-----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, O2oY97FtipWUS3bbgp7WhBD/9igvuNRXjmTQthyv2i0nZoGjgPL2NKkL/jVbodT2 bTsFBmkHTaUshtO9cI71Iw== 0000936392-97-000728.txt : 19970520 0000936392-97-000728.hdr.sgml : 19970520 ACCESSION NUMBER: 0000936392-97-000728 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD 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: 97608555 BUSINESS ADDRESS: STREET 1: 9855 SCRANTON RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196232200 10-Q 1 FORM 10-Q 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 MARCH 31, 1997 [ ] 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 12,452,989 of the registrant's Common Stock, no par value, outstanding on April 30, 1997. 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 March 31, 1997 and December 31, 1996 3 Condensed Consolidated Statement of Operations for the three months ended March 31, 1997 and March 31, 1996 4 Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 1997 and March 31, 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-10 Risks and Uncertainties 10-13 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 Page 3 Item 1. APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1997 1996 ---- ---- (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $1,731 $1,504 Investments - current 19,767 19,957 Accounts receivable, net 6,153 6,798 Inventory, net 7,098 7,363 Deferred income taxes 130 130 Prepaid expenses and other current assets 1,009 1,089 ---------- ----------- Total current assets 35,888 36,841 Property and equipment, net 4,757 4,936 Deferred income taxes 1,372 1,372 Other, net 2,590 2,823 ---------- ----------- $44,607 $45,972 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $2,265 $2,120 Accrued expenses 1,257 1,507 Accrued warranty 1,393 1,398 Deferred revenue 496 587 ---------- ----------- Total current liabilities 5,411 5,612 Obligations under capital leases, net of current portion 29 33 ---------- ---------- Total liabilities 5,440 5,645 ---------- ---------- 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, 12,394,971 and 12,255,334 shares issued and outstanding at March 31, 1997 and December 31, 1996, respectively 50,929 50,631 Additional paid-in capital 2,487 2,492 Unrealized gain on investments 9 25 Deferred compensation (37) (50) Accumulated deficit (14,221) (12,771) ----------- ----------- Total shareholders' equity 39,167 40,327 ----------- ----------- $44,607 $45,972 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 4 Page 4 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS -------------------- ENDED MARCH 31, --------------- 1997 1996 ---- ---- (Amounts in thousands except per share amount) Revenue $6,388 $6,637 Cost of revenue 3,211 3,020 ------- ------- Gross profit 3,177 3,617 Operating expenses: Research and development 2,001 1,667 In-process research and development related to asset acquisition - 1,186 Sales and marketing 1,458 1,441 General and administrative 1,355 680 ------ ------ Total operating expenses 4,814 4,974 ------ ----- Operating loss (1,637) (1,357) Interest income 243 474 Other income (expense), net (4) 15 ------ ------ Loss before income taxes (1,398) (868) Provision for income taxes 51 - ------ ------ Net loss ($1,449) ($868) ====== ====== Net loss per share ($0.12) ($0.07) ====== ====== Number of shares used in per share computations 12,310 11,939
The accompanying notes are an integral part of the consolidated financial statements. 5 Page 5 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996 ---- ---- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss ($1,449) ($868) Adjustments to reconcile net loss to net cash provided (used) by operating activities: In-process research and development related to asset acquisition - 1,186 Depreciation and amortization 661 255 Other 51 15 Changes in assets and liabilities: Accounts receivable 645 2,266 Inventory 240 94 Prepaid expenses and other current assets 80 151 Accounts payable 145 163 Accrued expenses (251) 168 Accrued warranty (5) 37 Deferred revenue (91) - ----------- ---------- Net cash provided by operating activities 26 3,467 ----------- ---------- Cash flows from investing activities: Purchases of investments (6,789) (8,042) Maturities of investments 6,944 8,926 Purchases of property and equipment (249) (200) Purchase costs related to asset acquisitions - (1,900) ----------- ---------- Net cash used by investing activities (94) (1,216) ----------- ---------- Cash flows from financing activities: Principal payments on capital leases (3) (9) Proceeds from the issuance of common stock under stock option plans 298 191 ----------- ---------- Net cash provided by financing activities 295 182 ----------- ---------- Net increase in cash and cash equivalents 227 2,433 Cash and cash equivalents, beginning of period 1,504 1,673 ---------- --------- Cash and cash equivalents, end of period $1,731 $4,106 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. 6 Page 6 APPLIED DIGITAL ACCESS, INC. Notes to Condensed Consolidated Financial Statements March 31, 1997 (Unaudited) 1. Basis of Presentation The accompanying Unaudited condensed consolidated financial statements include the accounts of Applied Digital Access, Inc. ("the Company" or "ADA") 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 month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996 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:
March 31, 1997 December 31, 1996 -------------- ----------------- (Dollars in thousands) Raw materials $3,825 $4,211 Work-in-process 2,447 2,558 Finished goods 1,320 1,063 ----- ----- 7,592 7,832 Less inventory reserve (494) (469) ----- ----- $7,098 $7,363 ====== ======
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. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 Earnings per Share ("SFAS No. 128"). SFAS No. 128 requires dual presentation of newly defined basic and diluted earnings per share on the face of the income statement for all entities with a complex capital structure. The accounting standards is effective for fiscal years ending after December 15, 1997, including interim periods. The Company does not believe that the adoption of SFAS No. 128 will have a material impact on the computation of its earning per share in future periods. 7 Page 7 Item 2. APPLIED DIGITAL ACCESS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 1997 Except for the historical information contained herein, the matters discussed in this Form 10-Q may contain forward-looking statements which involve risk and uncertainties. Factors that may affect the Company's results of operations include but are not limited to concentration of major customers, telephone company qualification requirements, high dependence on single product line, competition, management of changing business, mergers, rapid technological change and dependence on new products, dependence on suppliers and subcontractors, product recall, government regulation, proprietary technology, dependence on key personnel, and volatility of stock price. 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. 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, 1996 filed with the Securities and Exchange Commission. Overview ADA is a leading provider of network performance management products that include systems, software, and services used to manage the quality, performance, availability and reliability of telecommunications service providers' networks. ADA's products are designed to enable service providers to improve their quality of service, to increase productivity, to lower operating expenses and to effectively deploy new services. ADA has positioned its business to assist service providers in addressing the rapidly increasing demand for new services, higher bandwidth and access to the Internet. ADA's systems and software provide network management functions such as provisioning, configuration management, performance management, testing and traffic management. ADA has approached the industry demand for network management products with a three-faceted approach; (1) Network Systems and Sensors that provide testing and performance monitoring functions as well as selected transport functions; (2) Network Management software that enables service providers to manage their network operations; and (3) Services that are customized to meet the evolving needs of the service provider market. In 1996, the Company formed two strategic business units: the Network Systems and Sensors business unit and the Network Management business unit. The business units are synergistic with the evolution of the Company from a single product line to multiple product lines. The Network Systems and Sensors business unit is built around the Company's T3AS products and services including its T3AS system, Centralized Test System ("CTS") and Protocol Analysis Access System ("PAAS"), and the Remote Module, a DS1 network interface unit ("NIU"). The Network Management business unit focuses on Operations Systems ("OS") software products including the Traffic Data Collection and Engineering System ("TDC&E"), the Fault Management System ("FMS") and OS design services all acquired through acquisitions, as well as Graphical Test Assistant ("GTA") and Sectionalizer. The Company is currently transitioning portions of the OS design service business to a product-oriented business. Recent Developments On April 15, 1997, the Company reached a non-binding agreement with Northern Telecom Limited ("Nortel") to acquire Nortel's Digital Support System II(TM) ("DSS II(TM)") operations system software product. The non-binding agreement calls for the Company to acquire from Nortel an exclusive worldwide license, subject to certain residual rights retained by Nortel, to the DSS II(TM) software for cash and common stock of the Company. Nortel will retain the right to and will continue to support its current DSS II(TM) customers based outside of North America, as part of its Integrated Network Management ("INM") portfolio for managed Broadband Network solutions. The proposed acquisition is subject to negotiation and the execution of definitive documents. 8 Page 8 The proposed acquisition represents the completion of a two-part plan to acquire software development capability in the telephone company operations system software arena and convert that capability to a product-based business. The first part of the plan involved the acquisition by the Company of its Vancouver based development team known as British Columbia Group ("BCG") from MPR Teltech, Ltd., a subsidiary of BC TELECOM, Inc., in July 1996. BCG has been responsible for design, development, and maintenance of DSS II(TM) and its predecessor DSS since 1986, most recently under contract to Nortel's Network Services Management Division. The proposed acquisition of DSS II(TM) is part of the Company's strategic plan to enter the network management operations system software business and build a portfolio of products which are essential to the operation of telecommunication services providers networks. Results of Operations Revenue totaled $6,388,000 for the three months ended March 31, 1997, a 4% decrease from revenue of $6,637,000 for the three months ended March 31, 1996. The decrease is primarily due to fewer sales of T3AS products, which were offset by an increase in OS software and services revenue. Revenue for the quarter ended March 31, 1997 included approximately $2.8 million from the Company's T3AS products and services compared to $6.6 million in the same quarter a year ago. This decrease in T3AS sales was primarily the result of decreased capital expenditures by several of the Company's customers, the highly competitive market for the Company's CTS and NIU products, and the impact of regulatory actions on the Company's customers. Revenue for the quarter ended March 31, 1997 included approximately $3.6 million from OS services and products compared to $48,000 for the same prior year period. The Company's OS product and service revenue is mostly the result of the acquisition of assets from Applied Computing Devices, Inc. ("ACD") in February 1996 and the Special Services Network Division ("SSN") of MPR Teltech, Ltd. in July 1996. The Company expects that revenue from sales of the T3AS product family and recently acquired OS products and services will account for a majority of the Company's revenue for the foreseeable future. Gross profit was $3,177,000 for the three months ended March 31, 1997, a decrease of 12% from $3,617,000 in the first quarter of 1996. Gross profit as a percent of revenue was 50% for the three months ended March 31, 1997 compared to 54% for the three months ended March 31, 1996. The decrease in gross profit is the result of a change in the mix of products sold in the first quarter of 1997. In the quarter ended March 31, 1997 the majority of the Company's revenue was generated from OS software design services, which have a lower margin than T3AS products. 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. Factors which may materially and adversely affect the Company's gross profit in the future include its level of revenue, competitive pricing pressure in the telecommunication network management market, new product introductions by the Company or its competitors, potential inventory obsolesce and scrap, possible recalls, production or quality problems, timing of development expenditures, changes in material cost, disruptions in sources of supply, regulatory changes, seasonal patterns of bookings, capital spending, and changes in general economic conditions. Research and development expenses totaled $2,001,000 for the three months ended March 31, 1997, a 20% increase from $1,667,000 for the three months ended March 31, 1996. The majority of the increase was attributable to the addition of research and development personnel related to the acquisition of certain assets of ACD. The Company believes that its future success depends on its ability to maintain its technological leadership through enhancement of its existing products and 9 Page 9 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 March 31, 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 $1,458,000 for the three months ended March 31, 1997, a 1% increase from $1,441,000 for the three months ended March 31, 1996. While the expenses have remained consistent quarter to quarter, there was a change in the makeup of the expenses. Additional customer support and marketing personnel expense, required to support the OS system sales, increased over the same period in 1996, which was offset by a decrease in commission 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 in both network systems and network management business areas.. General and administrative expenses totaled $1,355,000 for the three months ended March 31, 1997, a 99% increase from $680,000 for the three months ended March 31, 1996. The majority of the increase was due to the amortization of goodwill and intangible assets associated with the SSN acquisition in the third quarter of 1996 and additional personnel expenses related to the 1996 acquisitions. 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 $243,000 for the first quarter of 1997, a 49% decrease from $474,000 in the same quarter a year ago. This decrease is mostly the result of decreased cash investments compared to the same period last year. For the three months ended March 31, 1997 the Company provided for income taxes related to the operations of the Company's Canadian subsidiary, based on an annual effective Canadian tax rate of 46%. The Company did not provide for U.S. income taxes for the three months ended March 31, 1997 or March 31, 1996 due to a net loss in both quarters. The Company expects to provide for foreign, federal and state income taxes for 1997 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 $1,449,000, or $.12 per share, for the three months ended March 31, 1997 compared to a net loss of $868,000, or $.07 per share, for the three months ended March 31, 1996. Liquidity and Capital Resources At March 31, 1997 the Company had approximately $21,498,000 in cash and investments, compared to $21,461,000 at December 31, 1996. The increase in cash and investments is primarily due to issuance of stock as part of the employee stock purchase plan offset by purchases of capital equipment. Working capital decreased approximately 2% or $752,000 from $31,229,000 at December 31, 1996 to $30,477,000 at March 31, 1997. The decrease in working capital was primarily the result of the net operating loss for the quarter, less adjustments for non-cash expenditures such as depreciation and amortization. For the three months ended March 31, 1997 the Company's operating activities provided $27,000 in cash, primarily as a result of a decrease in accounts receivable and inventory, compared to $3,467,000 provided by operating activities for the three months ended March 31, 1996. For the three months ended March 31, 1997 cash used for capital expenditures totaled approximately $249,000 compared to $200,000 for the three months ended March 31, 1996. Most of the capital equipment additions were related to the Vancouver office moving to a new location and to 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 1997 as a result of increased research and development efforts. 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 acquisitions, other than the proposed acquisition by ADA of the DSS II(TM) operations system software product, that is 10 Page 10 the subject of a non-binding agreement, discussed above. 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 the Company's products currently consists of the seven RBOCs, other local telephone companies, Competitive Access Providers ("CAPs") and long distance telephone companies. The Company's marketing efforts to date have focused on the RBOCs which accounted for 73% of the Company's revenue in 1996 and 26% of the Company's revenue in the first quarter of 1997. 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 with the telephone company for its products. 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. 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 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. High Dependence on Single Product Line. Historically, the majority of the Company's revenue to date has been derived from the sale of T3AS products and services. The Company expects that a majority of its revenue will continue to be derived from T3AS products and services in the near term. However, the Company is investing in the expansion of its product lines through the enhancement, development and marketing of its NIU, CTS, Protocol Analysis Access System("PAAS"), and OS products. Failure by the Company to enhance either its existing T3AS products and services including CTS and PAAS. or its NIU and OS 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 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. The Company believes the principal competitive factors in this market 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. There can be no assurance that the Company will compete successfully in the future with respect to these factors and others that may arise. 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 DS0 circuits that make up the DS3 circuit, this market is fiercely competitive. Such competitors and prospective competitors include a number of companies, such as manufacturers of DSI test and monitoring equipment, manufacturers of NIUs, manufacturers of digital cross-connect test and performance monitoring equipment and manufacturers of large transmission equipment. Many of these companies manufacture products that are directly competitive with the Company's Low-Speed Subsystems, T3AS Centralized Test Systems and Remote Module, and many of these competitors have significantly greater technical, financial, manufacturing and marketing resources than the Company. In addition, the Company believes that there are an increasing number of current 11 Page 11 competitors in the OS market that provide OS applications for testing, surveillance, performance monitoring and traffic management of telecommunications functions. In each of the NIU, CTS and OS markets, competition is expected to increase significantly in the future. For instance, the NIU market is fiercely competitive with respect to price, product features, established supplier, and conformance with industry standards, and in the OS market, improved technologies and tool sets have made the barriers to entry in this market relatively small. Additionally, several of the Company's competitors have long-established relationships with the Company's current 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. As a result of acquisitions in 1996, the Company obtained additional office space and hired additional personnel in both Terre Haute, Indiana and British Columbia, Canada to support the business operations of the new products, services and technologies acquired. The Company faces significant management challenges related to the integration of the business operations of the new products, services and technologies acquired. In 1996, the Company formed two strategic business units: the Network Systems and Sensors business unit and the Network Management business unit. The business units are synergistic with the evolution of the Company from a single product line to multiple product lines. The Network Systems and Sensors business unit is built around the Company's T3AS products and services including CTS and PAAS, as well as the Remote Module product. The Network Management business unit focuses on OS products including Traffic Data Collection and Engineering ("TDC&E"), Fault Management System("FMS") and OS design services all acquired through acquisitions, as well as Graphical Test Assistant ("GTA") and Sectionalizer. There can be no assurance that the Company will be successful in managing its new business unit structure. The Company is currently transitioning portions of the OS design service business to a product-oriented business. This transition will likely place a significant strain on the Company's management, information systems and operations and there can be no assurance that such a transition can be successfully managed. The acquisitions and resultant growth in the Company's infrastructure have placed, and are 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 the acquisitions or in the future. The Company's potential inability to manage its changing business effectively could have a material adverse effect on the Company's business, operating results, and financial condition. Mergers. Of the eight major Telephone Service Providers ("TSPs") currently involved in merger transactions, six are customers of the Company. Several of the mergers involve companies that purchase network systems, software and services from the Company's competitors. Consequently, the completion of certain of these mergers may result in the loss of business and customers for the Company. Additionally, the impact of capital spending constraints during the merger transitions could have a material adverse effect on the Company's business, operating results 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 standards, changing regulatory environments, 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, such as Asynchronous Transfer Mode ("ATM"), Frame Relay and Synchronous Optical Network ("SONET"), 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 its current products, to develop and introduce new products for the telephone network test and performance-monitoring market, the OS 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 Synchronous Digital Hierarchy ("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 standards. 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 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 meet customer requirements, 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. 12 Page 12 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 Application Specific Integrated Circuits ("ASICs") and other components, are available from a single source. 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 consists 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. Government Regulation. The majority of the Company's customers operate within the telecommunications industry which is subject to regulation in the United States and other countries. Most of the Company's customers must receive regulatory approvals in conducting their businesses. Although the telecommunications industry has recently experienced government deregulation, there is no assurance this trend will continue. In fact, recent regulatory rulings have affected the ability of the Company's customers to enter new markets and deliver new services which could impact their ability to make significant capital expenditures. The effect of regulatory rulings by federal and state agencies on the Company's customers may adversely impact the Company's business, operating results and financial condition. 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 nine U.S. patents granted and two U.S. patent applications allowed. One of the granted patents relates to the Company's Remote Module product. 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's products 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 13 Page 13 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, operating results 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. Fluctuation in the Company's stock price may also have an effect on customer decisions to purchase the Company's products which could have a material adverse effect on the Company's business, operating results and financial condition. 14 Page 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 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 License Agreement between Northern Telecom, Ltd. and Applied Digital Access, Inc. dated as of January 24, 1997 11.1 Statement regarding computation of net income (loss) per share. 27.1 Financial Data Schedule.
(b) Reports on Form 8-K. None. 15 Page 15 SIGNATURES Pursuant to the requirements of the Securities and 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: May 15, 1997 /s/ Peter P. Savage ------------ -------------------- Peter P. Savage Director President and Chief Executive Officer Date: May 15, 1997 /s/ James L. Keefe ------------ ------------------- James L. Keefe Vice President Finance and Administration and Chief Financial Officer EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 610.01 LICENSE AGREEMENT MEMORANDUM OF AGREEMENT made and entered into as of the 24th day of January, 1997 ("Effective Date"). BY AND BETWEEN: NORTHERN TELECOM LIMITED, a corporation duly incorporated under the laws of Canada, having an office at 8200 Dixie Road, Brampton, Ontario, Canada L6T 5P6, 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; and WHEREAS Northern Telecom and Licensee have previously entered into a license agreement for rights in respect of certain of such systems and technology; and WHEREAS Licensee wishes to obtain further rights in respect of such systems and technology; 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 byLicensee pursuant to the licenses granted in this Agreement; (c) "Copyrights" shall mean all copyrights owned or controlled byNorthern Telecom or its Subsidiaries or Affiliates in existence at anytime in any or all countries of the world and first existing prior to orduring the tern of this Agreement; (d) "DSS lI Product" shall mean the DSS II software product which is comprised of software proprietary to BC TEL, Microtel Limited and Northern Telecom; (e) "DSS II Licensed Information" shall mean those items of information 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 DSS II Product to the extent available in accordance with Article 3 hereof; (f) "Enhancements" shall mean any minor extensions of the features and/or capabilities which are contained in the DSS II licensed Information as it exists as of the Effective Date of this Agreement; (g) "Gross Sales" shall mean the proceeds paid to Licensee upon the sublicensing of Authorized Products or of DSS II Licensed Information, as well as engineering and installation related thereto, whether composing a lump sum and/or periodic payments; provided that Gross Sales shall not include (i) separately itemized taxes, support service or 2 3 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. (h) "Intellectual Property" shall mean the aggregate of Patents, Copyrights and Maskworks, trade secrets and know-how which relates in any way to DSS II Licensed Information and Authorized Products; (i) "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. (j) "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. (k) "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; (1) "Modifications" shall mean any minor changes such as, but not limited to, bug fixes, to the features and/or capabilities of the DSS lI Licensed Information as it exists as of the Effective Date of this Agreement; (m) "MOU" shall mean the Memorandum of Understanding between Northern Telecorn and Licensee, executed on even date to this Agreement, concerning the sale of the DSS II business to Licensee; (n) "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 part, divisionals, reissues, additions, reexaminations and extensions with respect to any of the foregoing; 3 4 (o) "Permitted Customers" shall mean GTE and BC TEL; (p) "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; ARTICLE 2 GRANT OF RIGHTS Northern Telecom, to the extent of its legal right so to do, and provided that Northern Telecom Limited and ADA enter into an agreement for the sale of the DSS II business as contemplated in the MOU, will grant, subject to the terms and conditions of this Agreement, to Licensee and its Subsidiaries and Affiliates, for the period from the execution of this Agreement to the closing date of the actual sale of the DSS II business as contemplated in the MOU, a personal, non-transferable, non-exclusive, non-assignable, indivisible right; (a) to use and modify and have modified the DSS II Licensed Information, and any Enhancements and Modifications thereto licensed hereunder, to develop Authorized Products for Permitted Customers only; (b) to sublicense Authorized Products to Permitted Customers only, pursuant to a valid sublicense agreement containing substantially the terms set forth in Schedule "B"; (c) to grant sublicenses to the DSS II licensed Information In object code version only, to Permitted Customers only, pursuant to a valid sublicense agreement containing substantially the terms set forth in Schedule "B"; (d) to grant, to Permitted Customers only, provided that such Permitted Customers are validly sublicensed as set out herein, 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 when 30 days after the filing thereof, or (ii) after using its best efforts to support Authorized Products, ceases all support of Authorized Products, 4 5 to have access to and to use the source code version of the DSS II 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 subparagraphs. The aforesaid rights shall include the right to communicate to Permitted Customers purchasing the Authorized Products permitted hereunder such portions of the DSS II Licensed Information as are reasonably needed by such Permitted Customers for the use of the Authorized Products; provided, however, that, to the extent that proprietary information is being communicated, the recipients of the DSS lI Licensed Information be advised by Licensee in writing at the tine, 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 DSS lI Licensed Information other than to develop Authorized Products for Permitted Customers only, and as set forth in the immediately preceding paragraph. Nothing herein shall be interpreted so as to restrict any rights or licenses granted to Licensee pursuant to the License Agreement between Licensee and Northern Telecom dated 15 July, 1996. Licensee shall comply with all applicable governmental legislation or regulations imposing restrictions on the export of 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 DSS II Licensed Information. Northern Telecom grants to Licensee and its Subsidiaries and Affiliates a personal, non-transferable, non-assignable, indivisible right to use all Enhancements and Modifications which Northern Telecorn may develop or have developed during the term of this Agreement in connection win the use of the DSS II Licensed Information. 5 6 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. In the event that prior to the actual closing date of the sale of the DSS II business as contemplated in the MOU, and provided that a Permitted Customer wishes to enter into an agreement with Licensee which is dependent on rights in the DSS II Information, then Northern Telecom and Licensee will negotiate in good faith the terms of a license which, to the extent of Northern Telecom's legal right so to do, grants to Licensee the rights necessary to complete such agreement with such Permitted Customer. Without limiting the generality of the foregoing, such a license between Northern Telecom and ADA shall include applicable payments and/or royalties as well as providing for reduced commitment by Nortel for ADA research and development capabilities and resources as set form under the Master Agreement between Northern Telecom and Licensee dated 15 July, 1996. ARTICLE 3 FURNISHING DSS II LICENSED INFORMATION Northern Telecom shall, to the extent of its legal right so to do, promptly furnish to Licensee the DSS II Licensed Information. Northern Telecom shall only be obliged to provide DSS II Licensed Information available to it or its Subsidiaries, and shall not be obligated to obtain, develop or produce, except as expressly set forth herein, any new or unavailable DSS II Licensed Information. Northern Telecom shall supply the DSS II 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 (90) days therefrom. DSS II 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 DSS II Licensed Information is delivered by electronic means. 6 7 That portion of the DSS II 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. ARTICLE 4 REVIEW OF AUTJORIZE 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 returned to Licensee. Northern Telecom shall, test the Authorized Products on Northern Telecom's premises and at Northern Telecom's expense. 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 DSS II 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 7 8 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. In determining what shall constitute a reasonable amount of support under the circumstances, consideration shall be also be given to the support provided by Northern Telecom to Licensee pursuant to the License Agreement between the Parties dated 15 July, 1996. Technical assistance shall include both consulting technical services of Northern Telecom and visits of Northern Telecom 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 the event that pursuant to Article 2, Northern Telecom and Licensee enter into negotiations in respect of a license agreement for rights in the DSS II Information, Northern Telecom and Licensee shall negotiate in good faith a value for such rights. In the event that Northern Telecom and Licensee execute a license agreement as contemplated under Article 2, the value of the rights, as negotiated by Northern Telecom and Licensee, shall be included in the sale price of the DSS II business. 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 (5) 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 suds 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. 8 9 ARTICLE 7 RECORDS AND REMITTANCES Licensee shall keep clear and accurate records with respect to the Authorized Product and the DSS II 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 amounts 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 DSS II 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 first quarterly period after the execution date of this Agreement and continuing thereafter until all royalties payable hereunder shall have been reported and paid, Licensee shall furnish to Northern Telecorn a statement, in a form acceptable to Northern Telecom, certified by an authorized official of Licensee, recording all Authorized Products or DSS II Licensed Information sublicensed during such quarterly period, the Gross Sales and the amount of royalties payable thereon. If no Authorized Products or DSS II licensed Information have been sublicensed, that fact shall be shown on such statement. 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. 9 10 Licensee shall pay all taxes imposed 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 DSS II 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 DSS II Licensed Information which is made public; 10 11 (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. ARTICLE 9 LIABILITY Northern Telecom makes no representations in respect to and does not warrant any DSS II 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 DSS II 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 DSS II 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 DSS II 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 naught infringe Intellectual Property rights through use of the DSS II Licensed Information, 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 11 12 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 Tom 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 DSS II 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.) arid subject to the restrictions and releases set form in the Development Agreement and in the DSS II development assignment agreement made as of July 15, 1996 among MPR, 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 12 13 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 labor 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 labor, 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 He 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 He forwarding of a notice go 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 tern, 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 of Northern Telecorn, Licensee shall forthwith 13 14 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. 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 over Party may, without any delay, by written notice, terminate this Agreement. In the event of termination of this Agreement prior to the expire of its term, Licensee shall discontinue the exercise of the rights granted hereunder and the use of the DSS II 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 8200 Dixie Road Brampton, Ontario Canada L6T 5P6 Attention: Corporate Secretary If to Licensee: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California U.S.A. 92121 Attention: President 14 15 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 at 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 labor 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. ARTICLE 14 GENERAL PROVISION Neither Party may assign all or any portion of this Agreement without the other Party's prior written consent. 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 DSS II Licensed Information to or from 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 serious 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: 15 16 (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 bar 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 arid 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 DSS II Licensed Information) at any time without notice and without liability. 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 over 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 should have been covered by the definitions of DSS II Licensed Information or Confidential Information had it been delivered pursuant to this Agreement shall be deepened to be DSS II Licensed Information or Confidential Information, as the case may be, and to be subject to the provisions of this Agreement. 16 17 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 an, 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 terns 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 WHEREAS, the Parties hereto have executed this Agreement on the date first above mentioned. NORTHERN TELECOM LIMITED APPLIED DIGITAL ACCESS, INC. Per. /s/ DAVID ARCHIBALD Per. /s/ PETER P. SAVAGE ------------------------------ ------------------------------- David Archibald Peter P. Savage Vice President and President and Chief Executive Officer Deputy General Counsel Dated: February 7, 1997 Dated: February 7, 1997 ---------------------------- ----------------------------- Per. /s/ D. J. NOBLE Per. /s/ JAMES L. KEEFE ------------------------------ ------------------------------- D.J. Noble James L. Keefe Assistant Secretary Chief Financial Officer Dated: February 7, 1997 Dated: February 7, 1997 ---------------------------- ----------------------------- 17 18 SCHEDULE "A" DSS II LICENSED INFORMATION 19 SCHEDULE "B" SUBLICENSING TERMS Sublicense agreements shall include terms and conditions substantially similar to the following: 1. restrict use of the Authorized Products or DSS II Licensed Information to object code form only; 2. prohibit causing or permitting the reverse engineering, disassembly or Recompilation of the Authorized Products or DSS II 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 DSS II Licensed Information from passing to the end user; 4. disclaim Northern Telecom liability for any damages, whether direct, indirect, incidental or consequential arising from the use of the Authorized Products or DSS IT Licensed Information; and 5. require the end user, at the termination of the sublicense, to discontinue use and destroy or return to Licensor the Authorized Products or DSS II Licensed Information, associated documentation and all archival or other copies of the Authorized Products or DSS II licensed Information. 6 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, 100 Dixie Road, Brampton, Ontario Canada L6T 5P6 20 7. End user shall comply with all applicable governmental legislation or regulations imposing restrictions on the export of products. 21 INDEX
ARTICLE TITLE - ------- ----- 1 DEFINITIONS 2 GRANT OF RIGHTS 3 FURNISHING OF DSS II LICENSED COMMON 4 REVIEW OF AUTHORIZED PRODUCTS BY NORTHERN TELECOM 5 TECHNICAL ASSISTANCE 6 PAYMENT 7 RECORDS AND REMITTANCES 8 CONFIDENTIAL INFORMATION 9 LIABILITY 10 FORCE EJECT 11 DURATION 12 FORCE MAJEURE 13 NOTICES 14 GENERAL PROVISIONS
SCHEDULE "A" DSS II LICENSED INFORMATION SCHEDULE "B" SUBLICENSING TERMS EX-11.1 3 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 ENDED MARCH 31, 1996 1996 ---- ---- Net income (loss) ($1,449) ($868) ======= ====== Reconciliation of weighted average number of shares outstanding to amount used in net income per share computation: Weighted average number of shares outstanding 12,310 11,939 Weighted average number of options and warrants outstanding, -- -- ------- ------ Weighted average number of shares outstanding 12,310 11,939 ======= ====== Net income (loss) per share ($0.12) ($0.07) ======= ====== See Note 3 to Condensed Financial Statements EX-27 4 EXHIBIT 27
5 3-MOS DEC-31-1997 MAR-31-1997 1,731 19,767 6,228 (75) 7,098 35,888 9,558 (4,903) 44,607 5,411 0 0 0 50,929 2,487 44,607 6,388 6,388 3,211 3,211 4,814 25 0 (1,398) 51 (1,449) 0 0 0 (1,449) (0.12) (0.12)
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