-----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, T9rdQ5loX40zLet3c9qVmGnxUw3coNMnX2Ridyfn0QLfjkX6QtqRzQprrHO8er8t jNpGtn9RYYjmIqdBTGuUlg== 0000936392-97-001119.txt : 19970815 0000936392-97-001119.hdr.sgml : 19970815 ACCESSION NUMBER: 0000936392-97-001119 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661286 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 JUNE 30, 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 12,513,195 shares of the registrant's Common Stock, no par value, outstanding as of July 31, 1997. 2 APPLIED DIGITAL ACCESS, INC. INDEX TO FORM 10-Q
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1997 and December 31, 1996......................................................... 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 1997 and June 30, 1996.................................. 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and June 30, 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............................................................ 15 SIGNATURES ............................................................................................ 16
2 3 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 3,221 $ 1,504 Investments - current 15,874 19,957 Accounts receivable, net 9,691 6,798 Inventory, net 7,107 7,363 Deferred income taxes 130 130 Prepaid expenses and other current assets 1,203 1,089 ----------- ----------- Total current assets 37,226 36,841 Property and equipment, net 5,666 4,936 Deferred income taxes 1,372 1,372 Other, net 3,389 2,823 ----------- ----------- $ 47,653 $ 45,972 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,112 $ 2,120 Acquisition payments due to licensor 2,600 -- Accrued expenses 1,573 1,507 Accrued warranty 1,374 1,398 Deferred revenue 980 587 ----------- ----------- Total current liabilities 10,639 5,612 Obligations under capital leases, net of current portion 24 33 ----------- ----------- Total liabilities 10,663 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, 12,498,449 and 12,255,334 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively 51,078 50,631 Additional paid-in capital 2,530 2,492 Unrealized gain on investments -- 25 Deferred compensation (24) (50) Accumulated deficit (16,594) (12,771) ----------- ----------- Total shareholders' equity 36,990 40,327 ----------- ----------- $ 47,653 $ 45,972 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ----------------------- ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT) EXCEPT PER SHARE AMOUNT) Revenue $ 8,164 $ 4,516 $ 14,552 $ 11,153 Cost of revenue 3,711 2,047 6,922 5,067 -------- -------- -------- -------- Gross profit 4,453 2,469 7,630 6,086 Operating expenses: Research and development 2,534 1,905 4,535 3,572 In-process research and development related to asset acquisition 1,578 -- 1,578 1,186 Sales and marketing 1,902 1,760 3,360 3,201 General and administrative 1,082 750 2,437 1,430 -------- -------- -------- -------- Total operating expenses 7,096 4,415 11,910 9,389 ======== ======== ======== ======== Operating loss (2,643) (1,946) (4,280) (3,303) Interest income 268 479 510 953 Other income (expense), net 14 27 11 42 ======== ======== ========= ======== Loss before income taxes (2,361) (1,440) (3,759) (2,308) Provision for income taxes 13 -- 64 -- -------- -------- -------- -------- Net loss ($ 2,374) ($ 1,440) ($ 3,823) ($ 2,308) ======== ======== ======== ======== Net loss per share ($ 0.19) ($ 0.12) ($ 0.31) ($ 0.19) ======== ======== ======== ======== Number of shares used in per share computations 12,452 11,983 12,381 11,961
The accompanying notes are an integral part of the consolidated financial statements. 4 5 APPLIED DIGITAL ACCESS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ----------------------- 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss ($ 3,823) ($ 2,308) Adjustments to reconcile net loss to net cash provided (used) by operating activities: In-process research and development related to asset acquisition 1,578 1,186 Depreciation and amortization 1,335 630 Other (116) 25 Changes in assets and liabilities: Accounts receivable (2,893) 1,947 Inventory 256 (869) Prepaid expenses and other current assets (114) (350) Accounts payable 1,992 (96) Acquisition payments due licensor 2,600 -- Accrued expenses 64 257 Accrued warranty (24) 63 Deferred revenue 393 253 -------- -------- Net cash provided by operating activities 1,248 738 -------- -------- Cash flows from investing activities: Purchases of investments (9,778) (12,026) Maturities of investments 14,017 13,935 Purchases of property and equipment (826) (838) Purchase costs related to asset acquisitions (3,383) (1,900) -------- -------- Net cash provided (used) by investing activities 30 (829) -------- -------- Cash flows from financing activities: Principal payments on capital leases (8) (17) Proceeds from the issuance of common stock under stock option plans 447 318 -------- -------- Net cash provided by financing activities 439 301 -------- -------- Net increase in cash and cash equivalents 1,717 210 Cash and cash equivalents, beginning of period 1,504 1,673 -------- -------- Cash and cash equivalents, end of period $ 3,221 $ 1,883 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 APPLIED DIGITAL ACCESS, INC. Notes to Condensed Consolidated Financial Statements June 30, 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 and six month periods ended June 30, 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:
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ (DOLLARS IN THOUSANDS) Raw materials $ 3,143 $ 4,211 Work-in-process 3,050 2,558 Finished goods 1,433 1,063 ------- ------- 7,626 7,832 Less inventory reserve (519) (469) ------- ------- $ 7,107 $ 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. 4. Recent Accounting Pronouncements 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. SFAS No. 128 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. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Comprehensive Income" ("SFAS No. 130") and Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operation decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. The impact of adopting SFAS No. 130 and SFAS No. 131, both effective for the Company in 1998, has not yet been determined. 5. License Acquisition On June 27, 1997, the Company acquired an exclusive worldwide license to Nortel's Digital Support System II (TM) ("DSS II") operations system software product, subject to certain residual rights retained by Nortel. The Company acquired the license and certain assets related to the DSSII product for a net amount of $3.1 million, $0.5 million of which is payable by the Company in cash and the remainder of which is payable in cash and/or stock at the Company's option in three equal quarterly installments beginning July 15, 1997. The first installment payment of approximately $.9 million was paid in cash. The Company recorded a charge of approximately $1.6 million for purchased research and development associated with the acquisition of the license and assets. As part of the transaction, the Company also issued Nortel a warrant to purchase 150,000 shares of the Company's common stock at an exercise 6 7 price of $12 per share. The warrant has a three year term. Nortel retains the right to and will continue to support its current DSS II customer base outside of North America as part of its integrated Network Management (NM) portfolio for Broadbank Network solutions. The Company has obtained exclusive worldwide rights to market and sell the DSS II product under the new name, . Provisioner, and has acquired substantially all of Nortel's North American DSS II customer relationships. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 two product lines, 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, which may result in 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 SEC. 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"), .Provisioner, a circuit and node provisioning system formerly known as Nortel's DSS II product, and OS design services all acquired through acquisitions, as well as Sectionalizer and Graphical Test Assistant ("GTA"). Recent Developments On June 27, 1997, the Company acquired an exclusive worldwide license to Nortel's DSS II OS software product, subject to certain residual rights retained by Nortel. The Company acquired the license and certain assets related to the DSSII product for a net amount of $3.1 million, $0.5 million of which is payable by the Company in cash and the remainder of which is payable in cash and/or stock at the Company's option in three equal quarterly installments beginning July 15, 1997. The first installment payment of approximately $.9 million was paid in cash. The Company recorded a charge of approximately $1.6 million for purchased research and development associated with the acquisition of the license and assets. As part of the transaction, the 7 8 Company also issued Nortel a warrant to purchase 150,000 shares of the Company's common stock at an exercise price of $12 per share. The warrant has a three year term. Nortel retains the right to and will continue to support its current DSS II customer base outside of North America as part of its integrated Network Management (NM) portfolio for Broadband Network solutions. The Company has obtained exclusive worldwide rights to market and sell the DSS II product under the new name, .Provisioner, and has acquired substantially all of Nortel's North American DSS II customer relationships. The acquisition relates to the Company's objective to acquire software development capability in the telecommunications carrier OS 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 and its predecessor DSS since 1986, most recently under contract to Nortel's Network Services Management Division. In June, the Company signed a three year supply contract with MCI Telecommunications Corporation ("MCI") for the Company's systems, software and services products. This contract is a standard supply contract which specifies the terms and conditions under which MCI will order and the Company will supply products and services. The contract is not a commitment contract and does not guarantee any purchases of products and services or any level of purchases. Although MCI has purchased certain products of the Company under the terms of this contract, the Company is uncertain whether this contract will result in any future orders for the Company's products, or if it does, whether the orders will result in significant revenue. Results of Operations Revenue totaled $8,164,000 for the three months ended June 30, 1997, an 81% increase from revenue of $4,516,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, revenue totaled $14,552,000, a 30% increase from $11,153,000 in the same period last year. The increases were mostly due to increased OS software design services generated from the BCG operations acquired in July 1996. For the three and six months ended June 30, 1997, revenue from T3AS products, services and sensors totaled $4.4 million and $7.2 million, respectively, compared to $3.7 million and $10.4 million, respectively, for the same periods last year. The quarter-over-quarter revenue increase was due to an increase in Remote Module product sales resulting from the purchases of the Company's NIU product by BellSouth. The decrease in T3AS sales for the six months ended June 30, 1997 was primarily the result of decreased engineering and installation ("E&I") services provided to customers for the installation of T3AS products. For the six months ended June 30, 1996, E&I revenue totaled $2.6 million, the majority of which was provided to one RBOC customer compared to $24,000 for the six months ended June 30, 1997. E&I services fluctuate significantly quarter to quarter and while the Company intends to continue to offer E&I services to its customers, future E&I services, if any, cannot be determined. For the three and six months ended June 30, 1997, OS revenue totaled $3.7 million and $7.4 million, respectively, compared to $.8 million for the same periods last year. The increase in OS revenue was primarily the result of increased software design services. Included in OS revenue for the three and six months ended June 30, 1997 is $1.7 million for the completion and wind down of the OS software design services agreement with Nortel for support of the DSS II product. These support services were provided to Nortel pursuant to an agreement between the Company and Nortel dated July 17, 1996 which was terminated on June 25, 1997. The Company will continue to market the design services business in the future. Nortel has indicated that it intends to continue to purchase software design services from the Company although at levels significantly lower than in the past. The Company has acquired from Nortel a license to the DSSII product and technology which it expects to market and enhance under the new name .Provisioner. The Company also expects to integrate the licensed technology into new product development. The acquisition has generated a shift in the Company's BCG operations from a software design services business to a product business. To date, the Company's BCG OS revenue has been generated from OS software design services provided to Nortel for which revenue has been recognized as the services were performed. Although the Company believes it will be successful in transitioning the majority of its BCG operations from a design services business to a product business, there can be no assurance the Company will be able to maintain the historical BCG revenue levels in the future. As a result, the Company may experience quarterly revenue fluctuations in the future that could have a material adverse effect on the Company's business, operating results and financial condition. The Company expects that revenue from sales of the T3AS product family and OS products and services will account for a majority of the Company's revenue for the foreseeable future. Gross profit was $4,453,000 for the three months ended June 30, 1997, an increase of 80% from $2,469,000 in the second quarter of 1996. Gross profit as a percent of revenue was 55% for the three months ended June 30, 1997, unchanged from the same period last year. The increase in gross profit for the second quarter was primarily due to increased revenue from OS software design services. 8 9 Gross profit totaled $7,630,000 for the six months ended June 30, 1997, an increase of 25% from $6,086,000 for the same period last year. Gross profit as a percent of revenue was 52% for the six months ended June 30, 1997 compared to 55% for the same period last year. The increase in gross profit for the six months ended June 30, 1997 was also the result of increased revenue from OS software design services partially offset by decreased sales of T3AS products and services and a change in product mix for T3AS products and services. In 1997, sales of the Company's T3AS products have been weighted toward the Company's CTS and Remote Module NIU products which carry lower product margins as compared to its T3AS system. The highly competitive CTS and NIU markets are subject to severe pricing pressures which have contributed to lower overall gross profits on these 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 obsolescence 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 $2,534,000 for the three months ended June 30, 1997, a 33% increase from $1,905,000 for the three months ended June 30, 1996. Research and development expenses totaled $4,535,000 for the six months ended June 30, 1997, a 27% increase from $3,572,000 for the six months ended June 30, 1996. The majority of the increases was attributable to the addition of research and development personnel related to the ACD acquisition and the shift in the BCG OS business toward product development as a result of the DSS II license 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 June 30, 1997 the Company recorded a charge of approximately $1.6 million for purchased research and development costs related to the acquisition of the DSS II license and related assets from Nortel. Sales and marketing expenses were $1,902,000 for the three months ended June 30, 1997, an 8% increase from $1,760,000 in the same period last year. For the six months ended June 30, 1997, sales and marketing expenses totaled $3,360,000, a 5% increase from $3,201,000 in the same period last year. The increases were due to additional customer support and marketing personnel expenses required to support the OS business. 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 $1,082,000 for the three months ended June 30, 1997, a 44% increase from $750,000 in the same period last year. For the six months ended June 30, 1997, general and administrative expenses totaled $2,437,000 a 70% increase from $1,430,000 in the same period last year. The majority of the increase was due to the amortization of goodwill and intangible assets associated with the acquisition of the BCG operations completed 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 $268,000 for the second quarter of 1997, a 44% decrease from $479,000 in the same quarter a year ago. Interest income totaled $510,000 for the first half of 1997, a 46% decrease from $953,000 in the same period in 1996. This decrease is mostly the result of decreased cash investments compared to the same period last year. For the three and six months ended June 30, 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 and six months ended June 30, 1997 or June 30, 1996 due to net losses. 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 $2,374,000, or $.19 per share, for the three months ended June 30, 1997 compared to a net loss of $1,440,000, or $.12 per share, for the three months ended June 30, 1996. Excluding the $1.6 million charge for purchased research and development associated with the purchase of the DSS II license, the Company would have recorded a net loss of $796,000, or $.06 per share, for the three months ended June 30, 1997. The Company incurred a net loss of $3,823,000, or $.31 per share, for the six months ended June 30, 1997 compared to a net loss of $2,308,000, or $.19 per share, for the 9 10 same period last year. Excluding the above referenced $1.6 million charge and the $1.2 million charge for purchased research and development associated with the ACD acquisition in the first quarter of 1996, the Company would have recorded a net loss of $2,245,000, or $.18 per share, for the six months ended June 30, 1997 and a net loss of $1,122,000, or $.09 per share, for the six months ended June 30, 1996. Liquidity and Capital Resources At June 30, 1997 the Company had approximately $19,095,000 in cash and investments, compared to $21,461,000 at December 31, 1996. The decrease in cash and investments is primarily due to cash payments associated with the acquisition of the DSS II license and related assets, and purchases of capital equipment. Working capital decreased approximately 15% or $4,642,000 from $31,229,000 at December 31, 1996 to $26,587,000 at June 30, 1997. The decrease in working capital was primarily the result of an increase in accounts payable due to the timing of inventory receipts and an increase in accrued payments related to the DSSII license acquisition. For the six months ended June 30, 1997 the Company's operating activities provided $1,248,000 in cash, primarily as a result of an increase in accounts payable and accrued payments related to the DSSII license acquisition offset by an increase in accounts receivable, compared to $738,000 provided by operating activities for the six months ended June 30, 1996. For the six months ended June 30, 1997 cash used for capital expenditures totaled approximately $826,000 compared to $838,000 for the six months ended June 30, 1996. Most of the capital equipment additions were related to the purchase of computer and lab equipment to support the Company's expanded research and development efforts and the BCG operations moving to a new location. 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. 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 29% of the Company's revenue in the first six months 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, U S West and MCI 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 and MCI contracts may be terminated at the convenience of the RBOC or MCI, 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 10 11 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 Two Product Lines. Historically, the majority of the Company's revenue to date has been derived from the sale of T3AS products and services. However, the Company expects that its future revenue will be derived from both T3AS products and services and OS software products and services. The Company is investing in the expansion of its product lines through the enhancement, development and marketing of its NIU, CTS, 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 DS1 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 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 Operations Systems ("OS") software products including the Traffic Data Collection and Engineering System ("TDC&E"), the Fault Management System ("FMS"), the circuit and node provisioning system, .Provisioner, 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. 11 12 Mergers. Of the eight major Telephone Service Providers ("TSPs") currently involved in or that have recently completed 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. 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 12 13 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 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. 13 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. The Annual Meeting of Shareholders was held on May 20, 1997 and was adjourned solely with respect to the Delaware reincorporation proposal until May 30, 1997 and again to June 13, 1997, on which date the proposal was adopted. At the meeting, the shareholders elected Kenneth E. Olson, Christopher B. Paisley, Peter P. Savage and Edward F. Tuck as directors of the Company for the ensuing year and until their respective successors are elected. The following tables sets forth the results of voting in this election:
For Against Withheld --- ------- -------- Kenneth E. Olson 10,779,651 - 493,579 Christopher B. Paisley 10,675,451 - 597,779 Peter P. Savage 10,774,827 - 498,403 Edward F. Tuck 10,782,151 - 491,079
In addition, the shareholders voted on the following proposals: (a) To approve the Company's reincorporation in Delaware, through the merger of Applied Digital Access, Inc., a California corporation, with and into a wholly-owned Delaware subsidiary of Applied Digital Access, Inc.: For Against Abstain Broker Non-Votes ------------------------------------------------------------------ 6,237,368 2,064,125 28,080 2,991,162 This proposal was approved. (b) To ratify the appointment of Coopers and Lybrand L.L.P. as the Company's independent public accountants for the fiscal year ending December 31, 1997: For Against Abstain ------------------------------------------ 11,228,320 23,927 20,883 This proposal was approved. ITEM 5. OTHER INFORMATION. None. 14 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1* Asset Purchase Agreement between Applied Digital Access, Inc. and Northern Telecom Limited dated June 27, 1997 ("the Asset Purchase Agreement"). Schedules A, C, E, G, I and K to the Asset Purchase Agreement have been omitted because they contain information that is not material to an investment decision and is otherwise discussed in the agreement (pursuant to Item 601.(b)(2) of Regulation S-K of the Securities Exchange Act of 1934, as amended). Schedules B, D, F and H of the Asset Purchase Agreement are included in this Form 10-Q as or as part of Exhibits 10.1, 10.2, 10.3 and 10.3, respectively. The Company agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request. 10.1* License Agreement between Northern Telecom Ltd. and Applied Digital Access, Inc. dated as of June 27, 1997 10.2 Applied Digital Access, Inc. 1997 Registration Rights Agreement between Applied Digital Access, Inc. and Northern Telecom Limited dated as of June 27, 1997 10.3 Stock and Warrant Purchase Agreement between Applied Digital Access, Inc. and Northern Telecom dated as of June 27, 1997 10.4* Master Purchase Agreement between MCI Telecommunications Corporation and Applied Digital Access, Inc. dated June 16, 1997 10.5* Master Agreement between Northern Telecom Limited and Applied Digital Access, Inc. dated as of June 26, 1997 11.1 Statement regarding computation of net income (loss) per share. 27.1 Financial Data Schedule.
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. None. 15 16 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: August 14, 1997 /s/ PETER P. SAVAGE ----------------------------------------- Peter P. Savage Director President and Chief Executive Officer Date: August 14, 1997 /s/ JAMES L. KEEFE ----------------------------------------- James L. Keefe Vice President Finance and Administration and Chief Financial Officer 16 EX-2.1 2 EXHIBIT 2.1 1 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. EXHIBIT 2.1 ASSET PURCHASE AGREEMENT Between APPLIED DIGITAL ACCESS, INC. and NORTHERN TELECOM LIMITED 2 TABLE OF CONTENTS 1. INTERPRETATION 2 1.1 Definitions 2 1.2 Interpretation 4 1.3 Schedules 5 2. PURCHASE AND SALE 5 2.1 Purchase of Purchased Assets 5 2.2 Excluded Assets 5 2.3 Assumed Liabilities 6 2.4 No Assumption of Liabilities 6 2.5 Purchase Price 6 2.6 Manner of Payment 7 2.7 Issuance of Stock and Warrants; Registration Rights 7 2.8 Allocation of Purchase Price. 8 2.9 Expenses and Taxes 8 2.10 Title 8 2.11 Election 8 2.12 Contingent Payments 8 3. NORTEL'S REPRESENTATIONS AND WARRANTIES 10 3.1 Representations and Warranties 10 3.2 Purchased Assets "AS IS, WHERE IS" 12 3.3 Purchaser's Sole Remedy 12 3.4 Survival of Nortel's Representations and Covenants 12 3.5 Nortel's Liability 12 3.6 Conditions for Indemnification 13 3.7 Limitation of Nortel's Indemnification 13 4. PURCHASER'S REPRESENTATIONS AND WARRANTIES 14 4.1 Representations and Warranties 14 4.2 Nortel's Sole Remedy 15 4.3 Survival of Purchaser's Representations and Covenants 15 4.4 Purchaser's Liability 15 4.5 Conditions for Indemnification 16 5. CONDITIONS TO CLOSING 16 5.1 Conditions for Purchaser's Benefit 16 5.2 Conditions for Nortel's Benefit 17 5.3 Non-Fulfillment of Conditions 17 5.4 No Prejudice to Other Rights 17
i 3 6. CLOSING 18 6.1 Time and Place of Closing 18 6.2 Nortel's Obligations on Closing 18 6.3 Purchaser's Obligations on Closing 18 7. POST-CLOSING MATTERS 19 7.1 Nortel to Provide Access and Facilities 19 7.2 Post-Closing Access to Books and Records 19 7.3 Accounts Receivable 19 8. CONFIDENTIAL INFORMATION 19 8.1 Confidentiality 19 8.2 Publicity 19 9. GENERAL PROVISIONS 20 9.1 Assignment 20 9.2 Counterparts; Facsimile 20 9.3 Conflict in Terms 20 9.4 Costs and Expenses 20 9.5 Entire Agreement 20 9.6 Finder's Fee 21 9.7 Further Assurances 21 9.8 Governing Law 21 9.9 Notice 21 9.10 No Consequential Losses 22 9.11 No Waiver 22 9.12 Severability 22 Schedule A - Purchased Assets Schedule B - License Agreement Schedule C - Assumed Liabilities Schedule D - Registration Rights Agreement Schedule E - Services Agreement Schedule F - Stock and Warrant Purchase Agreement Schedule G - Transition Plan Schedule H - Warrants Schedule I - Allocation of Purchase Price Schedule J - [Intentionally Left Blank] Schedule K - Bill of Sale
ii 4 ASSET PURCHASE AGREEMENT THIS AGREEMENT dated for reference the 27th day of June, 1997 BETWEEN: APPLIED DIGITAL ACCESS, INC., a corporation duly incorporated under the laws of the State of California and having an office at 9855 Scranton Road, San Diego, California, U.S.A. 92121 (hereinafter referred to as "Purchaser") OF THE FIRST PART AND: NORTHERN TELECOM LIMITED, a corporation duly incorporated under the laws of Canada and having an office at 8200 Dixie Road, Brampton, Ontario, Canada L6T 5P6 (hereinafter referred to as "Nortel") OF THE SECOND PART WHEREAS: Nortel is a company which provides advanced telecommunications systems and products to telecommunications carriers, vendors and users; Nortel's operations include its DSS II Business (as hereinafter defined) which focuses on developing software-intensive communications products for Nortel's Customers (as hereinafter defined); Purchaser and Nortel have entered into a Letter of Intent (as hereinafter defined) pursuant to which Purchaser has expressed an interest in purchasing certain assets of the DSS II Business; and Purchaser wishes to buy, and Nortel wishes to sell on the terms and conditions set out in this Agreement, certain assets of the DSS II Business; NOW THEREFORE in consideration of the premises and covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1 5 ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS. In this Agreement (including the recitals, this Article and each Schedule), unless there is something in the subject matter or context inconsistent therewith or unless otherwise expressly provided, the following words and expressions shall have the following meanings: "ADA" means ADA Canada, Inc., a company incorporated pursuant to the laws of The Yukon Territory; "Affiliate" means any person or entity controlling, controlled by or under common control with a party hereunder (with control, together with its correlative meaning "controlled by," meaning the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person or entity whether through ownership of voting securities by agreement or otherwise); "Closing" means the completion of the sale to and the purchase by Purchaser of the Purchased Assets in accordance with Article 2; "Closing Date" means the date for the Closing as specified in Section 6.1; "Closing Price" means the weighted average closing price of a share of Purchaser Common Stock as reported on the Nasdaq National Market for all of the trading days of a calendar quarter; "Confidential Information" means any proprietary, scientific, technical, planning, business, marketing, product or financial information (including DSS II Information), formulas, patterns, compilations, programs, devices, methods, techniques, processes, data, trade secrets or know-how ("Information") of one of the parties hereto or its Affiliates which is designated as confidential or similar designation at the time of disclosure or that would be understood by the party receiving such Information at the time of disclosure, exercising reasonable business judgment, to be confidential; "Contingent Payment" means the payments as specified in Section 2.12; "Customers" means the DSS II Business' customers as of the Time of Closing, with the exception ofAmeritech Communications Inc./Ameritech Services, Inc., Energis Communications Limited, Bell Cablemedia Management Limited, Avantel, S.A., Clear Communications Limited and Netherlands Armed Forces Integrated Network/The Kingdom of the Netherlands; 2 6 "DSS II Business" means the business unit of Nortel that designs, develops, markets and licenses the DSS II Products; "DSS II Information" means all design documentation, customer product documentation (including training and operations), installation and maintenance documentation, marketing materials developed for general use, test specifications, Nortel proprietary utilities and tools, command files for software development and testing, and everything currently used by Nortel as of the Closing Date to develop, modify, enhance and support the DDS II Products to the extent available in accordance with Article 3 and 4 of the License Agreement (as hereinafter defined); "DSS II Intellectual Property" means any Nortel invention, patent, utility model, copyright, industrial design, mask work or integrated circuit topography right, or any Nortel right of whatsoever nature in processes, techniques, improvements, modifications, computer software and data, Confidential Information, trade secrets or know-how, or any intangible right or privilege of a nature similar to any of the foregoing which is incorporated in or infringed by the DSS II Software or the DSS II Information; "DSS II Products" means the DSS II products (including DSS II Software and DSS II Information) which are comprised of software proprietary to BC TEL, Microtel Limited and Nortel; "DSS II Software" means all of the source code, object code and machine code for the DSS II Products as of the Closing Date as described in Schedule A to the License Agreement; "Encumbrance" means a security interest, adverse claim (including right of first purchase, option, first refusal or pre-emption), burden, charge or other interest attaching to the Purchased Assets and created by, through or under Nortel; "Letter of Intent" means the Letter of Intent executed by Purchaser, ADA and Nortel and dated April 15, 1997; "License Agreement" means the License Agreement to be entered into by Purchaser and Nortel pursuant to which rights and licenses are to be granted to Purchaser to design, produce and market certain products or software programs based upon DSS II Information and DSS II Software, and attached hereto as Schedule B to this Agreement; "Losses" means all actions, liabilities, fines, penalties, costs, interest or damages suffered or incurred by a party, including reasonable attorney's fees and disbursements; 3 7 "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature; "Purchased Assets" means the assets set out in Schedule A to this Agreement, but excluding the Excluded Assets; "Purchaser Common Stock" means the common stock of Purchaser, no par value; "Registration Rights Agreement" means the Registration Rights Agreement to be entered into in connection with the issuance of shares of Purchaser Common Stock and the Warrants as set forth in Section 2.5 of this Agreement, a form of which is attached hereto as Schedule D; "Services Agreement" means the Services Agreement to be entered into by Purchaser and Nortel pursuant to which Nortel will provide to Purchaser certain services related to the DSS II Business, and attached hereto as Schedule E to this Agreement; "Stock and Warrant Purchase Agreement" means the Stock and Warrant Purchase Agreement to be entered into in connection with the partial payment of the Purchase Price as set forth in Section 2.5 of this Agreement, a form of which is attached hereto as Schedule F; "Time of Closing" means the time on the Closing Date specified in Section 6.1; "Transaction Agreements" means the License Agreement, the Stock and Warrant Purchase Agreement, the Registration Rights Agreement, the Transaction Plan and the Services Agreement. "Transition Period" means that 120 day period following the Closing Date; "Transaction Plan" means the document attached hereto as Schedule G; and "Warrants" means those warrants exercisable into 150,000 shares of Purchaser Common Stock, in the form attached hereto as Schedule H. 1.2 INTERPRETATION. For purposes of this Agreement, except as otherwise expressly provided: a) "this Agreement" means this agreement, including the Schedules hereto, as may from time to time be supplemented or amended and in effect; b) all references in this Agreement to a designated "Article," "Section," "Subsection" or other subdivision or to a Schedule are to the designated 4 8 Article, Section, Subsection or other subdivision of, or Schedule to, this Agreement; c) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Subsection or other subdivision or Schedule; d) the headings in this Agreement are for convenience only and do not form a part of this Agreement and are not intended to interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof; e) unless expressed to be in some other currency, all references to currency refer to lawful money of the United States of America. The references to currency in the Schedules, excluding Schedule I, refer to Canadian currency; and f) words importing the masculine gender include the feminine or neuter gender and words in the singular include the plural and vice versa. 1.3 SCHEDULES. The following Schedules are attached to and form a part of this Agreement: a) Schedule A - Purchased Assets; b) Schedule B - License Agreement c) Schedule C - Assumed Liabilities d) Schedule D - Registration Rights Agreement; e) Schedule E - Services Agreement; f) Schedule F - Stock and Warrant Purchase Agreement; g) Schedule G - Transition Plan; h) Schedule H - Warrants; i) Schedule I - Allocation of Purchase Price; j) Schedule J - [Intentionally Left Blank]; and k) Schedule K - Bill of Sale ARTICLE 2 PURCHASE AND SALE 2.1 PURCHASE OF PURCHASED ASSETS. Upon the terms and subject to the conditions herein contained, Nortel shall transfer, sell, assign and convey the Purchased Assets to Purchaser or ADA as designated by Purchaser, and Purchaser and ADA shall purchase and receive from Nortel all of Nortel's right, title and interest in and to the Purchased Assets. 2.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary contained in Section 2.1 above, the following shall not be included in the Purchased Assets and shall not be sold by Nortel to Purchaser hereunder (the "Excluded Assets"): a) all cash and cash equivalents; b) all accounts receivable; 5 9 c) all contracts and leases of equipment or other property not assigned to and assumed by Purchaser as part of the Purchased Assets or as otherwise contemplated by this Agreement; d) all real estate and all leases of real property; e) all prepaid expenses and deposits; f) all causes of actions and litigation against third parties; g) all tax returns of Nortel and all tax refunds due Nortel from any governmental agency; and h) any solvents or chemicals which are identified by Purchaser on or before the Closing Date. Purchaser shall have no control over, interest in or liability or responsibility of any kind whatsoever for the Excluded Assets and/or Nortel's use or possession of same, whether before or after the Time of Closing, except as otherwise provided in the Services Agreement. 2.3 ASSUMED LIABILITIES. As of the Closing Date and subject to Section 2.4 below, Purchaser hereby agrees to assume, satisfy or perform when due those liabilities and obligations of Nortel set forth in Schedule C attached hereto (the "Assumed Liabilities"). Nortel acknowledges and agrees that all of the Assumed Liabilities will be assumed by Purchaser as of the Closing Date. 2.4 NO ASSUMPTION OF LIABILITIES. Purchaser shall not assume and shall not be liable for any liabilities of Nortel of whatever type or nature whatsoever not specifically included in the Assumed Liabilities, including for all employee accruals for unpaid vacation pay, premiums for unemployment insurance, health premiums, Canada Pension Plan premiums, accrued wages, salaries and commissions and employment benefit plan payments (collectively, the "Retained Liabilities") and Nortel assumes full responsibility with respect to all such employee accruals referred to in this subparagraph and all other Retained Liabilities. 2.5 PURCHASE PRICE. In full consideration for the purchase by Purchaser of the Purchased Assets and for the transactions contemplated in this Agreement, Purchaser shall pay to Nortel the aggregate purchase price of US Three Million Five Hundred Ninety-Nine Thousand Nine Hundred Ninety-Eight Dollars (US$3,599,998) and the Warrants, as adjusted pursuant to Section 2.12 below (the "Purchase Price"), in the following manner and subject to the following conditions: a) Purchaser shall pay to Nortel US One Million Dollars (US$1,000,000) in cash at the Time of Closing; b) Purchaser shall issue to Nortel the Warrants at the Time of Closing; c) Purchaser shall pay Nortel US Eight Hundred Sixty-Six Thousand Six Hundred Sixty-Six Dollars (US$866,666) in shares of Purchaser Common Stock, in cash or in a combination of cash and shares of Purchaser Common Stock, at Purchaser's sole discretion, per quarter, commencing 6 10 July 15, 1997 for a period of three (3) consecutive quarters, for an aggregate payment of US Two Million Five Hundred Ninety-Nine Thousand Nine Hundred Ninety-Eight Dollars (US$2,599,998). Such payment shall be made as described in Section 2.6 below and shall be subject to offset as described in Subsection 2.5(d) below; and d) Purchaser may, in addition to and without in any way waiving its other remedies under this Agreement or otherwise, withhold installment payments of the Purchase Price as set out in Subsection 2.5(c) to cover legal expenses reasonably incurred by Purchaser in defending against infringement litigation and to offset any payment of damages, settlements or royalties to third parties in the event that sales of any of the DSS II Business products that are acquired by Purchaser pursuant to this Agreement are claimed to infringe patents or other intellectual property of any third party and such claims become the subject of litigation. It is a condition precedent to Purchaser's right to so withhold payment and to so offset that, upon the filing of any such suit, Purchaser and ADA shall cease to sell that portion of the DSS II Business product or products which is the subject of such litigation. 2.6 MANNER OF PAYMENT. In partial payment of the Purchase Price, Purchaser and ADA, if designated by Purchaser, shall pay the sum set out in Subsection 2.5(a) to Nortel at the Time of Closing by wire transfer in immediately available funds to *. Any sums which Purchaser determines to pay, in Purchaser's sole discretion, pursuant to Subsection 2.5(c) to Nortel in cash shall be paid by wire transfer in immediately available funds to * in three equal installments as follows: the first on or before July 15, 1997, the second on or before October 15, 1997 and the third on or before January 15, 1998. 2.7 ISSUANCE OF STOCK AND WARRANTS; REGISTRATION RIGHTS. The issuance of the Warrants and the shares of Purchaser Common Stock in partial payment of the Purchase Price, if any, as set out in Subsections 2.5(b) and 2.5(c) shall be governed by the Stock and Warrant Purchase Agreement. In the event that Purchaser determines to pay, in Purchaser's sole discretion, pursuant to Subsection 2.5(c) any sums in shares of Purchaser Common Stock, the number of shares of Purchaser Common Stock, if any, to be issued to Nortel on the following dates shall be equal to the amount of the payment to be made by Purchaser in Purchaser Common Stock divided by the Closing Price for the quarter ending immediately prior to the date of payment. Such shares issued to Nortel, if any, shall be issued in three installments as follows: the first on or before July 15, 1997, the second on or before October 15, 1997 and the third on or before January 15, 1998. The shares of Purchaser Common Stock issuable upon exercise of the Warrants and the shares of Purchaser Common Stock issued in partial payment of the Purchase Price, if any, shall be entitled to those certain rights to register the shares for resale in the United States public market pursuant to the Registration Rights Agreement. 2.8 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated as set out in Schedule I. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 7 11 2.9 EXPENSES AND TAXES. The parties to this Agreement shall be solely responsible for their respective legal, accounting, taxes and other fees and costs with respect to the transactions that are the subject of this Agreement. Purchaser shall be liable for and pay all taxes, duties and like charges properly payable upon and in connection with the conveyance of the Purchased Assets and the grant of the license to the DSSII Products. 2.10 TITLE. Title to the Purchased Assets shall pass to Purchaser or ADA as designated by Purchaser at the Time of Closing and the Purchased Assets shall be at the risk of Nortel prior to Closing. Nortel and Purchaser acknowledge that it is intended that Nortel shall be entitled to the benefit of all revenues arising from the DSS II Business up to the Closing and shall be responsible for all expenses incurred by the DSS II Business up to the Closing. 2.11 ELECTION. Nortel and the Purchaser shall elect jointly under Subsection 167(1) of the Excise Tax Act (Canada), in the form prescribed for the purposes of that subsection, in respect of the sale and transfer of the Purchased Assets hereunder, and Nortel shall file such election in its GST return for its reporting period that includes the Closing Date. Nortel represents that its GST Registration Number is *. 2.12 CONTINGENT PAYMENTS. Nortel shall pay to Purchaser the following payments (the "Contingent Payments") in order to establish a quality support incentive for Purchaser and to allow Purchaser to resource customer service and support functions to * the *, in the following manner, subject to the following conditions and as adjusted pursuant to this Section 2.12: a) On that date which is six months following the Closing, Nortel shall pay to Purchaser US Five Hundred Thousand Dollars (US$500,000) by certified cheque or bank draft drawn on the bank of Nortel payable to or to the order of Purchaser or ADA, as designated by Purchaser, in immediately available funds; and b) On that date which is one (1) year following the Closing, Nortel shall pay to Purchaser US Five Hundred Thousand Dollars (US$500,000) by certified cheque or bank draft drawn on the bank of Nortel payable to or to the order of Purchaser or ADA, as designated by Purchaser, in immediately available funds. The payment in Subsection 2.12(b) is conditional upon Purchaser * a * as of the date which is one (1) year following the Closing as follows: (i) no * shall * an * or * a * as a result of Purchaser's * under a purchase agreement; and (ii) no * shall have been issued by * to the * or * in * to * of Nortel, at or above the *, for Purchaser's * to * of the * of * as of the Closing Date. Nortel hereby agrees that it shall * the terms and conditions of this provision. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 8 12 Nortel agrees to use its best judgment in *, recognizing that some * of this portion of this Agreement to * Purchaser's * or other aspects of a *. Nortel acknowledges that Purchaser's * with * is *, and may not be * of * Purchaser. To the extent that * of Purchaser results in a *, Nortel agrees to * in view of this *. Notwithstanding the foregoing, Nortel's decision as to whether the foregoing conditions have been satisfied shall be made in Nortel's sole discretion, acting reasonably. In the event the payment in Subsection 2.12(b) is required as set forth above, such payment shall be reduced by the amount equal to the aggregate amounts calculated as of each date of issuance of Purchaser Common Stock pursuant to Subsection 2.5(c) as follows, up to a maximum reduction of US $500,000: the product of (I) that amount that the reported closing price of a share of Purchaser Common Stock on the Nasdaq National Market on the date which is one day before the date which is one (1) year following the Closing is less than the Closing Price on the date such Purchaser Common Stock was issued to Nortel pursuant to Subsection 2.5(c) multiplied by (II) the number of shares of Purchaser Common Stock issued on such date. For example, assume (A) shares of Purchaser Common Stock are issued to Nortel pursuant to Subsection 2.5(c) only on July 15, 1997, (B) that on the date which is one day before the date which is one year following the Closing, the reported closing price of a share of Purchaser Common Stock is US$10, (C) the Closing Price for the July 15, 1997 payment was US$5 and (D) 173,333 shares of Purchaser Common Stock are issued to Nortel on July 15, 1997. No reduction in the payment due under Subsection 2.12(b) will be allowed. However, assume (W) shares of Purchaser Common Stock are issued to Nortel pursuant to Subsection 2.5(c) only on July 15, 1997, (X) that on the date which is one day before the date which is one year following the Closing, the reported closing price of a share of Purchaser Common Stock is US$4, (Y) the Closing Price for the July 15, 1997 payment was US$5 and (Z) 173,333 shares of Purchaser Common Stock are issued to Nortel on July 15, 1997. The payment due under Subsection 2.12(b) would be reduced by US$173,333 and Nortel would be required to pay to Purchaser US$326,667. Nortel may, in addition to and without in any way waiving its other remedies under this Agreement or otherwise, withhold the payment of any portion of the Contingent Payment set forth in Section 2.12(b) above to offset against accrued Losses incurred by Nortel in defending against litigation for breach of Nortel's obligations to any Customers, which litigation arises directly from Purchaser's performance of any such obligation, whether as a subcontractor or otherwise or for any other litigation arising directly from Purchaser's performance of its obligations under the Assumed Liabilities. ARTICLE 3 NORTEL'S REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES. Nortel represents and warrants to Purchaser, as warranties and representations that are true at the date hereof and at the Time of Closing as if such warranties and representations were made at such time that: * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 9 13 a) Nortel is a corporation duly organized and validly existing under the laws of Canada, and has all requisite corporate power and authority to carry on the business of the DSS II Business as now conducted; b) Nortel has all requisite corporate power and authority (i) to execute, deliver and perform its obligations under the Transaction Agreements and 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 proceedings or corporate action on the part of Nortel, its officers, directors and shareholders required and necessary for the authorization, execution and delivery of this Agreement and the Transaction Agreements and the performance of all obligations of Nortel hereunder and thereunder has been taken or will be taken prior to the Closing, and each of this Agreement and the Transaction Agreements constitutes valid and legally binding obligations of Nortel, enforceable in accordance with their respective 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; c) the execution and delivery of this Agreement and the Transaction Agreements by Nortel and the consummation of the transactions herein and therein provided for will not, with or without the giving of notice or the passage of time, or both, result in: i) the breach or violation of any of the provisions of, or constitute default under, or conflict with or cause the acceleration of any obligation of Nortel under A) any contract related to the Purchased Assets to which Nortel is a party or by which it or the Purchased Assets is or its properties are bound, including, without limitation, the Services Agreement and the License Agreement, B) any provision of the constating documents or by-laws or resolutions or articles of the board of directors or shareholders of Nortel, C) any judgment, decree, order or award of any court, governmental body or arbitrator having jurisdiction over Nortel, D) any license, permit, approval, consent or authorization held by Nortel and related to the Purchased Assets, or E) any applicable, statute, ordinance, regulation or rule; or 10 14 ii) the creation or imposition of any encumbrance on any of the Purchased Assets; which breach, violation or encumbrance would affect the Purchased Assets or Purchaser's rights thereto or enjoyment thereof after Closing; d) no consent, authorization, order or approval of, or filing or registration with, any governmental authority or other person or entity is required for the execution and delivery by Nortel of this Agreement or any Transaction Agreement and the consummation by Nortel of the transactions contemplated by such agreements; e) subject to the rights of third parties set out in Section 2 of Schedule A, the Purchased Assets are owned by Nortel free and clear of all liens and encumbrances; f) Nortel's financial statements for the most recently completed fiscal period present fairly the assets and liabilities of the DSS II Business and its financial condition as of the dates of such financial records and fairly present the results of operations of the DSS II Business for the periods reflected in the financial records in accordance with generally accepted accounting principles consistently applied (except as may be indicated in the notes thereto and subject to normal year-end adjustments in the case of any interim financial statements); g) there are no claims, proceedings, actions, or lawsuits in existence, or, to the best of Nortel's knowledge, threatened or asserted against or with respect to the Purchased Assets which would have a material adverse effect on the Purchased Assets or the value thereof; h) there are no material agreements entered into by Nortel in respect of the purchase of the DSS II Business or the Purchased Assets, other than this Agreement and the Transaction Agreements; i) to the best of Nortel's knowledge, Nortel has complied in all material respects with all existing laws, rules, regulations and orders and has obtained all permits and licenses required to operate the DSS II Business, and the present use by Nortel of the Purchased Assets in the operation of the DSS II Business does not violate any laws, rules, regulations or orders; j) to the best of Nortel's knowledge, there are no licenses, permit registrations or governmental approvals, agreements or consents applied for, pending by, issued or given to Nortel which would have a material adverse effect on the DSS II Business, and no agreements with governmental authorities (provincial, state, local or foreign) entered into by Nortel which would have a material adverse effect on the DSS II Business are in effect or have been applied for or are pending. 3.2 AS IS WHERE IS. THE PURCHASED ASSETS ARE SOLD ON AN AS IS WHERE IS BASIS IN THEIR CONDITION ON THE CLOSING DATE. EXCEPT AS 11 15 SET FORTH IN SECTION 3.1(c) ABOVE, THERE ARE NO OTHER WARRANTIES, REPRESENTATIONS, CONDITIONS OR GUARANTEES OF ANY KIND WHATSOEVER, EITHER EXPRESS OR IMPLIED, WHETHER ARISING BY STATUTE, CONTRACT, TORT, PRODUCT LIABILITY OR OTHERWISE, REGARDING THE PURCHASED ASSETS, INCLUDING BUT NOT LIMITED TO, WARRANTIES, REPRESENTATIONS, CONDITIONS AND GUARANTEES AS TO MERCHANTABILITY, FITNESS FOR A SPECIFIC PURPOSE, DESIGN, CONDITION OR QUALITY OF THE PURCHASED ASSETS. 3.3 PURCHASER'S SOLE REMEDY. PURCHASER'S SOLE REMEDY FOR BREACH OF THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 3 SHALL BE LIMITED TO THE INDEMNITY SET OUT IN SECTION 3.5. 3.4 SURVIVAL OF NORTEL'S REPRESENTATIONS AND COVENANTS. Each representation, warranty, covenant and agreement of Nortel contained herein shall survive the execution and delivery of this Agreement and the Closing, and shall expire * after the Closing Date unless, on or before such expiry date, Purchaser has delivered to Nortel written notice of a claim relating to such representation, warranty, covenant or agreement. 3.5 NORTEL'S LIABILITY. Subject to Section 3.4, and except as otherwise expressly provided for in this Agreement, Nortel shall be liable to Purchaser for, and shall indemnify and save harmless Purchaser from and against Losses sustained or incurred by Purchaser which arise out of, are based on, or are the result of: a) any misrepresentation or breach of representation, breach of warranty, nonfulfillment of covenant or agreement made by Nortel herein or in any certificate or other document delivered by or on behalf of Nortel pursuant hereto; or b) any failure of Nortel to comply with, or any breach by Nortel of, any of the covenants or agreements in this Agreement to be performed by Nortel, excluding in any event (with respect to both Sections 3.5(a) and 3.5(b)) (iii) anything for which Nortel is indemnified pursuant to Section 4.4, and (iv) anything for which liability is disclaimed pursuant to Section 3.6; excepting in each case any Losses to the extent that the same are caused by the negligence or willful misconduct of Purchaser. No claim shall be made by Purchaser hereunder unless written notice of such claim is delivered to Nortel within the time stipulated in Section 3.4 and such claim, together with any prior claims by Purchaser, exceeds *. In no event shall Nortel's cumulative liability under this Section 3.5 exceed *. It is agreed that if a misrepresentation or breach of warranty or covenant is discovered by Purchaser after * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 12 16 Closing, Purchaser's remedy shall be limited to indemnification as set forth herein and Purchaser shall not be entitled to rescission of this Agreement. 3.6 CONDITIONS FOR INDEMNIFICATION. The indemnity contained in Section 3.5 shall apply only where the following conditions are satisfied: a) Nortel shall have sole conduct of all proceedings and negotiations connected with such claims; b) Purchaser (i) will promptly notify Nortel within twenty (20) calendar days of its receipt of a written notice of any such claims, (ii) will furnish Nortel within thirty (30) calendar days of its receipt of such notice with copies of any pleadings, correspondence or other documents relating to such claims that are in Purchaser's possession, and (iii) will not make any admissions regarding such claims; c) Purchaser will provide Nortel with reasonable assistance and authority in connection with such claims. 3.7 LIMITATION OF NORTEL'S INDEMNIFICATION. Notwithstanding anything to the contrary contained in this Agreement, Nortel shall not be liable under the indemnification provisions of this Agreement or otherwise have any liability for any misrepresentation or breach of warranty or covenant to the extent that such misrepresentation or breach of warranty or covenant by Nortel is disclosed in any due diligence materials requested by and delivered to Purchaser prior to Closing; provided, however, that any failure of Purchaser to discover such misrepresentation or breach of warranty or covenant is not caused by the willful misconduct of Nortel. 13 17 ARTICLE 4 PURCHASER'S REPRESENTATIONS AND WARRANTIES 4.1 REPRESENTATIONS AND WARRANTIES. Purchaser hereby represents and warrants to Nortel, as warranties and representations that are true at the date hereof and at the Time of Closing as if such warranties and representations were made at such time, that: a) Purchaser is a corporation duly organized and validly existing 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. Purchaser 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, prospects or condition (financial or otherwise) of Purchaser, taken as a whole. Except as disclosed in Purchaser's filings with the United States Securities and Exchange Commission, Purchaser has no subsidiaries; b) Purchaser has all requisite corporate power and authority (i) to execute, deliver and perform its obligations under this Agreement, the Transaction Agreements and the Warrants 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 proceedings or corporate action on the part of Purchaser, its officers, directors and shareholders required and necessary for the authorization, execution and delivery of this Agreement, the Transaction Agreements and the Warrants and the performance of all obligations of Purchaser hereunder and thereunder has been taken or will be taken prior to the Closing, and each of this Agreement, the Transaction Agreements and the Warrants constitutes valid and legally binding obligations of Purchaser, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditor's rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies; c) the execution and delivery of this Agreement, the Transaction Agreements, and the Warrants by Purchaser and the consummation of the transactions contemplated herein and therein provided for will not, with or without the giving of notice or passage of time, or both, violate, nor be in conflict with, nor result in a breach or violation of any of the provisions of, or constitute default under, or cause the acceleration of any obligation of Purchaser under the provisions of any agreement or instrument to which Purchaser is a party or by which Purchaser is bound, or any judgment, decree, order or award of any court, governmental body or arbitrator having jurisdiction over 14 18 Purchaser, any applicable statute, ordinance, regulation or rule, or any provision of Purchaser's by-laws, or resolutions or articles of the board of directors or shareholders of Purchaser; d) as of the date of this Agreement, Purchaser is able to pay the cash portion of the Purchase Price in cash; e) all shares of Purchaser Common Stock to be issued to Nortel in partial payment of the Purchase Price, if any, and the Warrants shall be issued in a private transaction under the terms and conditions of the Stock and Warrant Purchase Agreement and Nortel's rights thereunder shall be governed by the terms and conditions of the Stock and Warrant Purchase Agreement; f) the financial statements of Purchaser present fairly the assets and liabilities of Purchaser and its financial condition as of the dates of such financial statements and fairly present the results of operations of Purchaser for the periods reflected in the financial statements in accordance with generally accepted accounting principles consistently applied (except as may be indicated in the notes thereto and subject to normal year-end adjustments in the case of any interim financial statements); and g) Purchaser is an American-controlled entity within the meaning and for the purposes of the Investment Canada Act, and will give notice of its acquisition of the Purchased Assets to Investment Canada in accordance with that Act. 4.2 NORTEL'S SOLE REMEDY. NORTEL'S SOLE REMEDY FOR BREACH OF THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 4 SHALL BE LIMITED TO THE INDEMNITY SET OUT IN SECTION 4.4. 4.3 SURVIVAL OF PURCHASER'S REPRESENTATIONS AND COVENANTS. Each representation, warranty, covenant and agreement of Purchaser contained herein shall survive the execution and delivery of this Agreement and the Closing, and shall expire * after the Closing Date unless, on or before such expiry date, Nortel has delivered to Purchaser written notice of a claim relating to such representation, warranty, covenant or agreement. 4.4 PURCHASER'S LIABILITY. Subject to Section 4.3 and except as otherwise expressly provided for in this Agreement, Purchaser shall be liable to Nortel for, and shall indemnify and save harmless Nortel from and against all Losses sustained or incurred by Nortel which arise out of, are based on, or are the result of: a) any misrepresentation or breach of representation, breach of warranty, nonfulfillment of covenant or agreement made by Purchaser herein or in any certificate or other document delivered by or on behalf of Purchaser pursuant hereto; or b) any failure of Purchaser to comply with, or any breach by Purchaser of, any of the covenants or agreements in this Agreement to be performed by Purchaser; or c) Purchaser's performance or non-performance of the Assumed Liabilities; * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 15 19 excepting in each case any Losses to the extent that the same are caused by the negligence or willful misconduct of Nortel. No claim shall be made by Nortel hereunder unless written notice of such claim is delivered to Purchaser within the time stipulated in Section 4.3 and such claim, together with any prior claims by Nortel, exceeds *. In no event shall Purchaser's cumulative liability under this Section 4.4 exceed *. 4.5 CONDITIONS FOR INDEMNIFICATION. The indemnity contained in Section 4.4 shall apply only where the following conditions are satisfied: a) Purchaser shall have sole conduct of all proceedings and negotiations connected with such claims; b) Nortel (i) will promptly notify Purchaser within twenty (20) calendar days of its receipt of a written notice of any such claims, (ii) will furnish Purchaser within thirty (30) calendar days of its receipt of such notice with copies of any pleadings, correspondence or other documents relating to such claims that are in Nortel's possession, and (iii) will not make any admissions regarding such claims; c) Nortel will provide Purchaser with reasonable assistance and authority in connection with such claims. ARTICLE 5 CONDITIONS TO CLOSING 5.1 CONDITIONS FOR PURCHASER'S BENEFIT. The obligations of Purchaser under this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions (each of which is for the exclusive benefit of Purchaser and may be waived in writing by Purchaser): a) all actions on the part of Nortel necessary to authorize the execution, delivery and performance of this Agreement and the other agreements provided for herein, and the consummation of the transactions contemplated herein and therein, shall have been duly and validly taken by Nortel; b) all of Nortel's representations and warranties contained in this Agreement and in the Transaction Agreements shall be true in all material respects at and as of the Time of Closing and Nortel shall have performed and satisfied in all respects all covenants and agreements required by this Agreement to be performed and satisfied by Nortel at or prior to the Closing; c) Nortel shall have executed and delivered to Purchaser the Stock and Warrant Purchase Agreement; d) Nortel shall have executed and delivered to Purchaser the Registration Rights Agreement; * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 16 20 e) Nortel shall have executed and delivered to Purchaser the Services Agreement; and f) Nortel shall have executed and delivered to Purchaser the License Agreement. 5.2 CONDITIONS FOR NORTEL'S BENEFIT. The obligations of Nortel under this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions (each of which is for the exclusive benefit of Nortel and may be waived in writing by Nortel): a) all actions on the part of Purchaser necessary to authorize the execution, delivery and performance of this Agreement and the other agreements provided for herein, and the consummation of the transactions contemplated herein and therein, shall have been duly and validly taken by Purchaser; b) all representations and warranties of Purchaser contained in this Agreement and in the Transaction Agreements shall be true in all material respects at and as of the Time of Closing and Purchaser shall have performed and satisfied in all respects all covenants and agreements required by this Agreement to be performed and satisfied by Purchaser at or prior to the Closing; c) Purchaser shall have executed and delivered to Nortel the Stock and Warrant Purchase Agreement; d) Purchaser shall have executed and delivered to Nortel the Registration Rights Agreement; e) Purchaser shall have executed and delivered to Nortel the Services Agreement; f) Purchaser shall have executed and delivered to Nortel the License Agreement. 5.3 NON-FULFILLMENT OF CONDITIONS. If any of the conditions referred to in Sections 5.1 or 5.2 shall not be fully satisfied at or before the Closing, then the party for whose benefit such condition has been included in this Agreement may, at its option, either: a) complete the transactions contemplated by this Agreement, in which event such party shall be deemed to have waived such condition; or b) elect not to complete the transactions contemplated by this Agreement. 5.4 NO PREJUDICE TO OTHER RIGHTS. No waiver by either party of the conditions set forth in Sections 5.1 or 5.2 in whole or in part shall in any way prejudice +or limit the rights and remedies of either party to claim or recover damages and compensation from the other party in respect of any inaccuracy in any representation or warranty that is not the subject of the waiver, or in respect of any breach or non-performance of any covenant or agreement of the other party contained in this Agreement that is not the subject of such waiver. No election by either party not to complete the transactions contemplated by this Agreement as a result of any breach or non-performance by the other party of any covenant or agreement contained in this Agreement, which breach or non-performance has resulted in a condition set forth in 17 21 in Sections 5.1 or 5.2 failing to be satisfied at or before the Closing, shall in any way prejudice or limit the rights of the party electing not to complete in respect of such breach or non-performance by the other party. ARTICLE 6 CLOSING 6.1 TIME AND PLACE OF CLOSING. The Closing shall take place by way of courier or facsimile transmission commencing at 10:00 a.m. San Diego, California time, on the 27th day of June, 1997, or by such other manner at such other time as the parties may agree. 6.2 NORTEL'S OBLIGATIONS ON CLOSING. At the Closing, Nortel shall deliver to Purchaser: a) a bill of sale in respect of the Purchased Assets, in the form attached hereto as Schedule K; b) a copy of the Stock and Warrant Purchase Agreement, executed on behalf of Nortel; c) a copy of the Registration Rights Agreement, executed on behalf of Nortel; d) a copy of the License Agreement, executed on behalf of Nortel; e) a copy of the Services Agreement, executed on behalf of Nortel; f) the prescribed form electing to have Section 167 of the Excise Tax Act (Canada) apply to the transfer of the Purchased Assets, duly executed by each of Nortel and ADA; and g) such other closing certificates as may be reasonably requested by Purchaser. 6.3 PURCHASER'S OBLIGATIONS ON CLOSING. At the Closing, Purchaser shall deliver to Nortel: a) certified cheques or bank drafts payable to "Northern Telecom Limited" in the amount of US One Million Dollars (US$1,000,000) and any applicable taxes; b) the Warrants in the name of "Northern Telecom Limited"; c) a certified copy of a resolution of the Boards of Directors of Purchaser and ADA, if applicable, authorizing the purchase of the Purchased Assets and the execution and delivery of this Agreement and all agreements contemplated under this Agreement; d) a copy of the Stock and Warrant Purchase Agreement, executed on behalf of Purchaser; e) a copy of the Registration Rights Agreement, executed on behalf of Purchaser; f) a copy of the License Agreement, executed on behalf of Purchaser; g) a copy of the Services Agreement, executed on behalf of Purchaser; 18 22 h) the prescribed form electing to have Section 167 of the Excise Tax Act (Canada) apply to the transfer of the Purchased Assets, executed on behalf of Purchaser; and i) such other closing certificates as may be reasonably requested by Nortel. ARTICLE 7 POST-CLOSING MATTERS 7.1 NORTEL TO PROVIDE ACCESS AND FACILITIES. After the Time of Closing and until such time as Purchaser can move the Purchased Assets to the Purchaser's premises, such move to be completed as soon as practicable but no later than December 31, 1997, or such earlier date of which Purchaser gives Nortel notice, Nortel shall provide access in accordance with the Transition Plan. 7.2 POST-CLOSING ACCESS TO BOOKS AND RECORDS. Purchaser and Nortel agree that, subsequent to the Closing Date, they will grant to each other and each other's agents reasonable access during normal business hours to any books and records then in their possession or in the possession of their respective affiliates solely to the extent of information contained in such books and records that relates to Nortel's operation of the DSS II Business prior to the Closing Date and is shown to be needed for tax, accounting, operations or other reasonable business purposes. 7.3 ACCOUNTS RECEIVABLE. Purchaser shall provide all reasonable assistance to Nortel with respect to the collection from Customers by Nortel of any accounts receivable which relate to the Purchased Assets and which accrued prior to the Closing. If Purchaser receives payment of any such accounts receivable, such payment shall be received in trust for Nortel and shall forthwith be paid by Purchaser to Nortel. Purchaser shall provide Nortel with reasonable details of any payment received by Purchaser and paid over to Nortel pursuant to this Section, and, if requested by Nortel, a full accounting of all such payments received by Purchaser. ARTICLE 8 CONFIDENTIAL INFORMATION 8.1 CONFIDENTIALITY. Except as required by law, all information provided to Purchaser in contemplation of and pursuant to this Agreement and the terms and conditions of this Agreement shall be kept confidential by Purchaser in accordance with the terms of the Non-Disclosure Agreement dated January 8, 1997 between Nortel and Purchaser. 8.2 PUBLICITY. No party to this Agreement shall make any public disclosure or publicity release or disclose the existence of or the terms and conditions of this Agreement to any other person without the prior written consent of the other party, except 19 23 that either party may disclose the existence of this agreement to: (i) its agents, representatives or others who will assist such party in conducting, evaluating or facilitating each party's due diligence review; (ii) its lenders or investors; and (iii) governmental agencies, where counsel deem such disclosure necessary to comply with applicable laws; provided that the foregoing shall not be deemed to prevent either Nortel or Purchaser from making any public announcement which may be required by the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder or the rules and regulations of any securities exchange upon which the securities of Nortel or Purchaser are traded. ARTICLE 9 GENERAL PROVISIONS 9.1 ASSIGNMENT. Purchaser may assign all or any part of this Agreement to (i) an Affiliate, (ii) a non-Affiliate third party in connection with any merger or acquisition activity to which Purchaser is a party and (iii) a non-Affiliate third party subcontractor; provided, however, that Purchaser cannot make such subcontractor assignment without the prior written consent of Nortel and unless the duties assigned to such subcontractor will be performed under the management and direction of Purchaser, and Purchaser shall remain liable for the performance and obligations of such subcontractor assignee. 9.2 COUNTERPARTS; FACSIMILE. This Agreement may be executed in counterparts with the same effect as if both parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. This Agreement may be executed by the parties and transmitted by facsimile transmission and if so executed and transmitted, this Agreement shall be for all purposes as effective as if the parties had delivered an executed original Agreement. 9.3 CONFLICT IN TERMS. Wherever any provision of any Schedule to this Agreement conflicts with any provision in the body of this Agreement, the provisions of the body of this Agreement shall prevail. All documents executed and delivered pursuant to this Agreement are subordinate to the provisions of this Agreement and, except as otherwise expressly provided, the provisions of this Agreement shall govern and prevail in the event of a conflict between the provisions of any such document and the provisions of this Agreement. 9.4 COSTS AND EXPENSES. Each party shall be responsible for and shall pay its own costs and expenses incidental to the preparation of and carrying out of this Agreement and the documents and agreements contemplated hereunder. 9.5 ENTIRE AGREEMENT. This Agreement, including the Schedules thereto, states and comprises the entire agreement between the parties and shall supersede and replace any and all prior agreements between the parties and may be amended only by written instrument signed by both parties. 20 24 9.6 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission to any broker, finder or any other third party in connection with this transaction. Each party agrees to indemnify and hold harmless the other from any liability for any commission or compensation in the nature of a finder's 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. 9.7 FURTHER ASSURANCES. At Closing and thereafter as may be necessary or desirable, and without further consideration, each of the parties shall execute, acknowledge and deliver such other documents, including, without limitation, assignments of the DSS II Products included in the Purchased Assets and shall take or refrain from taking such action as the other party may reasonably require to evidence, carry out and give full effect to the terms, conditions, intent and meaning of this Agreement and to assure the completion of the transactions contemplated hereby. 9.8 GOVERNING LAW. This Agreement shall governed by and construed in accordance with the laws of the Province of British Columbia, Canada and the courts of the Province of British Columbia and appellate courts therefrom shall have non-exclusive jurisdiction to determine all matters in dispute hereunder and the parties hereby attorn to the non-exclusive jurisdiction of such courts. 9.9 NOTICE. Any notice, direction or other instrument required or permitted to be given hereunder shall be in writing and may be given by facsimile transmission or by delivery, addressed as follows: To Nortel: Northern Telecom Limited 8200 Dixie Road, Suite 100 Brampton, Ontario L6T 5P6 Attention: ________________, _________ Telephone No.:(___) ___-____ Facsimile No.:(___) ___-____ With a copy to: Office of General Counsel 21 25 To Purchaser: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California U.S.A. 92121 Attention: President Telephone No.:(619) 623-2200 Facsimile No.:(619) 623-2208 With a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, California U.S.A. 92101 Attention: Faye H. Russell, Esq. Telephone No.:(619) 234-1966 Facsimile No.:(619) 234-3948 Either of the parties may from time to time change its address for service herein by giving written notice to the other party. Any notice may be served by personal service upon a party or by facsimile to the number for notice hereunder. Any notice given by service upon a party and any notice given by facsimile shall respectively be deemed to be given to and received by the addressee on the day (except Saturdays, Sundays, and statutory holidays) of service or the day of receipt. 9.10 NO CONSEQUENTIAL LOSSES. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY IN CONTRACT OR IN TORT OR UNDER ANY OTHER LEGAL THEORY FOR DAMAGES FOR LOST PROFITS, LOST SAVINGS, OR INCIDENTAL, INDIRECT, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTION DOCUMENTS OR THE LICENSE AGREEMENT, EVEN IF CAUSED BY SUCH PARTY'S NEGLIGENCE AND EVEN IF SUCH PARTY HAS KNOWLEDGE OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE. 9.11 NO WAIVER. No failure on the part of either party to exercise any right or remedy in respect of this Agreement shall operate as a waiver thereof, unless it is in writing and signed by such party. Unless expressly provided for therein, such waiver shall not limit or affect the rights of the party with respect to any other or subsequent breach of the same or any other provision. No single or partial exercise of any right or remedy in respect of this Agreement shall preclude any other or further exercise thereof or the exercise of any right or remedy at law or in equity or by statute or otherwise conferred. 22 26 9.12 SEVERABILITY. In the event that any particular provision or provisions of this Agreement is or are determined to be invalid, illegal or unenforceable in any respect, then the particular provision or provisions shall be deemed to be severed from the remainder of this Agreement and the validity, legality or enforceability of the remaining provisions contained in this Agreement shall not in any way be affected or impaired, unless as a result of any such determination this Agreement would fail in its essential purpose. 23 27 IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written. APPLIED DIGITAL ACCESS, INC. by its authorized signatory: Per: -------------------------------- Name: Title: NORTHERN TELECOM LIMITED by its authorized signatory: Per: -------------------------------- Name: Title: Per: -------------------------------- Name: Title: [SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT] 24 EX-10.1 3 EXHIBIT 10.1 1 EXHIBIT 10.1 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. CONFIDENTIAL TREATMENT REQUESTED LICENSE AGREEMENT This License Agreement (the "Agreement") is made and entered into as of the 27th day of June, 1997 (the "Effective Date"). BY AND BETWEEN: NORTHERN TELECOM LIMITED, a corporation 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 ("Nortel") AND: APPLIED DIGITAL ACCESS, INC., a corporation incorporated under the laws of California and having an office at 9855 Scranton Road, San Diego, California, U.S.A. 92121 ("Licensee") WHEREAS Nortel designs (or causes to be designed), produces and markets DSS II Products and is in possession of certain proprietary rights in the technology related to such products (the "DSS II Technology"); and WHEREAS Licensee wishes to use, design, produce, market, sublicense, distribute and support DSS II Products and certain products or software programs based upon DSS II Technology; and WHEREAS Nortel and Licensee have entered into a Letter of Intent pursuant to which Licensee has expressed an interest in purchasing certain assets and obtaining licenses in respect of the DSS II Technology; and WHEREAS Licensee wishes to buy, and Nortel wishes to sell certain portions of the DSS II Business as set out in the Asset Purchase Agreement; and WHEREAS Nortel is willing to grant licenses in respect of the DSS II Technology subject to certain obligations, as set forth in this Agreement, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged by each of Nortel and Licensee, and Licensee wishes to obtain such rights and undertake such obligations. NOW THEREFORE in consideration of the mutual promises set forth in this Agreement and the Asset Purchase Agreement, and other good and valuable consideration, the receipt 2 and adequacy of which is hereby acknowledged by each of Nortel and Licensee, the Parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 As used in this Agreement: (a) "Affiliate" means any corporation or company which Nortel or Licensee effectively owns or controls, directly or indirectly, other than a Subsidiary, through the ownership or control of shares in such corporation or company; (b) "Agreement" has the meaning specified in the preamble; (c) "Asset Purchase Agreement" means the agreement between Nortel and Licensee, executed on even date to this Agreement, concerning the sale of the DSS II Business; (d) "Confidential Information" means any proprietary, scientific, technical, planning, business, marketing, product or financial information (including DSS II Information), formulas, patterns, compilations, programs, devices, methods, techniques, processes, data, trade secrets or know-how ("Information") of one of the Parties or its Subsidiaries or Affiliates which is designated as confidential or similar designation at the time of disclosure or that would be understood by the Party receiving such Information at the time of disclosure, exercising reasonable business judgment, to be confidential; (e) "Contractor" means a third party (including any subcontractors of such third-party) contracted by a Party or a by a Subsidiary or Affiliate of a Party to support or develop or assist in supporting or developing a Nortel Authorized Product or a Licensee Product; (f) "Customers" means all DSS II Business' customers as of the Effective Date, with the exception of the Excluded Customers; (g) "Derivative Works" means: (i) for material subject to copyright, integrated circuit topography, or mask work protection, any work which is based upon the DSS II Software or the DSS II Information, such as a revision, modification, translation, abridgment, condensation, expansion, collection, compilation or any other form in which such pre-existing works may be recast, transformed or adapted, (ii) for patentable or patented materials, any adaptation, subset, addition, improvement or combination of the DSS II 2 3 Software or the DSS II Information, and (iii) for material subject to trade secret protection, any new material, information or data relating to and derived from the DSS II Software or the DSS II Information, including new material which may be protectable by copyright, patent or other proprietary rights, and with respect to each of the above, the preparation, use and/or distribution of which, in the absence of this Agreement or other authorization from the owner, would constitute infringement or misappropriation under applicable law; (h) "Distributor" means a third party which enters into a distribution agreement with a Party, or a Subsidiary or Affiliate of a Party, or another Distributor, to license or distribute Licensed Products or Nortel Authorized Products, as the case may be; (i) "DSS II Business" means the business unit of Nortel that designs, develops, markets and licenses the DSS II Products; (j) "DSS II Intellectual Property" means any Nortel invention, patent, utility model, copyright, industrial design, mask work or integrated circuit topography right, or any Nortel right of whatsoever nature in processes, techniques, improvements, modifications, computer software and data, Confidential Information, trade secrets or know-how, or any intangible right or privilege of a nature similar to any of the foregoing which is incorporated in or infringed by the DSS II Software or the DSS II Information; (k) "DSS II Products" means the DSS II products (including DSS II Software and DSS II Information) which are comprised of software proprietary to BC TEL, Microtel Limited and Nortel; (l) "DSS II Information" means all design documentation, customer product documentation (including training and operations), installation and maintenance documentation, marketing materials developed for general use, test specifications, Nortel proprietary utilities and tools, command files for software development and testing, and everything currently used by Nortel as of the Effective Date to develop, modify, enhance and support the DSS II Products to the extent available in accordance with Articles 3 and 4 hereof; (m) "DSS II Software" means all of the source code, object code and machine code for the DSS II Products as of the Effective Date as described in Schedule "A" attached hereto; 3 4 (n) "Effective Date" means the date set out in the preamble of this Agreement; (o) "End User" means a third party or parties licensed to use a Licensed Product or a Nortel Authorized Product; (p) "Enhancement" means any minor extensions of the features and/or capabilities which are contained in the Licensed Materials as they exist as of the Effective Date of this Agreement; (q) "Excluded Customers" means the customers (including subsidiaries and affiliates thereof) listed in Schedule "C" attached hereto; (r) "Joint Venture" means a cooperative business enterprise formed between Nortel and one or more other autonomous entities to address more effectively certain mutual business interests and opportunities; (s) "Licensed Materials" means the DSS II Software and DSS II Information; (t) "Licensed Products" means the DSS II Software in source or object code form, the DSS II Information, and any Derivative Works of the DSS II Software and the DSS II Information developed by or on behalf of Licensee (including Modifications and Enhancements); (u) "Manufacturing Licensee" means a third party entity which has entered into an agreement with Nortel to manufacture, in modified or unmodified form, Nortel products and directly or indirectly through Distributors, to sublicense and distribute Nortel products under the brand name of Nortel or the Manufacturing Licensee; (v) "Modifications" means any minor changes such as, but not limited to, bug fixes, to the features and/or capabilities of the Licensed Materials as they exist as of the Effective Date of this Agreement; (w) "Network Bid" means any Nortel bid or sale (including bids or sales under multiple invoices) in which Nortel contracts with a third party to sell or license equipment which consists primarily of Nortel manufactured and/or designed products, and, which may include OEM products or other non-Nortel products or any combination thereof, and which also includes Nortel Authorized Products, provided that such Nortel Authorized Products are used to provide network management services for the OEM products or other non-Nortel products in the bid or sale, and further provided that all of the equipment in the bid or sale can be reasonably construed as representing either a new and/or significant extension of a communications 4 5 network. Such a network can consist of hardware and/or software configured in a manner as defined by either the customer or Nortel. A bid or sale in which Nortel Authorized Products are considered the primary element of the transaction and/or is the primary basis for the transaction will not be considered a Network Bid; (x) "Nortel Authorized Products" means the DSS II Software in source or object code form, the DSS II Information, and any Derivative Works of the DSS II Software and the DSS II Information developed by or on behalf of Nortel Companies (including Modifications and Enhancements); (y) "Nortel Companies" means Northern Telecom Limited and its Subsidiaries, Affiliates, Joint Ventures and Manufacturing Licensees; (z) "Nortel Company" means one of the Nortel Companies; (aa) "Party" means Nortel or Licensee; (bb) "Parties" means Nortel and Licensee; (cc) "Purchase Price" has the meaning ascribed to that term in the Asset Purchase Agreement; (dd) "Sublicense Agreement" means an agreement containing terms and conditions which are the same as, or substantially similar to, the terms and conditions contained in Schedule B; (ee) "Subsidiary" means 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 2.1 Nortel, to the extent of its legal right to do so, hereby grants to Licensee (including its Subsidiaries and Affiliates, successors and assigns), subject to the terms and conditions of this Agreement a perpetual, irrevocable, worldwide, fully paid-up, transferable and assignable: (a) exclusive license to: 5 6 (i) use, copy, modify, have modified, and translate, directly and indirectly, Licensed Products, including the right to sublicense such rights to End Users at ADA's sole discretion (provided that such sublicenses include usage and confidentiality provisions at least as strict as those imposed upon Licensee in this Agreement); (ii) sublicense End Users (directly or indirectly), pursuant to Sublicense Agreements, the right to use Licensed Products in object code format only; (iii) distribute (including through multiple layers of distribution) Licensed Products; and (iv) maintain, support and provide services, directly and indirectly, in respect of Licensed Products; (b) non-exclusive right under the DSS II Intellectual Property to the extent necessary for Licensee and its sublicensees to exercise the rights granted in 2.1(a). The rights granted to Licensee in this section shall be non-exclusive with respect to, (i) * and * and its existing and future sublicensees in * and * only, (ii) the rights granted to * and * under the license to Prism Systems, Inc. and under a source code escrow agreement, and, (iii) any rights granted by Nortel (including its Subsidiaries, Affiliates, Manufacturing Licensees and Joint Ventures) to existing Customers in accordance with its usual terms prior to the Effective Date. Licensee is granted no rights in respect of the Licensed Materials for *. Licensee acknowledges that * has exclusive rights in respect of the Licensed Materials for *. 2.2 Nortel shall retain, and Licensee's licenses shall be subject to, only the following rights: (a) Nortel Companies shall have the right to license, distribute (including through multiple layers of distribution) Nortel Authorized Products, and provide services in respect of such Nortel Authorized Products, to Excluded Customers. Licensee shall have no right to license or distribute Licensed Products, or provide services in respect of Licensed Products, to Excluded Customers without the prior written consent of an officer of Nortel at the senior vice president level or higher; (b) Nortel Companies shall have the right to license and distribute (including through multiple layers of distribution) Nortel Authorized Products in Network Bids. Nortel Companies shall also have the right to provide * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 6 7 services in respect of any Nortel Authorized Products licensed or distributed pursuant to any such Network Bids. Nortel shall not license or distribute Nortel Authorized Products on a stand-alone basis with the exception of the Excluded Customers as defined in this Agreement; (c) For a period of * months following the Effective Date, Nortel shall have the * to the DSS II Product * set out in Schedule E (including subsidiaries and affiliates *), only upon *, a *. Nortel shall only be entitled * in the event that Nortel, in its reasonable judgment, determines * would materially adversely affect * or result in a * or * to Nortel, and further provided that * is based solely upon * and is not based upon a * provided that * was willing * with such * on * which would be considered reasonable having regard to standard industry practice. Except in accordance with a * under this provision, Nortel shall not * this provision. Licensee acknowledges that Nortel has *, or will be * an * and its subsidiaries and affiliates *. In the event that * with * is not * prior to the Effective Date, Nortel shall have the right * after the Effective Date. Such * shall be in a * to the * between * prior to the Effective Date; (d) Nortel Companies shall have the right to license, distribute (including through multiple layers of distribution) and provide services in respect of Nortel products (other than Nortel Authorized Products) which incorporate insignificant portions of the Licensed Materials; (e) Nortel Companies shall have the right to use, modify, have modified, license and distribute (including through multiple layers of distribution) and provide services in respect of the Licensed Materials provided that any such use is in a Nortel product that is not competitive or in competition with the Licensed Products; and (f) Nortel Companies shall have the right to use, modify, have modified, license and distribute (including through multiple layers of distribution) and provide services in respect of the Licensed Materials provided that such use is for a purpose or purposes other than for providing network management software or services. Nortel shall have the right to use, modify, have modified the Licensed Materials as may be necessary for Nortel to exercise its rights under the exceptions described above. Nortel shall not license, sublicense, use or provide services or support in respect of the Licensed Materials other than as set forth in this Section 2.2, except pursuant to a license obtained from Licensee or by other written agreement between the Parties. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 7 8 2.3 In the event that Licensee does not wish to license, distribute or provide services in respect of Licensed Products to a given customer, Nortel and Licensee shall negotiate in good faith the terms and conditions under which Nortel may license, distribute and/or provide services in respect of Licensed Products to any such customer. Such terms and conditions shall include a reasonable royalty to be paid to Licensee for such Licensed Products. In the event that Nortel licenses, distributes or provides services in respect of Licensed Products to such a customer, Nortel shall have the right to modify such Licensed Products as necessary to meet such customer's requirements. The provisions of this Section 2.3 shall not in any way restrict Nortel's right to license, distribute or provide support in respect of Nortel Authorized Products pursuant to Network Bids as provided in Section 2.2(b). 2.4.1 Licensee may provide Licensed Products and Licensed Materials (including Modifications and Enhancements) to Contractors to assist in the development or support of Licensed Products. Prior to, or at the time of providing the Licensed Materials or Licensed Products to a Contractor, Licensee shall enter into a written agreement with the Contractor which requires that: (a) the Contractor use the Licensed Materials and Licensed Products exclusively for the benefit of Licensee; (b) the Contractor incur the same obligations with respect to the use of Licensed Materials and Licensed Products as those incurred by Licensee under this Agreement; and (c) all copies of the Licensed Materials and Licensed Products provided to or made by the Contractor be returned to Licensee or destroyed, including all copies stored in computer memories or storage media, upon completion of its work for Licensee. 2.4.2 Nortel may provide the Licensed Materials and Nortel Authorized Products (including Modifications and Enhancements) to Contractors to assist in the development or support of Nortel Authorized Products. Prior to, or at the time of providing the Licensed Materials or Nortel Authorized Products to a Contractor, Nortel shall enter into a written agreement with the Contractor which requires that: (a) the Contractor use the Licensed Materials and Nortel Authorized Products exclusively for the benefit of Nortel; (b) the Contractor incur the same obligations with respect to the use of Licensed Materials and Nortel Authorized Products as those incurred by Nortel under this Agreement; and 8 9 (c) all copies of the Licensed Materials and Nortel Authorized Products provided to or made by the Contractor be returned to Nortel or destroyed, including all copies stored in computer memories or storage media, upon completion of its work for Nortel. 2.5 The aforesaid rights shall include the right to communicate to End Users such portions of the DSS II Information as are reasonably needed by such End Users to use the Licensed Products or Nortel Authorized Products, provided, however, that, to the extent that Confidential Information of either Party is being communicated, the recipients of such Confidential Information shall be advised by the disclosing Party in writing at the time, or before such communication, that Confidential Information is being communicated and further provided that such recipients undertake, in writing, to keep such Confidential Information confidential and not to use such Confidential Information except as expressly permitted. 2.6 Licensee shall have no right to use the Licensed Materials or DSS II Intellectual Property other than as set forth in this Agreement. Nothing herein shall limit Nortel's right to grant licenses 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 Nortel's patent cross licenses or any other rights granted prior to the Effective Date. Nothing in this Agreement shall preclude Nortel from independently developing software with functionality which is the same as or similar to that in the Licensed Materials or the Licensed Products, provided that none of the Licensed Materials or Licensed Products are directly incorporated into such software. 2.7 Licensee grants to Nortel Companies a perpetual, non-exclusive, royalty-free, worldwide right to make, use, copy, modify, license, distribute (including through multiple layers of distribution) and provide support in respect of all Modifications and Enhancements which Licensee may develop or have developed during the term of this Agreement in connection with the Licensed Materials. Nortel grants to Licensee and its Subsidiaries and Affiliates a perpetual, non-exclusive, royalty-free, worldwide right to make, use, copy, modify, license, distribute (including through multiple layers of distribution), and provide support in respect of all Modifications and Enhancements which Nortel may develop or have developed during the term of this Agreement in connection with the Licensed Materials. All Enhancements and Modifications shall be provided on an "AS IS" basis without any representations, warranties or conditions. 2.8 Within thirty (30) days of the end of each calendar quarter, each of Nortel and Licensee shall provide the other with a copy of all Modifications and Enhancements developed during such preceding quarter together with all applicable documentation, or, if applicable, written notice that no new Modifications and Enhancements have been developed during such preceding quarter. 9 10 2.9 The parties may, from time to time, upon mutual agreement, amend Schedule C to add additional entities. Nortel in its sole discretion, upon notice to Licensee, may delete an entity or entities from Schedule C. ARTICLE 3 THIRD PARTY SOFTWARE 3.1 Licensee acknowledges that the Licensed Materials contain certain third-party software as further described in Schedule "D". Licensee further acknowledges that Nortel does not have the right to grant sublicenses to such third-party software. Licensee shall, prior to use of the Licensed Materials in any manner, obtain the necessary licenses from the vendors of such third-party software. ARTICLE 4 PROVISION OF LICENSED MATERIALS 4.1 Nortel shall, to the extent of its legal right to do so, promptly provide to Licensee the Licensed Materials. Nortel shall only be obliged to provide Licensed Materials available to it or its Subsidiaries without any third-party restrictions on transfer, and shall not be obligated to develop or produce, except as expressly set forth herein, any new or unavailable Licensed Materials. 4.2 Nortel shall supply the Licensed Materials as soon as reasonably possible after: (a) execution of this Agreement, and (b) receipt from Licensee of the initial payment as set forth in the Asset Purchase Agreement. Nortel shall substantially complete such supply within thirty (30) days thereafter. 4.3 Licensed Materials provided hereunder shall be deemed delivered upon delivery to the common carrier chosen by Nortel, at the relevant facility of Nortel or upon sending by Nortel if such Licensed Materials are delivered by electronic means. 4.4 That portion of the Licensed Materials provided by Nortel to Licensee pursuant to any prior licenses, confidentiality or non-disclosure agreements shall be considered provided pursuant solely to this Agreement and subject only to the terms and conditions hereof. ARTICLE 5 TECHNICAL ASSISTANCE OBLIGATIONS 10 11 5.1 Licensee shall perform all technical assistance or support obligations for Customers of the DSS II Business as of the Effective Date. Failure of Licensee to perform all such technical assistance or support obligations shall constitute a material breach of this Agreement. 5.2 Licensee shall offer to license any of its Licensed Products and to provide services (including technical support and assistance) in respect of such Licensed Products to all Customers of the DSS II Business as of the Effective Date. Failure of Licensee to offer such Licensed Products or services to any such Customers shall constitute a material breach of this Agreement. ARTICLE 6 ESCROW 6.1 Licensee shall be entitled to place the Licensed Materials and Licensed Products in escrow with an escrow agent for the benefit of End Users. 6.2 In the event that Licensee: (i) becomes insolvent or files an assignment in bankruptcy or fails to have dismissed any petition seeking to have it declared bankrupt within thirty (30) days after the filing thereof, or (ii) after using its best efforts to support Licensed Products, ceases all support of Licensed Products, Licensee shall be entitled to grant an End User, pursuant to an escrow agreement, the right to have access to the Licensed Materials and Licensed Products in source code form, solely for internal use to support Licensed Products sublicensed to such End User. ARTICLE 7 CONFIDENTIALITY 7.1 Any Confidential Information (including "DSS II Information") provided by one Party to another hereunder shall remain the property of the disclosing Party, and the receiving Party shall be authorized to use such information or materials only within the scope of the rights and licenses granted herein. 7.2 Any Confidential Information received by a Party shall be retained in confidence and shall be used, disclosed, and copied solely for the purposes of, and in accordance with, this Agreement. The receiving Party shall use the same degree of care as it uses to protect 11 12 its own confidential information of a similar nature, but no less than reasonable care, to prevent the unauthorized use, disclosure or copying of the Confidential Information. 7.3 Neither Party shall be bound by obligations set forth in this Agreement, or any part thereof, restricting the disclosure, use or copying of Confidential Information, if such Confidential Information: (a) was known by the receiving Party prior to disclosure without obligation of confidence; (b) was lawfully in the public domain prior to its disclosure, or becomes publicly available other than through a breach of this Agreement; (c) was disclosed to the receiving Party by a third party provided such third party, or any other party from whom such third party received such information, is not in breach of any confidentiality obligation in respect of such information; (d) is independently developed by the receiving Party, as evidenced by its business records; or (e) is disclosed when such disclosure is compelled pursuant to legal, judicial, or administrative proceeding, or otherwise required by .5 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. 7.4 All technical and other information provided or made available to a Party prior to the execution of this Agreement which would have been covered by the definition of Confidential Information had it been delivered pursuant to this Agreement shall be deemed to be Confidential Information and to be subject to the provisions of this Agreement. 7.5 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. ARTICLE 8 REPRESENTATIONS 8.1 Nortel makes no representations and gives no warranties or conditions in respect of the Licensed Materials or Licensed Products except as set out in this Agreement. 12 13 8.2 Nortel represents and warrants that it has the authority to enter into this Agreement and has obtained all rights and waivers necessary to grant the rights granted hereunder. Nortel represents and warrants that the Licensed Materials (except those portions excluded under Article 3) do not infringe any third-party patent, copyright, Trade secret or other intellectual property right when used in accordance with this Agreement. 8.3 Nortel represents and warrants that there are no existing, or to Nortel's knowledge, threatened legal proceedings against Nortel in respect of its ownership or rights in the Licensed Materials. 8.4 Nortel represents and warrants that no substantial or significant portions of the Licensed Materials have been incorporated into other Nortel products after August 15, 1996. 8.5 Nothing contained in this Agreement shall be construed as: (a) requiring Nortel to file any patent application, to secure any patent or to maintain any patent in force; (b) constituting a warranty, condition or representation by Nortel as to the validity or scope of any patent licensed hereunder; (c) conferring any right to use, in advertising, publicity or otherwise, any name, trade-name or trademark, or any contraction, abbreviation or simulation thereof, except as expressly provided in writing by Nortel; or (d) conferring by implication, estoppel or otherwise upon Licensee any license or other right under any intellectual property, except the licenses and rights expressly granted hereunder. 8.6 NORTEL DISCLAIMS ALL WARRANTIES, CONDITIONS AND REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES AND CONDITIONS OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 8.7 LICENSEE'S SOLE REMEDY FOR BREACH OF THE REPRESENTATIONS, WARRANTIES AND CONDITIONS CONTAINED IN THIS ARTICLE SHALL BE LIMITED TO THE INDEMNITY SET OUT IN ARTICLE 9. ARTICLE 9 INDEMNIFICATION 13 14 9.1 Nortel shall indemnify, defend and hold Licensee harmless from any and all claims, liabilities, damages, settlements, losses, expenses or costs (including counsel fees) arising out of any breach of the representations, warranties or conditions described in Article 8, and any infringement or alleged infringement in any Licensed Materials. Licensee shall give Nortel prompt notice of, and reasonable authority to defend or settle, any such claim and shall give, at Nortel's expense, reasonable information and assistance. Nortel agrees not to take any action which is inconsistent with this agreement in the conduct or settlement of any action. 9.2 Nortel shall have no liability to Licensee in the event infringement of any third-party patent, copyright, trade secret or other intellectual property right arises from (a) portions of the Licensed Materials developed by Licensee (or any of its Subsidiaries or Affiliates) for Nortel under the Master Agreement between Northern Telecom Limited and ADA Canada, Inc. (this exclusion shall not, however, include work done by employees of Licensee operating under the direct management, direction and control of Nortel outside the scope of the Master Agreement), (b) modification by Licensee of the Licensed Materials, or (c) the combination of Licensed Materials with equipment or software not authorized or provided by Nortel or otherwise approved by Nortel in the specifications or documentation. 9.3 In no event shall Nortel's cumulative liability under this Article exceed *. Each of Nortel's representations, warranties and conditions in Article 8, and Nortel's obligation to indemnify Licensee pursuant to this Article 9, shall expire * after the Effective Date of this Agreement. Licensee may receive indemnification as provided herein provided that on or before such expiry date, Licensee has delivered to Nortel written notice of a claim relating to such representations, warranties, conditions or indemnification. 9.4 Subject to Sections 9.1 through 9.3, Licensee shall indemnify, defend and hold Nortel harmless from any and all claims, liabilities, damages, settlements, losses, expenses or costs (including counsel fees) arising out of any infringement or alleged infringement by any Licensed Materials or Licensed Products for which Nortel is not obliged to provide indemnification to Licensee. Nortel shall give Licensee prompt notice of, and authority to defend or settle, any such claim and shall give, at Licensee's expense, reasonable information and assistance. Licensee agrees not to take any action inconsistent with this Agreement in the conduct or settlement of any action. 9.5 Licensee shall indemnify, defend and hold Nortel harmless from any and all claims, liabilities, damages, settlements, losses, expenses or costs (including counsel fees) arising out of any malfunction, defect or error in any Licensed Materials or any Licensed Products or in any service provided by Licensee in respect of any Licensed Materials or Licensee Product. Nortel shall give Licensee prompt notice of, and authority to defend or settle, any such claim and shall give, at Licensee's expense, reasonable information and * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 14 15 assistance. Licensee agrees not to take any action inconsistent with this Agreement in the conduct or settlement of any action. 9.6 In the event that the acts of a third party infringe or might infringe intellectual property rights in the Licensed Materials, which infringement does or might affect any Licensee Product (an "Infringement"), Licensee may, after notice to Nortel of its intention, institute and prosecute any action or proceeding with respect to the Infringement at the cost of Licensee. 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 Licensed Products. Licensee agrees not to take any action inconsistent with this Agreement in the enforcement, conduct or settlement of any action. ARTICLE 10 LIMITATION OF LIABILITY 10.1 Except for (a) the indemnification provided in the article entitled "Indemnification" (and except as otherwise provided by any specific limitations set out in such section), (b) claims arising from a Party's breach of its confidentiality obligations set out in the Article entitled "Confidentiality", and (c) claims by or against a Party for bodily injury or tangible property damage caused by the fault of the other Party, no Party's cumulative liability for damages UNDER THIS AGREEMENT (WHETHER IN contract, tort, or any other theory of liability) shall exceed *. 10.2 EXCEPT WITH RESPECT TO 10.1(a) and 10.1(b), IN NO EVENT SHALL ANY PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION, LOST BUSINESS, LOST SAVINGS, LOST DATA, AND LOST PROFITS, EVEN IF THE BREACHING PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. ARTICLE 11 FORCE MAJEURE * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 15 16 11.1 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 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 12 TERM AND TERMINATION 12.1 This Agreement shall become effective on the Effective Date and shall continue in effect unless terminated as set out herein. 12.2 In the event any Party is in a curable material breach of, or fails to perform a material obligation under, this Agreement, then the other Party may by notice to the Party in default, require the breach to be cured or the obligation to be performed. If, within sixty (60) days of the receipt of such notice, such Party fails to undertake a reasonable course of action to cure such breach, or fails to perform such obligation, the notifying Party may, by notice, terminate this Agreement. 12.3 In the event that Licensee: (a) admits in writing its inability to pay its debts generally as they become due; (b) commits an act of bankruptcy; (c) is the subject of a petition or assignment in bankruptcy under applicable bankruptcy laws or other similar laws; (d) files a notice of intention to make a proposal under the Bankruptcy and Insolvency Act, commences proceedings under the Companies' Creditors Arrangement Act, or otherwise seeks a reorganization under applicable bankruptcy laws or any other similar law or statute of any relevant jurisdiction; (e) makes an assignment for the benefit of its creditors; (f) consents to the appointment of a receiver or receiver-manger of itself or of the whole or any substantial part of its property; 16 17 (g) enters into an arrangement or composition with or for the general benefit of its creditors; or (h) fails to satisfy any final judgment rendered against it within the period so permitted, Nortel may terminate this Agreement immediately upon notice. 12.4 Apart from those copies of the Licensed Materials necessary for Licensee to meet its support obligations to existing End Users at the time of termination, Licensee shall, within sixty (60) days of termination, return to Nortel or certify in writing to Nortel that all other copies of the Licensed Materials in the possession or control of Licensee have been destroyed. Except for Licensee's use which is strictly necessary for it to meet its support obligations to existing End Users at the time of termination, Licensee shall immediately discontinue the exercise of the rights granted hereunder and the use of the Licensed Materials. 12.5 In the event a Contractor, Distributor, Subsidiary or Affiliate of Licensee is in a curable material breach of, or fails to perform a material obligation under, its services, distribution or sublicense agreement, which results in a material contravention of the terms and conditions of this Agreement, Nortel may notify the breaching Contractor, Distributor, Subsidiary or Affiliate, and Licensee in writing of such contravention. If, within sixty (60) days of the receipt of such notice, such Contractor, Distributor, Subsidiary or Affiliate fails to undertake a reasonable course of action to cure such breach, or fails to perform such obligation, Licensee shall, by notice, terminate the rights related to this Agreement granted under the distribution or sublicense agreement. Within sixty (60) days of such termination, Licensee shall require the Contractor, Distributor, Subsidiary or Affiliate to discontinue use of, and either return to Licensee or destroy, any copies of the Licensed Materials in its possession, other than those copies necessary for such Distributor, Subsidiary or Affiliate to meet its support obligations to existing End Users. 12.6 All sublicenses of Licensed Products properly granted to End Users pursuant to this Agreement, whether granted by Licensee, its Distributors, Subsidiaries or Affiliates, shall survive termination of this Agreement. 12.7 In addition to this Article, the Articles entitled "Definitions", "Representations", "Limitation of Liability", "Indemnification" and "Confidentiality" shall survive termination of this Agreement. ARTICLE 13 NOTICES 17 18 13.1 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 or hand delivery to the other Party at the following address: If to Nortel: 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 and CEO 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 or hand delivery. 13.2 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. 13.3 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 PROVISIONS 14.1 Nothing in this Agreement shall be construed as establishing or implying any partnership or joint venture 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. 18 19 14.2 This Agreement and the AsseT Purchase Agreement set 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, including, but not limited to, the License Agreement executed between the Parties on July 15, 1996, and the Interim Licensed Agreement executed between the Parties on January 24, 1997. 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 representatives of the Parties. 14.3 Either Party may assign all or any portion of this Agreement without the other Party's consent. In no event shall either Party create any contractual relations between any third party and the other Party. 14.4 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. 14.5 Licensee represents and warrants that it will not, without the prior written consent, if required, of the U.S. Department of Commerce or its counterparts in nations other than the U.S., export, directly or indirectly, the Licensed Materials to any prohibited country specified in the applicable export administration regulations. 14.6 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. 14.7 Neither Party shall use the name of the other in any advertising, public relations or media release without the prior written consent of the other. 19 20 14.8 This Agreement shall be governed by and construed in accordance with the laws of the Province of British Columbia, Canada and the courts of the Province of British Columbia and appellate courts therefrom shall have non-exclusive jurisdiction to determine all matters in dispute hereunder. All proceedings shall be conducted in English. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date first above mentioned. NORTHERN TELECOM LIMITED APPLIED DIGITAL ACCESS, INC. - --------------------------------- ----------------------------------------- Authorized Signature Authorized Signature - --------------------------------- ----------------------------------------- Printed Name and Title Printed Name and Title - --------------------------------- ----------------------------------------- Authorized Signature Authorized Signature - --------------------------------- ----------------------------------------- Printed Name and Title Printed Name and Title 20 21 SCHEDULE "A" LICENSED MATERIALS DSS II Subsystems Subsystem Description - --------- ----------- ALS Alarm Surveillance APM Application Process Manager * * Interface 2 * * License* * Interface * Base for *Subsystem BSI Binary System Interface COM Communications CUE USer Interface for* * * Filter DAS Database Alignment System DBM Database Management Subsystem * * Interface DSS I/O Management System (otherwise referred to as 1MS) ELS Event Logging Subsystem EPM Network Performance Manager (otherwise referred to as EPM) ESI External System Interface * * Translator GEN Generic Network Element Manager * * Interface * * Custom Phase I (otherwise known as *) * * Interface NEM Network Element Manager * * Interface * * Interface OWS Operations Workstation System * * Server RTT Reach Through Tool SAM Service Availability Manager SIS Service Inventory Management SMS Service Management System SOT Selected Object Tool SPR Service Provisioner SSN DSS II Application Utilities * * Interface * * Interface * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 21 22 TMS Test Management System TOD Topological Display UPM User Profile Management 22 23 SCHEDULE "B" SUBLICENSING TERMS Sublicense agreements with End Users shall include terms and conditions substantially similar to the following: 1. restrict use of the Licensed Products or Licensed Information to object code form only; 2. prohibit causing or permitting the reverse engineering, disassembly or decompilation of the Licensed 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 licensed products or Licensed Information from passing to the End User; 4. disclaim Nortel's liability for any damages, whether direct, indirect, incidental or consequential arising from the use of the Licensed Products or Licensed Information; 5. in any sublicense to United States Government End Users, include the following on all copies of Licensed Products distributed to United States Government End Users: By accepting delivery of this software, the Government hereby agrees that this software qualifies as commercial computer software within the meaning of the acquisition regulation(s) applicable to this procurement. The terms and conditions of this license shall pertain to the Government's use and disclosure of this software, and shall supersede any conflicting contractual terms and conditions. If this license fails to meet the Governments minimum needs or is inconsistent in any respect with Federal procurement law, the Government agrees to return this software, unused to the seller. The following additional statement applies only to procurement governed by DFARS Subpart 227.4 (1988): "Restricted Rights - Uses, duplication and disclosure by the 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 (1988). 6. require End Users to comply with all applicable governmental legislation or regulations imposing restrictions on the export of products; and 7. require End Users, at the termination of the sublicense, to discontinue use and destroy or return to Licensor the Licensed Products or Licensed Information, 23 24 associated documentation and all archival or other copies of the Licensed Products or Licensed Information. 24 25 SCHEDULE "C" EXCLUDED CUSTOMERS *, Inc. / *, Inc. * Communications Limited * Limited*, S.A. * Limited* / The Kingdom of * * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 25 26 SCHEDULE "D" THIRD-PARTY SOFTWARE Non-Commercial Software Software Version - -------- ------- ACE * Athena Widget * clist dbug expect gcc (Sun) * GCC Compiler * gmake * gmalloc * perl * xpm * Commercial Software - -------------------
Software Version Vendor - -------- ------- ------ Booch Components * Rogue Wave C++ Compiler (HP-UX) - Hewlett-Packard * * * * * * * * * * * * * * * * * * * - * * * * * * * * Code Centre * Centerline * * * dde * Hewlett-Packard * * * * * * FrameBuilder * Adobe
26 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 27
Software Version Vendor - -------- ------- ------ HP-UX Development Environment * Hewlett-Packard HP OpenView DM Platform * Hewlett-Packard Motif * Open Software Foundation * - * Object Center - Centerline * * * * - * Pure Coverage * Pure Purify * Purify Quantify - Purify * * * * * * * * * * * * * * * UIL Compiler - Open Software Foundation * * * Windows * * Microsoft Corporation Windows * * Microsoft Corporation Corel Draw - Corel Corporation xdb * Hewlett-Packard xmt widget * Open Software Fdtn. X11 * Open Software Fdtn. Foundation ARS - Remedy Corporation
27 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 28 SCHEDULE "E" * * * * * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 28 29 INDEX ARTICLE TITLE - ------- ----- 1 DEFINITIONS 2 GRANT OF RIGHTS 3 THIRD-PARTY SOFTWARE 4 PROVISION OF LICENSED MATERIALS 5 TECHNICAL ASSISTANCE 6 ESCROW 7 CONFIDENTIALITY 8 REPRESENTATIONS 9 INDEMNIFICATION 10 LIMITATION OF LIABILITY 11 FORCE MAJEURE 12 TERM AND TERMINATION 13 NOTICES 14 GENERAL PROVISIONS SCHEDULE "A" LICENSED INFORMATION SCHEDULE "B" SUBLICENSING TERMS SCHEDULE "C" EXCLUDED ENTITIES SCHEDULE "D" THIRD-PARTY SOFTWARE SCHEDULE "E" * * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. 29 EX-10.2 4 EXHIBIT 10.2 1 EXHIBIT 10.2 APPLIED DIGITAL ACCESS, INC. 1997 REGISTRATION RIGHTS AGREEMENT This 1997 Registration Rights Agreement (this "Agreement") made as of June 27, 1997 by and between Applied Digital Access, Inc., a California corporation (the "Company") and Northern Telecom Limited, a Canadian corporation ("Nortel"). WHEREAS, the Company and Nortel have entered into that certain Stock and Warrant Purchase Agreement dated the date hereof (the "Stock and Warrant Purchase Agreement"), pursuant to which the Company has agreed to issue to Nortel, and Nortel has agreed to receive a warrant to purchase 150,000 shares of the Company's Common Stock (the "Warrant") and, in certain circumstances, shares of the Company's Common Stock (collectively, the "Shares"). In consideration of the mutual agreements, covenants and conditions contained herein, the Company and Nortel hereby agree as follows: SECTION 1 REGISTRATION RIGHTS The Company hereby grants to Nortel the registration rights set forth in this Section 1, with respect to the Registrable Securities (as hereinafter defined) owned by Nortel. The Company and Nortel agree that the registration rights provided herein set forth the sole and entire agreement on the subject matter between the Company and Nortel. 1.1 Definitions. As used in this Section 1: (a) The term "NASD" means the National Association of Securities Dealers, Inc. (b) The term "NASDAQ" means the National Association of Securities Dealers, Inc. Automated Quotation System. (c) The terms "register," "registered," and "registration" refer to a registration effected by filing with the Securities and Exchange Commission (the "SEC") a registration statement (the "Registration Statement") in compliance with the Securities Act of 1933, as amended (the "1933 Act") and the declaration or ordering by the SEC of the effectiveness of such Registration Statement. (d) The term "Registrable Securities" means (i) the Shares issued to Nortel pursuant to the Stock and Warrant Purchase Agreement, if any, (ii) shares of Common Stock of the Company issued to Nortel upon exercise of the Warrant (the "Warrant Shares") and (iii) any Common Stock of the Company issued as (or issuable 2 upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange or in replacement of the Common Stock or the Warrant Shares described in (i) and/or (ii) of this Section 1.1 (d). In the event of any recapitalization by the Company from the date hereof going forward, whether by stock split, reverse stock split, stock dividend or the like, the number of shares of Registrable Securities used throughout this Agreement for various purposes shall be proportionately increased or decreased. (e) The term "Registration Expenses" means all expenses incident to the Company's performance of or compliance with Section 1, including without limitation all registration, filing and applicable fees of the SEC, stock exchange or NASD registration or filing fees and all listing fees and fees with respect to the inclusion of securities in NASDAQ, all fees and expenses of complying with state securities or blue sky laws (including fees and disbursements of counsel to the underwriters or Nortel in connection with "blue sky" qualification of the Registrable Securities and determination of their eligibility for investment under the laws of various jurisdictions), all duplicating and printing expenses, all messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants including the expenses of "cold comfort" letters required by or incident to such registration, all fees and disbursements of underwriters customarily paid by issuers or sellers of securities and all transfer taxes; provided, however, that Registration Expenses shall exclude underwriters' fees and underwriting discounts and commissions in respect of the Registrable Securities being registered and the fees and expenses of counsel to Nortel. 1.2 Company Registration. (a) If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of security holders (other than Nortel), other than a registration relating solely to employee benefit plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, the Company shall: (i) promptly give Nortel written notice thereof (which shall be given at least 30 days prior to filing and shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after receipt of such written notice from the Company, by Nortel, except as set forth in Section 1.2(b) below. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise Nortel as a part of the written notice given pursuant to Section 1.2(a)(i). In such event the right -2- 3 of Nortel to require registration pursuant to this Section 1.2 shall be conditioned upon Nortel's participation in such underwriting and the inclusion of Nortel's Registrable Securities in the underwriting to the extent provided herein. If Nortel proposes to distribute its securities through such underwriting, Nortel, together with the Company and the other parties distributing their securities through such underwriting, shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Nortel may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of Nortel and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall also be conditions precedent to the obligations of Nortel. Nortel shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding Nortel, Nortel's ownership of and title to the Registrable Securities, Nortel's intended method of distribution and any other representations required by law or regulation, and the liability of Nortel to any underwriter or other person under such underwriting agreement shall be limited to liability arising from misstatements in or omissions from its representations and warranties and shall be limited to the amount of the net proceeds received by Nortel in the offering; provided, however, that the provisions of any underwriting agreement executed by the Company and Nortel will supersede any conflicting provisions of this Agreement. Notwithstanding any other provision of this Section 1.2, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the number of Registrable Securities to be included in the registration and underwriting, or may exclude Registrable Securities entirely from such registration and underwriting subject to the terms of this Section. The Company shall so advise Nortel of the Company's securities that would otherwise be registered and underwritten pursuant hereto, and the number of shares of such securities, including Registrable Securities, that may be included in the registration and underwriting shall be allocated in the following manner: (i) shares proposed by the Company to be sold for its own account shall be included first, and (ii) any Registrable Securities requested to be included in such registration and any other shares proposed to be included by any other Person holding securities of the Company that has been granted registration rights shall thereafter be included, pro rata among the holders thereof requesting such registration on the basis of the number of shares of such securities requested to be included by such holders. If Nortel disapproves of the terms of the underwriting, it may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Securities so withdrawn shall also be withdrawn from registration. (c) There is no limitation on the number of registrations which the Company may effect pursuant to this Section 1.2. The Company will pay all Registration Expenses in connection with any registration of Registrable Securities pursuant to this Section 1.2. -3- 4 1.3 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities as expeditiously as possible (and in any event within 120 days after the relevant request for registration) and use its diligent best efforts to cause such registration statement to become effective, and, upon the request of Nortel, keep such registration statement effective for up to the earlier of (I) ninety (90) days or (II) until Nortel has completed the distribution relating thereto. (b) Notify Nortel of the SEC's requests for amending or supplementing the registration statement and the prospectus and prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to Nortel such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions in the United States as shall be reasonably requested by Nortel, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. (f) Notify Nortel at any time when a prospectus relating thereto is required to be delivered under the 1933 Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Before filing any registration statement or any amendment or supplement thereto (or any comparable statements under securities or blue sky laws of any jurisdiction containing any different disclosure), furnish substantially final copies of such documents to Nortel. -4- 5 (h) Use its best efforts to cause all Registrable Securities covered by such registration statement to be listed on a national securities exchange or to secure designation of all such Registrable Securities as a NASDAQ "national market system security" within the meaning of Rule 11Aa2-1 under the 1934 Act (as defined below), in each case to the extent the shares of the Company's common stock are so listed or designated. (i) Make available its officers and personnel to the underwriters, if any, and otherwise provide reasonable assistance to the underwriters, if any, in their marketing of Registrable Securities. 1.4 Indemnification. (a) The Company shall, and does hereby undertake to, indemnify and hold harmless Nortel, each of Nortel's officers and directors and each person controlling Nortel, with respect to any registration, qualification or compliance effected pursuant to this Section 1 of the Registrable Securities held by or issuable to Nortel, and each underwriter of the Registrable Securities, if any, and each person who controls Nortel or any underwriter, against all claims, losses, damages and liabilities (or actions or proceedings in respect thereto whether commenced or threatened) to which they may become subject under the 1933 Act, the Securities Exchange Act of 1934, as amended, (the "1934 Act"), or other federal or state law arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other similar document (including any related Registration Statement, notification, preliminary prospectus, amendment or supplement thereto, documents incorporated by reference therein or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any violation or alleged violation by the Company of any federal, state or common law rule or regulation applicable to the Company in connection with any such registration, qualification or compliance, and shall reimburse, as incurred, Nortel, each such underwriter, and each such director, officer agent and controlling person, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, action or proceeding; provided that the Company shall not be liable in any such case hereunder to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by Nortel or such underwriter, as the case may be. (b) Nortel, if Registrable Securities held by or issuable to Nortel are included in such registration, qualification or compliance, shall indemnify the Company, each of its directors, and each officer who signs a Registration Statement in connection therewith, and each person controlling the Company, each underwriter, if any, and each person who controls Nortel or any underwriter, against all claims, losses, damages and liabilities (or actions or proceedings in respect thereof whether commenced or -5- 6 threatened) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse, as incurred, the Company, each such underwriter and each such director, officer, partner, and controlling person, for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, action, or proceeding, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) was made in such Registration Statement, prospectus, offering circular or other document, in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by Nortel. Notwithstanding any other provision of this Agreement, Nortel's liability hereunder shall be limited to the amount of the net proceeds received by Nortel in the offering with respect to which indemnity is being sought. (c) Each party entitled to indemnification under this Section 1.4 (the "Indemnified Party") shall give notice to the party required to provide such indemnification (the "Indemnifying Party") of any claim as to which indemnification may be sought promptly after such Indemnified Party has actual knowledge thereof, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be subject to approval by the Indemnified Party (whose approval shall not be reasonably withheld) and the Indemnified Party may participate in such defense at the Indemnifying Party's expense if representation of such Indemnified Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding; and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1.4, except to the extent that such failure to give notice shall materially adversely affect the Indemnifying Party in the defense of any such claim or any such litigation. No Indemnifying Party, in the defense of any such claim or litigation, shall consent, except with the consent of each Indemnified Party, to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff therein, to such Indemnified Party, of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 1.4 shall for any reason be held by a court to be unavailable to an indemnified party under subsection (a) or (b) hereof in respect of any claim, loss, damage or liability, or any action or proceeding in respect thereof, then, in lieu of the amount paid or payable under subsection (a) or (b) hereof, the indemnified party and the indemnifying party under subsection (a) or (b) shall contribute to the aggregate, claims, losses, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same), (i) in such proportion as is appropriate to reflect the relative fault of the Company and Nortel which resulted in such claim, loss, damage or liability, -6- 7 or action or proceeding in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect not only the relative fault but also the relative benefits received by the Company and Nortel from the offering of the securities covered by such registration statement as well as relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 1.4(d) were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In addition, no person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such person's consent, which consent shall not be unreasonably withheld. Notwithstanding anything in this subsection (d) to the contrary, no indemnifying party (other than the Company) shall be required to contribute any amount in excess of the net proceeds received by such party from the sale of the Registrable Securities in the offering to which the claims, losses, damages or liabilities of the indemnified parties relate. 1.5 Information by Nortel. Nortel, if included in any registration, shall furnish to the Company such information regarding Nortel and the distribution proposed by Nortel as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.6 Temporary Cessation of Offers and Sales by Shareholders. Nortel acknowledges that there may be times when the Company may be required to suspend the use of the prospectus forming part of the Registration Statement (including foregoing a request that the Registration Statement become effective) until such time as an amendment to the Registration Statement has been filed by the Company and declared effective by the SEC, until the prospectus is supplemented or amended to comply with the 1933 Act, or until such time as the Company has filed an appropriate report with the SEC pursuant to the Exchange Act, but only if pursuant to advice of counsel (i) the filing of a registration statement would require premature disclosure of information, the disclosure of which could have an adverse effect on the business or operations of the Company, or would in the good faith opinion of the Company not be in the Company's best interests at such time, or (ii) the Company then is unable to comply with the requirements of the SEC relating to such registration or to resale of the Registrable Securities, provided, however, that the Company shall use its reasonable best efforts to make such disclosure, or remedy such noncompliance including removal of any stop order, as the case may be, at the earliest practical date that the Company believes to be in the Company's best interests. In the event of any such suspension, Nortel may elect to withdraw the Registrable Securities from such registration by written notice to the Company. Nortel hereby agrees that it will not sell any Registrable Securities pursuant to said prospectus during the period commencing at the time at which the Company gives Nortel notice of the suspension of the use of the prospectus and ending at the time -7- 8 the Company gives Nortel notice that Nortel may thereafter effect sales pursuant to said prospectus, as the same may have been supplemented or amended. 1.7 Transfer of Registration Rights. The rights, contained in Sections 1.2, 1.3, 1.4 and 1.8 hereof, to cause the Company to register the Registrable Securities, may be assigned or otherwise conveyed in whole (but only with all related obligations) to a transferee or assignee of Registrable Securities, who shall be considered "Nortel" for purposes of this Section 1, provided that the transferee or assignee is a subsidiary, affiliate or shareholder of Nortel, and the Company is given written notice by Nortel at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. 1.8 Requested Registration. Nortel may, at any time and from time to time, make a written request that the Company effect a registration (a "Requested Registration") on Form S-3 (or any successor form, if permitted) and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by Nortel, subject to the limitations set forth below. In such event, the Company shall as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of Nortel's Registrable Securities as are specified in such request, provided that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.8: (a) if Form S-3 is not available to the Company for such offering by Nortel; (b) if Nortel proposes to sell Registrable Securities at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $1,000,000 unless such offering shall cover all remaining Registrable Securities; (c) if the Company shall furnish to Nortel a certificate signed by the president of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be materially detrimental to the Company and its shareholders for such Requested Registration to be effected at such time, (without taking into account the costs to the Company) and containing a statement of the reasons for such postponement and an approximation of the anticipated delay, in which event the Company shall have the right to defer the filing of the statement related to such Requested Registration for a period of not more than one hundred eighty (180) days after receipt of the request of Nortel under this Section 1.8; provided, however, that the Company shall not utilize this right more than once in any twelve -8- 9 (12) month period and, in the event of any such postponement, Nortel shall have the right to withdraw its registration request; (d) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two Requested Registrations for Nortel pursuant to this Section 1.8; or (e) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of Nortel's request. The Company agrees to include in any such registration statement all information which, in the reasonable opinion of counsel to Nortel and counsel to the Company, is required to be included. Whenever the Company shall effect a registration pursuant to this Section 1.8 in connection with an underwritten offering by Nortel, no securities other than Registrable Securities shall be included among the securities covered by such registration unless Nortel consents to such inclusion, such inclusion is pursuant to and subject to the terms of the underwriting agreement or arrangements and such inclusion will not have a material adverse effect on the offering (including, without limitation, on the pricing of the offering). Registration Expenses shall be shared equally by the Company and Nortel with respect to the first Requested Registration. All expenses incurred in connection with any Requested Registration after the first Requested Registration has been effected shall be borne by Nortel. Nortel shall, with respect to all Requested Registrations, be responsible for the payment of any and all underwriters' fees and underwriting discounts and commissions in respect of the Registrable Securities being registered and the fees and expenses of counsel to Nortel. The Company further agrees that if it shall have previously received a request for registration under Section 1.8 hereof, and if such previous registration shall not have been withdrawn or abandoned, the Company shall not effect any public or private offer, sale or other distribution of its securities or effect any registration of any of its securities under the 1933 Act (other than a registration of Form S-8), whether or not for sale for its own account, until a period of 90 days (or such shorter period as Nortel shall agree) has elapsed from the effective date of such previous registration. 1.9 Delay of Registration. Nortel shall have no right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 Rule 144 Reporting. With a view to making available to Nortel the benefits of certain rules and regulations of the SEC which may permit the sale of the -9- 10 Registrable Securities to the public without registration, the Company agrees to take all actions reasonably necessary to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the 1933 Act, at all times; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the 1933 Act and 1934 Act; (c) So long as Nortel owns any Registrable Securities, furnish to Nortel forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the 1933 Act, and of the 1934 Act; a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as Nortel may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 1.11 Amendment of Registration Rights. Any provision of this Section 1 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Nortel (or their respective successors or permitted transferees). Any amendment or waiver effected in accordance with this Section 1 shall be binding upon Nortel, each future holder of Registrable Securities and the Company. 1.12 Termination of Registration Rights. Nortel shall not be entitled to exercise any right provided for in this Section 1 following the earlier of (a) June 27, 2000 or (b) such time as Nortel is entitled to sell all of the Registrable Securities held by Nortel (and Nortel has no remaining rights to acquire Registrable Securities, upon exercise of the Warrant or otherwise), without any restriction on manner of transaction or any notice requirements, within a ninety (90)-day period under SEC Rule 144 (or a successor rule). 1.13 "Market Stand-Off" Agreement. During the period, specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the 1933 Act, Nortel shall not, to the extent requested by the Company and such underwriter, 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 (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except any Common Stock included in such registration; provided, however, that: (a) Such period shall not exceed one hundred eighty (180) days for the first such registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; -10- 11 (b) Such period shall not exceed ninety (90) days for any subsequent registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (c) Nortel shall not be so obligated unless all executive officers and directors of the Company are subject to or obligated to enter into similar agreements. In order to enforce this Section 1.13, the Company may impose stop-transfer instructions with respect to the Registrable Securities of Nortel (and the shares or securities of any other person subject to the foregoing restriction) until the end of such period. The obligations described in this Section 1.12 shall not apply to a registration statement relating solely to employee benefit plans on Form S-l or Form S-8 or similar forms which may be promulgated in the future, or a registration statement relating solely to an SEC Rule 145 transaction on Form S-4 or any similar form which may be promulgated in the future. SECTION 2 MISCELLANEOUS 2.1 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 made and to be performed entirely with the State of California. 2.2 Entire Agreement; Amendment. This Agreement constitutes the full and entire understanding and agreement between the parties with respect to the subject matter hereof. This Agreement may be amended, waived, discharged or terminated only by written consent of the Company and Nortel. 2.3 Notices. Any notice, request or other communication required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if personally delivered or if mailed by registered or certified mail, postage prepaid, at the following addresses: If to the Company: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California 92121 Attn: President Telephone No.: (619) 623-2200 Facsimile No.: (619) 623-2208 -11- 12 With a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, California 92101 Attn: Faye H. Russell, Esq. Telephone No.: (619) 234-1966 Facsimile No.: (619) 234-3848 If to Nortel: Northern Telecom Limited Suite 100 8200 Dixie Road Brampton, Ontario L6T 5P6 Attn: Corporate Secretary and Assistant General Counsel Telephone No.: (905) 863-1103 Facsimile No.: (905) 863-8386 Any party hereto may by notice so given change its address for future notices hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail in the manner set forth above and shall be deemed to have been received when delivered. 2.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2.5 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 2.6 Captions. The captions and headings to Sections and paragraphs of this Agreement have been inserted for identification and reference purposes only and shall not be used to construe the meaning or the interpretation of this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -12- 13 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties as of the date first above written. APPLIED DIGITAL ACCESS, INC., NORTHERN TELECOM LIMITED, a California corporation a Canadian corporation By: /s/ JAMES L. KEEFE By: ------------------------------- ------------------------------------- James L. Keefe Its: Chief Financial Officer ------------------------------------ By: ------------------------------------- Its: ------------------------------------ [SIGNATURE PAGE TO 1997 REGISTRATION RIGHTS AGREEMENT] EX-10.3 5 EXHIBIT 10.3 1 EXHIBIT 10.3 STOCK AND WARRANT PURCHASE AGREEMENT THIS STOCK AND WARRANT PURCHASE AGREEMENT (the "Agreement") is made as of the 27th day of June, 1997, by and between Applied Digital Access, Inc., a California corporation (the "Company"), and Northern Telecom Limited, a corporation incorporated under the laws of Canada ("Nortel"). WHEREAS, the Company and Nortel are contemporaneously entering into that certain Asset Purchase Agreement dated the date hereof (the "Asset Purchase Agreement") pursuant to which Nortel has agreed to sell and the Company has agreed to buy certain assets of Nortel (the "Transferred Assets"). WHEREAS, the Company has agreed to issue to Nortel, and Nortel has agreed to acquire, (i) a warrant to purchase 150,000 shares of the Company's Common Stock, in substantially the form attached hereto as Exhibit A (the "Warrant") in partial consideration of the purchase price of the assets acquired pursuant to the Asset Purchase Agreement and (ii) shares of the Company's Common Stock (the "Common Stock") (at the Company's discretion pursuant to the Asset Purchase Agreement). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Shares and Warrant. 1.1 Sale and Issuance of Shares and Warrant. (a) Warrant. Subject to the terms and conditions of this Agreement and the Asset Purchase Agreement and in consideration of the transfer of certain assets by Nortel under the Asset Purchase Agreement to the Company at the Closing, the Company agrees to sell and issue to Nortel the Warrant at the Closing. The sale and issuance of the Warrant will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and such Warrant is being issued in reliance on exemptions from registration under the Securities Act. (b) Shares of Common Stock. Subject to the terms and conditions of this Agreement and the Asset Purchase Agreement, the Company agrees to sell and issue to Nortel shares of Common Stock as follows: (i) In the event the Company determines to pay all or a portion of the amount due on or before July 15, 1997 pursuant to Sections 2.5(c) and 2.7 of the Asset Purchase Agreement in shares of Common Stock (such amount determined to be paid in shares of Common Stock, the "First Installment Amount"), the Company shall issue to Nortel the number of shares (the "First Installment Shares") of the Common Stock equal to the First Installment Amount or portion thereof, as the case may be, divided by the weighted average closing price of the Common Stock as reported on the Nasdaq National Market for all of the trading days of the calendar quarter ending 2 June 30, 1997. The Company shall deliver to Nortel the First Installment Shares (free and clear of all liens, claims and other encumbrances except as otherwise provided herein and in the Registration Rights Agreement dated as of June 27, 1997 between the Company and Nortel (the "Registration Rights Agreement")) on or before July 15, 1997, along with documentation of the First Installment Amount, the weighted average closing price of the quarter ending June 30, 1997 and the calculation made to determine the number of First Installment Shares issued. (ii) In the event the Company determines to pay all or a portion of the amount due on or before October 15, 1997 pursuant to Sections 2.5(c) and 2.7 of the Asset Purchase Agreement in shares of Common Stock (such amount determined to be paid in shares of Common Stock, the "Second Installment Amount"), the Company shall issue to Nortel the number of shares (the "Second Installment Shares") of the Common Stock equal to the Second Installment Amount or portion thereof, as the case may be, divided by the weighted average closing price of the Common Stock as reported on the Nasdaq National Market for all of the trading days of the calendar quarter ending September 30, 1997. The Company shall deliver to Nortel the Second Installment Shares (free and clear of all liens, claims and other encumbrances except as otherwise provided herein and in the Registration Rights Agreement) on or before October 15, 1997, along with documentation of the Second Installment Amount, the weighted average closing price of the quarter ending September 30, 1997 and the calculation made to determine the number of Second Installment Shares issued. (iii) In the event the Company determines to pay all or a portion of the amount due on or before January 15, 1998 pursuant to Sections 2.5(c) and 2.7 of the Asset Purchase Agreement in shares of Common Stock (such amount determined to be paid in shares of Common Stock, the "Third Installment Amount"), the Company shall issue to Nortel the number of shares (the "Third Installment Shares", and collectively, with the First Installment Shares and the Second Installment Shares, the "Shares) of the Common Stock equal to the Third Installment Amount or portion thereof, as the case may be, divided by the weighted average closing price of the Common Stock as reported on the Nasdaq National Market for all of the trading days of the calendar quarter ending December 31, 1997. The Company shall deliver to Nortel the Third Installment Shares (free and clear of all liens, claims and other encumbrances except as otherwise provided herein and in the Registration Rights Agreement) on or before January 15, 1998, along with documentation of the Third Installment Amount, the weighted average closing price of the quarter ending December 31, 1997 and the calculation made to determine the number of Third Installment Shares issued. (iv) The sale and issuance of the Shares, if any, will not be registered under the Securities Act and such Shares, if any, will be issued in reliance on exemptions from registration under the Securities Act; provided that if notwithstanding the accuracy of the representations of Nortel set forth herein, the issuance of any Shares requires registration with or approval of any governmental authority under Federal or state law before such Shares may be issued upon exercise thereof, the Company shall, at -2- 3 its expense and as expeditiously as possible, either cause such Shares to be duly registered or approved, as the case may be or the Company shall pay the First Installment Amount, the Second Installment Amount or the Third Installment Amount, as the case may be, in cash. 1.2 Closing. The closing for the purchase and sale of the Warrant shall take place as set forth in the Asset Purchase Agreement (the "Closing"), at which time the Company shall deliver to Nortel the Warrant. Nortel shall deliver to the Company a bill of sale for the Transferred Assets. 1.3 Subsequent Closings. The closing for the sale and issuance by the Company to Nortel of each of the First Installment Shares, the Second Installment Shares and the Third Installment Shares, if any and as applicable, shall take place on or before the respective due date set forth in Section 1.1(b) above at such time and place as the Company and Nortel mutually agree upon orally or in writing (each such time and place being designated a "Subsequent Closing"). At each Subsequent Closing, the Company shall deliver to Nortel a certificate representing the number of Shares being issued and the other documentation referred to in Subsection 1.1(b). 2. Representations and Warranties of the Company. The Company hereby represents and warrants to Nortel that: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized and validly existing 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, 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), 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 Warrant, the Warrant Shares (as defined below) and the Shares in the manner and for the purposes contemplated by this Agreement and the Asset Purchase 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, including, without limitation, the Registration Rights 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 and such other agreements and instruments, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of the Warrant, the Warrant Shares (as defined below) and the Shares 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 (y) as -3- 4 limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (z) 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, when issued, sold and delivered in accordance with the terms hereof and the Asset Purchase Agreement will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of Nortel in this Agreement, the Shares will be issued in compliance with all applicable United States federal and state securities laws. 2.4 Valid Issuance of Warrant Shares. The shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"), when issued, sold and delivered in accordance with the terms of the Warrants, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of Nortel in this Agreement, the Warrant Shares will be issued in compliance with all applicable United States federal and state securities laws. 2.5 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, 1996 and a Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (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, 1996, 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. 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. 2.6 Compliance with Other Instruments. The execution, delivery and performance of this Agreement and of the transactions contemplated hereby will not -4- 5 result in any violation of or constitute, with or without the passage of time and the giving of notice, either a default, breach or violation under any provision of the Company's Articles of Incorporation or Bylaws, any instrument or agreement of any kind to which the Company is bound, any judgment, decree, order or award of any court, governmental body or arbitrator to which the Company is a party or any law, rule or regulation applicable to the Company (in each case, if such default, breach or violation would materially and adversely affect the business, assets, prospects, operations or financial condition of the Company, the ability of the Company to perform its obligations under the Asset Purchase Agreement, this Agreement or the Warrant or the validity or enforceability of the Asset Purchase Agreement, this Agreement or the Warrant). 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. 2.7 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. 2.8 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 this Agreement or to consummate the transactions contemplated hereby. 2.9 SEC Filings. The SEC Filings correctly set forth, to the extent required under the Securities Act and the Exchange Act, as applicable, and the rules thereunder, as of the date thereof (before giving effect to this Agreement and the issuance of the Warrant), the authorized and outstanding shares of the Common Stock and other securities of the Company (specifying the type, class or series of all such Common Stock and other securities and whether such Common Stock and other securities are voting or non-voting) and all options, warrants and other rights to purchase any Common Stock and other securities of the Company, together with descriptions of the terms thereof. All such outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. There are no obligations (contingent or otherwise) of the Company to repurchase or otherwise acquire or retire any shares of its Common Stock or other securities (or options to purchase the same) and there are no preemptive rights, subscription rights, or other contractual rights similar in nature to preemptive rights with respect to any Common Stock of the Company. The Company has reserved from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares and the Shares. -5- 6 3. Representations and Warranties of Nortel. Nortel hereby represents and warrants that: 3.1 Organization. Nortel is a corporation duly organized and validly existing under the laws of Canada. 3.2 Authorization. Nortel 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 including, without limitation, the Registration Rights Agreement. All corporate action on the part of Nortel, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and such other agreements and instruments and the performance of all obligations of Nortel hereunder and thereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of Nortel, enforceable in accordance with its terms, except (y) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (z) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 3.3 Purchase Entirely for Own Account. This Agreement is made with Nortel in reliance upon Nortel's representation to the Company, which by execution of this Agreement Nortel hereby confirms, that the Warrant, the Warrant Shares and the Shares to be received by Nortel will be acquired for investment for Nortel's own account (or for the account of an Affiliate (as defined below)), not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Nortel has no present intention of selling, granting any participation in, or otherwise distributing the Warrant, the Warrant Shares or the Shares in violation of the Securities Act or the California Corporate Securities Law of 1968; provided that (subject to Section 6.1) Nortel's representations and warranties herein are without prejudice to its right at all times to sell or otherwise dispose of all or any part of the Warrant, the Warrant Shares or the Shares under the Securities Act, or in a transaction exempt from the registration requirements of the Securities Act, including a transaction pursuant to Rule 144. By executing this Agreement, Nortel further represents that Nortel 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 the Warrant, the Warrant Shares or the Shares. 3.4 Investment Experience. Nortel acknowledges that it is able to fend for itself and 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 Warrant, the Warrant Shares and the Shares. -6- 7 3.5 Representations as to Certain Matters Relating to the Warrant, the Warrant Shares and the Shares. (i) Nortel understands that no U. S. or Canadian, federal or state agency has passed on or made any recommendation or endorsement of the Warrant, the Warrant Shares or the Shares. (ii) Nortel acknowledges that, in making the decision to purchase the Warrant, the Warrant Shares and the Shares, it has relied solely upon independent investigations made by it and not upon any representations made by the Company with respect to the Company, the Warrant, the Warrant Shares or the Shares. (iii) Nortel understands that the Warrant, the Warrant Shares and the Shares are being offered and sold to it in reliance on specific exemptions or non- application from the registration requirements of federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of Nortel set forth herein in order to determine the applicability of such exemptions and the suitability of Nortel to acquire the Warrant, the Warrant Shares and the Shares. 3.6 Accredited Investor. Nortel is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 3.7 Restricted Securities. Nortel understands that the Warrant, the Warrant Shares and the Shares it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations the Warrant, the Warrant Shares and the Shares may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Nortel represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. 3.8 Further Limitations on Disposition. Without in any way limiting the representations set forth above, Nortel further agrees not to make any disposition of all or any portion of the Warrant, the Warrant Shares or the Shares unless and until the transferee has agreed in writing for the benefit of the Company to be bound by Sections 3.8 and 6.1 (except that Sections 3.8 and 6.1 shall not apply to a transferee in a registered public offering or a sale under Rule 144 or as provided in Section 7) of this Agreement and the Registration Rights Agreement, and: (a) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Nortel shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the -7- 8 circumstances surrounding the proposed disposition (to the extent required for purposes of securities law compliance), and (ii) Nortel 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 securities under the Securities Act. 3.9 Legends. It is understood that the Warrants and the certificates evidencing the Shares and the Warrant Shares may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) "These securities are subject to certain additional transfer restrictions contained in a certain Stock and Warrant Purchase Agreement dated as of June 27, 1997 as amended from time to time, a copy of which may be obtained from the corporation without charge." (c) Any legend required by the laws of any other jurisdiction. To the extent that such legends are no longer applicable, the Company shall cause its transfer agent to remove the legends upon request by Nortel. 3.10 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 Nortel in connection with Nortel's valid execution, delivery and performance of this Agreement or the Registration Rights Agreement or the issuance of the Warrant, the Warrant Shares or the Shares, except for any filings under any applicable United States state securities laws regarding Nortel's execution, delivery and performance of this Agreement, which notice shall have been given prior to the Closing. 4. Conditions of Nortel's Obligations at Closing and at Subsequent Closings. The obligations of Nortel under Subsections 1.1(a) and (b) of this Agreement are subject to the fulfillment on or before the Closing or any Subsequent Closing, as the case may be, of each of the following conditions, the waiver of which shall not be effective without the consent of Nortel thereto: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing, or any Subsequent Closing, as the case may be, with the same effect as though such representations and warranties had been made on and as of the date of such Closing, or any Subsequent Closing, as the case may be. -8- 9 4.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing, or any Subsequent Closing, as the case may be. 4.3 Compliance Certificate. An officer of the Company shall have delivered to Nortel a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 Qualifications. The Commissioner of Corporations of the State of California shall have issued a permit qualifying the offer and sale of the Warrant or the Shares, as the case may be, pursuant to this Agreement, or such offer and sale when made shall be exempt from such qualification under the California Corporate Securities Law of 1968, as amended. 4.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing, or any Subsequent Closing, as the case may be, and all documents incident thereto shall be reasonably satisfactory in form and substance to Nortel and Nortel shall have received all such counterpart original and certified or other copies of such documents as Nortel may reasonably request. 4.6 Agreements. The Company and Nortel shall have entered into the Asset Purchase Agreement, the Warrant and the Registration Rights Agreement. 4.7 Conditions of Nortel's Obligations at Subsequent Closings. The obligations of Nortel under Subsection 1.1(b) are subject to the fulfillment on or before the applicable closing of each of the following additional conditions, the waiver of which shall not be effective without the consent of Nortel thereto: (a) all shares purchased at the applicable closing shall, when issued, sold and delivered, be duly and validly issued, fully paid and nonassessable; (b) the offer and sale of the applicable shares shall comply with applicable federal and state securities laws; and (c) the Company shall have filed with the SEC all material reports required by the Exchange Act to be filed as of the date of the applicable closing. In the event any of the forgoing conditions are not fulfilled as of the time of any Subsequent Closing, then, unless such conditions are effectively waived by Nortel, the Company shall pay the First Installment Amount, the Second Installment Amount or the Third Installment Amount, as the case may be, in cash. 5. Conditions of the Company's Obligations at Closing and at Subsequent Closings. The obligations of the Company under Subsections 1.1(a) and (b) of this Agreement are subject to the fulfillment on or before the Closing, or any Subsequent Closing, as the case may be, of each of the following conditions, the waiver of which shall not be effective without the consent of the Company thereto: -9- 10 5.1 Representations and Warranties. The representations and warranties of Nortel contained in Section 3 shall be true on and as of the Closing, or any Subsequent Closing, as the case may be, with the same effect as though such representations and warranties had been made on and as of the Closing, or any Subsequent Closing, as the case may be. 5.2 Performance. Nortel shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing, or any Subsequent Closing, as the case may be. 5.3 Compliance Certificate. An officer of Nortel shall have delivered to the Company a certificate certifying that the conditions specified in Sections 5.1 and 5.2 have been fulfilled as of the date of Closing or Subsequent Closing, as the case may be. 5.4 California Qualification. The Commissioner of Corporations of the State of California shall have issued a permit qualifying the offer and sale to Nortel of the Warrant or the Shares, as the case may be, pursuant to this Agreement, or such offer and sale when made shall be exempt from such qualification under the California Corporate Securities Law of 1968, as amended. 5.5 Agreements. The Company and Nortel shall have entered into the Asset Purchase Agreement, the Warrant and the Registration Rights Agreement. 5.6 Conditions of the Company's Obligations at Subsequent Closings. The obligations of the Company under Subsection 1.1(b) are subject to the fulfillment on or before the applicable closing of the following additional condition, the waiver of which shall not be effective without the consent of the Company thereto: the offer and sale of the applicable shares shall comply with applicable federal and state securities laws. In the event the foregoing condition is not fulfilled as of the time of any Subsequent Closing, then, unless such condition is effectively waived by the Company, the Company shall pay the First Installment Amount, the Second Installment Amount or the Third Installment Amount, as the case may be, in cash (in which event the Company shall reserve all rights to remedies for any unwaived breach of representation or covenant by Nortel as contemplated by Section 7.1). 6. Covenants of The Parties. 6.1 Transfer Restriction. Notwithstanding any rights under the Registration Rights Agreement, Nortel hereby agrees that without the prior written consent of the Company (which may be withheld in the Company's sole discretion), neither Nortel nor any affiliate (as defined in Rule 144 under the Securities Act promulgated by the SEC ("Affiliate")) 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) the Warrant or any of the Warrant Shares or any of -10- 11 the Shares, until twenty four (24) months following the date hereof, provided, however, that Nortel may Sell one-half (1/2) of the shares of the Company's Common Stock acquired pursuant to this Agreement (the "Acquired Shares") after twelve (12) months has elapsed from the date hereof subject to, without limitation, the following conditions and restrictions: (a) Nortel hereby grants to the Company and its Affiliates the right of first refusal to purchase any or all of the Acquired Shares that Nortel proposes to sell in a transaction or transactions involving a broker-dealer as intermediary, and grants to the Company and its Affiliates the right of first refusal to purchase all but not less than all of the Acquired Shares that Nortel proposes to sell in a transaction or transactions not involving a broker-dealer as intermediary. In the event Nortel proposes to Sell any of the Acquired Shares, it shall give the Company written notice of its intention describing the price and the general terms upon which Nortel proposes to Sell the Acquired Shares and a statement as to whether the sale will involve a broker-dealer as intermediary (the "Notice"). The Company shall have twenty (20) days after the Notice is effective to agree to purchase any or all of the Acquired Shares Nortel proposes to Sell, as applicable, for the price and upon the terms specified in the Notice by giving written notice to Nortel and stating therein the quantity of the Acquired Shares to be purchased in any case where the Company is entitled to purchase less than all of the Acquired Shares that Nortel proposes to sell. In the event the Company fails to exercise the right of first refusal within said twenty (20)-day period, Nortel shall have one hundred twenty (120) days thereafter to sell or enter into an agreement (pursuant to which the sale of the Acquired Shares covered thereby shall be closed, if at all, within one hundred twenty (120) days from the date of said agreement) to sell any or all of the Acquired Shares with respect to which the Company's right of first refusal option set forth in this Section was not exercised, at a price and upon terms no more favorable to the purchaser or purchasers thereof than specified in the Notice. In the event Nortel has not sold within said one hundred twenty (120)-day period or entered into an agreement to sell the Acquired Shares within said one hundred twenty (120)-day period (or sold the Acquired Shares in accordance with the foregoing within one hundred twenty (120) days from the date of said agreement), Nortel shall not thereafter issue or sell any of the Acquired Shares prior to the date twenty four (24) months after the date of acquisition of such Acquired Shares without first again offering such Acquired Shares to the Company in the manner provided in this Subsection. (b) In the event Nortel Sells any Acquired Shares as permitted hereunder, Nortel shall maintain an orderly market and shall not unduly disrupt the public market for shares of the Company's Common Stock in connection with any such sale. (c) Nortel shall comply with any and all federal, state and local securities and other applicable laws of the United States and Canada. Notwithstanding the foregoing, transfers solely among Nortel Affiliates shall not be subject to the transfer restrictions set forth in this Subsection 6.1 provided the Nortel -11- 12 Affiliate transferee agrees in writing to be bound by this Subsection 6.1. The transfer restrictions set forth in this Section 6.1 shall terminate in the event of a change of control affecting the Company. Control shall have the meaning set forth in the definition of Affiliates in the Asset Purchase Agreement. In order to enforce the foregoing covenant, the Company may impose legends and/or stop-transfer instructions with respect to the Warrant or the Warrant Shares or the Shares held by Nortel or any Nortel Affiliate (and such securities of every other person subject to the foregoing restriction). 7. Miscellaneous. 7.1 Survival of Warranties. The warranties, representations and covenants of the Company and Nortel contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing or any Subsequent Closing, as the case may be, and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of Nortel or the Company. 7.2 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 securities sold or issued hereunder). 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. 7.3 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. 7.4 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. 7.5 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. 7.6 Notices. Unless otherwise provided, any notice required or permitted 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): -12- 13 If to the Company: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California 92121 Attn: President Facsimile: (619) 623-2208 If to Nortel: Northern Telecom Limited 8200 Dixie Road Suite 100 Brampton, Ontario L6T 5P6 Attn: Corporate Secretary and Assistant General Counsel Facsimile: (905) 863-8386 7.7 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. 7.8 Expenses; Attorney Fees. Irrespective of whether the Closing or any Subsequent 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 the Warrant Shares and shall save and hold Nortel harmless from and against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 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/or Nortel, as applicable. Any amendment or waiver effected in accordance with this Section 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. -13- 14 7.10 Severability. If one or more provisions of this Agreement are held to be 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. 7.11 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties pertaining to the subject matter hereof 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. 7.12 Arbitration Provisions. To the fullest extent permitted by applicable law, in the event of any controversy, dispute or claim arising out of, in connection with, or in relation to the interpretation, performance or breach of this or any action taken by the Company or Nortel hereunder, or otherwise arising out of the execution or performance hereof, such controversy, dispute or claim shall be determined by arbitration conducted in the English language in San Francisco, California in accordance with the Rules for Large Complex Cases of the American Arbitration Association as in effect on the date that demand for such arbitration is filed with the American Arbitration Association. The parties to the arbitration shall attempt to select an arbitrator from such members. If the parties to the arbitration do not agree on the selection of an arbitrator within twenty (20) days after the date demand for the arbitration is filed, an arbitrator having such experience shall be selected in accordance with such Rules of the American Arbitration Association. The arbitrator shall set forth his or her determination in writing (which shall be sent to each party to such arbitration) and shall enumerate in reasonable detail the basis of his or her determination. No party to the arbitration may seek, and the arbitrator shall not award, punitive or exemplary damages. To the fullest extent permitted by applicable law, any judgment or award rendered by the arbitrator shall be final, conclusive and binding. Judgment may be entered on any final, unappealable arbitration award by any state or federal court having jurisdiction thereof. To the fullest extent permitted by applicable law, any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section shall be determined by the arbitrator. The arbitration proceedings as well as the fact such proceedings occur, shall be kept confidential by the parties hereto and may only be disclosed to their personal representatives and advisors or as required by law and insofar as is necessary to confirm, correct, vacate or enforce the award. In the event of a breach of this provision, the arbitrator is expressly authorized to assess damages and each of the parties hereto consents to the expansion of the scope of arbitration for such purpose. The pendency of any arbitration under this Section shall not relieve any party hereto of its obligations under this Agreement. To the fullest extent permitted by applicable law, if the Company or Nortel shall resort to legal proceedings for injunctive or other similar relief pending the outcome of any such arbitration proceeding or prior to the initiation thereof, such party shall not be deemed to have waived its rights to cause such matter or any other matter to be referred to arbitration pursuant to this Section. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. The designation of a situs or a governing law for this Agreement or the arbitration shall not be deemed an election to preclude -14- 15 application of the Federal Arbitration Act if it would be applicable. The arbitrator shall have authority in his or her discretion to grant injunctive relief, award specific performance and impose sanctions upon any party to any such arbitration. The fees, expenses and charges of any such arbitration shall be allocated among the parties thereto in such manner as the arbitrator shall determine in his or her discretion. The provisions of the California Code of Civil Procedure Section 1283.05 are incorporated into this agreement to arbitrate. [Remainder of This Page Intentionally Left Blank] -15- 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. NORTEL: THE COMPANY: NORTHERN TELECOM LIMITED, APPLIED DIGITAL ACCESS, INC., a Canadian corporation a California corporation By: By: /s/ JAMES L. KEEFE ----------------------------- ------------------------------------- Title: Title: Chief Financial Officer -------------------------- ---------------------------------- By: ----------------------------- Title: -------------------------- [SIGNATURE PAGE TO STOCK AND WARRANT PURCHASE AGREEMENT] -16- 17 EXHIBIT A WARRANT 18 NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT MAY BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT ARE SUBJECT TO CERTAIN ADDITIONAL TRANSFER RESTRICTIONS CONTAINED IN A STOCK AND WARRANT PURCHASE AGREEMENT DATED AS OF JUNE 27, 1997 AS AMENDED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT NO CHARGE. No. W -1 Warrant to Purchase 150,000 Shares of Common Stock (subject to adjustment) WARRANT TO PURCHASE COMMON STOCK of APPLIED DIGITAL ACCESS, INC. Void after 5:00 P.M., PACIFIC TIME, JUNE 27, 2000 This certifies that, for value received, NORTHERN TELECOM LIMITED, or its registered assigns ("Holder") is entitled, subject to the terms set forth below, to purchase from APPLIED DIGITAL ACCESS, INC. (the "Company"), a California corporation, One Hundred Fifty Thousand (150,000) shares of the Common Stock of the Company, as constituted on the date hereof (the "Warrant Issue Date"), upon surrender hereof, at the principal office of the Company referred to below, with the Notice of Exercise attached hereto duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term 19 "Warrant" as used herein shall include this Warrant, and any warrants delivered in substitution or exchange therefor as provided herein. 1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, during the term commencing on the Warrant Issue Date and ending at 5:00 p.m., U.S.A. Pacific Time, on June 27, 2000 (the "Exercise Period"), and shall be void thereafter. 2. Exercise Price. The Exercise Price at which this Warrant may be exercised shall be $12.00 (U.S. Dollars) per share of Common Stock, as adjusted from time to time pursuant to Section 11 hereof (such price as from time to time to be adjusted as hereinafter provided being hereinafter called the "Warrant Price"). 3. Exercise of Warrant. (a) The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment (i) in cash or by check acceptable to the Company, (ii) by cancellation by the Holder of indebtedness of the Company to the Holder, or (iii) by a combination of (i) and (ii), of the purchase price of the shares to be purchased. (b) This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter (and in any event promptly following delivery of the purchase price for the purchased shares if paid other than as provided in Section 4 below), the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall round the number of shares down to the nearest whole number of shares. -2- 20 4. Net Issuance. (a) In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this Section 4 at any time or from time to time during the Exercise Period. Upon exercise of the Conversion Right with respect to a particular number of shares subject to the Warrant (the "Converted Warrant Shares"), the Company shall deliver to the Holder (without payment by the Holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock computed using the following formula: X = Y (A - B) ------- A Where X = the number of shares of Common Stock to be delivered to the Holder Y = the number of Converted Warrant Shares A = the fair market value of one share of the Company's Common Stock on the Conversion Date (as defined below) B = the per share exercise price of the Warrant (as adjusted to the Conversion Date) The Conversion Right may only be exercised with respect to a whole number of shares subject to the Warrant. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as defined below). Shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of the Warrant. (b) The Conversion Right may be exercised by the Holder by the surrender of the Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the total number of shares under the Warrant that the Holder is exercising through the Conversion Right. Such conversion shall be effective upon receipt by the Company of the Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to the Warrant, shall be issued as -3- 21 of the Conversion Date and shall be delivered to the Holder promptly following the Conversion Date. (c) For purposes of this Section 4, fair market value of a share of Common Stock on the Conversion Date shall be calculated in accordance with the formula set forth in the definition of "Market Price" in Section 11 hereof, except that in applying such formula, any references to dates as of or on which the "Market Price" is to be determined shall be deemed to be references to the applicable Conversion Date. 5. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. 6. Rights of Holder. This Warrant shall not entitle Holder to any of the rights of a shareholder of the Company until this Warrant shall have been exercised and the shares of Common Stock purchasable upon the exercise hereof shall have been issued, as provided herein. 7. Transfer of Warrant. (a) The Company maintains a register (the "Warrant Register") containing the names and addresses of the holders of warrants. The Holder of this Warrant, or any portion thereof, may change its address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 7(a) above, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant or any or all of the foregoing. Thereafter, any such registration, issuance, exchange or replacement, as the case may be, shall be made at the office of such agent. -4- 22 (c) This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "Act"), title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. (d) On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers and contained in this Section 7, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise thereof. In the event of a partial transfer or assignment of this Warrant, a new Warrant, in substantially the form of this Warrant, evidencing the rights to purchase the number of shares so transferred or assigned, shall be issued to the transferee or assignee thereof and a new Warrant, in substantially the form of this Warrant, evidencing the rights to purchase the remaining number of shares, shall be issued to the then-registered Holder thereof. 8. Reservation of Stock. The Company covenants that, during the Exercise Period, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares, and, from time to time, will take all steps necessary to amend its Articles of Incorporation (the "Articles") to provide sufficient reserves of the Warrant Shares. The Company further covenants that all Warrant Shares, upon exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens, and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously), will be validly and legally issued, will be fully paid and nonassessable and will be free from preemptive rights of any kind. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares. 9. Notices. (a) Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by -5- 23 which such adjustment was calculated and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first class mail, postage prepaid) to the Holder of this Warrant. (b) In case (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to Holder a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least fifteen (15) days prior to the earlier of the date therein specified or the date on which a record shall be taken for determining rights to vote or receive distributions in respect of such event. (c) All such notices, advices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing by certified or registered mail, postage prepaid and addressed to the Holder at its registered address. -6- 24 10. Amendments; Waivers. (a) Any term of this Warrant may be amended with the written consent of the Company and the Holder. Any amendment effected in accordance with this Section 10 shall be binding upon each future holder of this Warrant and the Company. (b) No waivers of or exceptions to any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 11. Adjustments. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: (a) In the event that the outstanding shares of Common Stock shall be split, combined or consolidated, by dividend, reclassification or otherwise, into a greater or lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation and the number of shares purchasable under this Warrant shall, concurrently with the effectiveness of such combination or consolidation, be proportionately adjusted. If there shall be effected any consolidation or merger of the Corporation with another corporation, or a sale of all or substantially all of the Corporation's assets to another corporation, and if the holders of Common Stock shall be entitled pursuant to the terms of any such transaction to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder of this Warrant shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable upon the exercise of such Warrant, such shares of stock, securities or assets as may be issuable or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore so receivable had such consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of this Warrant. (b) Adjustment Upon Issuance of Common Stock. If at any time after the date hereof the Company shall issue or sell any shares of Common Stock (except on exercise of one or more of the Warrants or exercise of stock options or stock purchases under the Company's future or existing stock option or stock purchase plans) for a consideration per share less than the Market Price (as hereinafter defined) per share of Common Stock immediately prior to the time of such issue or sale, then, -7- 25 forthwith upon such issue or sale, the Warrant Price shall be adjusted by multiplying the Warrant Price as in effect immediately prior to the time of such issue or sale by a fraction, (i) the numerator of which shall be the sum of (A) the total number of shares of Common Stock outstanding immediately prior to such issue or sale, multiplied by the Market Price per share of Common Stock immediately prior to such issue or sale, and (B) the consideration received by the Company upon such issue or sale, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issue or sale multiplied by the Market Price immediately prior to such issue or sale. (c) Issuance of Rights, Warrants or Options. If at any time after the date hereof the Company shall grant, issue or sell (whether directly or by assumption in a merger or otherwise) any rights (other than rights issued pursuant to a stockholders' rights plan adopted by the Company pursuant to which the acquisition by any third party of a specified percentage of shares of Common Stock triggers the exercisability of such rights to purchase Common Stock, for so long as no event has occurred triggering such right to exercise) or warrants (other than the Warrant) to subscribe for or to purchase, or any options (other than stock options or stock purchases under the Company's existing or future stock option or stock purchase plans) for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being herein called "Convertible Securities") whether or not such rights or warrants or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or warrants or options or upon conversion or exchange of such Convertible Securities (determined as provided below) shall be less than the Market Price as of the date of granting such rights or warrants or options, as the case may be, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or warrants or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or warrants or options shall (as of the date of granting of such rights or warrants or options) be deemed to be outstanding and to have been issued for such price per share (and such deemed amounts shall be used to determine the number of shares and the consideration received by the Company for purposes of adjustment under Section 11(b)). Except as provided in Section 11(e) hereof, no further adjustments of the Warrant Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or warrants or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. For the purposes of this Section 11(c), the price per share for which Common Stock is issuable upon the exercise of any such rights or warrants or options or upon conversion or exchange of any such Convertible Securities shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or warrants or options, plus the minimum aggregate amount of additional consideration payable to the Company -8- 26 upon the exercise of all such rights or warrants or options, plus, in the case of such rights or warrants or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or warrants or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or warrants or options. (d) Issuance of Convertible Securities. In case the Company shall issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined as provided below) shall be less than the Market Price determined as of the date of such issue or sale of such Convertible Securities, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share (and such deemed amounts shall be used to determine the number of shares and the consideration received by the Company for purposes of adjustment under Section 11(b)); provided, however, that (a) except as provided in Section 11(e) hereof, no further adjustments of the Warrant Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights or warrants to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Warrant Price have been or are to be made pursuant to Section 11(c) hereof, no further adjustment of the Warrant Price shall be made by reason of such issue or sale. For the purposes of this Section 11(d), the price per share for which Common Stock is issuable upon conversion or exchange of Convertible Securities shall be determined by dividing (i) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. (e) Change in Option Price or Conversion Rate. If the purchase price provided for in any rights or warrants or options referred to in Section 11(c) above, or the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in Sections 11(c) or 11(d) above, or the rate at which any Convertible Securities referred to in Sections 11(c) or 11(d) above are convertible into or exchangeable for Common Stock, shall change (other than under or by reason of any event resulting in a change pursuant to provisions set forth in the documents governing such rights, warrants, options or Convertible Securities designed to protect -9- 27 against dilution, which event also results in an adjustment pursuant to this Section 11), then the Warrant Price in effect at the time of such event shall forthwith be readjusted to the Warrant Price which would have been in effect at such time had such rights, warrants, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the expiration of any such option or warrant or right or the termination of any such right to convert or exchange such Convertible Securities, the Warrant Price then in effect hereunder shall forthwith be increased to the Warrant Price which would have been in effect at the time of such expiration or termination had such right, warrant, option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or warrant or option referred to in Section 11(c) above, or the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in Sections 11(c) or 11(d) above, or the rate at which any Convertible Securities referred to in Sections 11(c) or 11(d) above are convertible into or exchangeable for Common Stock, shall change at any time under or by reason of provisions set forth in the documents governing such rights, warrants, options or Convertible Securities designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or warrant or option or upon conversion or exchange of any such Convertible Security, the Warrant Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have obtained had such right, warrant, option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Warrant Price then in effect hereunder is thereby decreased. (f) Stock Dividends. In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock or Convertible Securities, any Common Stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (g) Consideration for Stock. In case any shares of Common Stock or Convertible Securities or any rights or warrants or options to purchase any such Common Stock or Convertible Securities shall be issued or sold: (i) for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith; -10- 28 (ii) for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the Company, in good faith and in the exercise of reasonable business judgment, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith, which determination shall be conclusive and which determination of valuation shall be sent in writing by the Board of Directors to the Holder, subject to Section 11(g)(v) below; (iii) in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration therefor shall be deemed to be the fair value as determined reasonably and in good faith by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation as such Board of Directors may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or warrants or options, as the case may be, subject to Section 11(g)(v) below; (iv) in the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities or other property of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities or other property of the other corporation, subject to Section 11(g)(v) below and provided that, if any such calculation results in adjustment of the Warrant Price, the determination of the number of shares of Common Stock issuable upon exercise of the Warrant immediately prior to such merger, consolidation or sale, for purposes of Section 11(a), shall be made after giving effect to such adjustment of the Warrant Price; (v) with respect to Sections 11(g)(ii), (iii) and (iv) above (and with respect to Sections 11(j)(ii) and 11(l) below), if the fair value of the non-cash consideration the value of which is being determined exceeds $50,000, the Board of Directors of the Company shall provide written notice of its valuation to the Holder, and in the event that the Holder disagrees with such valuation, the Holder may provide written notice of such disagreement to the Company within 30 days following such notice from the Board of Directors. For a period of 15 days following the delivery of the last -11- 29 timely delivered notice of disagreement, the Company and the Holder shall in good faith seek to agree upon a valuation. If at the end of such 15 day period the Company and the Holder have not agreed upon a valuation, then the value of the non-cash consideration the value of which is being determined shall be determined in an arbitration conducted in the same manner as an arbitration conducted to determine Market Price as provided in Sections 11(j) and 13(j) hereof. (h) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (i) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 11. (j) Definition of Market Price. "Market Price" shall mean: (i) If shares of the Common Stock are listed or admitted to trading on any exchange or quoted through NASDAQ or any similar organization, the Market Price shall equal the average of the daily closing prices per share of the Common Stock for the 20 consecutive trading days immediately preceding the date of public announcement of the event giving rise to adjustment under this Section 11 or, if no such public announcement is made with respect to such event, the average of the daily closing prices per share of the Common Stock for the 20 consecutive trading days immediately preceding the day as of which "Market Price" is being determined. The closing price for each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if shares of the Common Stock are not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the shares are listed or admitted to trading, of if the shares are not so listed or admitted to trading, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or through a similar organization if NASDAQ is no longer reporting such information. (ii) If such shares of Common Stock are not listed or admitted to trading on any exchange or quoted through NASDAQ or any similar -12- 30 organization, the Market Price shall be determined by the Board of Directors of the Company, in good faith and in the exercise of reasonable business judgment, without taking into consideration any premium for shares representing control of the Company, any discount for any minority interest therein or any restrictions on transfer under federal and applicable state securities laws or otherwise, which determination shall be conclusive, and which determination of valuation shall be sent in writing by the Board of Directors to the registered holders of Warrants, subject to Section 11(g)(v) above. (k) Determination of Market Price under Certain Circumstances. Anything herein to the contrary notwithstanding, in case the Company shall issue any shares of Common Stock or Convertible Securities in connection with the acquisition by the Company of the stock or assets of any other corporation or the merger of any other corporation into the Company, the Market Price shall be determined as of the date the number of shares of Common Stock or Convertible Securities (or in the case of Convertible Securities other than stock, the aggregate principal amount of Convertible Securities) was determined (as set forth in a written agreement between the Company and the other party to the transaction) rather than on the date of issuance of such shares of Common Stock or Convertible Securities. (l) Certain Special Dividends. In case the Company shall declare a dividend or make any other distribution (other than a distribution referred to in Section 11(a) or 11(f)) upon the Common Stock (other than regular periodic cash dividends made out of retained earnings), then in each case the Warrant Price in effect immediately prior to the declaration of such dividend or making of such distribution shall be adjusted by multiplying the Warrant Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such dividend or distribution by a fraction the numerator of which shall be the Market Price on the date fixed for such determination less, in the case of a dividend or distribution in cash, the amount per share of Common Stock so declared or, in the case of any other dividend or distribution, the then fair market value (as determined reasonably and in good faith by the Board of Directors of the Company) of the portion of the property so distributed applicable to one share of Common Stock (subject to Section 11(g)(v) above), and the denominator of which shall be the Market Price on the date fixed for such determination, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution. (m) Certain Events. If any event occurs as to which in the reasonable opinion of the Company or the holder of this Warrant, in good faith, the other provisions of this Section 11 are not strictly applicable but the lack of any adjustment would not in the opinion of the Company or such Holder fairly protect the purchase rights of the holder of this Warrant in accordance with the basic intent and principles of such provisions, or if strictly applicable would not fairly protect the purchase -13- 31 rights of the holder of this Warrant in accordance with the basic intent and principles of such provisions, then the Company shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give their opinion upon the adjustment, if any, on a basis consistent with the basic intent and principles established in the other provisions of this Section 11, necessary to preserve, without dilution, the exercise rights of the registered holder of this Warrant. Upon receipt of such opinion, the Company shall forthwith make the adjustments described therein. (n) Corresponding Change to Number of Warrant Shares. Whenever the Warrant Price payable upon exercise of this Warrant is adjusted, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be adjusted by multiplying the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior to such adjustment by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (o) Adjustment of Warrant Shares Upon Company Repurchase. In the event that the Company elects to repurchase any of its outstanding shares of Common Stock, the number of Warrant Shares issuable upon exercise of the Warrant shall be adjusted by multiplying (i) the total number of outstanding shares of the Company's Common Stock immediately after the repurchase by (ii) a fraction, the numerator of which is (A) the number of Warrant Shares issuable upon exercise of the Warrant immediately before the repurchase and the denominator of which is (B) the number of shares of the Company's Common Stock outstanding immediately prior to the repurchase. (p) Computation of Adjustments and Readjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 11, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request, at any time, of the Holder, furnish or cause to be furnished to the Holder a like certificate setting forth: (i) such adjustments and readjustments; (ii) the Exercise Price at the time in effect; and (iii) the number of shares and the amount, if any, of other property which at the time would be received upon the exercise of the Warrant. 12. Registration Rights. Upon exercise of this Warrant (and in connection with such exercise), the Holder shall have and be entitled to exercise the rights of registration granted under the Registration Rights Agreement of even date hereof between Holder and the Company (with respect to the Warrant Shares). -14- 32 13. MISCELLANEOUS. (a) Successors and Assigns. The terms and provisions of this Warrant shall be binding upon the Company and the Holder and their respective successors and assigns. (b) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the Holder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant. (c) Governing Law. This Warrant shall be governed by and construed for all purposes under and in accordance with the laws of the State of California. (d) Counterparts. This Warrant 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. (e) Remedies. In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where Holder will not have an adequate remedy at law and where damages will not be readily ascertainable. (f) No Impairment of Rights. The Company will not, by amendment of its Articles of Incorporation or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company shall not take any action which results in any adjustment of the Warrant Shares if such Warrant Shares issuable after the action would exceed the total number of shares of unissued Common Stock then authorized by the Company's articles of incorporation and available for the purpose of issue upon such exercise. (g) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant shall survive the execution and delivery of this Warrant. (h) Severability. In the event any one or more of the provisions of this Warrant shall for any reason be held invalid, illegal or unenforceable, the -15- 33 remaining provisions of this Warrant shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (i) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or Sunday or shall be a legal holiday in either the United States or Canada, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. (j) Arbitration Provisions. To the fullest extent permitted by applicable law, in the event of any controversy, dispute or claim arising out of, in connection with, or in relation to the interpretation, performance or breach of this or any action taken by the Company or the Holder hereunder, or otherwise arising out of the execution or performance hereof, including any determination of the fair market value of one share of the Company's Common Stock on the Conversion Date, such controversy, dispute or claim shall be determined by arbitration conducted in the English language in San Francisco, California in accordance with the Rules for Large Complex Cases of the American Arbitration Association as in effect on the date that demand for such arbitration is filed with the American Arbitration Association. The parties to the arbitration shall attempt to select an arbitrator from such members. If the parties to the arbitration do not agree on the selection of an arbitrator within twenty (20) days after the date demand for the arbitration is filed, an arbitrator having such experience shall be selected in accordance with such Rules of the American Arbitration Association. The arbitrator shall set forth his or her determination in writing (which shall be sent to each party to such arbitration) and shall enumerate in reasonable detail the basis of his or her determination. No party to the arbitration may seek, and the arbitrator shall not award, punitive or exemplary damages. To the fullest extent permitted by applicable law, any judgment or award rendered by the arbitrator shall be final, conclusive and binding. Judgment may be entered on any final, unappealable arbitration award by any state or federal court having jurisdiction thereof. To the fullest extent permitted by applicable law, any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 13(j) shall be determined by the arbitrator. The arbitration proceedings as well as the fact such proceedings occur, shall be kept confidential by the parties hereto and may only be disclosed to their personal representatives and advisors or as required by law and insofar as is necessary to confirm, correct, vacate or enforce the award. In the event of a breach of this provision, the arbitrator is expressly authorized to assess damages and each of the parties hereto consents to the expansion of the scope of arbitration for such purpose. The pendency of any arbitration under this Section 13(j) shall not relieve any party hereto of its obligations under this Warrant. To the fullest extent permitted by applicable law, if the Company or any Holder shall resort to legal proceedings for injunctive or other similar -16- 34 relief pending the outcome of any such arbitration proceeding or prior to the initiation thereof, such party shall not be deemed to have waived its rights to cause such matter or any other matter to be referred to arbitration pursuant to this Section 13(j). The parties intend that this provision to arbitrate be valid, enforceable and irrevocable. The designation of a situs or a governing law for this Warrant or the arbitration shall not be deemed an election to preclude application of the Federal Arbitration Act if it would be applicable. The arbitrator shall have authority in his or her discretion to grant injunctive relief, award specific performance and impose sanctions upon any party to any such arbitration. If any such arbitration pertains to a determination of the fair market value of one share of the Company's Common Stock on the Conversion Date or other valuation of property, the fees, expenses and charges of any arbitration pursuant to this Section 13(j) shall be borne (1) by the Company, if the arbitrator renders a valuation of the shares of Common Stock or such other property that is higher than the valuation rendered by the Board of Directors, or (2) by the Holder (pro rata in proportion to the number of shares of Common Stock issuable upon exercise of this Warrant if more than one person is a Holder), if the arbitrator renders a valuation of the shares of Common Stock or such other property that is equal to or less than the valuation rendered by the Board of Directors. In all other cases, the fees, expenses and charges of any such arbitration shall be allocated among the parties thereto in such manner as the arbitrator shall determine in his or her discretion. The provisions of the California Code of Civil Procedure Section 1283.05 are incorporated into this agreement to arbitrate. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: June 27, 1997 APPLIED DIGITAL ACCESS, INC., a California corporation By: /s/ JAMES L. KEEFE ------------------------------------ James L. Keefe, President -17- 35 NOTICE OF EXERCISE To: (1) The undersigned hereby elects to purchase shares of Common Stock of Applied Digital Access, Inc., pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full or, in the event of cashless exercise under Section 4 of the Warrant, agrees to the withholding of shares as described thereunder. (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell, or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ----------------------------------------- [Name] ----------------------------------------- [Name] (4) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ----------------------------------------- [Name] ----------------------------------------- - ----------------------- ----------------------------------------- [Date] [Signature] -18- 36 ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Name of Assignee Address No. of Shares - ---------------- ------- ------------- and does hereby irrevocably constitute and appoint _____________ ______________________ Attorney to make such transfer on the books of Applied Digital Access, Inc. maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. DATED: ---------------------- ----------------------------------------- Signature of Holder ----------------------------------------- (Witness) -19- EX-10.4 6 EXHIBIT 10.4 1 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. EXHIBIT 10.4 MASTER PURCHASE AGREEMENT NUMBER 09-823273 BETWEEN MCI TELECOMMUNICATIONS CORPORATION AND APPLIED DIGITAL ACCESS, INC. AGREEMENT NUMBER: 09-823273 DATE OF AGREEMENT: June 16, 1997 2 AGREEMENT GENERAL PROVISIONS ARTICLE 1 -- DEFINITIONS...................................................................1 ARTICLE 2 -- SCOPE OF WORK.................................................................2 ARTICLE 3 -- TERM OF AGREEMENT.............................................................2 ARTICLE 4 -- OPTIONS.......................................................................2 ARTICLE 5 -- PRICES........................................................................2 ARTICLE 6 -- ISSUANCE OF ORDERS............................................................3 ARTICLE 7 -- INVOICING AND PAYMENT.........................................................3 ARTICLE 8 -- DELIVERY......................................................................4 ARTICLE 9 -- ACCESS TO WORK IN PROGRESS AND DATA...........................................4 ARTICLE 10 -- INSPECTION AND TESTS.........................................................4 ARTICLE 11 -- ACCEPTANCE...................................................................4 ARTICLE 12 -- SOFTWARE.....................................................................5 ARTICLE 13 -- WARRANTY REGARDING PROCESSING OF DATES & DATE DEPENDENT DATA.................5 ARTICLE 14 -- TITLE AND ASSUMPTION OF RISK.................................................6 ARTICLE 15 -- EXCUSABLE DELAY..............................................................6 ARTICLE 16 -- DOCUMENTATION................................................................6 ARTICLE 17 -- RIGHTS IN DATA...............................................................7 ARTICLE 18 -- MODIFICATIONS/PROHIBITED USES................................................8 ARTICLE 19 -- PROPRIETARY INFORMATION......................................................9 ARTICLE 20 -- WARRANTIES...................................................................9 ARTICLE 21 -- TECHNICAL SUPPORT...........................................................11 ARTICLE 22 -- AVAILABILITY OF PARTS.......................................................12 ARTICLE 23 -- TRAINING....................................................................12 ARTICLE 24 -- CHANGES.....................................................................12 ARTICLE 25 -- CHANGES TO FORM, FIT, OR FUNCTION...........................................13 ARTICLE 26 -- INSURANCE...................................................................13 ARTICLE 27 -- INDEMNIFICATION.............................................................15 ARTICLE 28 -- PATENT RIGHTS...............................................................15 ARTICLE 29 -- PATENT INDEMNITY............................................................15 ARTICLE 30 -- LIENS.......................................................................16 ARTICLE 31 -- TERMINATION FOR CONVENIENCE.................................................17 ARTICLE 32 -- TERMINATION FOR DEFAULT.....................................................18 ARTICLE 33 -- ASSIGNMENT..................................................................19 ARTICLE 34 -- CONSEQUENTIAL DAMAGES.......................................................19
August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page i 3 ARTICLE 35 -- ARBITRATION / DISPUTE RESOLUTION............................................19 ARTICLE 36 -- MCI'S PROPERTY..............................................................20 ARTICLE 37 -- MCI'S RESPONSIBILITY........................................................20 ARTICLE 38 -- ADA'S RESPONSIBILITY........................................................20 ARTICLE 39 -- REQUIREMENTS FOR BAR CODING.................................................20 ARTICLE 40 -- PERMITS AND LICENSES........................................................20 ARTICLE 41 -- LABOR.......................................................................21 ARTICLE 42 -- TRADE NAMES, TRADEMARKS AND TRADE DRESS.....................................21 ARTICLE 43 -- PUBLIC RELEASE OF INFORMATION...............................................21 ARTICLE 44 -- NOTICES.....................................................................21 ARTICLE 45 -- ORDER OF PRECEDENCE.........................................................22 ARTICLE 46 -- APPLICABLE LAW..............................................................22 ARTICLE 47 -- GENERAL.....................................................................22 ARTICLE 48 -- EXAMINATION AND ENTIRETY OF AGREEMENT.......................................23 ARTICLE 49 -- MISCELLANEOUS...............................................................23 EXHIBITS EXHIBIT A DISCOUNT AND PRICE SCHEDULE......................................................A1 EXHIBIT B APPLIED DIGITAL ACCESS LIST PRICES BY PRODUCT NUMBER LISTING.....................B1 EXHIBIT C MCI ALLIANCE PARTNERS............................................................C1 EXHIBIT D SOFTWARE MAINTENCE PLAN..........................................................D1 EXHIBIT E PRODUCT CHANGE NOTICES...........................................................E1 EXHIBIT F TRAINING COURSES.................................................................F1
August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page ii 4 MASTER PURCHASE AGREEMENT This Master Purchase Agreement is made and entered into this 16th day of June (hereinafter referred to as the "Effective Date of Agreement") by and between APPLIED DIGITAL ACCESS, INCORPORATED (hereinafter referred to as "ADA") a California corporation with principal offices at 9855 Scranton Road, San Diego, CA 92121 and MCI TELECOMMUNICATIONS CORPORATION, (hereinafter referred to as "MCI") with offices at 2270 Lakeside Blvd., Richardson, Texas 75082. WHEREAS, MCI desires to purchase and license from ADA certain ADA telecommunications hardware and software, related services, materials and equipment, and such other optional equipment and services as MCI may elect to acquire pursuant to this Agreement (hereinafter, the "Products"); and WHEREAS, ADA desires to sell, license, and otherwise provide to MCI, the Products including services which MCI may elect to obtain pursuant to this Agreement; NOW, THEREFORE, in consideration of the mutual agreements and promises contained herein, the Parties mutually agree as follows: ARTICLE 1 - DEFINITIONS The term "Agreement" includes these terms and conditions, specifications, drawings, documents and addendum made a part of this Agreement, or incorporated herein by reference; and any amendments to this Agreement. The term "MCI" means MCI Telecommunications Corporation, its employees, directors, subsidiaries, affiliates, successors and assigns, and for purposes of this agreement, includes Alliance Partners. "Affiliates" means MCI's operating entities, controlling, controlled by, or under common control with MCI including, but not limited to, networkMCI, Inc., MCImetro Access Transmission Services, Inc., MCI International Telecommunications Corporation, and MCImetro, Inc. The term "Alliance Partner" shall mean any person or legal entity: (a) in which MCI has an equity ownership, or which conversely has an equity ownership in MCI, in excess of twenty (20) percent, or (b) with which MCI has an agreement requiring or permitting (i) the large-scale licensing of technology to such person or entity or (ii) the exclusive distribution of one or more products or services by such person or entity, and which in any event is listed from time to time during the term of this Agreement on Exhibit C ("MCI Alliance Partners") attached hereto and incorporated herein by this reference. The term "Parties" refers to ADA and MCI. The term "Patent" means patents for inventions and similar forms of statutory protection, domestic or foreign, such as utility models and registered designs. The term "Delivery" means the tendering of the Work called for by this Agreement by ADA at the MCI designated site, at the time(s) and place(s) specified in the Article of this Agreement entitled "Delivery." The term "Work" refers to the provision of goods, components, Products, Services, documents, software, data, or other items constituting the subject matter of this Agreement which are to be furnished by ADA to MCI. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 1 5 The term "Documentation" shall mean all or any portion of user guides, operator guides, installation manuals and other associated manuals furnished with the Products as updated from time to time. The term "Software" shall mean the tangible form, including without limitation, the media and documentation in machine readable or printed form, and the intangible interests therein. The term "Enhancements" shall mean modifications, changes, additions to and deletions from the Product provided by ADA. The term "Version" shall mean the issuance of new Software to the Product providing additional material feature/function capabilities and Enhancements which are definable and measurable by ADA. The term "Modification" means to change, alter, incorporate, enhance, upgrade or revise any Work, including Product firmware and/or software, which affects the form, fit, function, interface, interchangeability, substitutability, electrical performance capability, safety or reliability of the Product or which deviates from Work approved for use by MCI's Network Engineering Laboratory. ARTICLE 2 - SCOPE OF WORK ADA shall provide the necessary qualified personnel, facilities, and Products including services to perform the Work in accordance with the Purchase Orders issued and accepted in accordance with this Agreement. MCI shall have the unilateral right to reject any personnel provided under this Agreement upon demonstration by MCI of reasonable cause. ARTICLE 3 - TERM OF AGREEMENT The provisions of this Agreement shall be applicable to all Products purchased and/or leased by MCI from the Effective Date of Agreement through June 16, 2000 unless extended or terminated prior to this date in accordance with the provisions of this Agreement. ARTICLE 4 - OPTIONS At the request of MCI and upon the mutual written agreement of the Parties, the terms of this Agreement may be extended for up to ***** (*) successive periods of *** (*) year (each an "Extension Period") upon these same terms and conditions; provided, however, that either Party may request an adjustment in the pricing of the Products, and in such an event such pricing during the Extension Period shall be subject to mutual agreement in writing between the Parties; further provided, if the Parties fail to agree upon a requested adjustment in pricing this Agreement will not be extended further and will expire at the end of the current Extension Period. ARTICLE 5 - PRICES The prices set forth in Exhibit A and Exhibit B are exclusive of all taxes, duties and similar liabilities whatsoever, except as noted below. All charges for non-standard packaging, packing, crating and for shipping deliverable items to destinations designated by MCI shall be prepaid and added to the invoices. Unless otherwise agreed by the Parties, all prices quoted are payable in U.S. funds and shall be exclusive of taxes (including without limitation any added value, use, sales, or similar tax). MCI shall pay any and all such taxes and shall hold ADA harmless therefrom, provided that if ADA, at its sole discretion, * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 2 6 chooses to make any such payment, MCI shall reimburse ADA in full. All transactions pursuant to this Agreement shall be considered taxable unless MCI provides ADA with appropriate verification of exemption. All prices quoted shall likewise be exclusive of any import duties imposed by the country of final destination upon shipments from ADA to MCI. ADA represents and warrants, during the term of this Agreement, that the prices set forth in Exhibit A and Exhibit B shall be no higher than the current ADA price to any other customer for the same quantity of such Work under like conditions. ADA further agrees that in the event prices for the same quantity of such Work under like conditions are lowered, ADA shall notify MCI in writing of the new prices no later than thirty (30) days before they are to take effect, and Exhibit A and Exhibit B shall be adjusted by written amendment provided that any amounts previously paid to ADA shall be non-refundable and non-creditable. ADA may sell to MCI at prices lower than those cited herein on a case-by-case basis, and such sales shall not have the effect of lowering the prices generally offered under this Agreement. ADA shall notify MCI in writing of the prices and terms and conditions for this case-by-case Work. ARTICLE 6 - ISSUANCE OF ORDERS The purchase of Work shall be by means of individual purchase orders, including change orders thereto, and delivery release orders (hereinafter referred to collectively as "Orders") which may be issued from time to time to ADA by MCI. Each Order shall specify the Products, quantity, price, delivery date, destination, and other details pertaining to the Products ordered thereunder. ADA understands and agrees that unless otherwise stated in the Order, this Agreement shall be applicable to such Order for equipment and/or services, whether or not this Agreement is expressly referred to in such Orders. In the event of any conflict as to the terms and conditions between the pre-printed terms of the Order and this Agreement, this Agreement shall take precedence. Within thirty (30) days of receipt of the Order, ADA shall acknowledge acceptance or rejection of the Order. In the absence of such Order acknowledgment the Order shall be deemed to be accepted by ADA. Neither MCI nor any MCI Affiliate or Alliance Partner ("Ordering Entity") shall be liable for, or in relation to, any Order not placed by it. Further, neither MCI, nor any other Ordering Entity shall be liable for any act or omission of any other Ordering Entity whether in relation to this Agreement, any Order or otherwise. Any Ordering Entities placing Orders under this Agreement are separately and individually liable for anything pertaining to such Order(s). ARTICLE 7 - INVOICING AND PAYMENT ADA shall submit original invoices to the MCI Accounts Payable department identified on the applicable Order stating the amounts due. The applicable amounts due ADA shall be paid within thirty (30) days net in United States dollars after receipt of an invoice, provided that the Work that is the subject of the invoice has been delivered and/or completed and accepted in accordance with the requirements of this Agreement, and that all conditions established hereunder as prerequisites to payment have been fulfilled. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 3 7 ARTICLE 7 - DELIVERY ADA shall make deliveries both in quantities and at times specified herein and in the applicable Orders. ADA shall deliver the Products to MCI Free on Board (FOB) origin, and in the absence of other shipping instructions, ADA will ship "surface prepaid." If Orders are received specifying order intervals of less than thirty (30) days, ADA will use commercially reasonable efforts to meet such dates and may apply an expedite charge to orders requiring fulfillment in less than five (5) business days such expedite charges shall be pre-approved by MCI. Except as provided above, if ADA deliveries exceed the delivery date, MCI, without limiting its other rights or remedies as specified herein, may direct expedited routing and ADA shall pay for any excess costs incurred thereby. MCI shall not be liable for ADA's commitments or production arrangements in excess of the amount, or in advance of the time, necessary to meet MCI's delivery schedule. Products which ADA delivers more than fourteen (14) days in advance of schedule may, at MCI's option, either (a) be returned at ADA's expense for proper delivery, (b) have payment therefor withheld by MCI until the date that Products are actually scheduled for delivery or (c) be placed in storage on ADA's account until the delivery date specified herein. MCI may delay, at no cost to MCI, the delivery and invoicing of Products for a period of up to thirty (30) days; provided, however, that MCI notifies ADA in writing at least fifteen (15) days prior to the scheduled delivery date. Delay(s) beyond thirty (30) days shall be deemed a change in accordance with the Article of this Agreement entitled CHANGES. ARTICLE 9 - ACCESS TO WORK IN PROGRESS AND DATA All Work in progress under this Agreement and all data and documentation related to this Agreement are subject to continuous examination, evaluation and inspection by MCI at any reasonable time during the term of this Agreement. Thereafter, to the extent that such data and documentation is of a type normally retained by ADA, it shall continue to be available for such purposes, without affecting ADA's obligations under other provisions of this Agreement, and subject to ADA's rights in data under the Article of this Agreement entitled RIGHTS IN DATA. ADA shall also deliver copies of all such data and documentation to MCI upon written request of MCI at any time during the term of this Agreement. ARTICLE 10 - INSPECTION AND TESTS Inspections may be made at all reasonable times by MCI or its designated representative(s) at ADA's manufacturing facilities or at the MCI or ADA site designated for product staging, as described hereinafter. Travel and living expenses and other incidental expenses will be borne by each Party that incurs such expenses. Remedy of the non-conforming Products referred to in this Article shall be made promptly by ADA, at its expense, upon receipt of written notice thereof from MCI. If ADA fails to so remedy any such non-conforming Product(s), MCI may either (a) have any or all such non-conforming Product(s) remedied through other means, in which event ADA shall pay the reasonable costs of so remedying such non-conforming Product(s); or (b) accept the non-conforming Products and reduce the applicable price by the cost to remedy the Product. ARTICLE 11 - ACCEPTANCE After receipt at destination, MCI shall promptly inspect the Products received and accept them. If within ten (10) business days after such inspection a Warranty defect is found, MCI shall notify ADA in writing of those rejected Product(s). Remedy of rejected items shall be promptly made by ADA at its expense, which shall include all related costs for repair or replacement of the rejected Product(s) in accordance August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 4 8 with Article 18, WARRANTIES, and all applicable shipping changes. Upon remedy of such rejected Product(s) in accordance with this Agreement, the Products shall be accepted by MCI. If ADA fails to remedy any such rejected item(s), MCI may elect either (i) to have any or all such rejected item(s) remedied through other means, in which event ADA shall pay the reasonable costs of so remedying such rejected item(s); or (ii) to accept the Work and reduce the applicable price by an equitable amount. ARTICLE 12 - SOFTWARE The price of Software ordered hereunder shall include, with respect to each copy of Software covered by this Agreement, a perpetual, royalty-free, non-exclusive, non-sublicensable license, subject to all the terms and conditions of this Agreement, to use the initial feature release of the software delivered. These license terms shall also extend to all future Software Versions and Enhancements which are issued during the applicable Software Warranty period or provided pursuant to a Software Maintenance plan, as described in Exhibit D. Software that MCI develops independent of ADA or any MCI Software shall remain the property of MCI. MCI understands that any modification of ADA's software without ADA's consent shall vitiate ADA's maintenance responsibilities described in the paragraph below. Software is licensed hereunder and not sold. As between the Parties, ADA retains and shall exclusively own all title to and, except as expressly and unambiguously licensed herein, all rights and interests in the Software delivered by ADA hereunder, all modifications and derivative works (by whomever produced) thereof and all intellectual property and proprietary rights anywhere in the world. New product feature releases shall not be included under MCI's initial license but shall be available to MCI at charges mutually agreed upon. Provided that MCI subscribes to ADA's applicable Software Maintenance plan, ADA shall maintain all software required to operate the Software for a period of up to *** (**) years after the Effective Date of Agreement. Such software maintenance shall include updates or changes which reflect operational or efficiency changes, as well as, the development and delivery of new loads as released by ADA. In the event that ADA files for protection under the provision of the Bankruptcy Code, MCI and ADA agree that under Section17 U.S.C., particularly Section 117 (Federal Copyright Act), that MCI has the non-exclusive, limited right to use the Software for the provision of MCI's services, including the right to prepare copies for archive or back-up purposes. MCI may sell, transfer or dispose of its rights under this Article to any subsequent buyer of Products; such disposition shall be limited to the scope of the Software license normally provided by ADA for Products purchased hereunder. MCI may not sell, transfer or dispose of Products, with the rights under this Article, to competitors of ADA. ARTICLE 13 - WARRANTY REGARDING PROCESSING OF DATES & DATE DEPENDENT DATA The licensed Software will provide accurate processing of date and date dependent data (including, but not limited to, calculating, comparing and sequencing operations) for all dates through the year 2100 and otherwise comply with the certificate requirements for ISO 8601 standards for year 2000 date compliance, and that upon request ADA will provide sufficient evidence through adequate testing of the Software or otherwise to demonstrate compliance with this Warranty. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 5 9 ARTICLE 14 - TITLE AND ASSUMPTION OF RISK ADA shall convey good title, free from any claim or encumbrance, to MCI for all Products delivered under this Agreement. Title to all such Products excluding Software shall pass to MCI at the shipping point. Any loss or damage to such Products prior to passing of title shall be at ADA's risk. ARTICLE 15 - EXCUSABLE DELAY In the event performance of this Agreement, or of any obligation hereunder, is prevented, restricted or interfered with by reason of: a) acts of God; b) wars, revolution, civil commotion, acts of public enemies, blockage or embargo; c) acts of Government in its sovereign capacity; d) labor difficulties, including, without limitation, strikes, slowdown, picketing or boycotts; or e) any other external circumstances beyond the reasonable control of the Party affected. The Party affected, upon giving prompt notice to the other Party, but in no event to exceed more than twenty (20) days after either learning of such event or after the date when such party should have known of such event, shall be excused from such performance on a day-to-day basis to the extent of such prevention, restriction, or interference (and the other Party shall likewise be excused from performance of its obligations on a day-to-day basis to the extent such Party's obligations related to the performance so prevented, restricted or interfered with); provided, however, that the Party so affected shall use its best efforts to avoid or remove such causes of non-performance and both Parties shall proceed whenever such causes are removed or cease. ARTICLE 16 - DOCUMENTATION ADA shall supply MCI with originals of all documentation necessary to support and maintain the equipment and systems provided by ADA to MCI under this Agreement. ADA grants MCI a limited rights license, subject to all the terms and conditions of this Agreement, to MCI at no charge to reproduce this documentation in quantities required for this Agreement provided that all reproduced copies include all ADA copyrights and other proprietary marks and legends. MCI will take all reasonable precautions to insure that any documentation reproduced under the limited rights licenses will be used exclusively by MCI. Other documentation which may be provided pursuant to this Article at the request of MCI shall include: a) INSTALLATION, OPERATION AND MAINTENANCE (IOM) MANUALS -- Installation, operation and maintenance manuals, including packing and unpacking instructions, general descriptions, tables of specifications, theory of operation, installation procedures, maintenance procedures, trouble-shooting procedures and parts list. b) ENGINEERING DOCUMENTATION -- Non-proprietary specifications, functional descriptions and operating descriptions. c) ACCEPTANCE TEST PLAN/PROCEDURE -- This documentation shall be sufficiently comprehensive to ensure that acceptance testing is capable of determining whether the Products comply with the requirements of this Agreement. ADA shall develop jointly with MCI such test plans to include at a minimum: August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 6 10 i) Reference to specification ii) List of the test equipment to be used iii) Environmental conditions iv) Initial condition of item being tested, (e.g. profile, switch position, etc.) v) Brief description of each test, in the sequence they are to be performed including a list of parameters to be measured. vi) Block diagrams of the testing setups vii) Failure reporting, correction and analysis requirements a) FACTORY TEST PLAN -- This plan shall be sufficiently comprehensive to ensure that factory testing is capable of determining whether, upon shipment to MCI, the Products comply with the requirements of this Agreement. b) QUALITY ASSURANCE DOCUMENTATION -- This document shall describe the Quality Assurance Program of ADA. c) PRODUCT SUPPORT DOCUMENTATION -- This documentation shall include all the information necessary to support and maintain the continued operation of Products delivered by ADA. This shall include, but not be limited to, the following: iv) Recommended Spare Parts List -- ADA shall submit a complete list of Field Replaceable Unit (FRU) assemblies, sub- assemblies, parts and consumable recommended to support production equipment for a period of ****** (**) months. The list shall include part name, manufacturer's name and address, part number, MTBF (Mean Time Between Failures), lead-time, availability. For purposes of this Agreement, FRUs are defined as: Primary components, assemblies or sub-assemblies such as drawers, cards, boards and power units which, in the event of failure, must be replaced in the field by field service personnel in order to ensure continued equipment operation. In addition, ADA shall submit a recommended depot level sparing list. v) Provisioning Documentation ARTICLE 17 - RIGHTS IN DATA Written documentation, provided by ADA, which is required to be delivered under this Agreement shall be the same documentation as provided to other customers and shall become the property of MCI and shall not be disclosed by MCI to any other Party, and MCI shall have the right to use the information contained therein for the purpose of this Agreement. MCI shall protect any written documentation, which ADA has marked with an appropriate and valid proprietary legend, such as "ADA Confidential," from unauthorized use or disclosure to any person who is not a director, officer, employee, agent, contractor, or affiliate of MCI, and, at a minimum, use such measures as MCI uses to protect its own confidential information; provided, however, that MCI shall have the right to use and duplicate such written documentation together with applicable copyright notices for any MCI purpose consistent with this Agreement. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 7 11 ARTICLE 18 - MODIFICATIONS/PROHIBITED USES MCI shall have the right to request ADA to make Modifications to the Product(s) to perform any functions which MCI deems desirable and the Product(s) so modified shall remain subject to the terms of this Agreement. In such event, MCI shall request ADA to submit a proposal for such Modifications to the Product and provide an estimate for such Modifications and implementation thereof within thirty (30) days after receipt of the MCI's request. ADA shall implement such Modifications only upon receipt of written authorization from MCI Procurement at 2270 Lakeside Blvd., Richardson, TX 75082, Attn: Director of Procurement. Notwithstanding of the above, if ADA lacks the capability or resources to develop and implement the requested Modifications, the Parties agree to negotiate in good faith an appropriate license permitting MCI to develop or have developed the requested Modification. MCI agrees not to translate, decompile, dissemble or reverse engineer the Product(s) or otherwise attempt to alter, adapt or discover the source code of the Product(s) by any means whatsoever or permit another to do so. Further, MCI may not: a) Provide, rent, lease, lend, use for timesharing or service bureau purposes, sell, network (except as expressly contemplated herein), transfer, or otherwise distribute or allow others to use the Product(s), or any copy or portion thereof, or MCI's rights under this Agreement on a temporary or permanent basis to or for the benefit of anther person or entity without the prior written permission of ADA; b) Modify, incorporate into or with other software or create a derivative work based upon any part to the Product(s) or attempt or permit a third party to do so, except to the limited extent that such actions do not affect the form or function of the Product(s) provided that foregoing shall not restrict MCI from using standard application programming interface, hereinafter referred to as API, as necessary to permit interoperability of the Product(s) with other applications; c) Make any copies of the Product(s) or distribute any materials other than for MCI's (excluding any affiliates which function as telecommunications equipment suppliers) own internal use, except as reasonably required to use the Product(s) strictly in accordance with the license granted hereunder or as otherwise required by law or applicable industry regulation and, except for one (1) copy solely for archival and back-up purposes; d) Remove, modify, or obscure the copyright, trademark, and/or any other propriety notices or legends contained in the Product(s) or affixed on the Documentation or Product(s) media or packaging; e) Export, re-export, or transfer, directly or indirectly, the Product(s), or any portion thereof, from the country in which is it originally delivered to MCI in violation of any law, restriction, national security control or regulation or without all required licenses and authorizations to Cuba, Libya, North Korea, Iran, Iraq, or Rwanda, or to any Group D:1 or E:2 country (or any national of such country) specified in the then current supplement No. 1 to Part 740 to the U. S. Export Administration Regulations (or any successor supplement or regulations). This paragraph shall survive termination of this Agreement; and f) Use a portion or component of the Product(s) in a manner other than as specified in the "T3AS User Manual," and "T3AS Installation & Engineering Manual"; and g) Disclose the results of any benchmark of the Product(s) to any third party without the prior written authorization of ADA. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 8 12 ARTICLE 19 - PROPRIETARY INFORMATION Each Party agrees that with respect to any oral, written or computer generated information supplied or disclosed by either Party to the other Party under this Agreement and identified by the disclosing Party as confidential or proprietary (hereinafter referred to as "Confidential Information"): a) To use such Confidential Information only in performance of this Agreement; b) Not to make copies of any such Confidential Information or any part thereof without the permission of the disclosing Party; c) Not to disclose any such Confidential Information or any part thereof to others for any purpose without prior written approval from the disclosing Party; d) To limit dissemination of such Confidential Information to persons within the receiving Party's organization, including contractors and consultants who are bound to protect Confidential Information under the terms of a written agreement, who are directly involved in the performance of this Agreement and have a need to use such Confidential Information for purposes of such performance; and e) To return such Confidential Information and any copies thereof to the disclosing Party at the completion or termination of this Agreement, or at such earlier date as the Parties may agree in writing. Notwithstanding the foregoing, neither Party shall have any obligation with respect to any information which is: (i) previously known to the receiving Party, (ii) invalidly marked, (iii) in or becomes in the public domain through no fault of the receiving Party, (iv) rightfully acquired by the receiving Party from third parties, (v) independently developed by the receiving Party without reference to Confidential Information, (vi) approved for release by the written authorization of the disclosing party, or (vii) identified by the disclosing Party as no longer confidential. Upon the execution of this Agreement, the Non-Disclosure Agreement between the Parties dated June 10, 1996 shall terminate and all Confidential Information previously disclosed under said agreement shall thereafter be governed by the provisions of this Agreement. The provisions of this Article shall survive the termination or expiration of this Agreement for a period of **** (*) years thereafter. ARTICLE 20 - WARRANTIES ADA warrants the following with respect to each of its Hardware Products that the Hardware Product is free from defects in material and workmanship, and that upon payment in full all Hardware Product shall be delivered free and clear of liens, claims or encumbrances of any kind. ADA warrants that the Product(s) will conform to and perform in accordance with the specifications set forth in this Agreement for a period of ************ (**) months commencing with the date of shipment to MCI. With respect to Products sold but not manufactured by ADA, ADA will assign to MCI all warranties allowed by the manufacturer. If ADA installs the Hardware Product, ADA will warrant the installation against defects in material and workmanship for a period of ****** (**) days from the date of installation and provide all parts and on-site labor (including transportation costs of ADA's technician(s)) necessary to restore the Hardware Product to proper operating condition at no charge to MCI. The warranty period for repair parts and * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 9 13 labor and for replaced Products shall be the remainder of the warranty for the repaired or replaced item or ****** (**) days, whichever is greater. ADA warrants and represents that the Software media delivered hereunder is free from material defects and the Product will operate substantially in accordance with the Documentation provided with the Product for ****** (**) months following installation (herein referred to as "Software Warranty Period"). Once the Software Warranty Period has expired, MCI may request ADA continue maintenance in accordance with Exhibit D entitled SOFTWARE MAINTENCE PLAN. If at any time within the Software Warranty Period, the Product is considered by MCI to not be in conformance with this Warranty, MCI shall promptly notify ADA of such alleged non-conformance. ADA shall respond as required in the Article entitled ACCEPTANCE. THE WARRANTIES SET FORTH ABOVE ARE THE COMPLETE WARRANTY COVERAGE OFFERED BY ADA FOR THE HARDWARE AND SOFTWARE PRODUCTS AND SERVICES PROVIDED HEREUNDER AND ARE IN LIEU OF ALL OTHER WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANY OTHER OR PRIOR STATEMENT, WRITTEN OR ORAL, ADA MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE QUALITY, MERCHANTABILITY, FITNESS, OR THE USE OR DATA RESULTS BY THE USE OF THE PRODUCT(S). Except as specifically provided under the above paragraph in this section, ADA's liability under warranty shall be limited to either repair or replacement of the defective Product in accordance with the Repair and Return Procedures described elsewhere herein or, if repair or replacement is not reasonable, refund of the purchase price for the effected Product(s). ADA shall incur no obligation under this warranty if (i) the allegedly defective Product is returned to ADA more than thirty (30) days after the expiration of the applicable warranty period (provided, however, that notice of a defect that was caused by ADA's fraud or such gross mistakes by ADA as amount to fraud may be given at any time), or if (ii) ADA's verifiable tests disclose that the alleged defect is not due to defects in material or workmanship. The Warranty set forth in above of this Article does not extend to any Product that (i) is modified or altered, (ii) is not maintained by ADA's maintenance recommendations, (iii) is operated in a manner other than that specified by ADA, (iv) has its serial number removed or altered or (v) is treated with abuse, negligence or other improper treatment (including, without limitation, use outside the recommended environment). MCI's sole remedy with respect to any Product warranty or defect is as stated in this Article. ADA Products are intended for standard commercial uses. Without appropriate network design engineering, they should not be used (or sold, licensed or distributed for use) in hazardous environments requiring fail safe performance in which the failure of Products could lead directly to death, personal injury, or severe physical or environmental damage; such environments include, without limitation, the operation of nuclear facilities, aircraft navigation/communication systems, air traffic control, direct life support machines, or weapons systems. MCI agrees to consult with ADA prior to using the Products (or selling, licensing, or distributing them for use) in such environments so that ADA may review the proposed network design and recommend appropriate system redundancies or design modifications. Any use, sale, license or other distribution of the Products in any such environment without the prior written consent of ADA, shall be deemed at MCI's sole risk. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 10 14 ARTICLE 21 - TECHNICAL SUPPORT ADA shall maintain for the term of this Agreement a Technical Support Center (hereinafter referred to as "TSC") to provide support services as described below. ADA shall make TSC services available, starting Effective Date of Agreement, to MCI five (5) days per week, Monday through Friday, 8:00 A.M. to 8:00 P.M. EST. Upon receipt of a request from MCI via telephone, or other form, for TSC services, ADA shall provide the requested services via telephone on an immediate response basis. ADA support services shall include, but not be limited to, the following items: a) TECHNICAL SUPPORT CALL-IN -- Technical support staff personnel are available to assist in quick and easy resolutions of problems that occur in the installation or use of ADA's Equipment. This service is provided at no charge to MCI. b) FIELD SERVICE ENGINEERING -- Field Service Engineers are available to provide on-site installation assistance, installation checkouts, trouble-shooting, field repair, routine maintenance or training on installation operation and maintenance. Based upon mutual agreement that a charge for field service is necessary, the charge to MCI shall be in accordance with ADA's then existing rates. c) INSTALLATION OF NEW PRODUCTS -- During the installation period of new Products, ADA will guarantee immediate response on the turn around of defective equipment. d) REPAIR -- MCI shall contact ADA's personnel on the return of Products for in or out of warranty repair or concerning status of any repair service being performed. The following procedure shall cover the repair of equipment returned to ADA for repair: i) MCI must obtain ADA's Return Material Authorization (RMA) Number prior to the return of any Products. A block of RMA Numbers will be issued by ADA for MCI's Distribution Center(s). ii) In Warranty Products -- Ship via ADA designated carrier instructed to be used upon obtaining the RMA Number, if applicable. MCI is responsible for transportation charges from Product(s) shipped to ADA; ADA is responsible for return shipment to MCI. ADA will either repair or replace in warranty Products within fifteen (15) business days of its receipt. The warranty period for repaired or replaced Products shall be the remainder or the original warranty or ninety (90) days, which ever is greater. iii) Out of Warranty Products -- ADA, on receipt of an Order from MCI, is responsible for return shipment to MCI; MCI is responsible for transportation charges of Product(s) shipped to ADA. iv) MCI shall furnish the following information with material returned to ADA for repair: (a) MCI's name and complete address; and (b) name(s) and telephone number(s) of MCI's employee(s) to contact in case of questions about the Products to be repaired; (c) ship to address for return of repaired Products if different from (a); (d) a complete list of Products and quantity of each returned; (e) the nature of the defect or failure, if August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 11 15 known; (g) ADA's (RMA) Number; and (h) Order number to cover repair charges if out of warranty. v) ADA will either repair or replace defective Products not covered under warranty within fifteen (15) working days from receipt. The warranty on Serviced Products is ****** (**) days measured from date of service. vi) If Products are returned to ADA for repair as provided for in this section, and are determined to be beyond repair, or repair costs are expected to exceed the cost of a replacement, ADA shall so notify MCI. If requested by MCI for out of warranty Product(s), ADA will sell to MCI a replacement at the prices set forth in Exhibit A or, if no such price exists, at a price agreed upon by ADA and MCI. Repair charges will be invoiced against MCI's Repair Delivery Order (RDO). vii) All invoices originated by ADA for repair services must be clearly identified as such, and must contain: (1) a reference to MCI's Order for these repair services, (2) repair charges, if any and (3) the MCI tracking number (RE control number). With the concurrence and scheduling of MCI, repair may be made by ADA on site. ARTICLE 22 - AVAILABILITY OF PARTS ADA shall make available to MCI repair parts of the latest revision for all Products furnished under this Agreement for a period of *** (**) years from its effective date. ADA shall give *** (*) year prior written notice to MCI in the event ADA will be unable to supply such parts or to obtain another source of supply for MCI in accordance with this Agreement. ADA's inability to provide such parts shall be a default of this Agreement in accordance with the Article contained in the terms and conditions of this Agreement entitled "Termination for Default." Without waiving any of its rights or remedies under this Agreement or by law MCI may, at its sole option, allow ADA to provide MCI with drawings and all technical information or any other rights ADA may have so that MCI can manufacture or obtain such parts from other sources. The technical information shall include, by example and not by way of limitation: (a) manufacturing drawings and specification of raw materials and components comprising such parts; (b) manufacturing drawings and specifications covering special tooling and the operation thereof; (c) a detailed list of all commercially available parts and components purchased by ADA on the open market, disclosing the part number, name and location of the supplier, for the purchase thereof; and (d) in-depth test specifications and procedures describing the methods of testing and repairing the material. ARTICLE 23 - TRAINING At MCI's request and in accordance with the pricing and time frame set forth in Exhibit F, ADA shall provide training for MCI personnel on operation and maintenance of the ADA equipment and systems as reasonably requested by MCI. Training courses offered by ADA are set forth in Exhibit F. ARTICLE 24 - CHANGES MCI may, by written change order or modification, and without notice to any surety, make changes within the general scope of this Agreement in drawings, designs, specifications, methods of shipment or packaging/packing, quantities, or time or place of delivery; require additional Work or direct the * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 12 16 omission of Work. To the extent that such change modifies the scope of ADA's obligations under this Agreement, the Parties shall negotiate an equitable adjustment to the contract price and/or schedule as necessary. Changes to this Agreement can only be made in writing and signed by the duly authorized representatives or designee of both Parties as described in Article 44 -- NOTICES. ADA shall submit a proposal for the contract adjustment within thirty (30) days after receipt of written notice from MCI, which MCI shall either accept or reject within thirty (30) days of receipt. After the Parties have arrived at an equitable adjustment to the contract price and schedule, nothing in this Article shall excuse ADA from promptly proceeding with this Agreement as changed. The Parties shall attempt to reach agreement as to any equitable adjustment that is due pursuant to the first paragraph of this Article. Without relieving ADA of its obligation to proceed promptly with this Agreement, in the event the Parties are unable to reach an Agreement as to an equitable adjustment, the matter shall be determined in accordance with the Article of this Agreement entitled ARBITRATION. MCI's personnel may from time to time render technical assistance or give technical advice to, or effect an exchange of information with ADA personnel concerning the Work to be furnished under this Agreement. However, ADA shall not deviate from the requirements of this Agreement by reason of such assistance or exchange of information, unless the deviation is incorporated into and authorized by a change order issued in accordance with the first paragraph of this Article. ADA shall not, by reason of such assistance, advice or exchange of information, delete or in any way modify any of MCI's rights or any of ADA's obligations, express or implied, which are a part of this Agreement. ARTICLE 25 - CHANGES TO FORM, FIT, OR FUNCTION ADA shall neither make nor incorporate any changes to the Products provided hereunder which affect form, fit, function, interface or interchangeability, without the prior express written notification of MCI. ADA shall notify MCI within ninety (90) days of the effective change date. In addition, ADA shall furnish, if available, MCI with new or updated manuals and/or agenda sheets and new and/or revised data and drawings for all other affected documentation furnished under this Agreement. ADA may make or incorporate changes not affecting form, fit, function, interface or interchangeability of the Product as it deems necessary at any time. In the event certain changes become mandatory by reason of safety or failure of the Products to perform in accordance with the requirements of this Agreement, ADA shall provide immediate written notice to MCI and shall proceed promptly to make the necessary change(s). ADA shall bear all costs and expenses relating to such retrofit or replacement of Products which are necessary for the Products to conform to the requirements of the Agreement. Any mandatory changes to the Products, once approved by MCI, shall be compatible with all Products in use (for a minimum of two releases backward) or on order pursuant to this Agreement unless the Parties otherwise specifically agree. If any mandatory change is not compatible, upward or downward as described, ADA, at MCI's option, shall retrofit such change(s) on all affected installed Products ordered pursuant to this Agreement at no cost to MCI. ARTICLE 26 - INSURANCE During the term of this Agreement, ADA shall maintain insurance, the kinds and in the amounts specified with insurers of recognized responsibility, licensed to do business in the State(s) where the work is being August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 13 17 performed, and having either: an A.M. Best rating of A8, a Standard & Poor's rating of AA, or a Moody's rating of Aa2. If any Work provided for or to be performed under this Agreement are subcontracted, ADA shall require the subcontractor(s) to maintain and furnish insurance equivalent to that which is required of ADA. In accordance with the above, ADA and any subcontractors shall maintain the following insurance coverage: a) Comprehensive or Commercial General Liability as follows: $********* per occurrence combined single limit/$********* general aggregate and will include: i) coverage for contractual liability, ii) coverage for the use of independent contractors, products and completed operations, and iii) will not contain an exclusion for explosion, collapse, and underground coverage. a) Business Automobile Liability including coverage for owned, hired, leased, rented and non-owned vehicles as follows: $********* combined single limit per accident c) Workers' Compensation and Employers' Liability as follows: Workers' Compensation - Statutory Limits Employers Liability: Bodily Injury by Accident $********* each accident Bodily Injury by Disease $********* policy limit Bodily Injury by Disease $********* each employee A combination of primary and excess/umbrella liability policies will be acceptable as a means to meet the limits required under this Agreement. The required minimum limits of coverage shown above DO NOT limit or diminish ADA's liability under this Agreement. Excess or Umbrella Liability Excess or Umbrella Liability coverage at a limit of no less than $********* per occurrence and aggregate in excess of the underlying coverage required above. Standard Provisions a) ADA will submit to MCI a standard "Accord" insurance certificate (or comparable form acceptable to MCI) signed by an authorized representative of such insurance company(ies), certifying that the insurance coverage(s) required hereunder are in effect for the purposes of this Agreement. Said insurance certificate shall certify that no material alteration, modification or termination of such coverage(s) shall be effective without at least 30 days advance written notice to MCI. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 14 18 b) ADA's insurers shall waive all rights of recovery against MCI for any injuries to persons or damage to property due to the fault of ADA in the execution of work performed under this Agreement. c) All policies (excluding workers' compensation) shall name MCI, its subsidiaries and affiliates, as Additional Insured as respects work performed under this Agreement. d) ADA shall permit any authorized representative of MCI to examine ADA's original insurance policies should MCI so reasonably request. Should ADA at any time neglect or refuse to provide the insurance required herein, or should such insurance be canceled or non-renewed, MCI shall have the right to terminate this Agreement, or costs of securing substitute coverage shall be deducted from payments owed to ADA. e) ADA's insurance shall be considered primary and not excess of contributing with any other applicable insurance. f) ADA and all subcontractors shall ensure full compliance with the terms of the Occupational Safety and Health Administration (OSHA) and all locations' and jurisdictions' safety and health regulations during the full term of this Agreement. ARTICLE 27 - INDEMNIFICATION The Parties, at their own expense, shall indemnify and hold the other Party, its directors, officers, employees, agents, subsidiaries, affiliates, customers, designees, and assignees harmless from any loss, damage, liability or expense, on account of damage to physical property and bodily injuries, including death, to all persons, arising from any occurrence solely caused by any negligent or intentional act or omission of the other Party or its subcontractors related to the performance of this Agreement. Each Party, at its expense, shall defend any suit or dispose of any claim or other proceedings brought against the other Party on account of such damage or injury, and shall pay all expenses, including attorneys' fees, and satisfy all judgments which may be incurred by or rendered against the other Party, provided that the Party seeking indemnification hereunder shall notify the other promptly and in writing of any claim or action, provide reasonable assistance, and shall afford the other Party sole control in the defense or settlement of such claim or action. ARTICLE 28 - PATENT RIGHTS The Parties concur that, except as they may separately agree pursuant to an applicable development agreement, none of the hardware, software, processes, methods, techniques, or know-how produced or developed by ADA pursuant to this Agreement shall constitute a work for hire and, accordingly, no patent rights or other intellectual property rights with respect to the same shall accrue to MCI. ARTICLE 29 - PATENT INDEMNITY ADA, at its own expense, shall indemnify and hold MCI harmless from any loss, damage, liability or expense on account of any claim(s), and shall defend any suit based on an allegation that the Product, use, or license of any portion thereof infringes any United Stated patents, copyrights, trade secrets, trademarks, or other proprietary right(s). ADA shall pay any royalties and other costs or expenses, including attorney's fees, related to the defense, settlement, or disposition of such infringement claim(s). MCI shall promptly notify ADA in writing of any such infringement claim or action and give ADA authority and any assistance or information reasonably available to MCI for the defense of such claim(s). August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 15 19 Any such assistance or information which is furnished by MCI at the request of ADA shall be at ADA's expense. If MCI's Use or license of the Product or any portion thereof, is enjoined as a result of a suit based on any such claim(s) of infringement, ADA agrees to the following: a) At its own expense and option, negotiate a license or other agreement with the claimant so that the Product is no longer subject to such injunction; or b) At its own expense, replace or modify such Product suitably or substitute a suitable Product therefor (subject to the approval of MCI), which modified or substituted Product is not subject to such injunction, and to extend the provisions of this Article thereto, or c) In the event that none of the foregoing alternatives are suitably accomplished by ADA using commercially reasonable efforts, ADA shall accept return of the Product and reimburse MCI for the price of the Product less depreciation of the Product based on a system life of five (5) years. In the event that any proposed settlement or compromise terms do not include MCI's right to continue to Use the Product in substantially the same form and on substantially the same terms and conditions as set forth in this Agreement, MCI may participate in such negotiations at its own expense, and MCI and ADA shall seek to obtain such ongoing right to Use. Moreover, at any time, MCI may at its own cost and expense settle or compromise any such claims against it so long as such settlement or compromise is expressly without prejudice to the interest or position of ADA and without cost or expense to the ADA. ADA's obligation under this Article does not apply with respect to the Product or portions or components thereof (i) not supplied by Product or its suppliers, (ii) which are modified by any party other than Product after the date of delivery by Product, (iii) which are modified by Product in accordance with specifications provided by MCI (to the extent the alleged infringement relates to such modification), (iv) combined with other products, processes or materials, to the extent the alleged infringement relates to such combination, (v) where MCI continues the allegedly infringing activity after being notified thereof in writing by ADA, and (vi) where MCI's use of the Product is incident to an infringement not resulting primarily from the Product or is not strictly in accordance with the license granted in this Agreement. ARTICLE 30 - LIENS As MCI requires, before submitting any invoice for payment, or at any other time that MCI requires, ADA shall deliver to MCI a satisfactory release of any and all liens arising in connection with the Work under this Agreement. ADA shall dispose of any claim and defend any suit or injunction brought to enforce any lien arising from the performance of any Work under this Agreement, and shall pay all expenses associated with such proceedings. MCI may withhold from any payment or consideration otherwise due ADA, any sum that MCI has reason to believe may be needed to satisfy any third party lien arising out the Work under this Agreement. Prior to the time of any such withholding, MCI shall notify ADA in writing of the nature of the lien and the amount of money to be withheld pursuant to this Article and afford ADA reasonable opportunity to satisfy the lien. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 16 20 ADA shall reimburse MCI for all moneys, including all costs and reasonable attorneys' fees, incurred by MCI in removing liens arising out of the Work under this Agreement. Such reimbursement may be deducted from any payment or consideration otherwise due ADA. ADA shall, upon written request by MCI, promptly pay MCI any amounts due under this Article. ARTICLE 31 - TERMINATION FOR CONVENIENCE By written notice to ADA, MCI may terminate this Agreement or any Order issued hereunder for its convenience at any time prior to completion. In the event of such termination by MCI, it is agreed that the termination charges shall be negotiated. However, in no event shall the termination charges pursuant to this Article exceed the lesser of: a) the total contract price as reduced by contract price of the Work not terminated; or b) the total costs, both direct and indirect, incurred by ADA in the performance of the Work so terminated. In the event of termination pursuant to this Article, ADA shall take all action necessary to reduce the termination costs due from MCI, including but not limited to, the immediate discontinuance of the terminated Work under this Agreement, and the placing of no further orders for labor, material or services required under the terminated portion. ADA agrees to take such action, as may be necessary or as MCI may direct, for protection of property in ADA's possession in which MCI may have acquired an interest. ADA shall continue performance of the portion of this Agreement not terminated. MCI shall have no obligation to ADA with respect to the terminated portion of this Agreement, except as herein provided. In the event of termination, ADA agrees to advise MCI in writing of all proposed settlements with vendors which may bear upon the liability of MCI pursuant to this Article; and ADA further agrees not to enter into any binding settlement until either MCI has approved the proposed settlement or thirty (30) days have elapsed from the date MCI was first notified of such proposed settlement. Direct and indirect costs shall be determined in accordance with generally accepted accounting practices and verified by an independent Certified Public Accountant at MCI's cost. MCI shall pay ADA the termination charges due under this Article within sixty (60) days after submission to MCI of such total costs which, at MCI's option, may be verified by an independent Certified Public Accountant. Payment of any termination charges hereunder shall be in an amount equal to the total termination charges less the following: a) Amount(s) previously paid by MCI to ADA for the terminated Products pursuant to this Agreement; and b) Amount(s) representing ADA's total cost of segregable items of inventory for the terminated Work not desired by MCI and which is commonly retained in ADA's parts of finished goods inventory. Should the sum of (a) and (b) above exceed the total termination charges, ADA shall repay to MCI within sixty (60) days the amount by which the sum of (a) and (b) above exceed the total termination charges. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 17 21 ARTICLE 32 - TERMINATION FOR DEFAULT By written notice of default to ADA, MCI may terminate this Agreement, or any order issued hereunder, in any one of the following circumstances: a) If ADA fails to perform any of the other provisions of this Agreement, or so fails to make progress as to endanger performance of this Agreement in accordance with its terms, and in which of these two circumstances does not initiate a mutually agreeable plan within a period of ten (10) days (or such longer period as MCI may authorize in writing) after receipt of notice from MCI specifying such failure; or b) If ADA commits an anticipatory breach of this Agreement which is not remedied within thirty (30) days (or such longer period as MCI may authorize in writing) after receipt of notice from MCI specifying such anticipatory breach; or c) ADA become insolvent or the subject of proceedings under any law relating to bankruptcy the relief of debtors or admits its inability to pay its debts as they become due. In the event of default under this Article, ADA shall repay to MCI any payments made by MCI in excess of the price of Work delivered by ADA and accepted by MCI. In no event shall MCI be liable for the cost of partially completed Work not delivered and accepted by MCI. By written notice of default to MCI, ADA may terminate this Agreement, or any Order issued hereunder, in any one of the following circumstances: a) If MCI fails to make any payment within the time specified herein or any extension hereof and does not cure such failure within thirty (30) days of receipt of notice from ADA describing such default; or b) If MCI fails to perform any of the other provisions of this Agreement and does not cure such failure within a period of thirty (30) days (or such longer period as ADA may authorize in writing) after receipt of notice from ADA specifying such failure, except in the case of MCI's breach of Article 19 in which case termination shall be effective immediately upon MCI's receipt of notice; or c) If MCI commits an anticipatory breach of this Agreement which is not remedied within thirty (30) days (or such longer period as ADA may authorize in writing) after receipt of notice from ADA specifying such anticipatory breach; d) MCI becomes insolvent or the subject of proceedings under any law relating to bankruptcy the relief of debtors or admits its inability to pay its debts as they become due. In the event of expiration or any termination of this Agreement (i) MCI's obligation to pay all sums due hereunder shall be accelerated and all such sums shall be due and payable on the effective date of termination and (ii) in the event of termination by ADA due to MCI's default, all licenses granted to MCI hereunder shall immediately terminate. Neither Party shall incur any liability whatsoever for any damage, loss or expenses of any kind suffered or incurred, except attorney's fees, by the other party arising from or incident to any termination of this Agreement which complies with the terms hereof except as specified by Arbitration in Article 35 - -- ARBITRATION / DISPUTE RESOLUTION. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 18 22 If this Agreement is terminated as provided in this Article, in addition to any other rights provided in this Article, the terminating Party shall have the right of recovery of attorney's fees. MCI may withhold from amounts otherwise due ADA for such completed supplies such sum(s) as MCI deems reasonably necessary to protect MCI against any loss arising in connection with outstanding liens or claims of former lien holders with respect to the Work delivered by ADA. The rights and remedies of the Parties, provided in this Article are not exhaustive and are in addition to any other rights and remedies under this Agreement or by operation of law. ARTICLE 33 - ASSIGNMENT Any assignment or delegation of the rights or obligations hereunder, in whole or in part, or any other interest hereunder, without MCI's written consent, which consent shall not be unreasonably withheld, shall be void; except that an assignment confined solely to money due or to become due shall be void only to the extent that it attempts to impose upon MCI obligations to the assignee additional to the payment of such moneys, or preclude MCI from dealing solely and directly with ADA in all matters pertaining hereto, including the negotiation of amendments or settlements of amounts due. Either Party may assign its interest in the Agreement in connection with the sale of all or substantially all of the assets, capital stock or business of that Party, whether by sale of stock, assets, merger or otherwise, without the prior written consent of the other Party. ARTICLE 34 - CONSEQUENTIAL DAMAGES NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY SHALL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT OR UNDER ANY AGREEMENT OR CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR AMOUNTS IN EXCESS OF THAT AMOUNT WHICH IS THE GREATER OF (I) THE AGGREGATE OF THE AMOUNTS PAID BY MCI TO ADA UNDER THIS AGREEMENT DURING THE ******** PERIOD PRIOR TO THE DATE THE CAUSE OF ACTION AROSE, OR (II) $********* AND ANY SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL DAMAGES, LOSS OF PROFITS OR LOST DATA EXCEPT AS PROVIDED IN ARTICLE 29 -- PATENT INDEMNITY. ARTICLE 35 - ARBITRATION / DISPUTE RESOLUTION Any dispute arising out of or related to this Agreement, which cannot be resolved by negotiation, shall be settled by binding arbitration in accordance with the J.A.M.S/ENDISPUTE Arbitration Rules and Procedures ("Endispute Rules"), as amended by this Agreement. The costs of arbitration, including the fees and expenses of the arbitrator, shall be borne by the losing party unless the arbitration award provides otherwise. Each party shall bear the cost of preparing and presenting its case. The Parties agree that this provision and the Arbitrator's authority to grant relief shall be subject to the United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA"), the provisions of this Agreement, and the ABA-AAA Code of Ethics for Arbitrators in Commercial Disputes. The Parties agree that the arbitrator shall have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Agreement, and in no event shall the arbitrator have the authority to make any award that provides for punitive or exemplary damages. The Arbitrator's decision shall follow the plain meaning of the relevant documents, and shall be final and binding. The award may be confirmed and enforced in any court of competent jurisdiction. All post-award proceedings shall be governed by the USAA. Notwithstanding * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 19 23 anything to the contrary, either Party shall be entitled to petition a court of competent jurisdiction for the specific, limited purpose of requesting injunctive relief. ARTICLE 36 - MCI'S PROPERTY Unless otherwise agreed to in writing, any physical property including but not limited to designs, sketches, drawings, blueprints, patterns, dies, specifications, engineering data or other technical or proprietary information, and other equipment or material of every description furnished to ADA by MCI shall remain the property of MCI. ADA shall not substitute any property for MCI's property and shall not use such property except in filling MCI's orders. Such property while in ADA's custody or control shall be maintained in good condition at ADA's expense, shall be held at ADA's risk and shall be kept insured by ADA at ADA's expense in an amount equal to the replacement cost with loss payable to MCI. ADA shall make disposition of MCI's property as may be directed or approved at any time by MCI. ARTICLE 37 - MCI'S RESPONSIBILITY MCI shall provide ADA reasonable access to the Products during the time(s) necessary to install, maintain and service the Products on site. MCI shall provide reasonable working space and facilities, including heat, light, ventilation, electric current, outlets and the like, for use by ADA and adequate storage space, if required, for spare parts, components and other materials. All such facilities shall be provided by MCI at no cost to ADA on site. ARTICLE 38 - ADA'S RESPONSIBILITY ADA is an independent contractor and is responsible to MCI for all acts or omissions of all persons directly or indirectly used by it or any of its subcontractor(s) in connection with the Work required by this Agreement; provided, however, that nothing in this Agreement shall be construed as creating any contractual relationship between MCI and any subcontractor. The granting of any specific approvals by MCI shall not affect the responsibility of ADA for other aspects of the design of the Products to meet the requirements of the Agreement or for the correctness of ADA's drawings and specifications. No such granting by MCI or course of dealing between the Parties shall be held to constitute a waiver by MCI of any of MCI's rights under this Agreement. All waivers by MCI shall be in writing. ARTICLE 39 - REQUIREMENTS FOR BAR CODING ADA shall comply with MCI bar coding requirements which include the following documents: a) MCI Telecommunications Corporation Bar Code Label Specification Equipment Labels, Issue 4, dated November 15, 1991 b) MCI Requirements for Bar Code Labeling of Shipping Containers and Product Packaging, dated November 15, 1991 c) TCIG Shipping and Receiving Transaction Bar Code Label Specification, Issue 2, dated December 5, 1989 August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 20 24 ARTICLE 40 - PERMITS AND LICENSES ADA shall, at its own expense, obtain all permits and licenses required for the performance of Services under this Agreement, including but not by way of limitation, inspection fees or any certificates of occupancy required by any code, ordinance, or governmental regulations. ADA shall perform the Work in accordance with the conditions of all applicable permits and licenses. ARTICLE 41 - LABOR ADA shall use only workers and supervisory personnel skilled in the job for which they are employed. In the event that, in MCI's opinion, any workman or supervisory person is uncooperative, careless or incompetent and unless the Parties cannot resolve in good faith MCI's complaint, ADA shall remove such person immediately upon MCI's request and such person shall not be re-employed in the Work under this Agreement. Division of any project specification into sections is not intended to control ADA's division of Services among different trades or to limit the Services performed by any trade. ADA shall familiarize itself with the labor/management relationships at the site at which the Services under this Agreement are contemplated and shall conduct its activities under this Agreement in such a manner as to avoid (a) any interruption of activity or services at the sites and (b) any interference with the work of other contractors. Whenever ADA has knowledge that any actual or potential labor dispute is delaying or threatening to delay, or may delay the timely performance of this Agreement, it shall immediately give MCI notice thereof and all relevant information it has with respect thereto. ARTICLE 42 - TRADE NAMES, TRADEMARKS AND TRADE DRESS Upon mutual agreement between the Parties, ADA agrees to comply with all MCI instructions regarding the trade dress, packaging, trade names, trademarks, service marks or other indicia of source which shall appear on items to be delivered under this Agreement. ADA further agrees that, after delivery of said item(s) to MCI or a designated MCI customer, MCI may, as mutually agreed, modify the trade dress or packaging thereof, and/or replace, modify, or supplement any indicia of origin appearing thereon, to identify MCI as the source of said item(s). ADA shall not use any mark or trade name of MCI or refer to MCI in connection with any product, equipment, promotion, or publication without the prior written approval of MCI's Authorized Representative. ARTICLE 43 - PUBLIC RELEASE OF INFORMATION No news releases, articles, brochures, advertisements, speeches or other information releases related to this Agreement or the terms of this Agreement shall be made without the prior written approval of the MCI's Procurement Department or ADA's Marketing Department. The Parties agree to give each other reasonable advance time for review of any material submitted for approval which shall not be unreasonably delayed or withheld. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 21 25 ARTICLE 44 - NOTICES Any notice(s) required or permitted to be given or made in this Agreement shall be in writing. Such notice(s) shall be deemed to be duly given or made when it shall have been delivered by hand or registered mail to the Party to which it is required to be given or made at such Party's address specified below or as amended by notice pursuant to this Article: MCI: MCI Telecommunications Corporation 2270 Lakeside Blvd. Richardson, Texas 75082 Attention: Director, Network Acquisition ADA: Applied Digital Access, Inc. 9855 Scranton Road San Diego, California 92121 Attention: Contract Administration ARTICLE 45 - ORDER OF PRECEDENCE In the event of any ambiguity and/or inconsistency between the terms and conditions, Statement of Work, specifications, drawings or other documents incorporated by reference, the following descending order of precedence shall control: a) Terms and conditions and any amendments thereto; b) Orders issued pursuant to this Agreement; c) Drawings and other documents attached to the Specifications or incorporated by reference. ARTICLE 46 - APPLICABLE LAW This Agreement shall be interpreted, construed and governed by the laws of the State of New York without regards to its provisions relating to conflicts of laws. ARTICLE 47 - GENERAL ADA agrees that the Work performed under this Agreement, including the Products of that Work, shall comply with all applicable permits and licenses and the requirements of all applicable laws, regulations and standards. Where this Agreement or any code, ordinance, or governmental regulation requires a material or item to conform to a particular standard, ADA shall, at the request of MCI, deliver to MCI a certificate from the manufacturer or its authorized representative stating that the material of item furnished conforms to the standard prescribed. Such certificate shall be in triplicate and in such form as MCI may reasonably require. ADA agrees that it will neither incorporate any provision in its subcontracts nor enter into any contract, written or oral, either directly or indirectly, with subcontractor or vendors which has or may have the effect of prohibiting subcontractor or vendor sales directly to MCI of any supplies, like those manufactured or services like those furnished by any tier subcontractor or vendor pursuant to this Agreement. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 22 26 Any permission, acknowledgment or response required of or by either Party shall not be unreasonably delayed. The Parties agree that their respective rights, obligations and duties under Articles entitled DEFINITIONS, INVOICING AND PAYMENT, TECHNICAL SUPPORT, PATENT INDEMNITY, LIENS, MCI'S RESPONSIBILITY, ADA'S RESPONSIBILITY, APPLICABLE LAW, GENERAL, EXAMINATION AND ENTIRETY OF AGREEMENT, and MISCELLANEOUS shall survive expiration and any termination of this Agreement. ARTICLE 48 - EXAMINATION AND ENTIRETY OF AGREEMENT By executing this Agreement, each Party represents that it has thoroughly examined this Agreement and believes it to be complete, consistent and accurate. This Agreement sets forth and shall constitute the entire Agreement between MCI and ADA with respect to the subject matter thereof, and supersedes all prior or contemporaneous agreements or understandings between the Parties. This Agreement may not be changed, modified or terminated orally, and no amendment, interpretation, change, modification or termination of any of the provisions hereof shall be binding unless in writing and signed by a duly authorized officer or agent of both Parties against whom the same is sought to be enforced. ARTICLE 49 - MISCELLANEOUS The failure of either Party to enforce its rights under this Agreement at any time for any period shall not be construed as a wavier of such rights. Headings and captions are for convenience only and are not to be used in the interpretation of this Agreement. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 23 27 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the date written above. APPLIED DIGITAL ACCESS MCI TELECOMMUNICATIONS INCORPORATED CORPORATION - --------------------------------- --------------------------------------- SIGNATURE SIGNATURE - --------------------------------- --------------------------------------- NAME NAME - --------------------------------- --------------------------------------- TITLE TITLE - --------------------------------- --------------------------------------- DATE DATE August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page 24 28 EXHIBIT A DISCOUNT AND PRICE SCHEDULE The price schedule for T3AS/Centralized Test System (CTS) contained in this Exhibit is based on a progressive discount rate determined by the quantity of Product purchased in the previous calendar year. The discount rate is set at the beginning of each calendar year based on the total dollar volume of Products purchased in the previous calendar year by MCI. MCI will make a reasonable attempt to provide ADA with a forecast of the number of systems required for the upcoming calendar year. Additional discounts may be offered if MCI decides to purchase a specific quantity of T3AS/CTS systems at the beginning of each ** month period. Product deliveries for the quantity may extend throughout the ** month period. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page A-1 29
LIST DISCOUNT PART NUMBER DESCRIPTION CLEI CPR ECI/BAR PRICE * * - -------------------------------------------------------------------------------------------------------------------------------- ADMINISTRATION SHELF 02-0109-0000 * T3MYAATEAA 460307 417683 $***** $***** $***** 02-0110-0000 * T3PQDA71AA 680491 665544 ***** ***** *** 02-0102-0000 * T3PQDA81AA 780014 665545 *** *** *** 02-0111-0010 * T3PQDA91AA 780015 665546 ***** ***** ***** 02-0116-0010 * T3PQDB31AA 780018 665549 ***** ***** ***** 02-0113-0100 * T3PQAK86AA 680770 213803 ***** ***** ***** * 02-0108-0000 * T3MM4001RA 460306 072409 $***** $***** $***** 02-0180-0100 * T3PUAE0CAA F70420 217162 *** *** *** 02-0101-0000 * T3PQDA31AA 972855 665539 ***** *** *** 02-0105-0000 * T3PQDA41AA 973270 665540 ***** ***** ***** 02-0128-0000 * T3PQADG6AA A72405 628063 ***** ***** ***** 02-0100-0000 * T3PQDA51AA 973271 665541 ***** ***** ***** 02-0104-0100 * T3PQAEL6AA A73969 686974 ***** ***** ***** 02-0104-0200 * T3PQAK76AA D70645 213802 ***** ***** ***** 02-0165-0000 * T3PQAFH6AA B73375 200185 ***** ***** ***** * 02-0271-0000 * T3MMPM01RA 135240 426051 $***** $***** $***** 02-0180-0100 * T3PUAE0CAA F70420 217162 *** *** *** 02-0101-0000 * T3PQDA31AA 972855 665539 ***** *** *** 02-0166-0000 * T3PQAFG6AA B73374 200184 ***** ***** ***** 02-0104-0200 * T3PQAK76AA D70645 213802 ***** ***** ***** * * #N/A #N/A #N/A ***** ***** ***** * * T3PQAK16AA D70510 213511 ***** ***** ***** 02-0103-0010 * T3PQDA11AA 973269 665537 ***** ***** ***** 02-0103-0100 * T3CPL0GEAA D70317 212987 ***** ***** ***** * * T3CPM0GEAA D70318 212988 ***** ***** ***** 02-0117-0100 * T3PQAK06AA D70509 213509 ***** ***** ***** 02-0100-0000 * T3PQDA51AA 973271 665541 ***** ***** ***** 02-0105-0000 * T3PQDA41AA 973270 665540 ***** ***** ***** 02-0128-0000 * T3PQADG6AA A72405 628063 ***** ***** ***** * 02-0107-0000 * T3MM3001RA 460305 072408 $***** $***** $***** 02-0180-0100 * T3PUAE0CAA F70420 217162 *** *** *** 02-0101-0000 * T3PQDA31AA 972855 665539 ***** *** *** 02-0166-0000 * T3PQAFG6AA B73374 200184 ***** ***** ***** 02-0104-0100 * T3PQAEL6AA A73969 686974 ***** ***** ***** 02-0104-0200 * T3PQAK76AA D70645 213802 ***** ***** ***** 02-0117-0010 * T3PQDB41AA 972856 665690 ***** ***** ***** 02-0117-0100 * T3PQAK06AA D70509 213509 ***** ***** ***** 02-0103-0010 * T3PQDA11AA 973269 665537 ***** ***** ***** 02-0103-0100 * T3CPL0GEAA D70317 212987 ***** ***** ***** * * T3CPM0GEAA D70318 212988 ***** ***** ***** * * T3PQAFN6AA B73414 200473 ***** ***** *****
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page A-2 30
LIST DISCOUNT PART NUMBER DESCRIPTION CLEI CPR ECI/BAR PRICE * * - --------------------------------------------------------------------------------------------------------------------------------- * * T3PQAK16AA D70510 213511 $***** $***** $ *** * 02-0171-0000 * T3MM8001MA 560288 420066 ***** ***** ***** 02-0180-0100 * T3PUAE0CAA F70420 217162 *** *** *** 02-0101-0000 * T3PQDA31AA 972855 665539 ***** *** *** 02-0166-0000 * T3PQAFG6AA B73374 200184 ***** ***** ***** 02-0104-0100 * T3PQAEL6AA A73969 686974 ***** ***** ***** 02-0104-0200 * T3PQAK76AA D70645 213802 ***** ***** ***** 02-0172-0000 * T3PQAFJ6AA B73376 200186 ***** ***** ***** 02-0173-0000 * T3PQAFK6AA B73377 200187 ***** ***** ***** 02-0175-0000 * T3PQAFL6AA B73378 200188 ***** ***** *** * 02-0227-0430 * N/A N/A N/A ***** ***** ***** 02-0227-0440 * N/A N/A N/A ***** ***** ***** 02-0162-0000 * N/A N/A N/A ***** ***** ***** 02-0278-0000 * N/A N/A N/A ***** ***** ***** 02-0182-0000 * N/A N/A N/A ****** ****** ****** 02-0232-0000 * N/A N/A N/A ***** ***** ***** 02-0249-0000 * N/A N/A N/A ***** ***** ***** 02-0247-0000 * N/A N/A N/A ***** ***** ***** 02-0248-0000 * N/A N/A N/A ***** ***** ***** 02-0250-0000 * N/A N/A N/A ***** ***** ***** * 02-0193-0200 * N/A N/A N/A $*** $*** $*** 02-0193-0300 * N/A N/A N/A *** *** *** 02-0193-0400 * N/A N/A N/A *** *** *** 02-0197-0100 * N/A N/A N/A ***** ***** ***** 02-0197-0200 * N/A N/A N/A *** *** *** 02-0197-0300 * N/A N/A N/A ***** ***** ***** 02-0268-0100 * N/A N/A N/A ***** ***** ***** 02-0268-0200 * N/A N/A N/A *** *** *** 02-0268-0300 * N/A N/A N/A ***** ***** ***** 02-0131-0000 * N/A N/A N/A *** *** *** 02-0132-0000 * N/A N/A N/A *** *** *** 02-0177-0000 * N/A N/A N/A *** *** *** 02-0168-4430 * N/A N/A N/A ** ** ** 02-0187-0000 * N/A N/A N/A *** *** *** 02-0155-0000 * N/A N/A N/A *** *** *** 02-0164-0000 * N/A N/A N/A *** *** *** * 02-0193-0200 * N/A N/A N/A $*** $*** $*** 02-0148-0000 * N/A N/A N/A ** ** ** 02-0137-0000 * N/A N/A N/A *** *** *** 14-0139-0000 * N/A N/A N/A *** *** ***
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page A-3x 31
LIST DISCOUNT PART NUMBER DESCRIPTION CLEI CPR ECI/BAR PRICE * * - ------------------------------------------------------------------------------------------------------------------------------------ 14-0110-0000 * N/A N/A N/A *** *** *** 13-0151-0000 * N/A N/A N/A *** *** *** 14-0140-0000 * N/A N/A N/A *** *** *** 14-0142-0000 * N/A N/A N/A *** *** *** 02-0147-0000 * N/A N/A N/A *** *** *** 14-0116-0000 * N/A N/A N/A *** *** *** 02-0133-0020 * N/A N/A N/A *** *** *** 02-0133-0035 * N/A N/A N/A *** *** *** 02-0225-0000 * N/A N/A N/A ** ** ** 05-0125-0035 * N/A N/A N/A *** *** *** 02-0281-0000 * N/A N/A N/A ***** ***** ***** * 14-0128-0000 * N/A N/A N/A *** *** *** 14-0113-0000 * N/A N/A N/A *** *** *** 14-0129-0000 * N/A N/A N/A *** *** *** 14-0144-0000 * N/A N/A N/A *** *** *** 14-0130-0000 * N/A N/A N/A *** *** *** 13-0131-0000 * N/A N/A N/A *** *** *** 14-0131-0000 * N/A N/A N/A ** ** ** 14-0151-0000 * N/A N/A N/A ** ** ** 14-0106-0000 * N/A N/A N/A ** ** ** 02-0118-0000 * N/A N/A N/A ** ** ** 02-0119-0000 * N/A N/A N/A ** ** ** 65-0887-0000 * N/A N/A N/A ** ** ** 13-0114-0000 * N/A N/A N/A ** ** ** 02-0174-0000 * N/A N/A N/A *** *** ***
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page A-4 32 EXHIBIT B APPLIED DIGITAL ACCESS LIST PRICES BY PRODUCT NUMBER LISTING
LIST PART NUMBER DESCRIPTION CLEI CPR ECI/BAR PRICE - -------------------------------------------------------------------------------------------------------------------- 02-0100-0000 * T3PQDA51AA 973271 665541 ****** 02-0101-0000 * T3PQDA31AA 972855 665539 ***** 02-0102-0000 * T3PQDA81AA 780014 665545 *** 02-0103-0010 * T3PQDA11AA 973269 665537 ***** 02-0103-0100 * T3CPL0GEAA D70317 212987 ***** 02-0104-0100 * T3PQAEL6AA A73969 686974 ***** 02-0104-0200 * T3PQAK76AA D70645 213802 ***** 02-0103-0100 * T3CPL0GEAA D70317 212987 ***** 02-0105-0000 * T3PQDA41AA 973270 665540 ***** 02-0107-0000 * T3MM3001RA 460305 072408 ***** 02-0108-0000 * T3MM4001RA 460306 072409 ***** 02-0109-0000 * T3MYAATEAA 460307 417683 ***** 02-0110-0000 * T3PQDA71AA 680491 665544 ***** 02-0111-0010 * T3PQDA91AA 780015 665546 ***** 02-0113-0100 * T3PQAK86AA 680770 213803 ***** 02-0116-0010 * T3PQDB31AA 780018 665549 ***** 02-0117-0010 * T3PQDB41AA 972856 665690 ***** 02-0117-0100 * T3PQAK06AA D70509 213509 ***** 02-0105-0000 * T3PQDA41AA 973270 665540 ***** 02-0118-0000 * N/A N/A N/A ** 02-0119-0000 * N/A N/A N/A ** 02-0128-0000 * T3PQADG6AA A72405 628063 ***** 02-0103-0100 * T3CPL0GEAA D70317 212987 ***** 02-0131-0000 * N/A N/A N/A *** 02-0132-0000 * N/A N/A N/A *** 02-0133-0020 * N/A N/A N/A *** 02-0133-0035 * N/A N/A N/A *** 02-0137-0000 * N/A N/A N/A *** * * T3PQAFN6AA B73414 200473 ***** * * T3PQAK16AA D70510 213511 ***** 02-0108-0000 * T3MM4001RA 460306 072409 ***** 02-0147-0000 * N/A N/A N/A *** 02-0148-0000 * N/A N/A N/A ** 02-0155-0000 * N/A N/A N/A *** 02-0162-0000 * N/A N/A N/A ***** 02-0164-0000 * N/A N/A N/A *** 02-0165-0000 * T3PQAFH6AA B73375 200185 ***** 02-0166-0000 * T3PQAFG6AA B73374 200184 ***** 02-0132-0000 * N/A N/A N/A *** 02-0110-0000 * T3PQDA71AA 680491 665544 ***** 02-0168-4430 * N/A N/A N/A ** 02-0171-0000 * T3MM8001MA 560288 420066 ***** 02-0172-0000 * T3PQAFJ6AA B73376 200186 ***** 02-0173-0000 * T3PQAFK6AA B73377 200187 *****
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page B-1 33
LIST PART NUMBER DESCRIPTION CLEI CPR ECI/BAR PRICE - -------------------------------------------------------------------------------------------------------------------- 02-0174-0000 * N/A N/A N/A *** 02-0175-0000 * T3PQAFL6AA B73378 200188 ***** 02-0177-0000 * N/A N/A N/A *** 02-0180-0100 * T3PUAE0CAA F70420 217162 *** 02-0110-0000 * T3PQDA71AA 680491 665544 ***** 02-0133-0035 * N/A N/A N/A *** 02-0113-0100 * T3PQAK86AA 680770 213803 ***** 02-0182-0000 * N/A N/A N/A ****** 02-0187-0000 * N/A N/A N/A *** 02-0193-0200 * N/A N/A N/A **** 02-0193-0200 * N/A N/A N/A *** 02-0193-0300 * N/A N/A N/A *** 02-0193-0400 * N/A N/A N/A *** 02-0197-0100 * N/A N/A N/A ***** 02-0197-0200 * N/A N/A N/A *** 02-0197-0300 * N/A N/A N/A ***** 02-0225-0000 * N/A N/A N/A ** 02-0227-0430 * N/A N/A N/A ***** 02-0227-0440 * N/A N/A N/A ***** * * T3CPM0GEAA D70318 212988 ***** 02-0275-0300 * 0 N/A N/A * 02-0232-0000 * N/A N/A N/A ***** 02-0247-0000 * N/A N/A N/A ***** 02-0248-0000 * N/A N/A N/A ***** 02-0249-0000 * N/A N/A N/A ***** 02-0250-0000 * N/A N/A N/A ***** 02-0268-0100 * N/A N/A N/A ***** 02-0268-0200 * N/A N/A N/A *** 02-0268-0300 * N/A N/A N/A ***** 02-0271-0000 * T3MMPM01RA 135240 426051 ***** * * #N/A #N/A #N/A ***** 02-0278-0000 * N/A N/A N/A ***** 02-0281-0000 * N/A N/A N/A ***** 05-0125-0035 * N/A N/A N/A *** 13-0114-0000 * N/A N/A N/A ** 13-0131-0000 * N/A N/A N/A *** 13-0151-0000 * N/A N/A N/A *** 14-0106-0000 * N/A N/A N/A ** 14-0110-0000 * N/A N/A N/A *** 14-0113-0000 * N/A N/A N/A *** 14-0116-0000 * N/A N/A N/A *** 14-0128-0000 * N/A N/A N/A *** 14-0129-0000 * N/A N/A N/A *** 14-0130-0000 * N/A N/A N/A *** 14-0131-0000 * N/A N/A N/A ** 14-0139-0000 * N/A N/A N/A *** 14-0140-0000 * N/A N/A N/A *** 14-0142-0000 * N/A N/A N/A ***
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page B-2 34
LIST PART NUMBER DESCRIPTION CLEI CPR ECI/BAR PRICE - -------------------------------------------------------------------------------------------------------------------- 14-0144-0000 * N/A N/A N/A *** 14-0151-0000 * N/A N/A N/A ** 65-0887-0000 * N/A N/A N/A **
* Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page B-3 35 EXHIBIT C MCI ALLIANCE PARTNERS MCI Telecommunications Corporation, including but not limited to the following subsidiaries, affiliates, and those entities with which MCI has an on-going enterprise, are hereby designated authorized users of this Agreement and may at their option purchase Equipment, and/or Software in accordance with this Agreement. Access Transmission Services, Inc. Access Transmission Services of Virginia, Inc. Avantel, S.A. British Telecommunications, PLC Concert Communications Company MCI America, Inc. MCI Canada, Inc. MCI Equipment Acquisition Corporation MCI Global Access Corporation MCI Global Resources, Inc. MCI Infosearch, Inc. MCI International, Inc. MCI International Telecommunications Corporation MCImetro, Inc. MCImetro Access Transmission Services, Inc. MCI Network Technologies, Inc. MCI/OTI Corporation MCI Systemhouse Corporation (U.S.) MCI Telecommunications Corporation MCI Telecommunications Corporation of New Hampshire MCI Telecommunications Corporation of Virginia MCI Wireless, Inc. networkMCI, Inc. Overseas Telecommunications, Inc. SHL Systemhouse, Inc. (Canada) Southernnet Systems, Inc. Stentor Telecom*USA, Inc. Teleconnect Long Distance Services and Systems Company August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page C-1 36 EXHIBIT D SOFTWARE MAINTENCE PLAN D.1 INTRODUCTION ADA shall provide a Software Upgrade Program ("Program") to provide continued software support after MCI's software warranty has expired. The Program shall include a minimum of two software upgrades per year to incorporate enhancements, improvements and modifications to the System Software. New software releases add new functionality to T3AS or CTS that enable technicians to perform their job effectively. The software-based architecture of T3AS protects hardware investments, since most new features are enabled through software. D.2 SOFTWARE RELEASES The Program shall provide selected Enhancements and Modifications to previous Software Versions, including MCI suggested changes ADA considers not to be major feature enhancements and which are generally applicable to ADA's customers. Software upgrades shall be cumulative and include all improvements, changes and new features to date. The Program will include at least two software releases per year. ADA shall to ensure that new features are provided on a timely basis while minimizing the number of software upgrades each year. ADA will publish feature descriptions in advance for current and upcoming releases in accordance with MCI's standard procedures. D.3 TECHNICAL SUPPORT The Program will include unlimited telephone support at no charge during normal business hours for non-emergency issues and twenty-four hours per day for emergency (service affecting) issues. ADA will assist MCI in installing new software releases for an additional charge. Software installation charges are in accordance with ADA's charges for on-site technical support listed in the table below entitled Engineering & Installation Services. D.4 CHARGES MCI agrees to pay for the Program annually in advance. MCI may elect to terminate the Program upon thirty (30) days written notice to ADA and shall receive a prorated rebate for the remaining balance. A one year subscription to the software upgrade program for CTS costs $***** per system. Each software release for T3AS/CTS costs $***** per system outside the software upgrade program. ADA offers MCI the option of purchasing an additional 4 years of software maintenance extended from the period of time when the software warranty period expires for $********. SOFTWARE MAINTENANCE PROGRAM PRICES - --------------------------------------------------------------------------- MCI Price List Price CTS Maintenance Program 1 Yr. $***** $***** CTS Maintenance Program 4 Yr. $***** $****** CTS Software Upgrade $***** $***** (out-of-program) * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page D-1 37 ENGINEERING & INSTALLATION SERVICES ================================================================================ Description Price - -------------------------------------------------------------------------------- Project Management Services $**** per day Equipment Installation Quotations Available on Request Field Service Engineering $**** per day Software Upgrades $**** per system includes travel & expenses D.5 PROGRAM ADMINISTRATION ADA counts the number of T3AS Administration Shelves to determine the number of T3AS systems eligible for the Program (T3AS System Software runs in hardware on the T3AS Administration Shelf). Eligibility is based on the expiration of the Software Warranty or the expiration of the previous Software Upgrade Program subscription according to ADA's software warranty records. System warranties expiring mid-year are pro-rated on a monthly basis. For ease of administration and billing, a single total regional charge per customer is calculated on the first day of each new calendar year and valid until the second release is delivered. The Program should be continued without interruption from expiration of the Software Warranty or from the expiration of the previous Software Upgrade Program subscription. In the event of Software Upgrade Program interruption, a one-time charge equivalent to the cumulative subscription rates since interruption may be assessed for the inspection of T3AS systems and application of any software upgrades required to bring systems to the current release. If MCI does not subscribe to the Program, software support after the warranty period will be provided on a time and materials basis in accordance with ADA's standard charges for technical support (see table above). Charges will apply for telephone and on-site technical support to diagnose problems and to install software upgrades which resolve issues or provide features for which modifications have been incorporated into a current software release. A one-time software upgrade charge may also apply for software upgrades provided. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page D-2 38 EXHIBIT E PRODUCT CHANGE NOTICES E.1 INTRODUCTION This procedure establishes a process to notify customers of problems in ADA's Products that may affect a MCI's service or functions associated with operation or use of ADA's Products. Service-affecting problems are those that may: o Disrupt traffic carried on customer circuits, o Damage the company's product or associated equipment, o Disrupt the traffic-carrying functions of other customer systems interconnected with ADA's product. Function-affecting problems are those that may: o Disable or degrade to the point of unusability any functions of ADA's products. o Disrupt the non-traffic-carrying functions of other MCI Systems interconnected with ADA's product. The process for notifying MCI of potential Service-Affecting problems shall be initiated as quickly as reasonable after discovery of the issue. Distribution of MCI notification document must occur within two (2) weeks after the discovery of the problem and the decision that the problem is potentially service-affecting. The process for MCI notification of potential Service-Affecting problems is independent of how the problem was discovered -- whether as the result of field experience, customer experience or ADA internal testing. E.2 DEFINITIONS SERVICE-AFFECTING: The definition of service-affecting includes, but is not limited to, the following circumstances: Customer-revenue traffic carried on one or more telecommunications circuits could be unintentionally disrupted due to presence of an ADA product. IN WRITING: Within this procedure, the term "in writing" means by paper copy, electronic mail or other medium that provides a semi-permanent record that may be distributed to interested parties. CUSTOMER SUPPORT ENGINEER: An ADA employee or contractor providing assistance to customer for the specific purpose of resolving problems with installation, operation or usage of ADA products. This title and job functions may often be used synonymously with Field Service Engineer. FIELD SERVICE ENGINEER: An ADA employee or contractor providing a variety of on-site or field services to a customer purchasing or using ADA Products. These services may be proactive (installation, training, planning, project management, operations support) or reactive (resolving problems, repairing equipment, other maintenance services). This title and job functions may often be used synonymously with "Customer Support Engineer." August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page E-1 39 E.3 PROBLEM IDENTIFICATION The individual(s) who determine that a potentially Service-Affecting problem exists should perform the following: a) Report the problem to the Customer Support, Engineering, and Quality, in writing, including a description of the problem and the potential hazards, including resolution or work-around if known. b) Follow whatever other problem reporting processes exist within the MCI for reporting and initiating resolution of these problems. MCI NOTIFICATION OF THE PROBLEM (For this document, the term "customer notification document" shall be either Technical Bulletin, Product Change Notice or Product Release Notice.) After a problem has been identified and recorded, and Engineering and/or Production have confirmed the existence of the problem the VP Customer Support or his/her designee will: a) Assess the severity of the problem and determine the degree of urgency and the form of customer notification document. b) Prepare a customer notification document in the form of a Technical Bulletin, Product Change Notice or Product Release Notice to inform customers of the problem. Technical Bulletins are the most urgent notification form and generally focus on a limited number of specific problems. Technical Bulletins shall include at least the following information: i) Date of issue, a Technical Bulletin reference number, company name, product affected, author, contact party for additional information. ii) A description of the problem, iii) Identification of the systems and/or sites which may experience the problem iv) The problem's suspected cause and circumstances, v) The problem's detection or manifestation during operation, vi) Work-around or avoidance if known, vii) A statement of the company's intentions and plan to address and/or resolve the problem, viii) Associated Product Change Notice or Product Release Notice, if any, ix) In the event that resolution is unknown or indeterminate, when the Technical Bulletin is issued, a statement shall be included that gives a target date by which a resolution plan will be available. Formats and contents of Product Change Notices are governed by appropriate ADA standards and are not defined within this document. Format and contents of Product Release Notices are governed by ADA's customer service group and are not defined within this document. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page E-2 40 E.5 MCI NOTIFICATION OF RESOLUTION When the resolution or work-around for the problem has been determined and agreed upon within the company, the VP Customer Support or his/her designate shall decide on the urgency and form of customer notification document either Technical Bulletin, Product Change Notice or Product Release Notice. If the form of a Technical Bulletin is appropriate to the urgency of the problem, Customer Support will draft a Technical Bulletin to report the resolution of the problem. This Technical Bulletin must include at least the following information: a) A brief description of the problem and those modules or systems affected. b) The resolution or work-around. c) If a work-around, an estimate of when a full resolution will be found and a description thereof. d) If a product recall ensues, provide details of an exchange program and schedule. e) An offer of on-site assistance if appropriate. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page E-3 41 EXHIBIT F TRAINING COURSES TRAINING CHARGES ADA will provide MCI with 10 on-site training courses at any designated MCI facility. MCI may choose the desired course from the curriculum below. If MCI desires additional training, ADA offers MCI the training courses listed in this Exhibit at the prices listed in this Exhibit. On-site: $*** per student per day or fraction plus instructor's travel and living expenses. Minimum charge of six students per day. Maximum eight students per class. Instruction materials are included within charges. Up to 15 days' advance notice may be required for scheduling of these classes. TRAINING SERVICES ================================================================================ Description Price - -------------------------------------------------------------------------------- One Training Course $*** per student per day One Suitcased Training Course $*** per student per day plus (minimum 6 students) travel & expenses MCI provides suitable classroom, tables, chairs, nearby T3AS test system (training is not performed on live systems), blackboard/white board, paper pad and easel, overhead projector. ADA Classroom: $*** per student per day or fraction. Minimum of six students per class. Normal maximum of eight students per class; but may be extended with ADA's discretion to a maximum of ten students per class. Any customer including MCI sends fewer than six students may choose to attend scheduled classes with other students and pay the per student rate as long as minimum class sizes are met. ADA will schedule classes at its discretion to assure that minimum class sizes are met. ADA reserves the right to cancel scheduled classes with one week's notice if minimum attendance is not achieved. Students pay their own travel and living expenses. Up to 30 days' advance notice may be required for scheduling of these classes. ADA also publishes an annual head-office training class schedule. T3AS OPERATIONS AND MAINTENANCE TRAINING COURSE Introductory course to the functionality, use and maintenance of T3AS. Day One covers primarily system capabilities and principles of operation; Day Two provides hands-on usage, testing and introduction to acceptance test procedure and DS3 and DS1 rollover procedure. Target Audience: Equipment Maintenance Technicians and Managers, Technical Support. Prerequisites: 1. Familiarity with Central Office Standards and Practices, 2. Familiarity with DS3, DS1, DS0 DDS and VF transmission and test equipment. 3. Access to a powered T3AS system with VT-100 terminal, * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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 406 under the Securities Act of 1933. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-1 42 4. Two T-Berd 310 and two T-Berd 224 test sets. Maximum class size: Eight students Class Duration: When coincident with installation and turn-up of a T3AS system, typically one and a half days - three (3) hours of classroom, three (3) hours of hands-on and 3 hours of acceptance test preparation and run-through. When presented at ADA Headquarters, the class is more in-depth and lasts about two and one-half days or twenty-one (21) hours of combined classroom and hands-on. Areas covered include the following: 1. System Description 2. Network Architecture 3. TL1 Language 4. Alarms/Exception Reporting 5. TL1/T3AS-Specific Command Usage 6. Removing and Installing Modules 7. DS3 and DS1 Provisioning 8. Acceptance Testing 9. Rollover Procedure 10. Equipage of Remote Shelves T3AS SYSTEM ADMINISTRATION TRAINING COURSE This course details the administration tasks necessary to sustain the T3AS system. Target audience: System Administrators, Technical Support, Maintenance Engineering Prerequisites: 1. Familiarity with Central Office Standards and Practices. 2. Familiarity with Computer-controlled equipment, diskette and tape management. Maximum Class size: Eight Students Class Duration: August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-2 43 Typically two hours. Areas covered include the following: 1. TL1/T3AS-Specific Command Usage 2. General Administrative Functions 3. Assignment of TIDs, SIDs, Users, Passwords 4. Communications 5. Provisioning 6. Security 7. Software Upgrade Procedure T3AS USER TRAINING COURSE This course introduces students to performance monitoring, access and testing, and alarm and event management functions of the T3AS with hands-on training. Hands-on training usually occurs through the customer's Operational Support Systems (OSS) and in conjunction with customer-developed and provided OSS course. If no OSS is available, hands-on training occurs with direct interface to the T3AS system using man-machine interfaces available on the T3AS. Target audience: Test Centers, Service Assurance Centers PM/Surveillance/Alarm Centers, Circuit Design and Provisioning Centers and their Managers Prerequisites: 1. Familiarity with Access and Test of DS1, DS0, DDS or VF. 2. Familiarity with Performance Monitoring Practices, 3. Familiarity with DS3, DS1, DS0 DDS and VF transmission and test equipment. 4. Access to an installed and powered-up T3AS system with one or more VT-100 terminal, 5. Test DS3s provided by one T-Berd 310 and one T-Berd 224 test set or one live (monitored) DS3 with embedded DS1s and DS0s 6. NMA or equivalent surveillance/alarm system connected to T3AS 7. SARTS, REACT, LOGIX or equivalent test system connected to T3AS 8. One or more terminals connected to NMA or equivalent 9. One or more terminals connected to SARTS, REACT, LOGIX or equivalent 10. One or more terminals connected directly to the T3AS. Maximum class size: Eight students August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-3 44 Class Duration: Typically 4 hours of classroom and 4 hours of hands-on training. Areas covered include the following: 1. T3AS Architecture and Network placement 2. Access and test functions 3. Conducting HiCap, DDS, VF tests 4. Performance monitoring, thresholds, events, alarms, retrieval, history 5. Alarm and event report management, severity T3AS ADMINISTRATOR TRAINING COURSE This course details the administration tasks necessary to sustain the T3AS system in a telephone company central office. Target audience: System Installers, Maintenance Engineering Prerequisites: Familiarity with Central Office Standards and Practices. Familiarity with Computer-controlled equipment, diskette and tape management. Maximum Class size: Eight Students Class Duration: Typically one-half day Areas covered include the following: 1. TL1/T3AS-Specific Command Usage 2. General Administrative Functions 3. Assignment of TIDs, SIDs, Users, Passwords 4. Communications 5. Provisioning 6. Security 7. Software Upgrade Procedure T3AS INSTALLATION TRAINING COURSE This course details the installation tasks necessary to install, turn-up and perform acceptance tests of T3AS installed in a telephone central office. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-4 45 Target audience: System Installers, Equipment Maintenance Engineers who will be responsible for installation and turn-up of T3AS systems. Prerequisites: Familiarity with Central Office Installation Standards and Practices. Maximum Class Size: Eight students. Class Duration: Typically one-half day of classroom work, preferably at a site that has an existing T3AS system to illustrate installation details. Areas covered include the following: 1. T3AS to Network Cabling: DS3s, DS1s, Power, RS232, FADs, TADs, Remote Links 2. External Timing 3. System Assembly 4. Acceptance Testing 5. Future T3 Provisioning T3AS PROTOCOL ANALYSIS ACCESS SYSTEM (PAAS) APPLICATION INSTALLATION This course describes the installation of the T3AS and setup of all the other devices within the PAAS application. Target audience: One installation team - Central Office Technicians and Technical Support Technicians. Because the standards, specifications, procedures, policies and equipment are unique to each customer, we recommend that one team be established to carry out installation of all PAAS systems within an area. Prerequisites: 1. Familiarity with Central Office Standards, Practices and Procedures. 2. Familiarity with DS1 wiring, Packet networks, DDS transmission and test equipment. 3. Access to DS1 test equipment, asynchronous/X.25 protocol analyzers, specialized protocol test sets. 4. Access to corporate technical support for packet networks, DCS systems, central office engineering and wiring records. Maximum class size: Three students August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-5 46 Class Duration: Four hours of classroom Areas covered include the following: 1. System Description 2. Installation, setup and checkout of the T3AS, 3. Setup and checkout of the network 4. DS1 Wiring to frame-relay test equipment. 5. Removing and Installing Modules 6. DS1 Provisioning 7. Troubleshooting methodology. 8. Communications setup between T3AS, DCS and the control terminals, 9. DS1 FAD links from DCS to T3AS 10. Provisioning the DCS. 11. Acceptance Testing PAAS MAINTENANCE This course describes the application, equipment used and fault isolation techniques of the T3AS system and the other network devices used to support the PAAS application. Target audience: Equipment Maintenance Technicians and Managers, Technical Support. Prerequisites: 1. Familiarity with Central Office Standards and Practices, 2. Familiarity with DS1, DDS transmission and test equipment. 3. Access to a powered T3AS system with VT-100 terminal, 4. Operational PAAS system. Maximum class size: Four students Class Duration: Three hours of classroom with hands-on Areas covered include the following: 1. System Description 2. Network Architecture 3. TL1 Language August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-6 47 4. Alarms/Exception Reporting 5. TL1/T3AS-Specific Command Usage 6. Removing and Installing Modules 7. DS1 Provisioning 8. Troubleshooting methodology. PAAS USERS The course gives test center users an overview of the architecture of PAAS, points to the documentation references needed to identify channels to be tested, describes and exercises the T3AS test functions and procedures available to the tester. The customer is responsible for training staff on usage of the specialized test equipment and usage of any other terminal programs required to retrieve circuit information and control the specialized protocol test equipment. Target audience: Specialized protocol test center technicians and managers, Technical Support. Prerequisites: 1. Familiarity with Central Office Standards and Practices, 2. Familiarity with target protocol (frame relay, ATM, video) test equipment and transmission equipment. 3. Familiarity with circuit record keeping system and descriptions (e.g. TIRKS, WORD) 4. Access to a powered T3AS system with VT-100 terminal, 5. Access to an in-service T3AS PAAS system Maximum class size: Eight students Class Duration: Three hours of classroom with hands-on Areas covered include the following: 1. System Description 2. Network Architecture 3. TL1 Language 4. TL1/T3AS-Specific Command Usage August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-7 48 CUSTOMIZED TRAINING CLASSES ADA can develop training courses to suit specific MCI requirements. Charges for development of these course are quoted in response to requests. Standard per-student-per-day rates or ADA instructor rates of $**** per day, minimum charges, and travel and living expenses will still apply. For additional information or schedules call Applied Digital Access, Inc. at 800 854 2242 (Main), 800 774 8327 (Customer Support) 619 623 2208 (Fax) and ask for Customer Support. August 11, 1997 MCI PROPRIETARY AND CONFIDENTIAL Page F-8 EX-10.5 7 EXHIBIT 10.5 1 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. EXHIBIT 10.5 MASTER AGREEMENT Between NORTHERN TELECOM LIMITED And APPLIED DIGITAL ACCESS, INC. 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 - DEFINITIONS......................................................................................... 1 ARTICLE 2 - CONTRACT DOCUMENTS.................................................................................. 3 ARTICLE 3 - PERIOD OF PERFORMANCE............................................................................... 3 ARTICLE 4 - CONSIDERATION....................................................................................... 3 ARTICLE 5 - PAYMENT SCHEDULE.................................................................................... 4 ARTICLE 6 - INVOICES............................................................................................ 5 ARTICLE 7 - AUDIT............................................................................................... 5 ARTICLE 8 - INFORMATION FROM NORTEL.............................................................................. 6 ARTICLE 9 - STATUS REPORTS....................................................................................... 6 ARTICLE 10 - MEETINGS............................................................................................ 6 ARTICLE 11 - INDEPENDENT CONTRACTOR.............................................................................. 7 ARTICLE 12 - CHANGE CONTROL PROCEDURES AND ACCEPTANCE............................................................ 7 ARTICLE 13 - MINIMUM PURCHASE COMMITMENT......................................................................... 8 ARTICLE 14 - TERMINATION FOR CONVENIENCE......................................................................... 8 ARTICLE 15 - TERMINATION FOR DEFAULT............................................................................. 9 ARTICLE 16 - CHANGE IN CONTROL.................................................................................. 10 ARTICLE 17 - RIGHTS NOT CONFERRED............................................................................... 10 ARTICLE 18 - INVENTIONS AND IMPROVEMENTS
3
Page ---- ARTICLE 19 - ASSIGNMENT........................................................................................... ARTICLE 20 - COMPLIANCE WITH LAW................................................................................... ARTICLE 21 - PUBLICITY RELEASE..................................................................................... ARTICLE 22 - CONFIDENTIAL INFORMATION.............................................................................. ARTICLE 23 - PATENTS AND INFORMATION............................................................................... ARTICLE 24 - WARRANTY AND LIABILITY................................................................................ ARTICLE 25 - SPONSORS AND PRIMES................................................................................... ARTICLE 26 - NOTICES............................................................................................... ARTICLE 27 - APPLICABLE LAW........................................................................................ ARTICLE 28 - CONTINUING OBLIGATIONS................................................................................ ARTICLE 29 - WAIVERS............................................................................................... ARTICLE 30 - TERM OF AGREEMENT..................................................................................... ARTICLE 31 - ENTIRETY OF CONTRACT.................................................................................. ARTICLE 32 - FORCE MAJEURE......................................................................................... ARTICLE 33 - ARBITRATION........................................................................................... ARTICLE 34 - AMENDMENT............................................................................................. ARTICLE 35 - WITHHOLDING...........................................................................................
4 THIS MASTER AGREEMENT is made as of the 26th day of June, 1997. BETWEEN: NORTHERN TELECOM LIMITED, a company incorporated under the laws of Canada, having its head office at Suite 100, 8200 Dixie Road, Brampton, 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. ADA and Nortel had previously entered into a Master Agreement dated July 15, 1996 (the "Prior Agreement"), pursuant to which ADA performed certain research and development activities for Nortel from time to time subject to the terms and conditions of such agreement; B. ADA and Nortel wish to cancel the Prior Agreement and replace it with the terms and conditions set out herein: NOW THEREFORE in consideration of the premises and of the mutual covenants and agreements hereinafter set forth and contained, this agreement witnesseth: 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 25.1 hereof. Page 1 5 "Acceptance" has the meaning ascribed thereto in Section 12.4 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 any purchase order or Work Schedule to be paid to ADA; "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 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 set forth in the Work Schedule or Development Agreement. "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; "Minimum Purchase Commitment" has the meaning ascribed thereto in Section 13.1. Page 2 6 "Nortel Customer" means the end user, if any, identified in any purchase order or any Work Schedule to whom Nortel will be providing the Custom Software under such Work Schedule; "Nortel Prime" has the meaning ascribed thereto in Section 25.1 hereof. "RFQ" or "Request for Quotation" has the meaning ascribed thereto in Section 2.3(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 2.3 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 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 12 below. ARTICLE 2. CONTRACT DOCUMENTS 2.1 Nortel may purchase design, support or other services from ADA by either: (a) issuing a purchase order, or (b) making a verbal or written request for support, in each case setting out in adequate detail the nature of the service requested and the warranty, and other terms and conditions applicable. ADA shall invoice Nortel for such services each month at a rate of */person-hour with payment due within 30 days of receipt of invoice by Nortel. 2.2 Appendix A to this Agreement, the "Transition Plan" sets out, inter alia, certain services which ADA or its Affiliates shall provide to Nortel hereunder. ADA hereby acknowledges that it has received copies of the quotations and purchase order pertaining to such services, and a copy of Nortel's standard extended warranty plan. ADA hereby * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. Page 3 7 agrees to provide the services on the terms and conditions set out in such purchase orders, quotations, and (where applicable) extended warranty plan. 2.3 (a) In addition to Nortel's rights under Sections 2.1 and 2.2 hereof, Nortel may purchase services from ADA by preparing a Commercial Specification or equivalent and attaching such specification or equivalent to a RFQ with sufficient information to enable ADA to prepare a quotation as described in Section 2.4 below. (b) All RFQs shall indicate one of the following: (i) Whether ADA shall only be required to prepare a Technical Proposal, but not obliged to perform any further Work upon completion of such Technical Proposal, as contemplated in Section 2.6 below. (ii) Whether ADA shall be required to commit to performing the Work identified in the completed Technical Proposal in accordance with Section 2.6 below, if requested to do so by Nortel. (iii) If neither (i) or (ii) is specified, the parties shall meet, after the Technical Proposal is completes, to determine what further action, if any, they will take with respect to that Technical Proposal. 2.4 Based upon the Commercial Specification and the RFQ, ADA will use its best efforts (if such request can be accomplished with the resources dedicated to the Minimum Purchase Commitment of Nortel) and its reasonable efforts (if such request must be addressed by resources outside of those dedicated to satisfying the Minimum Purchase Commitment) to prepare a quotation for the preparation of a Technical Proposal using the resources that are committed by ADA to satisfy Nortel's Minimum Purchase Commitment. 2.5 If Nortel accepts any quotation within the time frame for acceptance set out in such quotation, if any, it shall signify such acceptance by means of a purchase order approving the preparation of the Technical Proposal by ADA. 2.6 Upon completion of the Technical Proposal and subject to Section 2.3 (b), 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. 2.7 ADA shall, within five (5) Business Days of its receipt of the purchase order and attached Work Schedule described in Section 2.5, advise Nortel in writing of ADA's acceptance or rejection of the Work Schedule. or Technical Proposals prepared pursuant to Section 2.3(b) (ii), ADA shall acknowledge acceptance of the purchase order and attached Work Schedules, within five (5) Business Days of receipt. Page 4 8 2.8 Upon Nortel's receipt of the written acceptance of any purchase order and attached Work Schedule by ADA, a contract for the performance of the Work described in the Work Schedule (a "Development Agreement") will, in each case, be formed. Each such Development Agreement will consist exclusively of the terms and conditions of this Agreement and the Work Schedule related thereto. If there is a conflict between this Agreement and the Work Schedule, this Agreement shall govern unless it is specifically provided in the Work Schedule that the Work Schedule shall govern. 2.9 The Work Schedule shall specify the Work to be done and the 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 and relating to follow-on work - liquidated damages for late delivery - additional ADA responsibilities - assumptions and dependencies - resource allocations - risk assessment - quality and process standards ARTICLE 3. PERIOD OF PERFORMANCE 3.1 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. Page 5 9 ARTICLE 4. CONSIDERATION 4.1 Except for services purchased pursuant to Section 2.1 and 2.2, 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 agreed to by the parties; c. All pre-approved travel expenses reasonably incurred by ADA in connection with the performance of the Work, at cost plus a markup as agreed to by the parties. (iii) 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. Page 6 10 (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. 4.2 The Contract Amount, unless otherwise specifically provided in any purchase order or 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. 4.3 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. 4.4 The parties acknowledge that certain Work Schedules may contain Work to be carried out partly under both Payment Options. ARTICLE 5. PAYMENT SCHEDULE 5.1 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: Page 7 11 (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 4.1 (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 as agreed to between the parties, 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 6 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 set out in the Work Schedules. 5.2 An alternative payment arrangement may be negotiated for each project by mutual written agreement of Nortel and ADA. ARTICLE 6. INVOICES 6.1 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 * 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. 6.2 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 7. AUDIT 7.1 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 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. Page 8 12 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 15. 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 8. INFORMATION FROM NORTEL 8.1 ADA shall use its commercially reasonable efforts to identify in the Work Schedule all 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. 8.2 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. 8.3 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 12.2. ARTICLE 9. STATUS REPORTS 9.1 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 Page 9 13 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 10. MEETINGS 10.1 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 any Development Agreement and changes in the Work. 10.2 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 11. INDEPENDENT CONTRACTOR 11.1 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 12. CHANGE CONTROL PROCEDURES AND ACCEPTANCE 12.1 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 12. 12.2 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. Page 10 14 (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. 12.3 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 12.2 (c), (d), (e), (f) and (g) shall apply except that ADA shall not be entitled to recover the cost of preparing the Preliminary Estimate. Page 11 15 12.4 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 13. MINIMUM PURCHASE COMMITMENT 13.1 During the period beginning on May 15, 1997, and ending on January 31, 1998, Nortel shall purchase at least * person-months of design services from ADA, at a rate of */hour (the "Minimum Purchase Commitment"). If Nortel fails to meet the Minimum Purchase Commitment within the prescribed time for reasons other than force majeure or reasons attributable to ADA, then Nortel shall pay ADA, as ADA's sole and exclusive remedy, and amount equal to the difference between the Minimum Purchase Commitment and the amount of design services ordered by Nortel. 13.2 For purposes of calculating whether the Minimum Purchase Commitment has been met, any services ordered by Nortel pursuant to the Transition Plan (other than purchase order obligations and warranty obligations expressly assumed under the Asset Purchase Agreement) shall be included. ARTICLE 14. TERMINATION FOR CONVENIENCE 14.1 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. 14.2 Neither party shall be held liable for indirect or consequential damages or loss of 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. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. Page 12 16 ARTICLE 15. TERMINATION FOR DEFAULT 15.1 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 or this 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. 15.2 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 or this 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 (c) is adjudicated bankrupt or insolvent; or Page 13 17 (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. 15.3 If Nortel terminates any Development Agreement as provided in Section 15.1, ADA shall have no claims for any payment save as hereinafter provided in this Article 15. 15.4 Upon a partial termination pursuant to this Article 15, 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. 15.5 Upon a termination pursuant to this Article 15.1, and subject to Article 18 below, Nortel, in addition to any other rights of Nortel in this Article 15, 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. 15.6 If, after notice of termination of the Development Agreement under the provisions of this Article 15, 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 14, TERMINATION FOR CONVENIENCE, and the rights and obligations of ADA and Nortel shall be governed by the provisions of that Article. ARTICLE 16. CHANGE IN CONTROL 16.1 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 17. RIGHTS NOT CONFERRED 17.1 ADA agrees that this Master Agreement does not confer any right to do all or any given proportion of Nortel's work. ARTICLE 18. INVENTIONS AND IMPROVEMENTS Page 14 18 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 or with others in the course of 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 sole property of Nortel. Subject to the provisions of Article 23, 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 direction 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 and 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 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 Unless the terms and conditions of any purchase order provide otherwise, ADA shall own any Inventions that may be retained in non-tangible form by ADA employees who had access to the Work. ARTICLE 19. ASSIGNMENT 19.1 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 its parents, affiliates or subsidiaries. Furthermore, ADA may subcontract to ADA's wholly owned subsidiary, ADA Canada Inc. ("ADA CANADA") any Services or Work, or any portion thereof without obtaining Nortel's consent. In no Page 15 19 event shall either party create any contractual relation between any third party and the other. ARTICLE 20. COMPLIANCE WITH LAW 20.1 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 21. PUBLICITY RELEASE 21.1 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. ARTICLE 22. CONFIDENTIAL INFORMATION 22.1 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. 22.2 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; Page 16 20 (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. ARTICLE 23. PATENTS AND INFORMATION 23.1 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. 23.2 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: Page 17 21 (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. 23.3 The indemnity set out in Section 23.2 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. ARTICLE 24. WARRANTY AND LIABILITY 24.1 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 * 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. 24.2 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. 24.3 ADA warrants that the personnel performing the Work will be qualified and capable of performing the Work. 24.4 (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. (a) 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 * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. Page 18 22 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. (b) 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. 24.5 Notwithstanding the foregoing or any other terms of this Agreement, if Nortel issues a purchase order or otherwise requests support or other services from ADA in connection with Nortel's obligations to any customer, and if Nortel provides ADA with a copy of such terms and conditions, then ADA's acceptance of any such purchase order or commencement of services shall be deemed to be an agreement to provide such services on such terms and conditions. ARTICLE 25. SPONSORS AND PRIMES 25.1 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 26. NOTICES 26.1 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. 26.2 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: Page 19 23 If to Nortel: Northern Telecom Limited NSM Division 150-13575 Commerce Parkway Richmond, British Columbia Canada V6V 2L1 Fax: (604) 244-4080 Attn: General Manager With a copy to: Northern Telecom Limited 8200 Dixie Road, Suite 100 Brampton, Ontario Canada L6T 5P6 Attention: Secretary 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 26.3 Invoices shall be sent to the address indicated for Nortel above, for the attention of Accounts Payable. 26.4 All notices given hereunder shall be given in writing and delivered or faxed. Such notice shall be deemed to have been received upon delivery. Page 20 24 ARTICLE 27. APPLICABLE LAW 27.1 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 and the federal laws of Canada applicable therein. Page 21 25 ARTICLE 28. CONTINUING OBLIGATIONS 28.1 The provisions of Articles 18 - Inventions and Improvements, 20 - Compliance with Law, 21 Publicity Release, 22 - Confidential Information, 23 - Patents and Information and 24 - Warranty and Liability shall survive the termination of this Master Agreement and any Development Agreement formed hereunder. ARTICLE 29. WAIVERS 29.1 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 30. TERM OF AGREEMENT 30.1 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 31. ENTIRETY OF CONTRACT 31.1 The Prior Agreement is hereby cancelled, effective as of the day immediately prior to the date of execution of this Agreement, without any further liability of Nortel to ADA Canada or ADA except for Nortel's obligation to pay to ADA an amount equal to * within 30 days of the execution of this Agreement. This Master Agreement and the schedules hereof contain the entire agreement between the parties with respect to the subject matter hereof. The prior Agreement and 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 herein. ARTICLE 32. FORCE MAJEURE 32.1 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. * Certain confidential portions of this Exhibit were omitted by means of blacking out the text (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. Page 22 26 ARTICLE 33. ARBITRATION 33.1 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. ARTICLE 34. AMENDMENT 34.1 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 35. WITHHOLDING 35.1 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. Page 23 27 IN WITNESS WHEREOF, Nortel and ADA have executed this Agreement as of the day of June, 1997. APPLIED DIGITAL ACCESS, INC. NORTHERN TELECOM LIMITED - -------------------------------- ----------------------------------------- By: By: - -------------------------------- ----------------------------------------- Name: Name: - -------------------------------- ----------------------------------------- Title: Title: ----------------------------------------- By: ----------------------------------------- Name: ----------------------------------------- Title: Page 24 EX-11.1 8 EXHIBIT 11.1 1 EXHIBIT 11.1 APPLIED DIGITAL ACCESS, INC. STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE (UNAUDITED) (Amounts in thousands, except per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------ ------------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Net income (loss) ($ 2,374) ($ 1,440) ($ 3,823) ($ 2,308) ======== ======== ======== ======== Reconciliation of weighted average number of shares outstanding to amount used in net income per share computation: Weighted average number of common shares outstanding 12,452 11,983 12,381 11,961 Weighted average number of options and warrants outstanding - - - - -------- -------- -------- -------- Weighted average number of shares outstanding 12,452 11,983 12,381 11,961 ======== ======== ======== ======== Net income (loss) per share ($0.19) ($0.12) ($0.31) ($0.19) ======== ======== ======== ========
See Note 3 to Condensed Financial Statements EX-27.1 9 EXHIBIT 27.1
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 $3,221 15,874 9,971 (100) 7,107 37,226 11,124 (5,458) 46,653 10,639 0 0 0 51,078 2,506 47,653 14,552 14,552 6,922 6,922 11,910 50 (2) (3,759) 64 (3,823) 0 0 0 (3,823) ($0.31) ($0.31)
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