Nortel, such approval not to be unreasonably withheld. 24.2 ADA shall, at its expense, timely defend any suit instituted against Nortel and indemnify Nortel against any award of damages and costs made against Nortel in any suit insofar as such is based on a claim that the use of the Work or Deliverables, or the manufacture, lease, sale or sublicensing of same infringes any patent, copyright, or other industrial or intellectual property right, in the United States, Canada, any member country of the European Economic Community, or Japan, except to the extent the claim is based on (i) ADA's compliance with or use of designs, requirement specifications, or alterations supplied, developed or requested by Nortel, and the infringement is necessitated by such compliance or (ii) infringement is caused by the use of with another product in combination with the Deliverables or Work whose use with the Deliverables or Work was not otherwise intended or reasonably foreseen by the ADA based on the information available to it or (iii) the Work or Deliverables are altered and the infringement results from that alteration. Provided Nortel gives ADA timely notice in writing of the institution of suit and permits ADA to defend same and provides, at ADA's request and expense, all available information, assistance and authority to so defend such suit and any appeals. ADA shall have sole control of the defense of any such claim or suit including appeals and of all the negotiations for settlement, including the right to effect the settlement or compromise thereof. If any element of the Work or Deliverables is in any suit held to constitute an infringement and its use is enjoined, ADA may at its option and expense: (a) procure for Nortel and any Nortel Customer the right to continue using such infringing element; or (b) replace or modify the same so that it becomes non-infringing, provided, however, the essential attributes of the element remain the same. (c) Where after exercising all reasonable efforts to obtain the rights set out in a) or b) above, neither alternative is possible, ADA shall refund all of the monies paid by Nortel pursuant to the Development Agreement which has given rise to the infringement. 24.3 The indemnity set out in Section 24.2 shall only be extended to countries other than those set forth therein upon mutual agreement of the parties with respect to any specific Work or Deliverable. -21- 25 ARTICLE 25 - WARRANTY AND LIABILITY 25.1 ADA warrants that, upon Acceptance by Nortel, each Deliverable will be of good quality and workmanship and will meet the specifications set out in the Work Schedule for a period of twelve (12) months or such greater period as may be specified in the Work Schedule and that the "design life" of each Hardware Deliverable will meet or exceed the design life specified for that Deliverable, if any, in the Work Schedule. If any Deliverable does not conform with such warranty, ADA will remedy the deficiencies so that the Deliverable conforms to the specifications set out in the Work Schedule. 25.2 Under Firm Price contracts, the cost of the warranty coverage referred to in this Article will be borne by ADA; under Time & Materials contracts, such costs shall be charged to Nortel on a Time & Materials basis. In the event that neither of these methods of payment applies, the parties will address the cost of warranty coverage in the individual Technical Proposals. 25.3 ADA warrants that the personnel performing the Work will be qualified and capable of performing the Work. 25.4 (a) The foregoing warranty for Deliverables will not apply to, and ADA will have no obligation or liability whatsoever in respect of, defects or damage caused by unauthorized use, misuse, accident, external cause, installation error (except where installed by or on behalf of ADA) or normal wear and tear. All of the foregoing warranties and remedies are in lieu of all other warranties and remedies. (b) Unless specifically defined otherwise ADA does not give and will not be liable for any warranties, representations, or guarantees of any kind, either express or implied by law or custom, regarding any products derived from or based on the Deliverables (hereinafter called the "Products") or the performance of the Products or their usefulness, including those regarding fitness for purpose, merchantability, condition, design, title, infringement of third party rights, or conformance with sample. (c) In no event will ADA be liable to Nortel or to any other party for damages, including but not restricted to, damages for lost profits, lost savings, or punitive, exemplary, incidental, consequential or special damages in respect of the Products, even if ADA has advance knowledge of the possibility of such potential loss or damage and even if caused by ADA's negligence. If, despite the foregoing limitations, for any reason ADA becomes liable to Nortel for damages incurred by Nortel in connection with any of the Products, then, the liability of ADA will be limited to an amount equal to the price paid by Nortel to ADA for the Development Agreement that gives rise to the claim for damages. -22- 26 ARTICLE 26 - SPONSORS AND PRIMES 26.1 Nortel will appoint a Prime (hereinafter called the "Nortel Prime") and ADA will appoint a prime (hereinafter called the "ADA Prime") for each Development Agreement (collectively the "Primes"). The address of the applicable Primes will be identified in the Work Schedule of the applicable Development Agreement. ARTICLE 27 - NOTICES 27.1 All communications in writing between Nortel and ADA related to a specific Development Agreement shall be deemed to have been received by the addressee if delivered to the appropriate Primes or if sent by courier or facsimile transmission addressed to the appropriate Prime at the address provided in the Work Schedule or such other address for the Prime as have been designed in writing by either party to the other. 27.2 All communications in writing between the parties hereto of a general nature and not related solely to a single Development Agreement for Work shall be deemed to have been received by the addressee if sent by courier or facsimile transmission addressed as follows: If to Nortel: Northern Telecom Limited NSM Division 150-13575 Commerce Parkway Richmond, British Columbia Canada V6V2L1 Fax: (604) 244-4080 Attn: General Manager -23- 27 With a copy to: Northern Telecom Limited 6200 Kenway Drive Mississauga, Ontario Canada LST2N3 Fax: (905) 238-7716 Attention: Deputy Vice President and General Counsel If to ADA: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California 92121 Fax: (619) 623-2208 Attention: President With a copy to: ADA Canada, Inc. 8999 Nelson Way Burnaby, British Columbia Fax: (604) 293-6100 Attention: President 27.3 Invoices shall be sent to the address indicated for Nortel above, for the attention of Accounts Payable. 27.4 All notices given hereunder shall be given in writing and delivered or faxed. Such notice shall be deemed to have been received upon delivery. ARTICLE 28 - APPLICABLE LAW 28.1 This Master Agreement and all Development Agreements formed hereunder shall be governed and construed in accordance with the laws of the Province of British Columbia. -24- 28 ARTICLE 29 - CONTINUING OBLIGATIONS 29.1 The provisions of Articles 18 - Inventions and Improvements, 21 - Compliance with Law, 22 - Publicity Release, 23 - Confidential Information, 24 - Patents and Information and 25 - Warranty and Liability shall survive the termination of this Master Agreement and any Development Agreement formed hereunder. ARTICLE 30 - WAIVERS 30.1 The waiver by either party hereto of any breach of any term of this Master Agreement or any Development Agreement formed hereunder shall not prevent the subsequent enforcement of that term and shall not be deemed a waiver of any subsequent breach. ARTICLE 31 - TERM OF AGREEMENT 31.1 This Master Agreement shall commence upon execution by both parties hereto, and shall continue until terminated by either party upon ninety (90) days' advance notice in writing. Termination of this Master Agreement will not affect the status of any Development Agreement formed hereunder or work performed in pursuance thereof. ARTICLE 32 - ENTIRETY OF CONTRACT 32.1 The preceding articles of this Master Agreement and the Work Schedule issued and acknowledged pursuant to Article 2 hereof contain the entire Development Agreement between the parties with respect to the Work described in the Work Schedule. All previous proposals and communications relative to such Work, oral or written, will be superseded by this Master Agreement and the Work Schedule except to the extent that they have been expressly incorporated in the Development Agreement. Notwithstanding the fact that the Prior Agreement has been formally assigned to ADA (or its subsidiary), the parties agree that in the event of any inconsistency between (a) the Prior Agreement (or any business agreement or other document assigned contemporaneously to ADA or any subsidiary) and (b) this Agreement or the License Agreement between Nortel and ADA (the "New License Agreement"), the terms of this Agreement and the New License Agreement shall control. -25- 29 ARTICLE 33 - APPENDICES 33.1 The following appendices are attached to this Master Agreement and are deemed to form a part hereof: A - ADA Rates; B - Non-Binding Forecast; and C - Firm Forecast. ARTICLE 34 - FORCE MAJEURE 34.1 Neither party to this Agreement shall be liable for its failure to perform any of its obligations hereunder during any period in which such performance is prevented by any cause beyond its reasonable control. In the event of any such delay the date of delivery or performance hereunder shall be extended by a period equal to the time lost by reason of such delay. ARTICLE 35 - ARBITRATION 35.1 All disputes arising out of or in connection with this Master Agreement shall be referred to and finally resolved by arbitration under the rules of the British Columbia International Commercial Arbitration Centre, in respect of which: (a) the appointing authority shall be the British Columbia International Commercial Arbitration Centre; (b) the arbitration shall be conducted by a single arbitrator unless the parties agree otherwise; (c) the case shall be administered by the British Columbia International Commercial Arbitration Centre in accordance with its "Procedures for Cases under the BCICAC Rules"; and (d) the place of arbitration shall be Vancouver, British Columbia, Canada. The prevailing party in any arbitration or legal action arising out of or related to this Master Agreement shall be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses incurred in such arbitration or action, including court costs and reasonable legal fees. -26- 30 ARTICLE 36 - AMENDMENT 36.1 No amendment, modification, supplement or other purported alteration of this Master Agreement shall be binding upon the parties unless it is in writing and is signed on behalf of both parties by their duly authorized representatives. ARTICLE 37 - WITHHOLDING 37.1 ADA believes that neither this Agreement (or any term hereof) nor the performance of or exercise of rights under this Agreement requires tax withholding under any law or regulations promulgated by any organization, province, group of provinces, or political or governmental entity located within Canada. Nortel agrees not to withhold any amounts payable to ADA, without the written consent of ADA, unless Revenue Canada has made a specific determination or assessment that such amounts must be withheld. ADA agrees to indemnify and hold harmless Nortel in respect of any amounts, including without limitation, withholding taxes, penalties and interest, that Revenue Canada may determine Nortel failed to properly withhold pursuant to this Agreement. IN WITNESS WHEREOF the parties have executed this Master Agreement as of the day and year first above written NORTHERN TELECOM LIMITED Per:_____________________________________ Per:_____________________________________ APPLIED DIGITAL ACCESS, INC. Per:_____________________________________ Per:_____________________________________ -27- 31 APPENDIX A TO MASTER AGREEMENT ADA RATES The price of ADA engineering services for the purposes of this Agreement will be computed as follows: *** *** *** * CONFIDENTIAL TREATMENT REQUESTED 32 APPENDIX B TO MASTER AGREEMENT NON-BINDING FORECAST APPENDIX B - PAGE 1 **** * CONFIDENTIAL TREATMENT REQUESTED 33 APPENDIX C TO MASTER AGREEMENT FIRM FORECAST APPENDIX C - PAGE 1 **** * CONFIDENTIAL TREATMENT REQUESTED EX-10.3 3 EXHIBIT 10.3 1 EXHIBIT 10.3 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 16th day of July, 1996, by and between Applied Digital Access, Inc., a California corporation (the "Company") and MPR Teltech, Ltd., a corporation organized under the laws of British Columbia and Canada ("MPR"). WHEREAS, the Company and MPR are contemporaneously entering into that certain Asset Purchase Agreement dated the date hereof (the "Asset Purchase Agreement") pursuant to which MPR has agreed to sell and the Company has agreed to buy certain assets of MPR (the "Transferred Assets"). WHEREAS, the Company has agreed to issue to MPR and MPR has agreed to acquire shares of the Company's Common Stock in partial consideration of the purchase price of the assets acquired pursuant to the Asset Purchase Agreement. THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Shares. 1.1 Sale and Issuance of Shares. Subject to the terms and conditions of this Agreement and the Asset Purchase Agreement, MPR agrees to transfer certain assets (the "Transferred Assets") pursuant to the Asset Purchase Agreement to the Company at the Closing and the Company agrees to sell and issue to MPR at the Closing 150,000 shares of the Company's Common Stock (the "Shares"). The sale of the Shares will not be registered under the U. S. Securities and Exchange Act of 1933, as amended, (the "Securities Act") but are being issued in reliance on Regulation S under the Securities Act. 1.2 Closing. The closing for the purchase and sale of the Shares shall take place at the corporate offices of MPR, 8999 Nelson Way, Burnaby, British Columbia, on the date of this Agreement, or at such other time and place as the Company and MPR mutually agree upon orally or in writing (which shall be designated as the "Closing"). At the Closing, the Company shall deliver to MPR a certificate representing the Shares (free and clear of all liens, claims and other encumbrances except as otherwise provided herein). In consideration of such delivery, MPR shall make payment for the Shares by delivery to the Company of a bill of sale for the Transferred Assets. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to MPR that: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would be reasonably expected to have a material adverse effect on the business, operations, properties, assets, 2 prospects or condition (financial or otherwise) of the Company, taken as a whole (a "Material Adverse Effect"). Except as disclosed in the SEC Filings (as defined herein) and as contemplated in the Asset Purchase Agreement, the Company has no subsidiaries. 2.2 Authorization. The Company has all requisite corporate power and authority (i) to execute, deliver and perform its obligations under this Agreement; (ii) to issue the Shares in the manner and for the purpose contemplated by this Agreement, and (iii) to execute, deliver and perform its obligations under all other agreements and instruments executed and delivered by it pursuant to or in connection with this Agreement. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of the Shares to be sold hereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 2.3 Valid Issuance of Shares. The Shares which are being purchased hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of MPR in this Agreement, the Shares will be issued in compliance with all applicable United States federal and state securities laws. 2.4 SEC Reports. The Company has heretofore filed with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), an Annual Report on Form 10-K for the year ended December 31, 1995, a Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and a Current Report on Form 8-K dated March 15, 1996, as amended (collectively, the "SEC Filings"). None of the SEC Filings contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements made, at the time and in light of the circumstances under which they were made, not misleading. Since December 31, 1995, the Company has timely filed with the SEC all SEC Filings and all such SEC Filings complied with all applicable requirements of the Securities Act and the Exchange Act, as applicable and the rules thereunder. The audited financial statements of the Company included or incorporated by reference in the SEC Filings and the unaudited financial statements contained in the SEC Filings each have been prepared in accordance with such acts and rules and with United States generally accepted accounting principles applied on a consistent basis throughout the periods indicated therein and with each other, except as may be indicated therein or in the notes thereto and except that the unaudited interim financial statements may not contain all footnotes and adjustments required by United States generally accepted accounting principles, and fairly present the financial condition of the Company as of the dates thereof and the results of its operations and statements of cash flows for the periods then ended, subject, in the case of unaudited interim financial statements, to normal year-end adjustments. -2- 3 Except as reflected in such financial statements, the Company has no material liabilities, absolute or contingent, other than ordinary course liabilities incurred since the date of the last such financial statements in connection with the conduct of the business of the Company." 2.5 Compliance with Other Instruments. The execution, delivery and performance of this Agreement and of the transactions contemplated hereby will not result in any violation of or constitute, with or without the passage of time and the giving of notice, either a default under any provision of its Articles of Incorporation or Bylaws or of any material agreement or instrument to which the Company is a party or by which the Company is bound, or any judgment, decree, order, law, statute, rule or regulation applicable to the Company. No party to any material contract included as an exhibit to the SEC Filings (or incorporated by reference therein) would be authorized or permitted to terminate its obligations thereunder by reason of the execution and delivery of this Agreement or any of the transactions contemplated herein. 2.6 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any United States federal, state or local governmental authority is required on the part of the Company in connection with the Company's valid execution, delivery and performance of this Agreement, except for any filings under any applicable United States state or foreign securities laws. The filings under United States state securities laws, if any, will be effected by the Company at its cost within the applicable stipulated statutory period. 2.7 Litigation. There is no action, suit, proceeding or investigation pending or currently threatened against the Company which questions the validity of this Agreement, or the right of the Company to enter into such instruments or to consummate the transactions contemplated hereby or thereby. 2.8 No Material Adverse Change. Since March 31, 1996, there has not been, occurred or arisen any change in or event affecting the Company or its business that has had or may reasonably be expected to have a material adverse effect on the Company or its business. 2.9 Property. The Company has good and marketable title to, or other right to use, all property (whether real or personal, tangible or intangible) material to the business of the Company. 2.10 Compliance With Law. The Company is organized and has conducted its business in accordance with applicable law and is in compliance with all such laws the violation of which might have a material adverse effect on that business. 2.11 Representations as to Certain Matters Relating to the Shares. (i) The Company understands that the Shares have not been and will not be registered under the Securities Act or any applicable state securities laws and may only be offered or sold pursuant to registration under the Securities Act and applicable state securities laws or available exemptions therefrom, and that MPR is relying upon the truth and accuracy of -3- 4 the representations, warranties, agreements, acknowledgements and understandings of the Company set forth herein in order to determine the applicability of such exemptions. (ii) To the Company's knowledge, MPR is not an Affiliate (as defined in Rule 405 promulgated by the SEC) of the Company. (iii) No offer of the Shares was made to MPR in the United States. (iv) None of the Company or its subsidiaries or Affiliates, nor any person or entity acting on behalf of the Company or any subsidiaries or Affiliates has engaged, or will engage, in any Directed Selling Efforts (as defined in Regulation S) with respect to the Shares; and the Company and its subsidiaries and Affiliates have complied, and will comply, with the offering restrictions, and any other requirements, of Regulation S with respect to the Shares. (v) The transactions contemplated by this Agreement: 1. have not been pre-arranged with a purchaser who is located in the United States or is a U.S. Person; and 2. are not part of a plan or scheme to evade the registration provisions of the Securities Act. 3. Representations and Warranties of MPR. MPR hereby represents and warrants that: 3.1 Organization, Good Standing and Qualification". MPR is a corporation duly organized, validly existing and in good standing under the laws of British Columbia and Canada, and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. 3.2 Authorization. MPR has all requisite corporate power and authority (i) to execute, deliver and perform its obligations under this Agreement; and (ii) to execute, deliver and perform its obligations under all other agreements and instruments executed and delivered by it pursuant to or in connection with this Agreement. All corporate action on the part of MPR, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the performance of all obligations of MPR hereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of MPR, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 3.3 Investment Experience. MPR acknowledges that it is able to bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. MPR -4- 5 also represents that it has not been organized for the purpose of acquiring the Shares. 3.4 Representations as to Certain Matters Relating to the Shares. (i) MPR understands that no U. S. or Canadian, federal or state agency has passed on or made any recommendation or endorsement of the Shares. (ii) MPR acknowledges that, in making the decision to purchase the Shares, it has relied solely upon independent investigations made by it and not upon any representations made by the Company (other than as expressly made in this Agreement) with respect to the Company or the Shares. (iii) MPR understands that the Shares have not been and will not be registered under the Securities Act or any applicable state securities laws and may only be offered or sold pursuant to registration under the Securities Act and applicable state securities laws or available exemptions therefrom, and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of MPR set forth herein in order to determine the applicability of such exemptions and the suitability of MPR to acquire the Shares. (iv) MPR is not a U.S. Person (as defined in Regulation S promulgated by the SEC) and is not to its knowledge an Affiliate (as defined in Rule 405 promulgated by the SEC) of the Company. (v) No offer of the Shares was made to MPR in the United States. (vi) MPR is a Canadian company, whose head office is in Canada and all its officers and directors reside in Canada. The decision to purchase the Shares was made by MPR officials in Vancouver, British Columbia. (vii) None of MPR or its subsidiaries, the MPR Affiliates (hereinafter defined), nor any person or entity acting on behalf of MPR or any subsidiaries or MPR Affiliates has engaged, or will engage, in any Directed Selling Efforts (as defined in Regulation S) with respect to the Shares; and MPR and its subsidiaries and the MPR Affiliates have complied, and will comply, with the offering restrictions, and any other requirements, of Regulation S with respect to the Shares. -5- 6 (viii) MPR: 1. will not, during the period commencing on the Closing and ending on the day forty (40) days after the Closing (the "Initial Restricted Period"), offer or sell the Shares in the United States, to a U.S. Person (as defined in Regulation S) or for the account or benefit of a U.S. Person or other than in accordance with Rule 903 or Rule 904 of Regulation S; pursuant to registration of the Shares under the Securities Act; or pursuant to an available exemption from the registration requirements of the Securities Act; and 2. will, after the expiration of the Initial Restricted Period, offer, sell, pledge or otherwise transfer the Shares only pursuant to registration under the Securities Act or an available exemption therefrom and, in any case, in accordance with any applicable state securities laws. (ix) The transactions contemplated by this Agreement: 1. have not been pre-arranged with a purchaser who is located in the United States or is a U.S. Person; and 2. are not part of a plan or scheme to evade the registration provisions of the Securities Act. (x) MPR is purchasing the Shares for its own account for the purpose of investment and not (A) with a view to, or for sale in connection with, any distribution thereof or (B) for the account or on behalf of any U.S. Person. MPR has no contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. 3.5 Further Limitations on Disposition. Without in any way limiting the representations set forth above, MPR further agrees not to make any disposition of all or any portion of the Shares during the Initial Restricted Period. After the Initial Restricted Period and after any additional period required under Section 4.1, MPR agrees not to make any disposition of all or any portion of the Shares unless MPR shall have furnished the Company with an opinion of counsel, in form and substance reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. 3.6 Legends. It is understood that the certificates evidencing the Shares may bear one or all of the following legends: -6- 7 (a) "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act") and have been sold in reliance on the exemption from registration provided by Regulation S under the Act ("Regulation S"). During the forty (40) day period after the date of original issuance (the "Initial Restricted Period"), the shares represented by this Certificate may not be offered or sold directly or indirectly, within the United States (as defined in Regulation S), to a U. S. Person (as defined in Regulation S) or for the account or benefit of a U. S. Person. The preceding sentence shall have no further effect subsequent to the expiration of the Initial Restricted Period and thereafter this legend set forth in this paragraph may be removed upon presentation of this Certificate to the Transfer Agent of Applied Digital Access, Inc." (b) "These securities are subject to certain additional transfer restrictions contained in a certain Stock Purchase Agreement dated July 15, 1996 as amended from time to time, a copy of which may be obtained from the corporation without charge." To the extent that such legends are no longer applicable, the Company shall cause its transfer agent to remove the legends upon request by MPR. 3.7 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of MPR in connection with MPR's valid execution, delivery and performance of this Agreement or the issuance of the Shares, except for (a) any filings under any applicable United States state securities laws or (b) any notification required by the Canadian Ministry of Finance regarding MPR's execution, delivery and performance of this Agreement, which notice shall have been given by MPR prior to the Closing. 4. Covenants of the Parties. 4.1 Additional Transfer Restriction. Notwithstanding the expiration of the Initial Restricted Period or any rights to Sell earlier which may exist under the United States federal securities laws, MPR hereby agrees that without the prior written consent of the Company (which may be withheld in the Company's sole discretion), neither MPR nor any MPR Affiliate (as hereinafter defined) shall, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (collectively, "Sell") (other than to donees who agree to be similarly bound) any of the Shares, until twelve (12) months following the date of this Agreement. Thereafter, this Section 4.1 shall not restrict MPR from Selling up to one-half (1/2) of the Shares. Following the date which is twenty-four (24) months following the date of this Agreement, this Section 4.1 shall not restrict MPR from Selling up all of the Shares. Notwithstanding the foregoing, transfers solely among MPR Affiliates shall not be subject to the transfer restrictions set forth in this Section 4.1 provided the MPR Affiliate transferee agrees in writing to be bound by this Section 4.1 and any requirements of Regulation S. In order -7- 8 to enforce the foregoing covenant, the Company may impose legends and/or stop-transfer instructions with respect to the Shares held by MPR or any MPR Affiliate (and the Shares of every other person subject to the foregoing restriction). For the purposes of this Agreement "MPR Affiliate" shall mean BC TELECOM, INC. or any subsidiary of BC TELECOM, INC. 4.2 Standstill Provisions. Commencing as of the Closing, so long as MPR owns at least 50,000 shares of Common Stock, MPR (including all MPR Affiliates) shall not acquire beneficial ownership of any shares of Common Stock, any securities convertible into or exchangeable for Common Stock, or any other right to acquire Common Stock, except by way of stock dividends or other distributions or offerings made available to holders of Common Stock generally, from the Company or any other person or entity, without the prior written consent of the Company, which consent may be withheld in its sole discretion; provided, however, that in no event shall (i) the original purchase of securities pursuant to this Agreement including Section 1.1 or (ii) the acquisition by MPR of another company that then owns securities of the Company, cause a violation of this Section 4.2. 5. Miscellaneous. 5.1 Survival of Warranties. The warranties, representations and covenants of the Company and MPR contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of MPR or the Company. 5.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any of the Shares sold hereunder), provided, however, MPR's rights and obligations under Section 1.1 of this Agreement shall not be assignable. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 5.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 5.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 5.6 Notices. Unless otherwise provided, any notice required or permitted -8- 9 under this Agreement shall be given in writing by personal delivery to the party to be notified or by Federal Express or other overnight package delivery service or registered or certified mail, postage prepaid and addressed to the party to be notified at the following addresses, or at such other address as such party may designate by five (5) days' advance written notice to the other parties (with notice deemed given upon receipt): If to the Company: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California 92121 Attn: President If to MPR: MPR Teltech Ltd. 8999 Nelson Way Burnaby, B. C. Canada VSA 4B5 Attn: President 5.7 Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each party agrees to indemnify and to hold harmless the other from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the indemnifying party or any of its officers, partners, employees, or representatives is responsible. 5.8 Expenses. Irrespective of whether the Closing is effected, each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. Notwithstanding the foregoing, the Company shall pay any and all stamp, transfer and other similar taxes payable or determined to be payable in connection with the execution and delivery of this Agreement or the original issuance of the Shares and shall save and hold MPR harmless from and against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. 5.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and MPR. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding, each future holder of all such securities, and the Company. 5.10 Severability. If one or more provisions of this Agreement are held to be -9- 10 unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 5.11 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MPR: THE COMPANY: MPR TELTECH, LTD. APPLIED DIGITAL ACCESS INC., a California corporation By: __________________________ By: _____________________________________ Title: _______________________ Title: __________________________________ [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT] -10- EX-10.4 4 EXHIBIT 10.4 1 CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.8(b), 200.83 AND 230.406 * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST THAT IS FILED SEPARATELY WITH THE COMMISSION EXHIBIT 10.4 LICENSE AGREEMENT MEMORANDUM OF AGREEMENT made and entered into as of the 16th day of July, 1996 ("Effective Date"). BY AND BETWEEN: NORTHERN TELECOM LIMITED, a corporation duly incorporated under the laws of Canada, having an office at 2920 Matheson Boulevard East, Mississauga, Ontario, Canada UW 4M7, on behalf of itself and its Subsidiaries and Affiliates (hereinafter called "Northern Telecom") AND: APPLIED DIGITAL ACCESS, INC. a corporation duly incorporated under the laws of California and having an office at 9855 Scranton Road, San Diego, California, U.S.A. 92121 (hereinafter called the "Licensee") WHEREAS Northern Telecom designs, produces and markets telecommunications systems and is in possession of certain proprietary rights in the technology related to such systems; WHEREAS Licensee wishes to design, produce and market certain products or software programs based upon certain technology of Northern Telecom; and WHEREAS each Party is prepared to grant such licenses and enter into such obligations, as hereinafter set forth. NOW THEREFORE THIS AGREEMENT WITNESSETH THAT, IN CONSIDERATION OF THE MUTUAL PROMISES HEREINAFTER SET FORTH, THE PARTIES AGREE AS FOLLOWS: 2 ARTICLE 1 DEFINITIONS As used herein, unless otherwise defined: (a) "Affiliate" shall mean a corporation or company which a Party hereto effectively controls, directly or indirectly, other than a Subsidiary, through the ownership or control of shares in the corporation or company; (b) "Authorized Products" shall mean all products which are developed by Licensee pursuant to the licenses granted in this Agreement within the "performance and fault management" domains as defined by the International Telecommunications Union Telecommunication Management Network Standards Series X.700; (c) "Copyrights" shall mean all copyrights owned or controlled by Northern Telecom or its Subsidiaries or Affiliates in existence at any time in any or all countries of the world and first existing prior to or during the term of this Agreement; (d) "Enhancements" shall mean any minor extensions of the features and/or capabilities which are contained in the Licensed Information as it exists as of the Effective Date of this Agreement; (e) "Gross Sales" shall mean the proceeds paid to Licensee upon the sublicensing of Authorized Products or of Licensed Information, as well as engineering and installation related thereto, whether comprising a lump sum and/or periodic payments; provided that Gross Sales shall not include (i) separately itemized taxes, support service or maintenance fees, insurance, interest charges on financing provided by Licensee to its customers and transportation costs, actually paid by Licensee's customers; or (ii) any refunds for returns. (f) "Intellectual Property" shall mean the aggregate of Patents, Copyrights and Maskworks, trade secrets and know-how which relates in any way to Licensed Information and Authorized Products; (g) "Joint Venture" shall mean a joint venture company which is a cooperative business enterprise formed between Northern Telecom and other autonomous entities to address more effectively certain mutual business interests and opportunities. (h) "Licensed Information" shall mean those items of information set forth in Schedule "A" attached hereto and forming part hereof and all source code, object code, design documentation, Northern Telecom's customer product documentation (including training and operations), installation and maintenance documentation marketing materials developed for general use, test specifications, Northern Telecom proprietary utilities and tools, command files for software development and testing, and everything currently used by Northern Telecom at the Effective Date to develop, modify and enhance the Licensed Information to the extent available in accordance with Article 3 hereof. 3 (i) "Manufacturing Licensee" shall mean a third party entity which has entered into an agreement with Northern Telecom to manufacture, in modified or unmodified form, Northern Telecom products and directly or indirectly through distributors, to sublicense and distribute Northern Telecom products under Northern Telecom or the Manufacturing Licensee's own brand name. (j) "Maskworks" shall mean all rights in semiconductor topology owned or controlled by Northern Telecom or its Subsidiaries or Affiliates similar to those defined in the Semiconductor Chip Protection Act of 1984 (U.S.A.) in existence at any time in any or all countries of the world and first existing prior to or during the term of this Agreement; (k) "Modifications" shall mean any minor changes such as, but not limited to, bug fixes, to the features and/or capabilities of the Licensed Information as it exists as of the Effective Date of this Agreement; (1) "Patents" shall mean all patents (including utility models but excluding design registration and design patents) owned or controlled by Northern Telecom or its Subsidiaries or Affiliates issued at any time in any or all countries of the world on applications having effective filing dates prior to the expiration or termination of this Agreement, including all continuations, continuations-in party, divisionals, reissues, additions, reexaminations and extensions with respect to any of the foregoing; (m) "Subsidiary" shall mean a corporation or company in which a party hereto effectively owns or controls, and continues to own or control directly or indirectly, more than fifty percent (50%) of the voting stock or shares; (n) "Test Plan" shall mean the plan for testing set forth in the documentation designated as such in Schedule "A" hereof. 4 ARTICLE 2 GRANT OF RIGHTS Northern Telecom, to the extent of its legal right so to do, hereby grants to Licensee and its Subsidiaries and Affiliates, subject to the terms and conditions of this Agreement, a perpetual, personal, non-transferable, exclusive (except as set forth in this Article 2), non-assignable, indivisible, world-wide right: (a) to use and modify and have modified the Licensed Information, and any Enhancements and Modifications thereto licensed hereunder, to develop Authorized Products; (b) to sublicense Authorized Products, except as expressly set forth herein, pursuant to a valid sublicense agreement containing substantially the terms set forth in Schedule "B"; (c) to grant sublicenses to the Licensed Information, in object code version only, pursuant to a valid sublicense agreement containing substantially the terms set forth in Schedule "B"; (d) to grant to sublicensees the right pursuant to an escrow agreement, if the Licensee, (i) becomes insolvent or files an assignment in bankruptcy or fails to have dismissed any petition seeking to have it declared bankrupt within 30 days after the filing thereof, or (ii) after using its best efforts to support Authorized Products, ceases all support of Authorized Products, to have access to and to use the source code version of the Licensed Information solely for Internal use to support the Authorized Products; and (e) under Intellectual Property, but only to the extent necessary to enable the exercise of the rights granted in the immediately preceding sub-paragraphs. The aforesaid rights shall include the right to communicate to customers purchasing the Authorized Products permitted hereunder such portions of the Licensed Information as are reasonably needed by such customers for the use of the Authorized Products; provided, however, that, to the extent that proprietary information is being communicated, the recipients of the Licensed Information be advised by Licensee in writing at the time, or before such communication, that proprietary information is being communicated and that such information is to be kept confidential and not used except as expressly permitted in writing and provided that such recipients undertake such obligations of confidentiality and restricted use in writing. For greater certainty, Licensee shall have no right to use the Licensed Information other than to develop Authorized Products and as set forth in the immediately preceding paragraph. Nothing herein shall limit Northern Telecom's right to grant licenses in the Licensed Information for activities other than those for which the Licensee is granted an exclusive license hereunder. For greater certainty, the exclusive rights granted hereunder shall not prejudice Northern Telecom's patent cross-licensees or any others granted rights in Intellectual Property which licenses do not include rights in the Licensed Information. Licensee shall comply with all applicable governmental legislation or regulations imposing restrictions on the export of products. 5 Notwithstanding anything in this Article 2, the grant of rights contained in this Article shall be non-exclusive with respect to: (a) any Manufacturing Licensee or Joint Venture existing as at the date of this Agreement; (b) Telrad Telecommunications & Electronic Industries Ltd. and its existing and future sublicensees only with respect to Israel and India; (c) any existing or future Subsidiary of Northern Telecom; (d) any end user customer of Licensed Information, which may be granted certain rights in the event that Northern Telecom fails to support products licensed to such licensee; (e) BC Tel and AGT Limited, which retain rights for their own use; and (f) any existing sublicensee of Northern Telecom or its Subsidiaries, Affiliates, Manufacturing Licensees or Joint Ventures for Internal use only. Northern Telecom agrees that it shall not grant to any party, other than the parties described in the immediately foregoing items (a) to (f), the right to sublicense Modifications or Enhancements to any Authorized Products. Licensee grants to Northern Telecom and its Subsidiaries, Manufacturing Licensees and Joint Ventures a personal, non-transferable, non-assignable, (except as provided in this Agreement) indivisible, world-wide right to use all Enhancements and Modifications which Licensee may develop or have developed during the term of this Agreement in connection with the use of the Licensed Information. Northern Telecom grants to Licensee and its Subsidiaries and Affiliates a personal, non-transferable, non-assignable, (except as provided in this Agreement) indivisible, world-wide right to use all Enhancements and Modifications which Northern Telecom may develop or have developed during the term of this Agreement in connection with the use of the Licensed Information. Within Thirty (30) days of the end of each calendar quarter, each party shall provide the other with a copy of all Enhancements and Modifications developed during such preceding quarter together with all applicable documentation, or, if applicable, written notice that no new Enhancements or Modifications have been developed during such preceding quarter. 6 ARTICLE 3 FURNISHING OF LICENSED INFORMATION Northern Telecom shall, to the extent of its legal right so to do, promptly furnish to Licensee the Licensed Information listed in Schedule "A" hereof. Northern Telecom shall only be obliged to provide Licensed Information available to it or its Subsidiaries, and shall not be obligated to develop or produce, except as expressly set forth herein, any new or unavailable Licensed Information. Northern Telecom shall supply the Licensed Information as soon as reasonably possible after execution of this Agreement and receipt from Licensee of the payment set forth in the first paragraph of Article 6 and substantially complete such supply within ninety days therefrom. Licensed Information provided hereunder shall be deemed delivered upon delivery to the common carrier chosen by Northern Telecom, at the relevant facility of Northern Telecom or upon sending by Northern Telecom if such Licensed Information is delivered by electronic means. That portion of the Licensed Information provided by Northern Telecom to Licensee pursuant to a prior confidentiality or non-disclosure agreement shall be considered provided pursuant solely to this Agreement and subject only to the terms and conditions hereof. 7 ARTICLE 4 REVIEW OF AUTHORIZED PRODUCTS BY NORTHERN TELECOM Licensee shall advise Northern Telecom, in writing, of each new release of Authorized Products developed during the term of this Agreement and, at Northern Telecom's request, provide suitable prototype and commercial versions of such Authorized Products for a period not to exceed three (3) business days solely to allow Northern Telecom to test such products. Authorized Products shall be resumed to Licensee. Northern Telecom shall, test the Authorized Products on Northern Telecom's premises and at Northern Telecom's expense in accordance with the Test Plan. Licensee shall provide, free of charge, such reasonable assistance of its qualified technical personnel as may be requested by Northern Telecom to assist in carrying out such testing. Northern Telecom shall provide to Licensee the results of such testing, and may, in its sole discretion, provide to Licensee comments and advice thereon. ARTICLE 5 TECHNICAL ASSISTANCE During the term of this Agreement, Northern Telecom shall make available to Licensee, to the extent contemplated in the immediately following paragraphs, upon the latter's request, technical assistance to facilitate the use of the Licensed Information provided hereunder for the exercise of the rights granted herein. Technical assistance provided hereunder by Northern Telecom shall be provided as reasonably required, under Northern Telecom's standard terms and conditions, including Northern Telecom's then-current per diem rates therefor plus expenses. Technical assistance provided hereunder shall be limited to that which is reasonable under the circumstances and shall be scheduled by Northern Telecom to serve the needs of Licensee, but not so as to inconvenience, or place excessive demands upon, the operations of Northern Telecom, or its Subsidiaries or Affiliates. Technical assistance shall include both consulting technical services of Northern Telecom and visits of Northern Telecom's personnel to Licensee's facilities. Technical assistance provided by Northern Telecom prior to the commencement of this Agreement and related to the subject matter hereof shall be considered provided pursuant to this Agreement and subject only to the terms and conditions hereof. ARTICLE 6 PAYMENT In consideration of the rights granted hereunder, the Licensee shall pay to Northern Telecom the following amounts: (a) ** lump sum of ** upon execution of this Agreement; (b) a royalty ** of the Authorized Products for the period, and in the manner, hereinafter set forth (which royalty is herein called the "Royalty") * CONFIDENTIAL TREATMENT REQUESTED 8 The Royalty shall be payable a set forth in Article 7 for a period of ** commencing on the Effective Date of this Agreement. Notwithstanding anything in this Article 6, the Royalty shall not exceed an aggregate of **. The Royalty shall accrue on the sublicensing of the Authorized Products and shall become payable in accordance with the provisions hereof. If the amount that a third party shall pay to Licensee for the Authorized Products and associated engineering and installation cannot be determined at the time that Licensee grants a license to such third party because such amount is not separately identified, Licensee shall pay to Northern Telecom an amount determined as set out below: (i) Licensee shall establish a list price for the Authorized Product for the particular third party customer; and (ii) Licensee shall then determine a discount percentage to be applied against such price based upon current market practice and the average discount percentage applied to the previous five licenses granted to the Authorized Product for which the licensee most closely approximates such license with respect to the size and functionality of the system being licensed; provided however, that such average shall include all prior licenses of the Authorized Product, if five (5) or fewer of such prior licenses have been granted at that time. Northern Telecom shall not be under any obligation to transmit to Licensee any Licensed Information or render any technical assistance whatsoever hereunder until the payment of the lump sum provided in subparagraph (a) of this Article 6 has been made or to continue to provide Licensed Information or to provide technical assistance unless payments of the Royalty or other amounts due related to the Authorized Products are not overdue, unless such overdue payments relate to a good faith payment dispute which has been continuing for not more than thirty (30) days. ARTICLE 7 RECORDS AND REMITTANCES Licensee shall keep clear and accurate records with respect to the Authorized Product and the Licensed Information. Northern Telecom shall have the right, through its Internal auditing experts, to examine and audit, during normal hours, annually (or at less frequent intervals) all such records and such other records and accounts as may under recognized accounting practices contain information bearing upon the amount of Royalties payable to it under this Agreement. Prompt adjustment shall be made by the proper party to compensate for any errors or omissions disclosed by such examination or audit. Neither such right to examine and audit, nor the right to receive such adjustments, shall be affected by statements to the contrary appearing on cheques or otherwise, unless any such right is expressly waived by the party having such right. Licensee shall furnish whatever additional information Northern Telecom may reasonably prescribe from time to time to enable Northern Telecom to ascertain whether the Authorized Product or Licensed Information sublicensed is subject to the payment of Royalties hereunder and the amount payable thereon. Within sixty (45) days following the end of each quarterly period ending on March 31, June 30, September 30 or December 31, commencing with the quarterly period which ends on September 30,1996 and continuing thereafter until all Royalties payable hereunder shall have been reported and paid, Licensee shall furnish to Northern Telecom a statement, in a form acceptable to Northern Telecom, certified by an authorized official of Licensee, recording all Authorized Products or Licensed Information sublicensed during such quarterly period, the ** and the amount of Royalties payable thereon. If no Authorized Products or Licensed Information have been sublicensed, that fact shall be shown on such statement. * CONFIDENTIAL TREATMENT REQUESTED 9 On the last day of each quarterly period, Licensee shall pay to Northern Telecom the Royalty applicable to all amounts received in such quarter. All payments to be made by Licensee to Northern Telecom shall be made in United States Dollars at Northern Telecom's address as shown in Article 13 hereof, or at such other address as Northern Telecom shall have specified by written notice. Licensee shall pay all taxes imposed as a result of the existence or operation of this Agreement including, but not restricted to, registration fees, remittance fees, stamp taxes, sales, value added or use imposed with respect to the granting or transfer of rights hereunder or the payment or receipt of fees hereunder and any tax which Licensee shall be required to withhold or deduct from fees or other payments to Northern Telecom except any tax on income imposed on Northern Telecom. Payments when provided for in this Agreement shall, when overdue, bear interest at a monthly rate of one and one-half percent (1.5%) or an annual rate of eighteen percent (18%). ARTICLE 8 CONFIDENTIAL INFORMATION Any information or materials (including "Licensed Information") provided by Northern Telecom hereunder ("Confidential Information") shall remain the property of Northern Telecom, and the Licensee shall be authorized to use such information or materials only within the scope of the rights and licenses herein granted. Except as hereinafter provided, for a period of three (3) years following the date of termination of this Agreement, Licensee shall protect Confidential Information provided to it by use of the same care and discretion to avoid disclosure, publication, or dissemination of such Confidential Information, as the case may be, beyond those employees of Licensee with a need to know such information for the purposes of this Agreement, as the Licensee employs with similar information of its own which it does not desire to disclose, publish or disseminate. Information which would otherwise be classified as Confidential Information hereunder shall not be treated as confidential, or otherwise subject to the restrictions and obligations set forth in this Article 8, if such information: (a) is already in the possession of Licensee without obligation of confidence and is so documented; (b) is independently developed by Licensee and is so documented; (c) is or becomes publicly available without breach of this Agreement, including Licensed Information which is made public; (d) is rightfully received by Licensee from a third party without obligation of confidence; or (e) is released for disclosure by Northern Telecom with its written consent. 10 ARTICLE 9 LIABILITY Northern Telecom makes no representations in respect to and does not warrant any Licensed Information furnished pursuant hereto, but shall furnish such in good faith to the best of its knowledge and ability. Without restricting the generality of the foregoing, Northern Telecom makes no representations or warranties as to merchantability or fitness for a particular purpose, or as to whether or not the use of the Licensed Information supplied hereunder may infringe any patent or other rights of any other person. Licensee shall indemnify and save Northern Telecom harmless from any and all claims and liabilities for damages, losses, expenses or costs (including counsel fees and expenses) arising out of any infringement or alleged infringement by any modification to the Licensed Information made by or on behalf of Licensee as well as any and all claims and liabilities arising out of any modification to the Licensed Information made by or for Licensee. Northern Telecom represents that to the best of its knowledge there is no conflicting claim related to the rights granted hereunder. In the event of any suit against Licensee or its customers for any alleged infringement of any intellectual property right or any other right of any third party arising from the sale or sublicense of Authorized Products by Licensee, Northern Telecom's sole and only obligation and liability shall be to assist Licensee in defending or otherwise dealing with such suit, at Licensee's expense, without incurring any liability with respect to any such assistance. In the event that either party becomes aware of any actual or suspected acts of a third party that do or might infringe Intellectual Property rights through use of the Licensed Technology, which infringement does or might affect any Authorized Product (an "Infringement"), such party shall notify the other of the Infringement and Northern Telecom may choose, but shall have no obligation, to institute and prosecute any action or proceeding with respect to the Infringement at the cost of Northern Telecom, and Northern Telecom shall be entitled to any and all proceeds recovered from third parties as a result of such enforcement. Northern Telecom agrees not to take any action inconsistent with this Agreement in the settlement of any action. If Northern Telecom elects not to prosecute any Infringement suit, Licensee may do so at Licensee's own expense after notice to Licensee of that intention and Licensee shall be entitled to any and all proceeds as a result of such enforcement to the extent that such proceeds relate to infringement against Authorized Products. Licensee shall indemnify and save Northern Telecom harmless from any and all claims and liabilities for damages, losses, expenses or costs (including counsel fees and expenses) arising out of the furnishing or receipt of any technical assistance pursuant hereto and hereby waives any claims that it might have or might pretend to have against Northern Telecom, its employees and agents, as well as those of its Subsidiaries and Affiliates, for or arising from the provision of such assistance or information. Notwithstanding anything else in this Article 9, Northern Telecom agrees that it shall indemnify and save the Licensee and its Affiliates and Sublicensees harmless with respect to any suit based on a claim that the use of the Licensed Information or the sublicensing of the same infringes any intellectual property right of any third party; provided that such obligation of Northern Telecom shall apply only to the extent that Northern Telecom is indemnified by MPR Teltech Ltd. ("MPR") pursuant to the master agreement (the "Development Agreement") made as of December 11,1992 between MPR and Northern Telecom (as assignee of Prism Systems Inc.) and subject to the restrictions and releases set forth in the Development Agreement and in the DSS II development assignment agreement made as of July 15, 1996 among MPR, 11 ADA Canada, Inc., Northern Telecom and BC Telecom Inc. For greater certainty, nothing in this paragraph shall render Northern Telecom liable to Licensee in respect of a claim of infringement for any amount in excess of the amount received by Northern Telecom from MPR in respect of such claim of infringement. ARTICLE 10 FORCE MAJEURE Neither Party shall be in default or liable for any loss or damage resulting from delays in performance or from failure to perform or comply with terms of this Agreement due to any causes beyond its reasonable control during the continuation of such causes, which causes include but are not limited to Acts of God or the public enemy; riots and insurrections, war, accidents, fire, strikes and other labour difficulties (whether or not the Party is in a position to concede to such demands), embargoes, judicial action; lack of or inability to obtain export permits or approvals, necessary labour, materials, energy, components or machinery; acts of civil or military authorities. ARTICLE 11 DURATION This Agreement shall commence on the above mentioned Effective Date and terminate (save with the exception of the survivorship provisions set forth in the final paragraph of Article 12) upon completion of a period of three (3) years following such date. Following the expiry of this Agreement by the passage of time, Licensee may continue to exercise the licenses granted pursuant to Article 2 as though this Agreement had continued. ARTICLE 12 TERMINATION In the event either Party shall be in breach of this Agreement or fail to perform one or more of its material obligations under this Agreement, the other Party may, by written notice to the Party in default, require the remedy of the breach or the performance of the obligation and, if the Party so notified fails to remedy or perform within sixty (60) days of the forwarding of a notice so to do, the other Party may, by written notice, terminate this Agreement. In the event of an enforceable decision or directive declaring invalid an essential part of this Agreement, without which this Agreement would not have been entered into, this Agreement may, at the option of either Party, be terminated upon the giving of notice to the other Party. Save as before set forth, in the event that any term, clause, provision or condition of this Agreement shall be similarly adjudged invalid for any reason whatsoever, such invalidity shall not affect the validity or operation of any other term, clause, provision or condition and such invalid term, clause, provision or condition shall be deemed to have been deleted from this Agreement. In the event that Licensee becomes majority owned or controlled by an entity which is a direct competitor or Northern Telecom, Licensee shall forthwith provide written notification to Northern Telecom of such change in majority ownership or control. Within thirty (30) days of receipt of such change in ownership or control, Northern Telecom may, in its sole discretion, elect to terminate this Agreement and the licenses granted hereunder provided that the acquiring entity is reasonably determined to be a direct competitor of Northern Telecom. 12 In the event either Party becomes involved or is the object of bankruptcy or insolvency proceedings, or makes an assignment for the benefit of its creditors, or is placed in receivership or liquidation, or fails to satisfy any final judgment rendered against it within the period so permitted, then, the other Party may, without any delay, by written notice, terminate this Agreement. In the event of termination of this Agreement prior to the expiry of its term, Licensee shall discontinue the exercise of the rights granted hereunder and the use of the Licensed Information and shall pay to Northern Telecom all amounts due hereunder. Notwithstanding any termination hereunder, the provisions of Articles 2 and 8 related to confidentiality and non-use, and the provisions of Article 9 related to liability shall survive the termination of this Agreement. ARTICLE 13 NOTICES Any and all notices or other information to be given by one of the Parties to the other shall be deemed sufficiently given when forwarded by prepaid, registered or certified first class air mail or by facsimile, telegram, telex or hand delivery to the other Party at the following address: If to Northern Telecom: Northern Telecom Limited 2920 Matheson Boulevard East Mississauga, Ontario Canada UW 4M7 Attention: Corporate Secretary If to Licensee: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California U.S.A. 92121 Attention: President and such notices shall be deemed to have been received fifteen (15) business days after mailing if forwarded by mail, and the following business day if forwarded by facsimile, telegram, telex or hand. The aforementioned address of either Party may be changed to any time by giving fifteen (15) business days prior notice to the other Party in accordance with the foregoing. In the event of a generally-prevailing labour dispute or other situation which will delay or impede the giving of notice by any such means, in either the country of origin or of destination, the notice shall be given by such specified mode as will be most reliable and expeditious and least affected by such dispute or situation. 13 ARTICLE 14 GENERAL PROVISIONS Neither party may assign all or any portion of this Agreement without the other party's prior written consent, such consent not to be unreasonably withheld. Notwithstanding the foregoing, a party may assign and transfer this Agreement and its rights and obligations hereunder to its parents, Affiliates or Subsidiaries. In no event shall either party create any contractual relation between any third party and the other. The Parties recognize that the transfer of Licensed Information to or for a country other than Canada or the United States of America may be subject to the specific approval of the governments of such countries or various agencies thereof. Nothing in this Agreement shall be construed as requiring Northern Telecom to disclose technical information, or to grant rights under licenses, or to render any technical assistance, which would violate any confidentiality undertakings which it has towards third persons or which would violate any present or future law or decrees of any government or governmental office or agency, and nothing contained herein shall require the disclosure of technical information which would increase or impose any obligations on Northern Telecom with respect to third parties. Nothing contained in this Agreement shall be construed as: (a) requiring Northern Telecom to file any patent application, to secure any patent or to maintain any patent in force; (b) constituting a warranty or representation by Northern Telecom as to the validity or scope of any patent licensed hereunder; (c) constituting a warranty or representation by Northern Telecom that any use, lease, sale or sublicense by Licensee hereunder will be free from infringement of patents, copyrights and other intellectual property rights other than those under which, and to the extent to which, licenses are granted hereunder; (d) constituting an agreement to bring or prosecute actions or suits against third parties for infringements; (e) conferring any right to use, in advertising, publicity or otherwise, any name, trade-name or trademark, or any contraction, abbreviation or simulation thereof; (f) conferring by implication, estoppel or otherwise upon Licensee any license or other right under any patent, except the licenses and rights expressly granted hereunder. Except as explicitly set forth herein, nothing contained in this Agreement shall limit, in any manner, either Party's right to discontinue or change the design or characteristics of any of its products (including Licensed Information) at any time without notice and without liability. 14 The failure of either Party to give notice to the other Party of the breach or non-fulfillment of any term, clause, provision or condition of this Agreement shall not constitute a waiver thereof, nor shall the waiver of any breach or non-fulfillment of any term, clause, provision or condition of this Agreement constitute a waiver of any other breach or non-fulfillment of that or any other term, clause, provision or condition of this Agreement. All technical and other information provided or made available to Licensee prior to the execution of this Agreement which would have been covered by the definitions of Licensed Information or Confidential Information had it been delivered pursuant to this Agreement shall be deemed to be Licensed Information or Confidential Information, as the case may be, and to be subject to the provisions of this Agreement. This Agreement sets forth the entire agreement and understanding between the Parties with respect to the subject matter addressed herein and supersedes and cancels all previous negotiations, agreements, commitments, and writings in respect to the subject matter hereof, and neither Party hereto shall be bound by any term, clause, provision or condition save as expressly provided in this Agreement or as duly set forth on or subsequent to the date hereof in writing, signed by duly authorized officers of the Parties. Nothing in this Agreement shall be construed as establishing or implying any partnership between the Parties hereto, and nothing in this Agreement shall be deemed to constitute either of the Parties hereto as the agent of the other Party or authorize either Party to incur any expenses on behalf of the other Party or to commit the other Party in any way whatsoever, without obtaining the other Party's prior written consent. The specific terms and conditions of this Agreement shall be held in confidence by both Parties and only disclosed as may be agreed by both Parties, which agreement shall not be unreasonably withheld by either Party. Notwithstanding the foregoing, or paragraph (e) above, either Party may make public statements, issue publicity or media releases, or make other disclosures, revealing the existence of this Agreement, and the general relationship of the Parties hereunder, without the prior approval of the other Party. This Agreement shall be construed in accordance with and governed by the laws of the Province of Ontario, Canada. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date first above mentioned. NORTHERN TELECOM LIMITED APPLIED DIGITAL ACCESS, INC. Per: ___________________ Per: ________________________ Per: ___________________ Per: ________________________ Date:___________________ Date: _______________________ 15 SCHEDULE "A" LICENSED INFORMATION 16 SCHEDULE "B" SUBLICENSING TERMS sublicense agreements shall include terms and conditions substantially similar to the following: 1. restrict use of the Authorized Products or Licensed Information to object code form only; 2. prohibit causing or permitting the reverse engineering, disassembly or decompilation of the Authorized Products or Licensed Information except to the extent permitted by law or required to obtain interoperability with other independently created software programs; 3. prohibit title to the Authorized Products or Licensed Information from passing to the end user; 6. disclaim Northern Telecom's liability for any damages, whether direct, indirect, incidental or consequential arising from the use of the Authorized Products or Licensed Information; and 7. require the end user, at the termination of the sublicense, to discontinue use and destroy or return to Licensor the Authorized Products or Licensed Information, associated documentation and all archival or other copies of the Authorized Products or Licensed Information. 8. in any sublicense to United States Government end users, include the following on all copies of Authorized Products distributed to United States Government end users; This software is provided with RESTRICTED RIGHTS. Use, Duplication, or Disclosure by the U.S. Government is subject to restrictions as set forth in subparagraph (c) (1) (ii) of The Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c) (1) and (2) of the Commercial Computer Software-Restricted Rights at 48 CFR 52.227-19, or successor legislation, as applicable. Contractor/ Manufacturer is Northern Telecom Limited, 2920 Matheson Boulevard East Mississauga, Ontario Canada L4W 4M7. 9. End user shall comply with all applicable governmental legislation or regulations imposing restrictions on the export of products. EX-10.5 5 EXHIBIT 10.5 1 EXHIBIT 10.5 SECOND AMENDMENT TO LEASE This Second Amendment to Lease (this "Amendment"), entered into as of August 8, 1996, by and between SORRENTO TECH ASSOCIATES, a California limited partnership ("Landlord"), and APPLIED DIGITAL ACCESS, a California corporation ("Tenant"), modifies that certain R & D Building Lease dated as of June, 1993, by and between Landlord and Tenant, as amended by that certain First Amendment to Lease dated as of September 23, 1994 (collectively, the "Lease"). All capitalized terms used in this Amendment and not defined shall have the meanings set forth in the Lease. The parties hereto desire that the Lease be modified to provide for, among other things, an increase in the size of the Premises, an extension of the Term and an addition of an option to further extend the Term. AGREEMENT NOW THEREFORE, in consideration of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to the above recitals and as follows: 1. Premises. The Lease is hereby amended to provide for a new definition of the Premises. Effective December 1, 1996, approximately 23,381 additional square feet ("Expansion Areat') shall be added to the existing approximately 38,987 square feet, for a total of approximately 62,368 square feet which shall constitute the new Premises. The additional square feet described in the foregoing sentence are shown on Exhibit A attached hereto and incorporated by this reference. 2. Commencement Date. The provisions of the Lease shall become applicable to the Expansion Area on December 1, 1996 and Tenant shall pay Rent and Additional Charges on the Expansion Area as per the terms of the Lease commencing on said date. Upon said date, the Rent and Tenant's Additional Charges shall be determined using the rentable square feet within the Premises as amended hereby. 3. Acceptance of Expansion Area. Upon taking possession of the Expansion Area, Tenant shall be deemed to have accepted the Expansion Area in its "As Is" condition, and to have acknowledged that the same fully comply with Landlord's obligations under the Lease and this Amendment. Tenant shall be entitled to construct certain improvements in the Expansion Area, subject to obtaining Landlord's prior written consent of the architects, contractors and all plans and specifications for such improvements before the commencement of any work. Landlord shall provide to Tenant an improvement allowance of $150,000 to be applied towards actual costs in connection with Tenant's construction of improvements in the Expansion Area. Landlord will fund such allowance within thirty days of receipt of invoices for actual costs expended towards such improvements. The provisions of the Lease shall apply to such improvements, including, but not limited, to Articles 11 and 12 of the Lease. Landlord hereby notifies Tenant that Landlord does not know, and does not have reasonable cause to believe, that any Hazardous Materials has come to be located on or beneath the Expansion Area. In the event Hazardous Materials are discovered to have been released in, on, under or about the Expansion Area by Pacific Data Products, prior to the Commencement Date for the Expansion Area, Landlord agrees to diligently pursue Landlord's applicable rights and remedies pursuant to Landlord's current lease agreement with Pacific Data Products arising from any remediation required as a result of such Hazardous Materials. Additionally, in the event Pacific Data Products remains in the Expansion Area after the Commencement Date, without having subleased the Expansion Area from Tenant as provided below, then Landlord agrees to enforce Pacific Data Products' surrender obligations under the current lease of the Expansion Area. 2 4. Extension of Term Rent. The Term of the Lease is hereby extended for an additional period of forty-eight months ("Extension Term") with the new Expiration Date being August 31, 2003. Rent during the Extension Term shall be payable at the following rates per rentable square foot of the Premises per month: September 1, 1999 Through August 31, 2000 $ .97 September 1, 2000 Through August 31, 2001 $1.00 September 1, 2001 Through August 31, 2002 $1.04 September 1, 2002 Through August 31, 2003 $1.08 5. Option to Extend Term. Subject to all of the terms and conditions of the Lease, Tenant shall have a one time option ("Extension Option") to further extend the Term of the Lease for an additional five (5) years. Tenant must deliver irrevocable written notice to Landlord of Tenant's exercise of the Extension Option not later than August 31, 2002. Tenant's failure to timely deliver such notice shall constitute an automatic termination of the Extension Option and Tenant shall have no further right to extend the term of the Lease. During the five year extension, Rent and Additional Charges shall be based on 100% of the then current fair market value of the Premises, as determined at that time for comparable space in the Project, but in no event shall such amounts be less than the Rent and Additional Charges paid by Tenant during the prior year under the Lease. If Landlord and Tenant are unable to agree to the fair market value of the Premises for the additional five year extension term, then the matter shall be submitted to arbitration for determination under the procedures set forth in the Lease. 6. Security Deposit. Upon execution of this Amendment, Tenant shall pay to Landlord in immediately available funds as a portion of the Security Deposit held by Landlord pursuant to the terms and conditions of the Lease, an amount equal to $26,500.00, in order to adjust the amount of the Security Deposit so that the amount of the Security Deposit held by Landlord shall be $65,700.00. 7. Contingent Upon Termination of PDP Lease. Tenant acknowledges that the Expansion Area is currently occupied by Pacific Data Products under the terms of a lease between Pacific Data Products and Landlord. Landlord shall have no obligations under this Amendment and this Amendment shall not be effective unless and until Landlord and Pacific Data Products enter into a termination agreement in a form acceptable to Landlord pursuant to which Pacific Data Products agrees to vacate the Expansion Area by no later than November 30, 1996. Landlord agrees to diligently and in good faith negotiate a mutually acceptable termination agreement with Pacific Data Products and, if such termination agreement is not executed by both Landlord and Pacific Data Products by November 1, 1996, this Second Amendment to Lease shall be null and void and be of no further force or effect, and neither party shall have further rights or obligations to the other except that Landlord shall return any payment made by Tenant to Landlord. Notwithstanding Landlord's termination of the current lease of the Expansion Area to Pacific Data Products, Landlord hereby preapproves Pacific Data Products as a subtenant of Tenant in the Expansion Area pursuant to a sublease between Tenant and Pacific Data Products, in a form reasonably acceptable to Landlord, and subject to all terms and conditions of the Lease including without limitation the provisions of Article 18 of the Lease. 8. Broker's Commissions. Tenant represents and warrants that it has not entered into any agreement or incurred or created any obligation which might require Landlord to pay any broker's commission, finder's fee or other commission or fee relating to subject matter of this Amendment. 9. Lender Consent. Landlord shall diligently pursue and obtain from the Mortgagee of Landlord's interest in the Project appropriate consents to this Second Amendment to Lease. 10. Miscellaneous. 3 10.1 Further Assurances. Each of the parties hereto agrees to execute all documents and instruments and to take all other actions as may specifically be provided for herein or in the Lease as may be required in order to consummate the purposes of this Amendment. 10.2 No Third Parties. Except as specifically set forth herein, no third party shall be benefitted by any of the provisions of this Amendment, nor shall any such third party have the right to rely in any manner upon any of the terms hereof, and none of the covenants, representations, warranties or agreements herein contained shall run in favor of any third party not specifically referenced herein. 10.3 Legal Expenses. The prevailing party in any litigation or dispute over rights, remedies or duties arising under this Amendment shall be entitled to recover, in addition to other appropriate relief, its reasonable costs and expenses, including, without limitation, attorneys' fees and court costs. Such entitlement shall include costs and expenses incurred in the collection of any judgment or settlement. 10.4 Integration: Interpretation. This Amendment in combination with the Lease contains or expressly incorporates by reference the entire agreement of the parties with respect to the matters contemplated herein and supersedes all prior negotiations. Except as specifically set forth herein, the Lease remains unmodified and in full force and effect. 10.5 Construction. The parties acknowledge that each party and its counsel have reviewed this Amendment. The parties agree that the rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Amendment. 10.6 Severability. If any provision of this Amendment or of the Lease shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed therefrom and the remaining parts shall remain in full force as though the invalid, illegal, or unenforceable portion had never been a part thereof. 10.7 No Defaults. Tenant hereby represents and warrants that it is not in default under the Lease nor do any facts or circumstances exist which with the passage of time or the giving of notice, or both, could ripen into a default. IN WITNESS WHEREOF, this Amendment has been executed as of the date first above set forth. LANDLORD: TENANT: SORRENTO TECH ASSOCIATES, APPLIED DIGITAL ACCESS, a California limited partnership a California corporation By Barnes Canyon RPF Realty By ______________________ Corp., a Connecticut corporation, General ______________________ Partner [Print Name and Title] By ____________________ Mark S. Knapp, Vice President 4 EXHIBIT A [Expansion Area] EX-10.6 6 EXHIBIT 10.6 1 EXHIBIT 10.6 LEASE CONTRACT APPLIED DIGITAL ACCESS AND ROSE HULMAN INSTITUTE OF TECHNOLOGY 2 CONTENTS Section Number Page - -------------- ---- SECTION 1: THE LEASED PREMISES..............................................6 1.1: DESCRIPTION......................................................6 1.2: CONDITION........................................................6 SECTION 2: THE TERM.........................................................7 2.1: PRIMARY TERM.....................................................7 2.2: OPTIONAL TERMS...................................................7 SECTION 3: RENTS AND PAYMENTS...............................................7 3.1: RENT.............................................................7 3.2: ADDITIONAL RENTS.................................................7 SECTION 4: USE OF THE LEASED PREMISES.......................................8 4.1: BUSINESS USE.....................................................8 4.2: GENERAL CONDITION................................................8 4.3: EXTERIOR USE.....................................................8 4.4: EXTERIOR APPEARANCE..............................................8 4.5: SIGNAGE..........................................................8 4.6: REFUSE AND HAZARDOUS SUBSTANCES..................................8 4.7: ACCESS TO THE LEASED PREMISES....................................9 4.8: SECURITY SYSTEM..................................................9 4.9: PARKING..........................................................9 SECTION 5: MAINTENANCE, REPAIRS AND ALTERATIONS.............................9 5.1: MAINTENANCE AND REPAIRS BY THE LANDLORD..........................9 5.2: MAINTENANCE AND REPAIRS BY THE TENANT...........................10 5.3: ALTERATIONS. ...................................................10 5.4: CONSTRUCTION AND REPAIR INCONVENIENCE...........................10 5.5: EMERGENCY ACTIONS. .............................................11 5.6: JANITORIAL MAINTENANCE..........................................11 SECTION 6: THE COMMON AREA.................................................11 6.1: DEFINITION......................................................11 6.2: USE OF THE COMMON AREA..........................................11 6.3: COMMON AREA MAINTENANCE ("CAM").................................11 SECTION 7: PUBLIC UTILITY SERVICES.........................................12 7.1: EXISTING UTILITY SERVICES.......................................12 7.2: MODIFICATIONS TO UTILITIES......................................12 7.3: PAYMENT FOR UTILITIES...........................................12 2 3 SECTION 8: INDEMNITY AND INSURANCE.........................................12 8.1: INDEMNITY.......................................................12 8.2: LANDLORD'S INSURANCE............................................13 8.3: TENANT'S INSURANCE..............................................13 8.4: WAIVER OF SUBROGATION...........................................13 8.5: TENANT'S INSURANCE REIMBURSEMENT................................13 8.6: COMPLIANCE......................................................13 SECTION 9: LOSS............................................................14 9.1: LOSS BY DAMAGE OR DESTRUCTION...................................14 9.2: LOSS BY EMINENT DOMAIN..........................................14 SECTION 10: TAXES..........................................................15 10.1: TAXES PAID BY THE LANDLORD.....................................15 10.2: TAXES PAID BY THE TENANT.......................................15 10.3: REAL ESTATE TAX REIMBURSEMENT. ................................15 SECTION 11: TERMS OF SUCCESSION............................................15 11.1: TERMS OF SUBLEASING............................................15 11.2: TERMS OF ASSIGNMENT............................................16 11.3: AGREEMENT BINDING ON SUCCESSORS................................16 SECTION 12: DEFAULTS AND REMEDIES..........................................16 12.1: DEFINITION OF CONTRACT DEFAULTS................................16 12.2: REMEDIES.......................................................16 12.3: LANDLORD'S RIGHT OF RECOVERY...................................17 12.4: CONTRACT TERMINATIONS..........................................17 12.5: EXPENSE REIMBURSEMENT..........................................18 12.6: NO WAIVER PROVISION............................................18 12.7: EXCULPATION....................................................18 SECTION 13: MISCELLANEOUS PROVISIONS.......................................19 13.1: APPROVED HOLDOVER OCCUPANCY....................................19 13.2: VACATING THE LEASED PREMISES...................................19 13.3: EXCLUSIVITY OF TERMS...........................................19 13.4: AMENDMENTS AND ADDENDA.........................................19 13.5: GOVERNING LAW..................................................19 13.6: SUBORDINATION AND NON-DISTURBANCE. ............................19 13.7: FORCE MAJEURE..................................................20 13.8: ESTOPPEL CERTIFICATE...........................................20 13.9: COMPLIANCE WITH LAWS...........................................20 13.10: AGENT'S AUTHORITY.............................................20 13.11: QUIET ENJOYMENT...............................................20 3 4 SECTION 14: NOTICES........................................................21 SECTION 15: ACCEPTANCE AND EXECUTION.......................................21 NOTARIZATIONS...............................................................22 "EXHIBIT A".................................................................23 "EXHIBIT B".................................................................24 "EXHIBIT C".................................................................25 "EXHIBIT D".................................................................26 4 5 LEASE AGREEMENT RECITATIONS THIS LEASE AGREEMENT ("Lease"), made and entered into September 15, 1996, by and between Rose Hulman Institute of Technology, a private engineering college in the State of Indiana acting by and through its authorized leasing agent, Ragle and Company ("Landlord"), and Applied Digital Access, a corporation in the State of California, ("Tenant"), WITNESSETH THAT: WHEREAS the Landlord is the owner of certain property and improvements as described herein and is authorized and empowered to enter into this Lease, and WHEREAS the Tenant does now desire to lease from the Landlord certain facilities and/or property as described herein, now therefore The Landlord hereby leases to the Tenant and the Tenant hereby leases from the Landlord said facilities and/or property for and in consideration of the mutual covenants and conditions agreed upon by both parties as contained and described hereinafter. SECTION 1: THE LEASED PREMISES 1.1: DESCRIPTION. Upon and subject to all the provisions and terms of this Lease, the improvements and/or property being leased by the Tenant and affected by this Lease ("Leased Premises") is described and defined as a portion of 200 East Campus Drive, consisting of approximately 12,600 square feet of floor area, which space is situated in, and part of a facility commonly referred to as Aleph Park West ("Facility") located on the west side of State Highway 46 one mile south of Interstate 70, Vigo County, Indiana, along with the non-exclusive right to use common areas. Said Leased Premises are depicted in red on a site plan drawing attached hereto and labeled "Exhibit A" The legal descriptions, easements, variances and right-of-ways, both existing and future, recorded in the applicable deeds, titles and abstracts shall govern the boundaries and accessibility of the Leased Premises. 1.2: CONDITION. Subject to the terms of this Lease, the Leased Premises are being leased in "as is" condition. Subject to the terms of this Lease, Tenant's commencement of occupancy shall be deemed its acceptance of the Leased Premises in its then existing condition. See "Exhibit C", attached hereto, for work to be performed by Landlord prior to Tenant's occupancy. Landlord shall complete Landlord's Work no later than the Commencement Date, subject to punch list items and force majeure. Tenant shall complete work described in "Exhibit D," attached hereto and incorporated herein, (Tenant's Work") prior to Tenant's occupancy, subject to punch list items and force majeure. Landlord acknowledges and agrees that it has approved Tenant's Work. (Tenant's Work and Landlord's Work shall be referred to, collectively, as "Tenant Improvements"). 5 6 Landlord shall (1) deliver the Leased Premises to Tenant clean and free of debris and free from any material defect on the Commencement Date, and (2) warrants to the Tenant that (i) existing plumbing, electrical systems, fire sprinkler systems, lighting, air condition and heating systems and load doors, if any, in the Leased Premises, shall be in good operating condition on the Commencement Date, and (ii) the Leased Premises shall be in compliance with all government codes and regulations, including the Americans With Disabilities Act ("ADA") on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Landlord shall promptly after receipt of written notice from Tenant setting forth with specificity the nature and extent of such non-compliance, rectify the same at Landlord's expense. SECTION 2: THE TERM 2.1: PRIMARY TERM. The primary term for which this Lease shall remain in effect will be for a period of Twelve (12) consecutive months (1 year) , ("Primary Term"), which shall commence on the earlier of (i) completion of the Tenant's Improvements or, (ii) October 1, 1996 ("Commencement Date"). This Primary Term shall expire at midnight on the last day of the twelfth (12th) full month following the Commencement Date. 2.2: OPTIONAL TERMS. The Tenant shall have Two (2) consecutive options to extend this Lease for additional consecutive terms of One (1) year each, ("Options"), which shall commence upon the expiration of the Primary Term or the prior Option term upon the Tenant's delivery of written notice to the Landlord, at least ninety (90) days prior to the expiration of the Primary Term or the immediately preceding Option term, indicating its intent to exercise the Option of the Leased Premises. The exercise of any Options shall be contingent upon the Tenant's full compliance and performance of all the terms and conditions set forth herein, within the applicable cure periods, as they pertained to the Tenant's previous term of occupancy. All Options shall be subject to all the terms and conditions contained herein. SECTION 3: RENTS AND PAYMENTS 3.1: RENT. For and in consideration of all the terms and conditions contained in this Lease, the Tenant shall pay to the Landlord, without demand, a regular monthly rental payment of Thirteen Thousand, One Hundred Twenty-Five Dollars ($13,125.00), beginning October 1, 1996, and no later than the first business day and in advance of each consecutive month thereafter, through and until the expiration of the Term or exercised Option term. The Tenant further agrees to make all payments to the Landlord by a check or draft drawn and payable to the Landlord and delivered and received by Landlord at the Landlord's address as stipulated and or modified by the Landlord in Section 14 of this Lease. Unpaid or late rents shall be subject to the penalties contained in Section 12.2, hereinafter. 3.2: ADDITIONAL RENTS. In addition to regular monthly rental payments, all sums that are payable by the Tenant to the Landlord under the terms of this Lease shall be considered additional rent. Additional rentals not paid within thirty (30) days after written notice from Landlord shall be subject to the penalties contained in Section 12.2 hereinafter. 6 7 SECTION 4: USE OF THE LEASED PREMISES 4.1: BUSINESS USE. The Tenant warrants that the Leased Premises will be used exclusively for the purposes of general office, research, light manufacturing, development and marketing. The Tenant further warrants that its use of the Leased Premises shall be conducted within full compliance of all federal, state and local laws, regulations and codes at all times. Any other use of the Leased Premises shall be strictly prohibited without the written consent of the Landlord which shall not be unreasonably withheld or delayed. Landlord represents and warrants that Tenant's use of the Leased Premises is permitted by all zoning and other applicable laws existing at the Commencement Date. 4.2: GENERAL CONDITION. Throughout the entire term of this Lease, and notwithstanding the terms contained in Section 5, hereinafter, the Tenant shall maintain the Leased Premises in at least as good a condition as was present at the Commencement Date of this Lease normal wear and tear and casualty excepted. The Tenant further warrants that it will maintain the decor and cleanliness of its operation in a manner that is neat and befitting of a properly operated establishment of this type. The Tenant shall maintain its conduct, activity, noise levels or odors emitted from, or resulting from its use of the Leased Premises, to levels that are not a nuisance to other tenants and/or neighboring entities. 4.3: EXTERIOR USE. The Tenant does hereby acknowledge that the primary function of the exterior area surrounding the Leased Premises is meant to provide access and accommodate those conducting business with the Landlord and other occupants of the Facility and property attached thereto. Any use of the exterior area surrounding the Leased Premises, for the purpose of promoting, merchandising, storage, or any other purpose is strictly prohibited without the prior consent of the Landlord. 4.4: EXTERIOR APPEARANCE. The Tenant shall maintain the immediate exterior of the Leased Premises in a clean and neat manner excepting those obligations that are the Landlord's responsibility as described herein. 4.5: SIGNAGE. The Tenant may install signs within the Leased Premises which are not visible from the exterior of the Leased Premises, without the consent of the Landlord. Any signs which are visible from the exterior of the Leased Premises, are subject to the prior written approval of the Landlord, which shall not be unreasonably withheld or delayed. All costs for installing, maintaining, repairing, changing and removing any signs on or about the Leased Premises shall be borne by the Tenant. The Tenant shall be responsible for procuring all necessary permits for, and comply with all applicable governmental regulations and codes with respect to any such signage on or about the Leased Premises. 4.6: REFUSE AND HAZARDOUS SUBSTANCES. The Tenant shall keep all trash, refuse and other wastes in a proper and safe manner and in compliance with all governmental regulations and codes applicable to the correct storage, transport and disposal of all such waste. The Landlord shall arrange and pay for the reasonable removal of non-hazardous waste. The Tenant shall not cause or permit any hazardous substance or material (as may be defined at anytime during the course of this Lease by any governmental authority) to be brought upon, handled, stored, produced, emitted, discharged into the 7 8 Leased Premises or the environment, disposed of or used upon, about, beneath, or above the Leased Premises, or the Landlord's property, by the Tenant, its agents, employees, contractors or invitees; provided Tenant shall be allowed to lawfully use and store normal and customary office products, including, without limitation, toner for copiers and printers, cleaning supplies, etc., in the normal course of business in the Leased Premises. The Tenant shall indemnify and defend the Landlord from any loss, liability, penalties, claims or orders by any person, entity or governmental authority resulting directly or indirectly from any claim arising from Tenant's use of hazardous material on or about the Leased Premises. Notwithstanding any other provision of this Lease, Landlord represents that as of the Commencement Date it is unaware of any Hazardous Substances contamination or condition in, on or under the Facility. Notwithstanding this representation, Landlord shall defend, protect, indemnify and hold Tenant harmless against and from all liability and claims of any kind for loss or damage to Tenant (including, but not limited to costs, expenses and reasonable attorney's fees) incurred, directly or indirectly, as a result of the existence of such Hazardous Substances contamination or condition, on, in or under the Facility that was not caused by Tenant or its agents, employees or invitees. 4.7: ACCESS TO THE LEASED PREMISES. The Landlord warrants and represents that the Tenant, upon paying all rentals as contained herein and abiding by all the covenants and terms hereof, shall have the quiet enjoyment of the Leased Premises and reasonable access thereto, subject, however, to the Landlord's rights as contained herein. At all times, the Tenant agrees to maintain reasonable safety and security of the Leased Premises in the interest of its own property and that of the Landlord. The Landlord shall have the right, after reasonable notice, to enter the Leased Premises during all regular business hours for the purpose of inspecting, making repairs, modifications or exhibiting the Leased Premises to prospective buyers, lessees or mortgagees, so long as it shall not unreasonably interfere with the Tenant's operation. Further, the Landlord may enter the Leased Premises at anytime, after notifying the Tenant or in a potential emergency situation. 4.8: SECURITY SYSTEM. Tenant shall have the use of the existing security system, which shall be shared with ICTT (the neighboring tenant). Tenant further shall have the right, at its sole cost and expense, to modify the security system as it deems appropriate (including, without limitation, installation of independent control units or system of access security cards). Tenant shall pay its pro rata share of the monthly security fees, wherein Tenant's pro rata share shall equal the square footage of the Leased Premises divided by the total leased and leasable square footage of the Facility. 4.9: PARKING. Tenant shall have the non-exclusive right, in connection with its use and occupancy of the Leased Premises, to use a minimum of 35 parking spaces on a non-reserved basis at no additional cost to Tenant for Tenant's employees, agents, invitees, customers, suppliers or contractors. SECTION 5: MAINTENANCE, REPAIRS AND ALTERATIONS 5.1: MAINTENANCE AND REPAIRS BY THE LANDLORD. The Landlord shall be responsible for reasonable maintenance and repair to a good condition the structural portions of improvements situated on the Leased Premises, including foundations, roof, down spouts, gutters, incoming utility mains and canopies. Additionally, the Landlord shall be responsible for reasonable 8 9 maintenance and repair to a good condition all plumbing, plumbing fixtures, water heaters, all HVAC equipment (HVAC meaning heating, ventilating and air conditioning) and the electrical system, which electrical repairs and maintenance shall be limited to electrical switching panels, breaker boxes and distribution wiring servicing the Leased Premises at Lease Commencement Date. The Landlord will repair such items referred to above in a reasonably timely and professional manner after being notified that such need exists. Landlord shall not cause an interference with Tenant's business or interruption or reduction in service to Tenant except to the extent required to do the repair work, and in such event Landlord shall minimize interference with tenant's use of the Leased Premises. Furthermore, the Landlord may repair or cause to be repaired any item for which it is the Tenant's responsibility to maintain, should the Tenant fail to take appropriate action to cure such condition within thirty (30) days following the Landlord's delivery of written notice, and the Tenant hereby agrees to fully reimburse the Landlord for any and all expenses incurred as a result of such actions taken by the Landlord. 5.2: MAINTENANCE AND REPAIRS BY THE TENANT. Notwithstanding the items set forth in Section 5.1 herein, the Tenant shall be responsible for the maintenance and repair of all other non-structural, interior portions of the Leased Premises, including, but not limited to, floor coverings, walls, wall coverings, ceiling, interior lighting fixtures, signage fixtures, and other interior fixtures and decor not specifically defined herein and to keep the same in good and serviceable condition at Tenant's expense. The Tenant further agrees to notify the Landlord in a timely manner, of any condition requiring maintenance and/or repair that may be the Landlord's responsibility to perform, as defined herein. Notwithstanding these representations, Tenant shall be responsible to repair and restore any damage or casualty caused upon the Leased Premises by its actions or use thereon. 5.3: ALTERATIONS. The Landlord reserves the right to physically alter or modify the Leased Premises or any portion of the common area and property attached thereto so long as such alteration does not unreasonably interfere with the Tenant's use of the Leased Premises as defined herein (See also, Section 5.4). The Tenant shall obtain the prior approval of the Landlord, which shall not be unreasonably withheld or delayed, before attempting any material changes to the interior of the Leased Premises or modifications or repairs that may affect the structure of the Facility or that may affect the incoming utility services. The Tenant's removable equipment or trade fixtures shall remain the property of the Tenant and may be removed by the Tenant on or before the expiration of this Lease, providing the Tenant repairs any damage to the Leased Premises resulting from such removal. Nothing in this Lease or any attachments hereto shall be deemed in any way as constituting the request or consent of the Landlord, expressed or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials for any specific improvements, alteration or repair of the Leased Premises as may be caused by the Tenant. 5.4: CONSTRUCTION AND REPAIR INCONVENIENCE. The Landlord, at its sole discretion, may elect to effect repairs, maintenance or alterations to the Leased Premises or any improvements or property attached thereto. In such instances, the Tenant agrees to cooperate and grant the Landlord access, as necessary, to the Leased Premises during reasonable periods. Landlord shall not cause an interference with Tenant's business or interruption or reduction in service to Tenant except to the extent required to do the repair work, and in such event Landlord shall minimize interference with tenant's use of the Leased Premises. Should such repair or modification threaten to materially disrupt the Tenant's business operation to the extent that more than twenty-five percent (25%) of the Tenant's 9 10 floor space is rendered unusable for the Tenant's normal business activity, then the Landlord shall make a reasonable effort to attain a mutually agreeable method to accommodate the Tenant's operational needs, which shall include the temporary and partial abatement of rent in proportion to the affected floor space. Excepting Landlord's or its employee's, agent's or contractor's negligence, willful misconduct or breach of this Lease, the Tenant shall hold the Landlord harmless from any and all claims arising from the affect of such repairs or modifications, whether within the confines of the Leased Premises or on any portion of the property attached thereto. The Landlord shall (which shall not include the employment of labor at overtime rates) minimize interference with the Tenant's business operations and access during periods of such work. 5.5: EMERGENCY ACTIONS. If a condition arises in the Leased Premises or the Landlord's property attached thereto, where an immediate need for emergency action becomes necessary to avoid significant property damage or to reduce or eliminate a potentially life-threatening situation and the Tenant is unable to contact the Landlord or cannot take the time to contact the Landlord, then the Landlord hereby consents to the Tenant's reasonable and necessary actions taken to remedy such a condition. Furthermore, the Landlord agrees to reimburse the Tenant for any reasonable and justifiable costs incurred by the Tenant in taking such action, providing it was clearly taken in the best interest of both parties and was for a repair or maintenance item for which the Landlord is responsible under the terms of this Lease. 5.6: JANITORIAL MAINTENANCE. Reasonable interior janitorial service shall be provided at no additional cost to the Tenant in accordance with "Exhibit B" attached hereto. SECTION 6: THE COMMON AREA 6.1: DEFINITION. The common area is described and defined as being those areas contiguous with, but excluding leased or leasable areas that are provided for the uses defined hereinafter. Such areas may include, but may or may not be limited to parking areas, delivery areas, truck docks, sidewalks, landscaped areas, patios, outdoor break areas, ponds, private roadways and the appurtenances situated thereon. 6.2: USE OF THE COMMON AREA. The Landlord agrees to allow its tenants, their employees, customers and invitees, the non-exclusive right to use the common area for purposes of parking, employee break area, delivery and access, only. Any other use of the common area is expressly prohibited without the prior approval of the Landlord. Further, the Landlord retains the right to designate particular portions of the common area for such use by the Tenant. Should the Landlord designate specific portions of said common areas for the Tenant's employee parking, break area, accessibility or delivery of goods, the Tenant agrees to enforce such action, provided such designation does not unreasonably interfere with Tenant's business operations. 6.3: COMMON AREA MAINTENANCE ("CAM"). The Landlord shall make reasonable efforts, at its discretion, to maintain the common area in a good condition so as to provide the tenants, their employees, customers and invitees with reasonable ease of access to and from the Leased Premises. Such maintenance by Landlord shall include reasonable and best-effort attempts to reduce the 10 11 accumulation of snow, ice and dirt in common area parking, traffic and walkways without assuming any liability to any of Tenant's employees, agents or invitees. The Landlord shall reserve the right to reconfigure, close off, reduce or alter all or any portion of the common area either temporarily or permanently, at any time, providing, however, Landlord shall make reasonable and best-effort attempts to insure that such action shall not unreasonably interfere with the Tenant's business use. SECTION 7: PUBLIC UTILITY SERVICES 7.1: EXISTING UTILITY SERVICES. The Landlord will provide and maintain (unless maintained by the applicable utility company), reasonable access necessary for the Tenant to connect to such services for the supply of electricity, natural gas, water, sewer and telephone lines, so long as such services are available at this location and were present at the Commencement Date of this Lease. The Tenant understands that any one or more of the utility services described herein may be interrupted by reason of accident, emergency or repairs. Landlord shall interrupt or reduce services only to the extent required to remediate the situation causing the interruption and should minimize interference with Tenant's use of the Leased Premises. Except for Landlord's, or its employee's, agent's or contractor's negligence, willful misconduct or breach of this Lease, any such interruption shall not be construed as an eviction, default, breach or create any right of the Tenant to make any claim against the Landlord or release the Tenant from any of its obligations under the terms of this Lease. Further, in no event shall Landlord be liable for any consequential damages or loss of business by Tenant as a result of any such utility interruption. 7.2: MODIFICATIONS TO UTILITIES. The Tenant agrees to obtain the prior written approval from the Landlord, which shall not be unreasonably withheld or delayed, before making any modifications to the Leased Premises which may in any way alter the existing utility services. Utility fixtures that are owned by the Tenant may be added or removed at the Tenant's discretion, so long as the incoming utility supply is adequately sized to accommodate such fixtures. The Tenant shall be required to obtain the prior written approval of the Landlord, which shall not be unreasonably withheld or delayed, before removing or altering any fixtures that are owned by the Landlord. The cost of any such utility modifications, if approved by Landlord, shall be solely borne by the Tenant. 7.3: PAYMENT FOR UTILITIES. All normal and reasonable utility consumption charges for electricity, water, sewer, gas, but excluding telephone service, shall be borne by the Landlord. SECTION 8: INDEMNITY AND INSURANCE 8.1: INDEMNITY. The Tenant shall protect, defend, indemnify and hold harmless the Landlord from and against all damages, claims, liabilities, costs and expenses (including reasonable attorney's fees) ("Claims") which (i) may occur within the Leased Premises, or (ii) is caused by the negligence or willful misconduct of Tenant or its employees or agents, unless any of the foregoing Claims arise from the negligence or willful misconduct of Landlord or Landlord's employees, agents, or contractors, or Landlord's breach of this Lease. The Landlord shall protect, defend, indemnify and hold harmless 11 12 the Tenant from and against all damages, claims, liabilities, costs and expenses (including reasonable attorney's fees) arising from Landlord's or Landlord's employees', agents' or contractors' negligence, willful misconduct or breach of this Lease. 8.2: LANDLORD'S INSURANCE. The Landlord shall reasonably insure the property and improvements on which the Leased Premises are located for damage from fire and other customary risks (which shall not include coverage for earthquake or flood damage) in an amount adequate to fully and functionally replace the Leased Premises. 8.3: TENANT'S INSURANCE. The Tenant agrees to maintain insurance coverage against the loss of its own property in, on or about the Leased Premises, by fire or other hazards as the Tenant deems necessary. The Tenant hereby releases the Landlord from any liability for damage to the Tenant's property excepting incidents caused by the willful misconduct or grossly negligent action of the Landlord, its employees or agents. The Tenant further warrants that such insurance policy shall contain a waiver of subrogation recognizing the Landlord's release from such liability. Additionally, each party of this Lease agrees to maintain in full force and effect during the term of this Lease, general liability insurance coverage with a minimum single-occurrence limit of one million dollars ($1.0 million) for any incident occurring on or about the Leased Premises and common areas resulting from the actions, negligence, conduct or operations of each respective party, their employees or agents. The Tenant further agrees to name Landlord as additional insured in such liability policy and, upon request, to provide the Landlord with proof of all such policies and any subsequent renewals, endorsements, modifications or cancellations. 8.4: WAIVER OF SUBROGATION. Each party waives all rights of recovery against the other party, and its officers, employees, agents and representatives for any claims for loss or damage to person or property caused by or resulting from fire or any other risks insured against under any insurance policy in force at the time of such loss or damage. Each party shall cause each insurance policy obtained by it to provide that the insurer waives all rights of recovery by way of subrogation against the other party in connection with any damage covered by such policy. 8.5: TENANT'S INSURANCE REIMBURSEMENT. Should the cost of Landlord's insurance policies required by the terms herein be increased during the term of this Lease, then the Tenant agrees to pay its proportionate share of such increase. Said amount shall be calculated by subtracting the base insurance premium(s) due by the Landlord ("base" meaning the first insurance premiums due and payable during the first twelve months of this Lease), from the increased premiums, and dividing the difference by the total leased and leasable area (square footage) located in the Facility. The resulting quotient shall then be multiplied by the square footage of the Tenant's Leased Premises resulting in the proportionate share to be reimbursed by the Tenant. If the Tenant has occupied the Leased Premises for a period that is less than the policy year, then the Landlord shall adjust the aforementioned calculation to reflect only the Tenant's period of occupancy. The Landlord shall submit a descriptive invoice, detailing its calculation for such insurance recovery and the Tenant shall reimburse the Landlord within thirty (30) days thereafter. 8.6: COMPLIANCE. Should any situation or condition within the Leased Premises adversely affect the Landlord's ability to procure or maintain adequate insurance coverage for the Facility, and 12 13 should such condition be in the control of the Tenant, then the Tenant hereby agrees to comply with, and or remedy such condition within thirty (30) days of receiving written notification regarding the need for any corrective action on the part of the Tenant and subsequently agrees to notify the Landlord, in writing, when such actions have been completed. SECTION 9: LOSS 9.1: LOSS BY DAMAGE OR DESTRUCTION. If, during the term of this Lease, one-third (1/3) or less of the Leased Premises or the Facility become damaged by fire or other casualty, then the Landlord shall restore or rebuild the Facility to a condition as practically similar to the original condition as is reasonable, and shall diligently do so within a reasonable and timely period. Should the Leased Premises be totally or partially untenable by reason of such restoration, then the Tenant's rental payments shall be abated in proportion to such untenable area until the area is suitable for Tenant's use as defined herein. Should (i) more than one third (1/3) of the Leased Premises or the Facility attached thereto incur damage or destruction, (ii) the Landlord and Tenant mutually determine that restoration and repair cannot be reasonably completed within ninety (90) days after the date of such damage, (iii) the Landlord fail to commence and diligently pursue such repair and restoration to completion within ninety (90) days, or (iv) the damage or destruction occur within the last six (6) months of the Lease Term, then the Landlord or Tenant shall have the right to terminate this Lease as of the date of such damage or destruction. If neither party terminates this Lease, then Landlord shall promptly and diligently rebuild all of the damaged Facility to substantially the same condition as before such damage or destruction and continuing rentals or rental abatement shall apply as previously set forth in this paragraph. Should the Landlord elector Tenant elect to terminate this Lease, then this Lease shall thereupon terminate as of the day and date of such damage, providing all rentals and charges are proportionately paid through and until the date of said damage. All casualty insurance proceeds under policies procured by Landlord shall belong to Landlord. 9.2: LOSS BY EMINENT DOMAIN. The term "public authority" as used in this Section shall include any corporation, firm, association or other entity, whether publicly or privately owned, having the power of eminent domain. The term "eminent domain" shall include the exercise of any similar governmental power or any purchase or other acquisition by such entity under the threat of such taking or condemnation. Should all or any portion of the Leased Premises or common areas attached thereto be taken by public authority under the power of eminent domain so as to substantially interfere with Tenant's use of the Leased Premises prior to such condemnation, then the Tenant shall have the option of canceling this Lease providing it supplies written notice to the Landlord of its intentions to do so and submits to the Landlord its proportional share of all rentals and other outstanding balances due, through and until the date of such taking. Should the Tenant not elect to cancel this Lease in the event of such taking and the Leased Premises are totally or partially untenable by reason of such taking, then the Tenant's rental payments shall be abated in proportion to such untenable area until the area is suitable for Tenant's use as defined herein. Landlord shall diligently restore the portion of the Leased Premises remaining useable to as near its former condition as reasonably possible. All damages awarded, or compensation paid for any such taking or conveyance shall become the sole property of the Landlord, whether such payments shall be awarded as compensation for diminution in value to the leasehold or for the reduction of any leased premises; provided, however, that Tenant 13 14 shall have the right to make a claim and the Landlord shall not be entitled to any payments made to the Tenant for loss of business, or costs for moving to new lease space, or removing or loss of personal property and fixtures owned by the Tenant. Should such taking permanently reduce the area of the Leased Premises, the Landlord shall proportionately reduce Tenant's rentals, unless the Lease is terminated in which event Tenant shall have no liability for rent or the other obligations under this Lease. SECTION 10: TAXES 10.1: TAXES PAID BY THE LANDLORD. The Landlord shall pay all real estate taxes levied on the Leased Premises and the facilities and property attached thereto. 10.2: TAXES PAID BY THE TENANT. The Tenant agrees to pay any taxes or assessments levied against its operation, inventory or any other property it may own or cause to have located on or about the Leased Premises. 10.3: REAL ESTATE TAX REIMBURSEMENT. Should the property on which the Leased Premises is situated be reassessed or incur any other levy or increase during the term of this Lease, then the Tenant agrees to reimburse the Landlord for its proportionate share of such an increase. Said reimbursable amount shall be calculated by subtracting the base tax due by the Landlord ("base" amount being the real estate taxes due and payable during the first twelve months of this Lease), from the increased tax amount and dividing the difference by the total leased and leasable area (square footage) of the Facility. The resulting quotient shall then be multiplied by the square footage of the Leased Premises resulting in the proportionate share owed by the Tenant. If the Tenant has occupied the Leased Premises for a period that is less than the taxable period affected, then the Landlord shall adjust the aforementioned calculation to reflect only the Tenant's period of occupancy. The Landlord shall submit an invoice within sixty (60) days of such tax payments detailing its calculation of said tax reimbursement, along with copies of Landlord's paid tax receipts. The Tenant shall reimburse the Landlord within thirty (30) days following the delivery of said invoice or be subject to the late fee penalties defined hereinafter. The following shall not constitute real estate taxes for purposes of this Lease: (A) any state, local, federal, personal or corporate income tax measured by the income of Landlord; (B) any estate, inheritance taxes, or gross rental receipts tax; (C) any franchise, succession or transfer taxes; (D) interest on taxes or penalties resulting from Landlord's failure to pay taxes; (E) any increases in taxes attributable to additional improvements to Leased Premises unless the improvements were constructed by Tenant or at Tenant's request; (F) any increases in taxes attributable to change of ownership of all or any part of the Leased Premises or Facility resulting from the sale, refinancing, transfer of ownership or conveyance of the Leased Premises or Facility after the Commencement Date; (G) any taxes which are essentially payments to a governmental agency for the right to make improvements to the Leased Premises or surrounding area. SECTION 11: TERMS OF SUCCESSION 11.1: TERMS OF SUBLEASING. The Tenant is prohibited from subletting all or any portion 14 15 of the Leased Premises without first obtaining the expressed written consent of the Landlord, which shall not be unreasonably withheld or delayed. Should the Landlord consent to any such sublease, the Tenant shall remain primarily liable and responsible to the Landlord for the full and complete performance of all the terms and conditions in this Lease. 11.2: TERMS OF ASSIGNMENT. Tenant is prohibited from assigning all or any portion of this Lease to a successor party without first obtaining the expressed written consent of the Landlord, which shall not be unreasonably withheld or delayed. 11.3: AGREEMENT BINDING ON SUCCESSORS. The covenants, agreements and obligations contained herein shall extend to, bind and inure to the benefit not only to the parties hereto, but their respective personal representatives, heirs, successors and assigns. SECTION 12: DEFAULTS AND REMEDIES 12.1: DEFINITION OF CONTRACT DEFAULTS. The occurrence of any one or more of the following events shall be deemed a contract default ("Default"): (a) Should the Tenant cause the assignment, attachment or execution on or against the Leased Premises or any property attached thereto, representing it as property of the Tenant, and the same is not released or discharged within sixty (60) days thereafter. (b) Should the Tenant attempt to assign this Lease for the benefit of creditors. (c) Should either party commence, or be forced into proceedings conducted in a court of competent jurisdiction for the purpose of adjudicating a reorganization, liquidation, dissolution, bankruptcy, insolvency, or for the court appointment of a receiver of the respective party's property and the same is not dismissed within sixty (60) days thereafter. (d) Should the Tenant cause a mechanic's lien to be filed against the property or Facility on which the Leased Premises is situated and the same is not released, or otherwise provided for by indemnification, satisfactory to the Landlord within sixty (60) days of the filing of said lien. (e) Should either party fail to perform any of its respective covenants contained in this Lease. (f) Should Tenant fail to comply with all laws, regulations and codes of the local governing body of jurisdiction, the State of Indiana and the United States of America as they apply to the operation and use of the Leased Premises, and as they may be modified or amended from time to time during the term of this Lease. Should any such Default occur, then the non-defaulting party shall be hereby justified in taking further action as stipulated hereinafter. 12.2: REMEDIES. In the event any such Default occurs, as heretofore defined (other than a 15 16 Default regarding any payment by the Tenant to the Landlord), then the non-defaulting party shall give written notice detailing such Default to the defaulting party and the defaulting party shall have thirty (30) days thereafter to cure such Default. Should such Default remain unremedied after said thirty (30) day period, then unless the defaulting party has undertaken to cure the Default within thirty (30) days and diligently and continuously attempts to complete this cure as soon as reasonably possible, then the non-defaulting party shall have the option of pursuing any or all of the following further actions: (a) curing the Default for the reimbursable account and at the cost of the defaulting party, (b) terminating this Lease, at which time the Tenant shall have thirty (30) days to vacate the Leased Premises in accordance with the terms of this Lease, (c) pursuing any other remedy available under this Lease or available in law or in equity. Any regular monthly rentals that are not postmarked or dispatched by the Tenant within five (5) days of their due dates as specified and defined herein shall be subject to a late fee assessment equaling One Hundred Dollars ($100.00) for each day such rental payment remains unpaid. Additional rents that are not paid within thirty (30) days of their invoice date shall incur and accrue interest at a rate equaling two percent (2%) higher than the then current national prime rate of interest as published in the Wall Street Journal. Said interest shall continue to be accrued, compounded monthly and remain payable until all payments due are paid in full to the Landlord. Furthermore, any breach by Tenant in paying Landlord any sums due under this Lease shall entitle Landlord to pursue any and all remedies afforded by this Lease for a default or available in law or in equity. 12.3: LANDLORD'S RIGHT OF RECOVERY. Subsequent to the continuation of an unremedied Default as heretofore described and defined, the Landlord may lawfully re-enter the Leased Premises using such means as may be necessary, and remove all persons and property therefrom, and the Landlord shall not be liable to the Tenant for damages or other occurrences resulting from such re-entry. Such re-entry, repossession and or removal by the Landlord shall not be construed as a waiver, release or discharge of any obligations or liabilities of the Tenant as they pertain to this Lease for the full term hereof unless Landlord gives written notice of election to terminate this Lease. Upon repossessing the Leased Premises, the Landlord shall use reasonable effort to relet the Leased Premises. Should the Landlord elect to remove the Tenant's property from the Leased Premises for the purpose of reletting the same, said property shall be stored in a public warehouse or other similar facility at the expense and for the account of the Tenant and the Landlord shall not be liable for damage or costs incurred as a result of such action. Furthermore, the Landlord shall be entitled to hold all such property owned by the Tenant as security for any unpaid rentals and or other damages and expenses incurred by the Landlord as a result of such Default. The Landlord shall also have the right to cancel and terminate this Lease at anytime upon the continuance of a Default, but shall be entitled to lawfully collect from the Tenant, all damages, reasonable attorney's fees, leasing commissions and other similar expenses incurred by the Landlord prior to and during such Default, repossession and reletting resulting from said Default. Further, the Landlord shall be entitled to collect and or pursue by due process of law, any unpaid rental balances or other amounts due hereunder accrued through and until this Lease is terminated by the Landlord, plus any rental deficiencies resulting from the subsequent reletting of the Leased Premises, through the effective expiration date of this Lease. 12.4: CONTRACT TERMINATIONS. Should either party elect to terminate the Lease for valid reasons heretofore described, then the party initiating such procedure shall give written notification, as stipulated herein, and the Tenant shall have thirty (30) days thereafter to remove its property from the 16 17 Leased Premises, providing the Landlord has not commenced repossession procedure as previously stipulated. Any property remaining on the Leased Premises after said thirty (30) day period shall become the property of the Landlord. The Tenant shall pay the Landlord all unpaid rentals and other amounts due, daily prorata share of the regular monthly rent, and any additional rents and/or payable reimbursements through and until the date the Tenant surrenders the Leased Premises to the Landlord. Such termination and payment(s) shall not release or waive any rights of Landlord to pursue any and all other remedies provided for in this Section 12. 12.5: EXPENSE REIMBURSEMENT. If the Landlord incurs any expense for the purpose of curing or remedying a contract breach or Default after the applicable cure period by the Tenant or to enforce the terms of this Lease, then the expenses so incurred by the Landlord shall be deemed to be additional rent, subject to, and as defined in the Section addressing "Additional Rent". In the event litigation occurs between the two parties arising from the terms of this Lease, the party prevailing in such litigation shall be entitled to have all of costs, including reasonable attorney's fees, reimbursed by the non-prevailing party. 12.6: NO WAIVER PROVISION. The violation or Default of any one or more of the terms and conditions contained herein by either party shall not constitute a waiver, release or discharge of that party's other obligations with respect to this Lease. Further, should a violating party remedy a Default, after the applicable cure period, such remedy shall not be construed as a release on the part of that party, and the other party shall have the right to pursue from the violating party, any reasonable expenses and/or damages incurred as a result of such previous violation. Additionally, any failure on the part of the Landlord to pursue any remedy for a Default shall neither be construed as a waiver, nor release the obligations of the Tenant as they pertain to the terms of this Lease, nor as a waiver of Landlords right to pursue any remedy for any subsequent default. 12.7: EXCULPATION. Notwithstanding anything to the contrary contained in this Lease or in any amendment thereto it is expressly understood and agreed by and between the parties hereto that: (a) The recourse of Tenant or its successors or assigns against Landlord with respect to the alleged breach by or on the part of Landlord of any representation, warranty, covenant, undertaking or agreement contained in the Lease (collectively, "Landlord's Lease Undertakings") shall extend only to Landlord's interest in the Facility of which the Leased Premises are a part and not to any other assets of Landlord; (b) Except to the extent of Landlord's interest in the Facility, neither Rose-Hulman Institute of Technology, nor its Investment Management Committee nor Ragle & Company, nor any of their respective directors, Board of Managers, committee members, officers, employees or agents shall have any personal liability whatsoever with respect to any breach by Landlord of any of Landlord's Lease Undertakings; and (c) Except to the extent of Landlord's interest in the Facility, no personal liability or personal responsibility of any sort with respect to any of Landlord's Lease Undertakings is assumed by or shall at any time be asserted or enforceable against Landlord or Ragle & Company or against any of their respective directors, Board of Managers, committee members, officers, employees, agents or 17 18 representatives. SECTION 13: MISCELLANEOUS PROVISIONS 13.1: APPROVED HOLDOVER OCCUPANCY. Should the Tenant remain in possession of the Leased Premises after the expiration of this Lease with the consent of the Landlord, then the Tenant shall be deemed as occupying the Leased Premises on a month-to-month term and shall continue to pay all rentals as were effective immediately prior to the Lease expiration, including all effective reimbursements, and shall be subject to all the other terms and conditions of this Lease insofar as they relate to month-to-month tenancy, prior to its expiration. Under the terms of such a month-to-month occupancy, either party shall give the other at least thirty (30) days prior notification before terminating this Lease, during which period all other terms, conditions and obligations of this Lease shall being performed by each of the respective parties. 13.2: VACATING THE LEASED PREMISES. Upon the expiration or termination of this Lease, for whatever reason, the Tenant shall vacate and surrender the Leased Premises in at least as good a condition as was prevailing on the Commencement Date of this Lease, normal wear and tear, loss by casualty not caused by Tenant or condemnation, excepted. Tenant shall not be required to remove its improvements or the security system, as modified. Tenant shall have the right to remove its equipment, trade fixtures and furniture, except that Tenant shall repair any damage caused by its action or removals, and shall restore and surrender the Leased Premises in a condition similar to that prevailing on the Commencement Date, normal wear and tear and casualty excepted. 13.3: EXCLUSIVITY OF TERMS. Both parties of this Lease acknowledge and agree that the terms and conditions contained herein are inclusive of each party's performance under the terms of this Lease and that all negotiations, considerations, representations and understandings between the two parties have been incorporated herein. No other terms, conditions, covenants or warranties, whether written or verbally implied shall be considered or construed to be a term of this Lease unless such condition is written and properly executed as an addendum to this Lease. 13.4: AMENDMENTS AND ADDENDA. In the event a condition arises which, in the judgement of both parties, has not been adequately addressed in this Lease, then upon the two parties reaching a mutually acceptable resolution, an amendment shall be drawn in writing by the Landlord and shall contain reference to this Lease. Said amendment shall be dated and duly executed by both parties, thereby becoming a part of this Lease. 13.5: GOVERNING LAW. The laws of the State of Indiana shall govern the validity, performance and enforcement of this Lease. The invalidity or unenforceability of any individual provision(s) of this Lease shall not affect or impair any other provision. 13.6: SUBORDINATION AND NON-DISTURBANCE. This Lease is, and shall be subject and subordinate at all times to any mortgages, liens or encumbrances resulting from any method of financing or refinancing by the Landlord, which may now or hereafter affect the Leased Premises, providing Tenant shall receive a Non-Disturbance Agreement from any lender, beneficiary or mortgagor 18 19 warranting that neither this Lease, nor Tenant's possession will be disturbed so long as Tenant attorns to the record owner of the Leased Premises. The Tenant hereby attorns to any underlying mortgagee and shall promptly execute any certificate or other instrument which the Landlord or such mortgagee may request in confirmation of such subordination and attornment. 13.7: FORCE MAJEURE. Whenever this Lease requires any physical act (other than the payments required herein) to be performed by or within a certain time, that time shall be extended by a period equal to any delays that have been caused by war, strikes, lockouts, civil commotion, uncontrollable material shortages, casualties, acts of God or any other condition of delay that is beyond the control of the party required to perform such act. 13.8: ESTOPPEL CERTIFICATE. Within ten (10) days following the receipt of a written request from the Landlord, the Tenant shall execute, acknowledge and deliver to the Landlord or to any individual or entity designated by the Landlord, a written statement certifying: (a) that this Lease is in full force and effect and has not been modified (or, if modified, stating the nature of such modification), (b) the date to which the rentals have been paid, and (c) that there are no uncured Defaults (or specifying such Defaults if any are claimed). Furthermore, the Tenant agrees to provide as part of the estoppel certificate any other information reasonably requested by the Landlord. The Tenant hereby acknowledges that any such statement may be relied upon by any prospective purchaser or lender. 13.9: COMPLIANCE WITH LAWS. Tenant shall comply with the requirements of municipal, county, state, federal and other applicable governmental authorities now in force, or which may hereafter be in force ("Applicable Laws"), pertaining to the interior, non-structural portion of the Leased Premises. Tenant shall not be required to pay for or make any structural changes or capital expenditures in or on the Leased Premises or common areas in order to comply with any Applicable Law unless such changes and expenditures are required to accommodate Tenant's particular use of the Leased Premises as defined herein. Subject to the foregoing, Landlord shall comply with all Applicable Laws pertaining to the Leased Premises and common areas. 13.10: AGENT'S AUTHORITY. The Landlord, in consenting below to this Lease, signifies its approval of the terms and provisions of this Lease and authorizes Ragle & Company as its leasing agent to enter into this Lease on behalf of the Landlord and Ragle & Company is hereby appointed by Landlord as its agent for the purpose of administering and enforcing the terms hereof and until further notice from Landlord the Tenant may rely upon Ragle & Company as the Landlord's authorized leasing and management agent with who Tenant may deal pertaining to any term or provision of this Lease. 13.11: QUIET ENJOYMENT. Provided Tenant has performed all of the terms, covenant, agreements and conditions of the Lease, including the payment of rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and enjoy the Leased Premises for the term hereof, without hindrance from Landlord, or any party claiming under or through Landlord subject to the terms and conditions of this Lease and Landlord shall defend Tenant's right to such use and occupancy. 19 20 SECTION 14: NOTICES Any notices or consents required in the provisions of this Lease shall be delivered in person, by mailing or courier to the addresses provided hereafter. Either party shall be required by the same means, to notify the other party of any change in its address contained herein. To the Landlord's Authorized Agent: Ragle & Company P.O. Box 537 Terre Haute, IN 47808 C/O John G. Ragle To the Tenant: Applied Digital Access 9855 Scranton Road San Diego, CA 92121 C/O James Keefe SECTION 15: ACCEPTANCE AND EXECUTION IN WITNESS WHEREOF, the Landlord and Tenant have each caused this Lease contract to be executed and effective by their duly authorized representatives affixing their signatures hereto as of the day and year first written above. LANDLORD'S AUTHORIZED AGENT TENANT: Ragle and Company, Inc. Applied Digital Access Corp. by:_________________________________ by:___________________________________ (signature) (signature) John G. Ragle, President James Keefe, Chief Financial Officer Consented to by: Rose Hulman Institute of Technology by:_____________________________________________ Printed Name:___________________________________ Title:__________________________________________ 20 21 NOTARIZATIONS STATE OF INDIANA ) ) SS: COUNTY OF VIGO ) Before me, a Notary Public within and for said County and State, on this _____________________ day of _______________________________________, 19________, personally appeared John G. Ragle, known to me to be the duly authorized representative of Rose Hulman Institute of Technology, (the Landlord), a private Indiana college, of whom having been sworn, acknowledged the execution of the foregoing contract for and on behalf of the said party. WITNESS my hand and Notarial Seal. _______________________________ Notary Public (signature) (seal) _______________________________ Notary Public (printed name) My County of Residence_________________ My Commission Expires__________________ * * * * * * * STATE OF _________________________ ) ) SS: COUNTY OF ) Before me, a Notary Public within and for said County and State, on this __________________ day of ____________________________________________________, 19________, personally appeared ________________________________________________________, known to me to be the duly authorized representative of _____________________________________________________ (the Tenant), a corporation/resident of the State of _________________________________, of whom having been sworn, acknowledged the execution of the foregoing contract for and on behalf of said party. WITNESS my hand and Notarial Seal. ____________________________________________ Notary Public (signature) (seal) ____________________________________________ Notary Public (printed name) My County of Residence_________________________ My Commission Expires__________________________ 21 22 (Insert "EXHIBIT A" Here) 22 23 "EXHIBIT B" Janitorial Service Outline For Applied Digital Access Daily Service (3x per week) Empty all trash receptacles and replace liners as necessary including front entry and ashtray container. Remove all collected trash to designated area. Refill dispensers, empty trash, clean and sanitize all restroom fixtures, wipe all counters, clean mirrors, wipe chrome, spot wipe partitions, sweep and damp mop floors using a germicidal cleaner, clean and sanitize showers. Empty all trash receptacles and replace liners as necessary. Remove all collected trash to designated area. Dust mop all hard surface floors with treated or electrostatic dust mop. Ensure coffee maker is turned off. Weekly Service (2x per week) Vacuum all carpeted traffic lane areas. Mop all stains and spills, especially coffee and drink spills. Weekly Service (1x per week) Dust all horizontal surfaces. Spot clean all walls, light switches and doors. Fully vacuum all carpets from wall to wall. Clean both sides of all glass doors and side glass. Damp mop entire area. Dust mop all hard surface floors with treated or electrostatic dust mop. Sweep entire front sidewalk. Monthly Service (1x per month) Dust high and low areas (e.g., pictures, clocks, partition tops, etc.) Dust wipe all telephones including ear and mouth piece. Using approved spotter, spot clean carpeted area. Completely clean both sides of all exterior ground level windows. Wipe clean office furniture. Vacuum all upholstered furniture. Dust venetian blinds. Quarterly Service (every 4 months) Machine scrub hard surface floor. Using a high speed floor machine spray buff all hard surface area. Bi-Yearly (every 6 months) Hot water extract (steam clean) carpeting using high pressure extraction equipment. Clean all partition glass. Yearly (1x per year) Machine scrub hard surface floor and apply one coat of polish, allow to dry, then buff. 23 24 Strip hard surface floor and recoat with three coats of floor wax. "EXHIBIT C" Landlord's Work The following work is to be completed by Landlord: 1. Two (2) doors leading to ICTT's portion of the Facility are to be removed, closed in with drywall, painted and trim installed as appropriate. 2. Repair the two inch gap on bottom of the overhead garage door panel and repair water damage to carpet resulting from water penetrating through gap in garage door. 24 25 "EXHIBIT D" Tenant's Work The following work is to be completed to the Leased Premises by Tenant: Attached hereto and incorporated herein is Tenant's scope of work and plans for Tenant's Work. 1. New entrance doors with window walls to enclose vestibule. 2. Extend sidewalk to the new entrance and demo bushes. 3. Install exit signs per code. 4. Demo existing walls to create hallway. 5. Demo training room walls. 6. Columns are load bearing and will be incorporated in cubicle layout. 7. Construct 3/4 high walls similar to design provided. 8. Reception desk and storage cabinets as shown on sketches. 9. Painting/finishing of all existing/new walls/plate covers over large conduits and remove those required by owner. 10. New floor to separate ICTT entrance. 11. Resize office to become locked storage rooms located off of new hallway per drawings. 12. Remove wall at copier area (manager CPT). 13. Provide mechanical, electrical and tile flooring in southwest computer lab which includes temp. Controls, power for 25 computer stations and a separate unit to service this room only but does not include humidification controls. 14. Repair/replace carpet effected by wall demolition with existing carpet. 15. Repair/replace ceiling tile damaged or stained. 16. Provide new floor base on new walls and repair any loose base throughout. 17. Relocate ceiling lighting as required per cubical layout. 25 26 18. Included a budget for lobby furniture. ($2,500.00) 19. Removal of installed floor-to-ceiling Herman Miller partitions/walls. 20. Re-install Herman Miller partitions/spot cleaning per original layout. 21. Change all light switches/covers to white. 22. Enclosed coat room with bi-fold doors for storage area. 23. Final cleaning and general office cleaning. 26 EX-10.7 7 EXHIBIT 10.7 1 EXHIBIT 10.7 AGREEMENT FOR EXTENSION OF TERM (AMENDMENT NO. 2) This Agreement for Extension of Term is entered into by and between U S WEST Business Resources, Inc., a Colorado corporation, with offices for transaction of business located at 788 Inverness Drive West, Englewood, Colorado 80112, as agent for U S WEST Communications, Inc. ("Customer") and Applied Digital Access, Inc., with offices for transaction of business located at 6175 Lusk Boulevard, San Diego, California 92121 ("Supplier"). RECITALS Customer and Supplier entered into that certain agreement styled "General Purchasing Agreement" dated February 19, 1994, as amended by Amendment No 1 dated February 1, 1996 (the "Agreement"). The term of the Agreement will automatically expire on August 16, 1996 (the "Expiration Date"); and Customer and Supplier wish to extend the term of the Agreement beyond the Expiration Date under the terms and conditions hereof. AGREEMENT In consideration of mutual promises and advantages to the parties, the parties incorporate by reference and agree to the accuracy of the above recitals and further agree that the Agreement shall not expire on the Expiration Date, but shall automatically renew for an additional six (6) month period commencing on August 17, 1996, and will automatically expire on February 16, 1997. All other terms and conditions of the Agreement remain unchanged and shall all continue in full force and effect. The term "Customer" as used herein may be applicable to one or more parties and the singular shall include the plural. If there shall be more than one party referred to as Customer herein, then their obligations shall be several, not joint. The parties intending to be legally bound have executed this Agreement for Extension of Term as of the dates set forth below in multiple counterparts each of which is deemed an original but all of which together shall constitute one and the same instrument. U S WEST BUSINESS RESOURCES, INC. APPLIED DIGITAL ACCESS, INC. AS AGENT FOR U S WEST COMMUNICATIONS, INC. - ------------------------------------ ----------------------------------- (AUTHORIZED SIGNATURE) (AUTHORIZED SIGNATURE) - ------------------------------------ ----------------------------------- (PRINT OR TYPE NAME OF SIGNATORY) (PRINT OR TYPE NAME OF SIGNATORY) - ------------------------------------ ----------------------------------- (TITLE) (TITLE) AUGUST 15, 1996 AUGUST 15, 1996 - ------------------------------------ ----------------------------------- (EXECUTION DATE) (EXECUTION DATE) EX-11.1 8 EXHIBIT 11.1 1 EXHIBIT 11.1 APPLIED DIGITAL ACCESS, INC. STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE (UNAUDITED) (Amounts in thousands, except per share data)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ------------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Net income (loss) ($ 3,165) ($ 1,474) ($ 5,473) $ 492 ======== ======== ======== ======== Reconciliation of weighted average number of shares outstanding to amount used in net income per share computation: Weighted average number of shares outstanding 12,175 11,854 12,033 11,780 Weighted average number of options and warrants outstanding, -- -- -- 1,046 -------- -------- -------- -------- Weighted average number of shares outstanding 12,175 11,854 12,033 12,826 ======== ======== ======== ======== Net income (loss) per share ($ 0.26) ($ 0.12) ($ 0.45) $ 0.04 ======== ======== ======== ========
See Note 3 to Condensed Consolidated Financial Statements EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 2,359 19,030 5,922 (50) 7,449 36,511 8,840 (4,156) 47,002 5,099 0 0 0 50,564 2,426 47,002 0 18,110 0 8,874 15,919 0 0 (5,300) 173 (5,473) 0 0 0 (5,473) (0.45) (0.45)
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