<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 12,561,374 shares of the registrant's Common Stock, no par value,
outstanding on October 31, 1997.
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APPLIED DIGITAL ACCESS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996.................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and September 30, 1996....... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and September 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............................................ 14
SIGNATURES ........................................................................... 15
</TABLE>
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Item 1.
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,658 $ 1,504
Investments - current 11,911 19,957
Accounts receivable, net 9,759 6,798
Inventory, net 8,171 7,363
Deferred income taxes 130 130
Prepaid expenses and other
current assets 2,815 1,089
------- -------
Total current assets 34,444 36,841
Property and equipment, net 5,768 4,936
Deferred income taxes 1,372 1,372
Other, net 3,106 2,823
------- -------
$44,690 $45,972
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,657 $ 2,120
Acquisition payments due to
licensor 1,733 -
Accrued expenses 1,506 1,507
Accrued warranty 1,449 1,398
Deferred revenue 570 587
------- -------
Total current liabilities 7,915 5,612
Obligations under capital leases,
net of current portion 19 33
------- -------
Total liabilities 7,934 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,
12,551,948 and 12,255,334 shares
issued and outstanding at September
30, 1997 and December 31, 1996,
respectively 51,339 50,631
Additional paid-in capital 2,492 2,492
Unrealized gain on investments 56 25
Deferred compensation (11) (50)
Accumulated deficit (17,120) (12,771)
------- -------
Total shareholders' equity 36,756 40,327
------- -------
$44,690 $45,972
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ----------------------------
1997 1996 1997 1996
------- ------- ------- -------
(AMOUNTS IN THOUSANDS EXCEPT (AMOUNTS IN THOUSANDS EXCEPT
PER SHARE AMOUNT) PER SHARE AMOUNT)
<S> <C> <C> <C> <C>
Revenue $ 8,750 $ 6,957 $23,302 $18,110
Cost of revenue 3,873 3,807 10,795 8,874
------- ------- ------- -------
Gross profit 4,877 3,150 12,507 9,236
Operating expenses:
Research and development 1,963 1,816 6,498 5,388
In-process research and
development related to
asset acquisition - 2,100 1,578 3,286
Sales and marketing 2,230 1,631 5,590 4,832
General and administrative 1,379 983 3,816 2,413
------- ------- ------- -------
Total operating expenses 5,572 6,530 17,482 15,919
------- ------- ------- -------
Operating loss (695) (3,380) (4,975) (6,683)
Interest income 236 384 746 1,337
Other income (expense), net (24) 4 (13) 46
------- ------- ------- -------
Loss before income taxes (483) (2,992) (4,242) (5,300)
Provision for income taxes 43 173 107 173
------- ------- ------- -------
Net loss ($526) ($3,165) ($4,349) ($5,473)
======= ======= ======= =======
Net loss per share ($0.04) ($0.26) ($0.35) ($0.45)
======== ======= ======== =======
Number of shares used in
per share computations 12,512 12,175 12,425 12,033
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
-------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,349) ($5,473)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
In-process research and
development related to
asset acquisition 1,578 3,286
Depreciation and amortization 2,167 1,192
Other 87 38
Changes in assets and liabilities:
Accounts receivable (2,961) (514)
Inventory (808) (877)
Prepaid expenses and other
current assets (1,726) 245
Accounts payable 537 383
Acquisition payments due to
licensor 1,733 -
Accrued expenses (20) 639
Accrued warranty 51 83
Deferred revenue
Net cash used in
operating activities (3,711) (998)
------- -------
Cash flows from investing activities:
Purchases of investments (12,716) (16,016)
Maturities of investments 20,743 24,979
Purchases of property and equipment (1,475) (1,372)
Purchase costs related to asset
acquisitions (3,383) (6,356)
------- ------
Net cash provided by investing
activities 3,169 1,235
------ ------
Cash flows from financing activities:
Principal payments on capital leases (12) (26)
Proceeds from the issuance of common
stock under stock option plans 708 475
------ ------
Net cash provided by financing
activities 696 449
------ ------
Net increase in cash and cash
equivalents 154 686
Cash and cash equivalents,
beginning of period 1,504 1,673
------ ------
Cash and cash equivalents, end of
period $1,658 $2,359
====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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APPLIED DIGITAL ACCESS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Applied Digital Access, Inc. and its wholly owned
subsidiaries (the "Company" or "ADA"). All significant intercompany balances
and transactions have been eliminated in consolidation. These financial
statements have been prepared in accordance with the interim reporting
requirements of Form 10-Q, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 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:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials $4,228 $4,211
Work-in-process 3,241 2,558
Finished goods 1,420 1,063
------ ------
8,889 7,832
Less inventory reserve (718) (469)
------ ------
$8,171 $7,363
====== ======
</TABLE>
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. The accounting standard 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 earnings 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
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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
In June 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 DSS II product for a net amount
of $3.1 million, $2.2 million of which has been paid by the Company in cash
with the remaining $0.9 million to be paid in cash and/or stock at the
Company's option on January 15, 1998. In June 1997 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 price of $12 per share.
The warrant has a three year term. Nortel retained the right to and continues
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.
6. Joint Development Agreement
In September 1997, the Company entered in to a Joint Development Agreement
("JDA") with Northern Telecom, Inc. ("Nortel") to develop unique SONET
network products for the telecommunications industry. Nortel and ADA will
each contribute technology and development resources to projects conducted
under the JDA and will equally share development costs. Development of the
first product under the JDA has commenced. Operating expenses for the three
and nine months ended September 30, 1997 include a $1 million offset to
research and development costs representing Nortel's proportionate share of
development costs that have been incurred through September 30, 1997 in
connection with the initial project being conducted under the JDA.
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, need to make advance purchase commitments, product recall,
government regulation, proprietary technology, dependence on key personnel, and
volatility of stock price. The Company believes that deregulation in the
telecommunications industry and the resulting increased number of competitors
providing telecommunications services could result in an expansion of the
Company's customer base and increased competition with regard to service levels
and costs, ultimately causing an increased demand for the Company's products.
However, 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
7
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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"), the .Provisioner System (".Provisioner"), and
OS design services all acquired through acquisitions, as well as Graphical Test
Assistant ("GTA"), the Integrated Test Access System ("ITAS") and Sectionalizer.
As a result of the software license acquisition from Nortel, the Company has
transitioned portions of the OS design service business to a product-oriented
business.
Recent Developments
In September 1997, the Company entered in to a Joint Development Agreement
("JDA") with Northern Telecom ("Nortel") to develop unique SONET network
products for the telecommunications industry. Nortel and ADA will each
contribute technology and development resources to projects conducted under the
JDA. The companies will equally share development costs, estimated to be several
million dollars per quarter. Development of the first product under the JDA has
commenced with initial availability expected in the first half of 1999. The
agreement also contemplates additional projects as agreed to in the future by
Nortel and ADA. Operating expenses for the three and nine months ended September
30, 1997 include a $1 million offset to research and development costs
representing Nortel's proportionate share of development costs that have been
incurred through September 30, 1997 in connection with the initial project being
conducted under the JDA.
In June 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 DSS II
product for a net amount of $3.1 million, $2.2 million of which has been paid by
the Company in cash with the remaining $0.9 million to be paid in cash and/or
stock at the Company's option on January 15, 1998. In June 1997, 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 price of $12 per share. The
warrant has a three year term. Nortel retained 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 all of Nortel's
North American DSS II customer relationships.
The acquisition related 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 1997, 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.
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Results of Operations
Revenue totaled $8,750,000 for the three months ended September 30, 1997, a 26%
increase from revenue of $6,957,000 for the three months ended September 30,
1996. Revenue for the nine months ended September 30, 1997 totaled $23,302,000
an increase of 29% over revenue of $18,110,000 for the same period in 1996. The
increases were the net result of increased sales of the Company's OS products
and services generated from the BCG operations acquired in July 1996 offset by
decreased sales of the Company's T3AS products and services.
For the three and nine months ended September 30, 1997, revenue from T3AS
products, services and sensors totaled $3.2 million and $10.4 million,
respectively, compared to $4.3 million and $14.6 million, respectively, for the
same periods last year. The quarter-to- quarter revenue decrease was the net
result of decreased T3AS product sales related to in-line applications offset by
increased sales of the Company's Remote Module NIU product to BellSouth. The
revenue decrease for the nine months ended September 30, 1997 was the net result
of decreased T3AS product sales related to in-line applications and decreased
engineering and installation ("E&I") services provided to customers for the
installation of T3AS products offset by increased sales of the Company's Remote
Module NIU product to BellSouth and increased sales of the Company's CTS product
to MCI. For the nine months ended September 30, 1996, E&I revenue totaled $2.7
million, the majority of which was provided to one RBOC customer compared to
$0.2 million for the nine months ended September 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 nine months ended September 30, 1997, revenue from OS products
and services totaled $5.5 million and $12.9 million, respectively, compared to
$2.7 million and $3.5 million, respectively, for the same periods last year. The
revenue increases were primarily the result of increased sales of the Company's
OS products and services generated from the BCG operations. The acquisition of
the software license from Nortel has generated a shift in the Company's BCG
operations from a software design services business to a product business. The
Company markets and supports the DSS II product and technology under the new
name .Provisioner. The Company also intends to integrate the licensed technology
into new product development. Although the Company has continued to market and
develop the design services business, revenue levels are significantly lower
than in the past due to the shift in BCG's operations. Although the Company
believes it will be successful in transitioning the majority of its OS
operations from a design services business to a product business, there can be
no assurance the Company will be able to maintain historical OS 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 the majority of the Company's revenue for the
foreseeable future.
Gross profit totaled $4,877,000 for the three months ended September 30, 1997, a
55% increase from $3,150,000 for the three months ended September 30, 1996.
Gross profit as a percent of revenue was 56% for the three months ended
September 30, 1997 compared to 45% for the three months ended September 30,
1996. The quarter-to-quarter increase was primarily the result of a product mix
weighted toward higher margin OS software products and increased sales of OS
software products partially offset by decreased sales of T3AS products and
services as well as a change in product mix for T3AS products and services
weighted toward the Company's Remote Module NIU and CTS products which carry
lower product margins compared to the Company's T3AS system. Gross profit
totaled $12,507,000 for the nine months ended September 30, 1997, a 35% increase
from $9,236,000 for the nine months ended September 30, 1996. Gross profit as a
percent of revenue was 54% for the nine months ended September 30, 1997 compared
to 51% for the nine months ended September 30, 1996. The increase in gross
profit for the nine months ended September 30, 1997 was mostly due to increased
sales of OS products and services generated from the BCG operations and a change
in product mix weighted toward higher margin OS software products partially
offset by decreased sales of T3AS products and services as well as a change in
product mix for T3AS products and services weighted toward the Company's CTS and
Remote Module NIU products which carry lower product margins compared to the
Company's 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. Additionally, gross profit for the three and nine months
ended September 30, 1997 increased due to the shift of a majority of engineering
labor previously associated with design services revenue from the cost of
revenue line to research and development operating expenses in relation to the
shift of the BCG operations from a design services business to a product
business. There can be no assurances 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.
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Research and development expenses totaled $1,963,000 for the three months ended
September 30, 1997, an 8% increase from $1,816,000 for the three months ended
September 30, 1996. Research and development expenses totaled $6,498,000 for the
nine months ended September 30, 1997, a 21% increase from $5,388,000 for the
nine months ended September 30, 1996. The increases were primarily the result of
a shift of a majority of engineering labor expenses previously associated with
design services revenue from the cost of revenue line to research and
development operating expense due to the shift in the BCG OS business from
design services to product development and increased research and development
personnel to support efforts related to OS software product development and the
JDA with Nortel all of which was largely offset by the Nortel credit for their
share of development costs incurred on the project. For the three and nine
months ended September 30, 1997, research and development expenses include a $1
million offset representing Nortel's proportionate share of development costs
that have been incurred through September 30, 1997 in connection with the
initial project being conducted under the JDA. 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 June 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 software license and related assets from Nortel.
Sales and marketing expenses totaled $2,230,000 for the three months ended
September 30, 1997, a 37% increase from $1,631,000 for the three months ended
September 30, 1996. Sales and marketing expenses totaled $5,590,000 for the nine
months ended September 30, 1997, a 16% increase from $4,832,000 for the nine
months ended September 30, 1996. The increases were primarily the result of
increased marketing and customer support personnel required to support the OS
business including the shift in BCG's operations. 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 $1,379,000 for the three months
ended September 30, 1997, a 40% increase from $983,000 for the three months
ended September 30, 1996. General and administrative expenses totaled $3,816,000
for the nine months ended September 30, 1997, a 58% increase from $2,413,000 for
the nine months ended September 30, 1996. The majority of the increases was due
to the amortization of goodwill and intangible assets associated with the Nortel
license acquisition and the BCG acquisition completed in the third quarter of
1996, and additional personnel expenses required to support the operations of
the Company's 1996 and 1997 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 $236,000 for the three months ended September 30, 1997,
a 39% decrease from $384,000 for the three months ended September 30, 1996.
Interest income totaled $746,000 for the nine months ended September 30, 1997, a
44% decrease from $1,337,000 for the nine months ended September 30, 1996. This
decrease is mostly the result of decreased cash investments compared to the same
period last year.
For the three and nine months ended September 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 nine months ended September 30,
1997 and September 30, 1996, respectively, 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
$526,000, or $.04 per share, for the three months ended September 30, 1997
compared to a net loss of $3,165,000, or $.26 per share, for the three months
ended September 30, 1996. The Company incurred a net loss of $4,349,000, or $.35
per share, for the nine months ended September 30, 1997 compared to a net loss
of $5,473,000, or $.45 per share, for the nine months ended September 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 $2,771,000 or $.22 per share, for the nine months ended
September 30, 1997. Excluding the $1.2 and $2.1 million charges for purchased
research and development associated with 1996 acquisitions, the Company would
have recorded a net loss of $2,187,000, or $.18 per share, for the nine months
ended September 30, 1996.
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<PAGE> 11
Liquidity and Capital Resources
At September 30, 1997 the Company had approximately $13,569,000 in cash and
investments, compared to $21,461,000 at December 31, 1996. The decrease in cash
and investments is primarily due to increased accounts receivable and inventory,
the purchase of capital equipment, cash payments associated with the acquisition
of the DSS II license and related assets, and the net loss from operations.
Working capital decreased approximately 15% or $4,700,000 from $31,229,000 at
December 31, 1996 to $26,529,000 at September 30, 1997. The decrease in working
capital was primarily the result of an increase in accrued payments related to
the DSS II license acquisition, purchases of capital equipment and an increase
in accounts payable due the timing of inventory receipts and the net loss from
operations.
For the nine months ended September 30, 1997, the Company's operating activities
used $3,711,000 in cash, primarily the result of an increase in accounts
receivable due to a majority of product deliveries occurring late in the
quarter, as well as an increase in inventory due to timing of remote module
receipts all of which was partially offset by an increase in accrued payments
due Nortel in conjunction with the DSS II license acquisition, compared to
$998,000 used by operating activities for the nine months ended September 30,
1996.
For the nine months ended September 30, 1997, cash used for capital expenditures
totaled approximately $1,475,000, compared to $1,372,000 for the nine months
ended September 30, 1996. The majority of the capital additions were for
purchases of computer and lab equipment to support expanded research and
development efforts, improvement of the network infrastructure to support the
Company's multiple locations, and the BCG operations move 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, long distance telephone companies, other local telephone companies,
Competitive Access Providers ("CAPs") and Internet Service Providers ("ISPs").
The Company's marketing efforts to date have focused on the RBOCs and long
distance telephone companies which accounted for 73% of the Company's revenue in
1996 and 51% of the Company's revenue in the first nine 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 and a major long distance
telephone company 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 and OS 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.
11
<PAGE> 12
There can be no assurance that the Company's products will be qualified by new
customers, or that such qualification will not be significantly delayed.
Furthermore, telephone company work force reductions and staff reassignments
have in the past delayed the product qualification process, and the Company
expects such reductions and reassignments to continue in the future. There can
be no assurance that such reductions and reassignments will not have a material
adverse effect on the Company's business, operating results and financial
condition.
High Dependence on Two Product Lines. Historically, the majority of the
Company's revenue has been derived from the sale of T3AS products and services.
As a result of acquisitions completed in 1996 and 1997, the Company's revenue
has been derived from a product mix of both T3AS products and services and OS
software products and services. The Company is investing in the expansion of
these two 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, provisioning, 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 resulting in fierce
competition with respect to price, performance, product features, product
reputation, quality, and customer support. Additionally, several of the
Company's competitors, especially in the NIU, CTS and OS markets, have
long-established relationships with the Company's current prospective customers
which may adversely affect the Company's ability to successfully compete for
business with these 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. In June 1997,
the Company acquired a license from Nortel to its DSS II software product and
technology. The Company markets and supports the DSS II product and technology
under the new name .Provisioner. The Company also intends to integrate the
licensed technology into new product development. The acquisition of the
software license has generated a shift in the Company's BCG operations from a
software design services business to a product business and the 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
12
<PAGE> 13
in hiring sufficient numbers of qualified personnel to support the expansion of
the business. The Company may also make future acquisitions where it believes it
can acquire new products or otherwise rapidly enter new or emerging markets.
Mergers and acquisitions of high technology companies are inherently risky and
can place significant strains on the Company's management, information systems
and operations. 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 recent or future acquisitions or in the future. The Company's
potential inability to manage its changing business effectively could have a
material adverse effect on the Company's business, operating results, and
financial condition.
Mergers. Of the nine major Telephone Service Providers ("TSPs") currently
involved in or that have recently completed merger transactions, seven 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.
In addition, future merger transactions involving or contemplated by the
Company's current or prospective customers may cause delays in their capital
spending decisions, which 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 few 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
products or components, the Company must make advance commitments to purchase
relatively large quantities of such products or 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 sell such
products or incorporate such components in its other products could have a
material adverse effect on the Company's business, operating results and
financial condition.
13
<PAGE> 14
Product Recall. Producers of telephone network equipment, including test
access and performance monitoring systems such as those being marketed by the
Company, are often required to meet rigorous standards imposed by Bellcore, the
research and development entity created following the divestiture of AT&T to
provide ongoing engineering support to the RBOCs. In addition, the Company must
meet specialized standards imposed by its customers. The Company's systems are
also required to interface in a complex and changing environment with
telecommunication network equipment made by numerous suppliers. In the event
there are material deficiencies or defects in the design or manufacture of the
Company's systems, or if the Company's systems become incompatible with existing
third-party network equipment, the affected products could be subject to a
recall. The Company has experienced two significant product recalls in its
history and there can be no assurance that the Company will not experience any
product recalls in the future. The cost of any subsequent product recall and
associated negative publicity could have a material adverse effect on the
Company's business, operating results and financial condition.
Government Regulation. The majority of the Company's customers operate within
the telecommunications industry which is subject to regulation in the United
States and other countries. Most of the Company's customers must receive
regulatory approvals in conducting their businesses. Although the
telecommunications industry has recently experienced government deregulation,
there is no assurance this trend will continue. In fact, recent regulatory
rulings have affected the ability of the Company's customers to enter new
markets and deliver new services which could impact their ability to make
significant capital expenditures. The effect of regulatory rulings by federal
and state agencies on the Company's customers may adversely impact the Company's
business, operating results and financial condition.
Proprietary Technology. The Company relies on a combination of technical
leadership, patent, 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. Additionally,
should a third party challenge any of the Company's current or future patents,
there can be no assurance that the Company will be successful in defending its
patents or that any litigation, regardless of outcome, will not result in
substantial cost to and diversion of efforts by the Company. 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 by or against the Company could materially and adversely
affect the Company's business, operating results and financial condition.
Moreover, the laws of some foreign countries do not protect the Company's
proprietary rights in the products to the same extent as do the laws of the
United States.
Dependence on Key Personnel. The success of the Company is dependent, in
part, on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and the inability to attract and
retain additional key employees or the loss of one or more current key employees
could adversely affect the Company. There can be no assurance that the Company
will be successful in hiring or retaining requisite personnel.
Volatility of Stock Price. The Company's future earnings and stock price may
be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by public market analysts
and investors could have an immediate and significant adverse effect on the
trading price of the Company's common stock. Fluctuation in the Company's stock
price may also have an effect on customer decisions to purchase the Company's
products which could have a material adverse effect on the Company's business,
operating results and financial condition.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, ADA may be involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Quarterly Report, the Company is not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1* Joint Development Agreement between Northern Telecom, Inc. and
Applied Digital Access, Inc. dated September 30, 1997
11.1 Statement regarding computation of net (loss) per share.
27.1 Financial Data Schedule.
</TABLE>
* 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
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Applied Digital Access, Inc.
Date: November 14, 1997 /s/ PETER P. SAVAGE
--------------------
Peter P. Savage
Director
President and Chief Executive Officer
Date: November 14, 1997 /s/ JAMES L. KEEFE
-------------------
James L. Keefe
Vice President Finance and
Administration and Chief
Financial Officer
16
<PAGE> 1
EXHIBIT 10.1
*CONFIDENTIAL*
TREATMENT REQUESTED
JOINT DEVELOPMENT AGREEMENT
This Joint Development Agreement ("Agreement") is entered into as of
September 29, 1997 (the "Effective Date") by and between Applied Digital Access,
Inc. a California corporation with a principal place of business at 9855
Scranton Rd., San Diego, CA 92121 ("ADA") and Northern Telecom, Inc., a Delaware
corporation, with a place of business at 5555 Windward Parkway, Alpharetta, GA
30201-3895, on behalf of itself and its Affiliates ("Nortel").
RECITALS
A. ADA has developed technology and telecommunications systems design,
particularly in the areas of performance management of high speed
telecommunications networks, including network and circuit * and *.
B. Nortel has developed technology in specific areas of
telecommunications systems design that are applicable to the design of
telecommunications systems, including * communications, * and * technology.
C. Nortel and ADA have developed market positions among
telecommunications service suppliers and telephone companies, and have
recognized a need in the marketplace for a product line which is not currently
being addressed by any existing products.
D. Nortel and ADA desire to combine their technology and expertise in
order to develop, market and sell a new product line, consisting of a new *
product family.
E. ADA will develop the new product line, and ADA and Nortel will share
equally in the development costs.
AGREEMENT
Now, therefore, in consideration of the mutual promises set forth below,
ADA and Nortel agree as follows:
1. DEFINITIONS
1.1. ADA Field means the field into which (i) * equipment and (ii) *
equipment can be sold, as is more particularly defined in Exhibit 1.1.
1.2. ADA Field Technology means Jointly Developed Technology in the ADA
Field.
1.3. ADA Contributed Technology means the inventions (whether patentable
or not), patents, copyrights, trade secrets, know-how and mask works developed
prior to the Effective Date (a) which are owned by or licensed to ADA, and which
ADA has the right to sublicense and (b) which meet the System Design
Specification (or parts thereof), and (iii) which are incorporated in or
practiced by any one or more Product, provided that ADA Contributed
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.
<PAGE> 2
*CONFIDENTIAL*
TREATMENT REQUESTED
Technology does not include inventions, patents, copyrights, trade secrets,
know-how and mask works which would otherwise constitute ADA Contributed
Technology to the extent to which Nortel has reimbursed expenses pursuant to
Section 7.4 below in respect thereof.
1.4. ADA Improvements means Improvements developed during the term of
the Project and funded jointly by the parties hereunder, made to technology in
the ADA Field, which cannot be practiced without using or infringing on ADA
Contributed Technology.
1.5. Additional Products means such products in the Product Line as the
parties may agree to develop under Additional Projects in accordance with the
provisions of Section 2.2 below.
1.6. Additional Projects means such Additional Projects for the
development of Additional Products as may be agreed upon between the parties in
accordance with the provisions of Section 2.2 below.
1.7. Affiliate means the parent company of Northern Telecom Inc,
Northern Telecom Limited, and any wholly-owned subsidiary of such parent
company.
1.8. Approval Period means the applicable period under the heading
"Approval Period" in the applicable Development Schedule. If no Approval Period
is set forth in the applicable Development Schedule, the Approval Period will be
five (5) calendar days.
1.9. Approval Process means the process for approval hereunder, as
described in Section 3.4 below.
1.10. Binder means that certain three-ring binder, with one or more
volumes, entitled "Statement of Work for the * Project with respect to the
ADA/Nortel Joint Development Agreement, dated as of September 27, 1997, Binder,"
in which certain documents, materials or other items incorporated into this
Agreement by reference are kept. The original Binder is maintained by and
located at the premises of ADA.
1.11. Completion Date means the date on which a particular Product has
been accepted under the Approval Process. Each Product will have its own
Completion Date.
1.12. Components means certain individual electronic components,
comprised of ADA Contributed Technology or of Nortel Contributed Technology, as
the case may be, which components will be incorporated into one or more Products
under a Project, and as to which ADA or Nortel, respectively, commit to sell to
the other pursuant to the terms and conditions of the Component Supply
Agreement. The Components contributed by ADA as of the Effective Date are listed
in Exhibit 1.13-1; the Components contributed by Nortel as of the Effective Date
are listed in Exhibit 1.13-2.
1.13. Component Supply Agreement means the agreement entered into
pursuant to the terms of Section 5.2 below, as amended from time to time.
2
<PAGE> 3
1.14. Confidential Information means any data or information disclosed
hereunder that relates to either party's products, technology, research,
development, business activities, and is confidential or proprietary to and/or a
trade secrets of the disclosing party and also may include confidential,
proprietary and/or trade secret information that is owned by third parties,
which third parties have granted sufficient rights to a party to permit it to
provide such Confidential Information to the other party hereunder. As used
herein, "Confidential Information" includes any data or information that relates
to ADA Contributed Technology, Nortel Contributed Technology and Jointly
Developed Technology.
1.15. Deliverables means any items to be delivered during a Project as
set forth in the corresponding Development Schedule.
1.16. Development Costs means the development costs described in Section
7.2 to develop the Products under the Projects.
1.17. Development Schedule shall mean one or more plans and schedules
for the development of the Initial Products and any Additional Products or the
conduct of any Project hereunder, including without limitation the milestone
payments associated with Deliverables, as developed and approved, as such
schedule is amended from time to time during the term and in accordance with the
provisions hereof. The preliminary Development Schedule for the Initial Project
is described in the Binder under the heading "Development Milestones" and the
final of which for the Initial Products is to be agreed by the parties and
inserted in the Binder in accordance with the terms of Section 3.3.4 hereof.
1.18. Expense Analysis means the estimated costs of the development in
accordance with the Development Schedule for the Initial Product, Additional
Products or any other Project, as applicable. The initial Expense Analysis for
the Initial Product is set forth in Binder under the heading "Expense Analysis",
as amended from time to time under the provisions of Section 3 below.
1.19. Improvement means any and all enhancements, modifications,
derivative works, improvements or changes to the ADA Contributed Technology, to
the Nortel Contributed Technology, or to the Jointly Developed Technology (which
Jointly Developed Technology is developed during the term of the Project and
funded jointly by the parties hereunder), including without limitation
improvements to patents, whether or not reflected in a continuation in part or
reissue of a patent. For purposes of this definition, a patentable invention
which is conceived, reduced to practice or developed independent of, and without
benefit of, any of the ADA Contributed Technology, the Nortel Contributed
Technology or the Jointly Developed Technology, and which patentable invention
can be practiced without using or infringing upon any ADA Contributed
Technology, Nortel Contributed Technology, or Jointly Developed Technology,
shall not be considered an "Improvement" hereunder.
1.20. Initial Development Project shall mean the development of the
Initial Products under the terms of Section 4 below.
3
<PAGE> 4
*CONFIDENTIAL*
TREATMENT REQUESTED
1.21. Initial Products are the Products to be developed during the
Initial Project hereunder, as identified in Section 4 below.
1.22. Jointly Developed Technology means the inventions (whether
patentable or not), patents, copyrights, trade secrets, know-how and mask works,
developed during the term of this Agreement, which technology meets all of the
following conditions:
a. they are first conceived, made, created, reduced to practice or fixed
in a tangible medium of expression by ADA alone, Nortel alone, or jointly by ADA
and Nortel, in the course of the development Project under this Agreement;
b. they meet the System Design Specifications (or portion thereof);
c. they can be practiced without using or infringing any ADA Contributed
Technology or Nortel Contributed Technology.
all of which, along with all intellectual property rights associated therewith,
including without limitation patents, patent applications, copyrights, trade
secrets, know-how and mask works, are referred to collectively herein as
"Jointly Developed Technology". Jointly Developed Technology shall consist of
"Statutory IP Rights" and "Non-Statutory IP Rights".
1.23. Manufacturing Services Agreement means the agreement, if any,
entered into in accordance with the terms hereof, as described in Section 9.2,
as amended from time to time, under which Nortel will manufacture certain
Components and Products.
1.24. Non-statutory IP Rights means any intellectual property rights in
Jointly Developed Technology, including without limitation copyrights, works of
authorship, trade secrets, know-how, processes, algorithms, methods, designs,
mask works, drawings or other intellectual or proprietary rights other than
Statutory IP Rights.
1.25. Nortel Contributed Technology means the inventions (whether
patentable or not), patents, copyrights, trade secrets, know-how and mask works,
developed prior to the Effective Date (a) which are owned by or licensed to
Nortel and which Nortel has the right to sublicense, (b) which meet the System
Design Specifications (or portion thereof), and (iii) which are incorporated in
or practiced by any one or more Products, provided that Nortel Contributed
Technology does not include inventions, patents, copyrights, trade secrets,
know-how and mask works which would otherwise constitute Nortel Contributed
Technology to the extent to which ADA has reimbursed expenses pursuant to
Section 7.4 below in respect thereof.
1.26. Nortel Field means the field into which (i) * , (ii) * , (iii) * ;
and (iv) * can be sold, all as is more particularly defined in Exhibit 1.27.
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1.27. Nortel Field Technology means Jointly Developed Technology in the
Nortel Field.
1.28. Nortel Improvements means Improvements developed during the term
of the Project and funded jointly by the parties hereunder, made to technology
in the Nortel Field which cannot be practiced without using or infringing upon
any Nortel Contributed Technology.
1.29. Product(s) means one or more products in the Product Line,
consisting of the Initial Products, together with such Additional Products as
are agreed upon between the parties and added to this Agreement under the terms
of Section 2.2 below.
1.30. Product Line is the family or line of products in the * Field more
particularly described in Section 2.1 below.
1.31. Product Marketing Specifications means the features and
functionalities of the Products which, in the judgment of the parties, are
required by the marketplace, the preliminary description of which for the
Initial Products is described in the Binder, under the heading "Marketing
Requirements Document (MRD)"
1.32. Product Subsystems is a combination of individual Products,
consisting of a number of circuit modules, each of which circuit modules is
comprised of a number of individual electronic components, including but not
limited to the Components, as is more particularly described in the Binder,
under the heading entitled "Marketing Requirements Documents."
1.33. Project means, as applicable, the Initial Development Project
described in Section 4 below, or an Additional Project.
1.34. Resource Plan means the description of personnel required and
qualifications of such personnel required for a specific Project, the
preliminary description of which for the Initial Products is in the Binder,
under the heading "Resource Plan".
1.35. Statement of Work means, collectively, the statement of work
prepared for each Project which describes project milestones, staffing and
related matters, including the responsibilities to be performed by each party,
the responsibilities to be performed jointly, the schedule for performance of
those responsibilities, and a staffing plan detailing project management
assignments and the expected level of personnel resources to be devoted by each
party to the performance of its responsibilities. Each Statement of Work will
consist of (i) the Product Marketing Specifications, (ii) the System Design
Specifications, (iii) the Development Schedule, (iv) the Resource Plan, and (v)
the Expense Analysis for a particular Project.
1.36. Statutory IP Rights means any intellectual property rights in
Jointly Developed Technology which is or may be patentable or otherwise
protectable under Title 35 of the United States Code or equivalent legislation.
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1.37. * Field means the field more particularly described in the
Marketing Requirements Document (MRD) included in the Binder, known by the code
name "*", comprised of a * can be sold.
1.38. System Design Specifications means the functional description of
each Product, describing in general terms the features and functionalities
thereof, the preliminary description of which for the Initial Products is
described in the Binder, under the heading "System Requirements Document (SRD)",
and the final of which for the Initial Products is to be agreed by the parties
and included in the Binder in accordance with the terms of Section 3.3 hereof.
1.39. Technology License Agreement means the agreement to be entered
into promptly after the execution of this Agreement, all as is more particularly
described in Section 5.1 below, as amended from time to time.
2. DEVELOPMENT OF THE PRODUCT LINE.
2.1. STATEMENT OF OBJECTIVES. The parties expressly set forth herein
their mutual objectives under this Agreement, as follows:
2.1.1. Development of New and Needed Product Line . ADA and Nortel
desire to combine their respective technology and expertise in order to develop
a new * product family for the * Field (the "Product Line"). The parties intend
that the Product Line will be compatible with and provide interoperability with
products manufactured by Nortel, ADA, * , * and other established
telecommunications manufacturers and suppliers. Without limiting the foregoing,
the parties intend that the interoperability include, but not be limited to, * ,
* management, and true interoperability.
2.1.2. Nature of New Product Line. As of the Effective Date, the parties
have identified specific Products, a list of which is described in the Binder,
under the heading entitled "Marketing Requirements Documents" (the "Initial
Products") within the Product Line to be developed as the Initial Products
hereunder, comprising of the four Product Subsystems more particularly described
in the Binder, under the heading entitled "Marketing Requirements Documents."
Each such Product Subsystem represents a combination of individual Products.
2.1.3. Ability to Add Products and Other Development Projects. The
parties further intend that this Agreement describe a process by which the
parties not only will develop the Initial Products, but also may add products to
the Product Line from time to time as "Additional Products" hereunder and
otherwise conduct other development projects from time to time as "Additional
Projects" hereunder, pursuant to the terms of Section 2.2 below.
2.1.4. Ability to Modify. In order to develop a basis for entering into
this Agreement, the parties have prepared and agreed upon an initial Statement
of Work, described in the Binder, under the heading "Statement of Work for the *
Project" setting forth a description applicable to the Initial Development
Project. The initial Statement of Work will operate as a base line for the
Initial Development Project. The parties recognize that additional clarification
and refinement of the Statement of Work will be required for the Initial
Development Project,
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and that any initial Statement of Work for Additional Projects undertaken for
the development of Additional Products will similarly require clarification and
refinement. Therefore the parties intend that this Agreement establish a process
by which the parties may amend the Statement(s) of Work, thereby amending the
nature and scope of the Project(s), pursuant to the terms of Section 2.3.
2.2. ADDITIONAL PROJECTS.
2.2.1. Request for Additional Product or Other Development Work. From
time to time during the term hereof, either party (i) shall, prior to commencing
development alone or with a third party of (x) any new product or product line
within the * Field which uses Jointly Developed Technology, (y) development of
any enhancements or modifications or improvements to existing Products, or (z)
licensing any technology to a third party to permit either of the foregoing
within the * Field, suggest, and (ii) may, in any other instance, suggest the
addition of additional products in the Product Line or the conduct of additional
joint development work pursuant to the terms of this Agreement. Either party
shall make such request by submitting to the other an Additional Product
Appendix, in the form attached to this Agreement as Exhibit 2.2.1. Promptly upon
receipt of such form, the receiving party shall provide the submitting party
with an oral indication of interest in proceeding with the additional
development project.
2.2.2. Preparation of Statement of Work. In the event that the receiving
party indicates a willingness to proceed, then the parties shall meet and
determine which party should conduct the development of such Additional Project
hereunder. Promptly upon such determination, the party selected to conduct the
development (the "development party") shall complete and return to the other
party a detailed Product Marketing Specification, System Design Specification,
Development Schedule, Resource Plan and Expense Analysis applicable to the
Additional Product or Products or additional development Project requested.
Costs incurred by the developing party in preparing such response to the request
shall be included in Development Costs. To the extent that a requested
Additional Product or Products have interdependencies with the rest of the
Product Line then under development, the developing party shall, concurrently
with the preparation and submission to the other of the response to request,
propose corresponding changes to the Product Marketing Specification, System
Design Specifications, Development Schedule, Resource Plan and Expense Analysis
for the Product or Products then under development affected by such requested
Additional Project. Neither party assumes any obligation to pay for development
work performed on Additional Project until such Additional Project shall have
been approved in accordance with the provisions of Section 3.3. When the
Statement of Work applicable to the proposed Additional Project(s) shall have
been approved under Section 3.3 then such project shall constitute an
"Additional Project" hereunder and any products described therein shall
constitute "Additional Products" hereunder, a new Additional Project Binder will
be created in which all documents related to such Additional Project shall be
prepared and maintained by ADA.
2.2.3. * Products. The parties agree that it is their intention to
develop versions of the Products which are * compliant in accordance with the
Additional Products process described herein, if sufficient demand for such
Products is determined to exist. Accordingly, the
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parties agree to commence market research to determine if there is sufficient
demand and each party shall bear the costs of its market research regarding any
* product. Upon the completion of such market research either party may request
that an * product be an Additional Product as set forth in Sections 2.2.1 and
2.2.2. The request shall also include an analysis of work required and
preparation of cost estimates with respect to an * version of the Products. It
is the intent of the parties that such a request will be submitted by one party
to the other within 90 days of the execution of this Agreement.
2.3. DESIGN CHANGES AFTER COMPLETION DATE.
2.3.1. Statement of Intention . The parties agree that, during the term
hereof, they will each exercise best efforts to maintain a single product design
for the Product Line, and for each Product therein. The parties acknowledge and
agree that a single product design enjoys economies of scale, including without
limitation, economies in the manufacture and engineering and technical support
of the Product Line, and further that a single product design enhances the
ability to optimize joint marketing and sales efforts. Therefore, it is the
parties' intention and agreement that the Product Marketing Specification and
the System Design Specification represent the single product design which the
parties will attempt to maintain.
2.3.2. Changes to Product Line or Products. Notwithstanding the
foregoing, the parties recognize that from time to time during the term hereof
some one or more customers may desire, or anticipated customer desires may
dictate, that special enhancements or modifications be made to the Product Line,
or to any Product therein or to add certain properties or products thereto, and
that either party may desire to adopt such changes requested by the customer or
anticipated to be desired by customers. From and after the Completion Date with
respect to any particular Product, each party will notify the other promptly
upon receipt of a request from a customer, or upon identification of an
anticipated customer need, to implement any enhancement, modification or other
change to the Product Line, or any Product therein. The receiving party shall
have not more than ten (10) business days within which to request that such
enhancement be a joint development between the parties, and the subject of an
Additional Project under the terms of this Agreement and Section 2.2 above. In
the event the receiving party elects not to participate, or fails to respond
within such ten (10) business day period, then the requesting party shall have
the right to conduct such product development alone, at its sole cost and
expense, subject to the terms of this Agreement and the Technology License
Agreement. The requesting party shall not be required to license to the
responding party any intellectual property, other than Improvements made to
technology in the other party's Field which cannot be practiced without using or
infringing on the other party's Technology, arising from such independent
product development conducted during the term hereof. Nothing herein shall
obligate ADA to conduct development work after the Completion Date with respect
to any particular Product, without regard to whether Nortel indicates a
willingness to pay some portion or the entire costs of such development.
2.3.3. Correction of Design Defects After Completion Date. The parties
acknowledge the importance of sustaining engineering of such products. Following
the Completion Date in respect of any Product, ADA agrees to conduct such
sustaining engineering development work as shall be agreed upon between the
parties or as required to facilitate the
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manufacturing process. The parties intend that the cost of such support,
including the correction of any design defects in the Jointly Developed
Technology and for carrying out any required sustaining engineering Improvements
(as defined in Section 12.2.2) with respect to the Jointly Developed Technology,
shall be shared equally by the parties. Each party acknowledges that it shall be
responsible for paying its own cost for supporting its contributed technology,
including the correction of design defects and sustaining engineering
Improvements.
3. MANAGEMENT OF THE PROJECT (INITIAL PROJECT AND ADDITIONAL PROJECTS).
3.1. PROJECT MANAGERS. The Project Manager for Nortel as of the Effective
Date is *; the Project Manager for ADA as of the Effective Date is *. Either
party may appoint a new or substitute Project Manager at any time upon written
notice to the other party. The Nortel and ADA Project Managers shall be
responsible for the following activities, together with such other activities as
the parties may agree:
3.1.1. Representing Nortel and ADA, respectively, in all development
matters relating to this Agreement;
3.1.2. Submitting and receiving the Deliverables and other materials and
documents required to be delivered under this Agreement;
3.1.3. Overseeing the proposing and development of any modifications to
the Product Marketing Specification, System Design Specification, Development
Schedule, Resource Plan or Expense Analysis, and presenting the same to the
Management Committee as defined in Section 4.2.1;
3.1.4. Arranging any meetings to be held between the parties;
3.1.5. Maintaining, for recordkeeping purposes, a log book or notes
containing summaries of all material communications and deliveries between the
two Project Managers; and
3.1.6. Implementing appropriate practices and procedures to assure the
security of the items delivered under this Agreement.
3.2. APPOINTMENT AND REMOVAL OF PROJECT MANAGERS AND OF COMMITTEE MEMBERS.
Each of Nortel and ADA may at any time, by written notice to the other, remove
one or more of its representatives as Project Managers and as members of any
committee constituted under the provisions of this Agreement, with or without
cause, and substitute other agents to serve in their stead.
3.3. APPROVAL OF CHANGES TO STATEMENT OF WORK. The parties intend that,
prior to the Completion Date with respect to any particular Project, the Project
may require that a new Statement of Work with respect to a proposed Additional
Product or other developing project be developed or that a Statement of Work
with respect to a Product or other development project then under development
may need to be amended or revised. The parties intend that the process
applicable to any development, amendment or modification to the Product
Marketing Specification, System Design Specifications, Development Schedule
(including milestone
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payments), Resource Plan and Expense Analysis applicable to such proposed
additional project, product or such specific Project or Product shall be as
described in this Section 3.3. Changes, modifications or improvements to
Products, after the Completion Date with respect to such Product, are governed
by the provisions of Section 2.3 above (which, in the case of Section 2.3.3,
shall include the process described in this Section 3.3).
3.3.1. Request for Modifications. In the event that one party delivers a
request for proposed Additional Product(s), proposed development Project or
proposed amendments or modifications of the Statement of Work to the other party
from time to time during the term hereof, or requests amendments or
modifications of any Statement of Work prior to the Completion Date with respect
to such Product, such party shall make such request for development, amendment
or modification by submitting to the other party such request in writing, in
sufficient detail to enable the other party to evaluate the request. Promptly
upon receipt of such request, but in any event not more than ten (10) business
days thereafter, the receiving party shall provide the submitting party with an
oral indication of interest in proceeding with the request.
3.3.2. Preparation of Statement of Work In the event that the receiving
party indicates a willingness to proceed or otherwise reasonably consents, then
the requesting party shall complete and return to the other party a detailed
Product Marketing Specification, System Design Specification, Development
Schedule, Resource Plan and Expense Analysis responsive to the request. Costs
incurred by the requesting party to prepare such response to the request shall
be included in Development Costs hereunder.
3.3.3. Acceptance of New or Modified Statement of Work .
a. The Management Committee shall promptly, but not more than
ten (10) days after delivery of a new or modified Statement of Work, meet and
consult with respect to the new or modified Statement of Work. Neither party may
unreasonably withhold approval to a modified Statement of Work. Failure of the
modified Statement of Work to meet the intention of the parties as identified in
Section 2.1 above shall constitute reasonable grounds for withholding approval.
It shall be unreasonable to withhold approval of any request for modification
made in order to reflect the status of development to date in a Project,
including without limitation to reflect actual Development Costs incurred, to
reflect modified delivery dates for Deliverables, changes to milestone payments
and other aspects of the Project to reflect actual course of development. Either
party may withhold approval to a Statement of Work for a proposed Additional
Product at its discretion, except that a party required to submit such a request
under Section 2.2.1 may not unreasonably withhold consent to the proposed
Statement of Work if the receiving party provides an indication of interest in
proceeding with the additional development project under Section 2.2.
b. The Management Committee shall, upon completion of their
consultation and review under paragraph (a), but not more than ten (10) business
days from the receipt of the new or modified Statement of Work, provide each
other with either a written acceptance of the Statement of Work or, in the case
of a requested modification or amendment, a detailed statement specifying the
basis for rejection. The requesting party may, in its discretion,
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further modify the Statement of Work to reflect the discussions of the parties,
and redeliver the Statement of Work for further review. The requesting party may
undertake to modify and redeliver a modified Statement of Work multiple times
using this process until the parties have agreed upon the modifications. Either
party may, in its discretion, determine that the parties have reached an impasse
with respect to any proposed modification and implement the escalation procedure
described in Section 18 below to resolve such impasse.
c. A party's review of a redelivered Statement of Work shall be
solely for the purpose of determining that corrections have been made as
specified in the written statement of objections delivered by a party under
paragraph (b) and that such changes do not materially adversely affect other
aspects of the Statement of Work and not for any other purpose, including
without limitation the incorporation at such time of additional new ideas or
requirements.
3.3.4. Modified Statement of Work . At such time as the Management
Committee shall have agreed upon a modified Statement of Work, or any portion
thereof including without limitation the Product Marketing Specification, System
Design Specification, Development Schedule, Resource Plan or Expense Analysis,
the Statement of Work as so modified and approved shall constitute the Statement
of Work hereunder and be incorporated by reference into this Agreement, and
shall supersede the preceding Statement of Work, or applicable portions thereof,
for all purposes. In order to evidence their agreement to the revised Statement
of Work, the parties shall initial the revised Statement of Work and include it
in an additional volume of the Binder, labeled "Statement of Work" in which all
amendments and modifications to the Statement of Work will be kept.
3.4. ALL OTHER APPROVALS. From time to time throughout the course of the
Project (whether the Initial Project or any Additional Project), the parties
will be required to review and approve Deliverables and other items hereunder.
The parties intend that the process established in this Section 3.4 (the
"Approval Process") will apply to all approvals hereunder, except the approval
of revisions to the Statement of Work which are governed by the provisions of
Section 3.3 above.
a. For the period of time identified as the applicable Approval
Period in the Development Schedule, the parties shall review and, if applicable,
test a Deliverable or other item required to be approved hereunder. The
Management Committee shall promptly, but not more than ten (10) days after
delivery of the applicable Deliverable or other item, meet and consult with
respect thereto Neither party may unreasonably withhold approval to the
Deliverable. If the Statement of Work subjects the applicable Deliverable to
testing and the parties shall have agreed to the applicable testing requirements
and protocol as a part of the Statement of Work, then it shall be reasonable for
either party to withhold approval if the applicable Deliverable fails to perform
in accordance with the specifications therefor as determined by the testing
established therefor.
b. The Management Committee shall, upon completion of their
consultation and review under paragraph (a), but not later than upon the
expiration of the Approval Period for such Deliverable or other item, prepare
either a written acceptance of the
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Deliverable or other item or a detailed statement specifying the manner in which
the Deliverable or other item fails to meet the specifications therefor. ADA
may, in its discretion, continue its development efforts and attempt to correct
the failures identified in any such Deliverable and to redeliver the Deliverable
or other item multiple times using this process. Either party may, in its
discretion, determine that the parties have reached an impasse with respect to
any particular Deliverable and implement the escalation procedure described in
Section 18 below to resolve such impasse.
c. A party's review of a redelivered Deliverable or other item
shall be solely for the purpose of determining that corrections have been made
as specified in the written statement of objections delivered by a party under
paragraph (b) and that such changes do not adversely affect other aspects of the
Statement of Work and not for any other purpose, including without limitation
the incorporation at such time of additional new ideas or requirements.
3.5. EXECUTIVE COMMITTEE. The parties shall form an Executive Committee
made up of three representatives for each party. The initial members of the
Executive Committee shall be *, *, *, *, * and *. The Executive Committee shall
meet at least twice annually to review the progress of the Project(s), establish
any applicable policies and discuss any outstanding issues.
4. INITIAL PROJECT.
4.1. ADA DEVELOPMENT EFFORTS. The parties intend that Product development
will be conducted primarily and principally by ADA, under the terms of this
Agreement and subject to the Approval Process. For greater certainty, it is the
intent of the parties that ADA use reasonable commercial efforts to carry out
design selection appropriately and on time, and to enumerate the impact any
delays will have on the Development Schedule, and to conduct interoperability
testing and design for interoperability. The parties agree to share the
Development Costs equally, in accordance with the terms and conditions hereof,
including Section 7 below.
4.2. STATEMENT OF WORK. Included in the Binder (i) under the heading
"Marketing Requirements Document (MRD)" is the initial Product Marketing
Specification, (ii) as under the heading "System Requirements Document (SRD)" is
the initial System Design Specification, (iii) under the heading "* Development
Milestones" is the initial Development Schedule, (iv) under the heading "*
Resource Plan" is the initial Resource Plan, and (v) under the heading "*
Expense Analysis" is the initial Expense Analysis. The parties will meet and
prepare final versions of each such document comprising the Statement of Work,
as follows:
4.2.1. Product Marketing Specification. Nortel and ADA shall establish a
Management Committee which shall consist of an even number of individuals, half
of whom shall be representatives of Nortel and the other half of whom shall be
representatives of ADA. ADA shall conduct any necessary market research and
recommend any changes which are necessary or appropriate to the Product
Marketing Specifications by October 15, 1997. ADA shall deliver such
recommendations to Nortel promptly upon completion thereof. Nortel shall have a
period of five (5) days within which to review the recommended changes and
comment thereon. The
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recommended changes, incorporating Nortel's comments shall then be submitted to
the Management Committee, which shall determine what, if any, changes are
required to the Product Marketing Specifications under the Approval Process
described in Section 3.3, above. The parties intend to enter into a final
Product Marketing Specification on or before October 31, 1997, or such other
date as may be mutually agreed upon between the parties, substituting such final
Product Marketing Specification for the preliminary Product Marketing
Specification initially included in the Binder.
4.2.2. System Design Specification. Promptly upon receipt of the final
Product Marketing Specification, and in any event not more than ten (10) days
thereafter, ADA shall prepare a proposed System Design Specification. ADA agrees
to use reasonable commercial efforts to design the Product Line to accomplish
the features and functionalities more particularly described in the final
Product Marketing Specification. ADA shall deliver the proposed System Design
Specification to Nortel, promptly upon completion thereof, and Nortel shall have
a period of five (5)days within which to review and comment thereon. The System
Design Specification shall then be submitted to the Management Committee for
approval under the Approval Process described in Section 3.3.3 above.
4.2.3. Development Schedule. Promptly upon approval of a final Product
Marketing Specification and a final System Design Specification, the Project
Managers shall prepare and deliver to Nortel and ADA a final Development
Schedule, with delivery dates for the Deliverables scheduled over a time period
which will allow completion of the Initial Development Project not materially
different than those described on the Development Schedule initially included in
the Binder. The parties shall implement the Approval Process for the purposes of
finalizing the Development Schedule.
4.2.4. Resource Plan. Promptly upon approval of a final Product
Marketing Specification and a final System Design Specification, the Project
Managers shall prepare and deliver to Nortel and ADA a final Resource Plan. The
parties shall implement the Approval Process for the purposes of finalizing the
Resource Plan.
4.2.5. Expense Analysis. Promptly upon approval of a final Product
Marketing Specification and a final System Design Specification, each party
shall prepare and deliver to the other a final expense analysis setting forth
its own estimated costs forming part of the Expense Analysis. ADA shall compile
a final Expense Analysis incorporating the expense information for both parties.
The parties shall implement the Approval Process for the purpose of finalizing
the Expense Analysis.
4.3. DEVELOPMENT. With the exception of development tasks expressly
allocated to Nortel in the Statement of Work, ADA agrees to use reasonable
commercial efforts to perform all tasks described in the Statement of Work for
the purpose of developing the Initial Products.
4.3.1. Personnel. ADA shall commit qualified personnel to the Project in
accordance with the staffing plan set forth in the Resource Plan.
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4.3.2. Development Schedule. Each party agrees to use reasonable
commercial efforts to achieve the delivery dates for the Deliverables as are
more particularly described in the final Development Schedule. Notwithstanding
the foregoing, the parties understand that the achievement of the dates for
Deliverables described on the Development Schedule may be delayed as a result of
the uncertainties of the development process. Both parties understand and agree
that the development of any one or more Products in accordance with the
Statement of Work may not be feasible. Neither party will be in breach of its
obligations to the other hereunder if its reasonable commercial efforts are not
sufficient to successfully complete the development of the Product Line, or any
Product therein. In addition, the milestone payments described in the
Development Schedule shall be due and payable without respect to the achievement
of any particular Deliverable specified in the Development Schedule.
5. CONTRIBUTION OF AND LICENSE TO CERTAIN TECHNOLOGY.
5.1. TECHNOLOGY LICENSE AGREEMENT. The parties acknowledge that the
development of the Product Line will require that each party contribute certain
of its technology in order to permit such technology to be embodied within
Products in the Product Line. Promptly upon the execution of this Agreement, the
parties agree to meet and negotiate in good faith a Technology Licensee
Agreement setting forth the terms and conditions of the license of technology
consistent with the terms and conditions hereof. Attached hereto as Exhibit 5.1
is a form of Technology License Agreement which the parties agree shall
constitute the first draft of the Technology License Agreement. The parties
agree, promptly upon the execution of this Agreement, to meet and negotiate in
good faith the final terms and conditions of the Technology License Agreement
and to finalize such negotiations and enter into the formal Technology License
Agreement no later than October 31, 1997. The failure to enter into the formal
Technology License Agreement by October 31, 1997 shall give either party the
right to implement the escalation procedure described in Section 18 below. The
Technology License Agreement to be entered into between the parties shall
include without limitation the following minimum terms:
a. ADA hereby grants a personal, nontransferable, indivisible,
worldwide, irrevocable, perpetual (except as described in Section 17), license
to Nortel of the ADA Contributed Technology and Improvements thereof for the
limited purpose of permitting Nortel to include the ADA Contributed Technology
and Improvements thereon in the Products and distribution of the Products
through Nortel's customary channels of distribution and the further licensing
terms more particularly described in Section 9.1 below;
b. Nortel hereby grants a personal, nontransferable,
indivisible, worldwide, irrevocable, perpetual (except as described in Section
17), license to ADA of the Nortel Contributed Technology and Improvements
thereon for the limited purpose of permitting ADA to include the Nortel
Contributed Technology and Improvements thereon in the Products and distribution
of the Products through ADA's customary channels of distribution and the further
licensing terms more particularly described in Section 9.1 below.
c. Each party hereby grants to the other the license to Jointly
Developed Technology more particularly described in Section 9.3.
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d. Each party hereby grants to the other the license to
sustaining engineering Improvements more particularly described in Section
12.2.2.
e. The terms of the licenses are subject to the limitations set
forth in Section 12.4.
5.2. COMPONENT SUPPLY. The parties recognize that certain individual
electronic components incorporated into one or more Products in the Product Line
are comprised of ADA Contributed Technology or of Nortel Contributed Technology,
as the case may be. No license or other rights with respect to the intellectual
property incorporated in the Components are granted under this Agreement. Each
party shall, however, supply to the other the Components, for the limited
purpose of permitting the incorporation of such Components into the Products, on
the terms and conditions described in the Component Supply Agreement. Attached
hereto as Exhibit 5.2 is a form of Component Supply Agreement which the parties
agree shall constitute the first draft of the Component Supply Agreement. The
parties agree, promptly upon the execution of this Agreement, to meet and
negotiate in good faith the final terms and conditions of the Component Supply
Agreement and to finalize such negotiations and enter into the formal Component
Supply Agreement no later than October 31, 1997. The failure to enter into the
formal Component Supply Agreement by October 31, 1997 shall give either party
the right to implement the escalation procedure described in Section 18 below.
5.3. ENGINEERING DESIGN PACKAGE. ADA will develop an Engineering Design
Package, in the English language, in such form as ADA shall deem appropriate for
the particular product applicable thereto. Each Engineering Design Package will
include, without limitation, schematics, drawings, bills of materials, product
specifications, assembly drawings, approved supplier lists and test procedures.
Each engineering design package will accurately reflect the design of the
applicable Product and will be in sufficient detail to permit the manufacture of
the Product.
5.4. CUSTOMER DOCUMENTATION. ADA shall prepare customer documentation for
each Product, in the English language. The Customer Documentation will be in a
form which ADA deems appropriate for the particular Product applicable thereto.
The customer documentation will include, without limitation, command manuals,
applications manuals, training manuals, installation manuals and maintenance
manuals will provide adequate instructions and information to permit a
reasonably trained customer to use and maintain the applicable Product. The
customer documentation shall be subject to the reasonable approval of the
parties.
6. MANUFACTURING.
6.1. PRODUCTION. Promptly upon the completion for each Product of the
design phases as more particularly described on the Development Schedule, the
engineering prototypes and the manufacturing pilot modules for the particular
Product will be built, as more particularly described below. Promptly upon
delivery of the engineering prototypes and manufacturing pilot modules, the
parties shall implement the Approval Process for such prototypes and/or pilot
modules (provided that, if applicable, Nortel shall submit any materials and/or
make and changes required in respect of the manufacturing pilot modules).
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6.2. ENGINEERING PROTOTYPE MODULES. ADA shall build the engineering
prototype modules, meeting the System Design Specification, in accordance with
the Development Schedule. ADA shall use reasonable commercial efforts to
commence the manufacture of each such engineering prototype module for each
Product hereunder no later than the date specified therefor in the Development
Schedule. The parties recognize the complexity of building such engineering
prototype modules, and therefore, the parties agree to meet in accordance with
the procedure described in Section 3.3, and prepare a schedule setting forth the
costs of processing, tooling, including without limitation, with respect to any
chip manufacturing mask tooling and chip tooling, and other production related
costs associated with the development of such prototypes and modules, and
addressing the manner in which process die, excess engineering die and other
customary and ordinary costs of production shall be allocated.
6.3. MANUFACTURING PILOT MODULES. From and after completion of the
engineering prototypes for each Product, and the acceptance thereof by the
parties, Nortel will build manufacturing pilot modules of each Product prior to
proceeding to production manufacturing. The parties acknowledge the complexity
of such manufacturing pilot module production, and agree to meet and agree upon
the terms applicable thereto in accordance with the procedure described in
Section 3.3 (provided that, if applicable, Nortel will prepare, submit to the
Management Committee and, if necessary, modify any materials required to be
approved with respect to the manufacturing pilot module production). The parties
agree that the design of the manufacturing processes and requirements for the
production Products shall be developed in a manner, to the extent feasible and
economical, to maximize compatibility with Nortel manufacturing processes and
materials. In the event that Nortel is not selected as the manufacturer of a
Product, Nortel shall not build the manufacturing pilot modules and shall not be
reimbursed for such pilot modules notwithstanding Section 7.2.1(c).
7. DEVELOPMENT COSTS.
7.1. INTENT TO SHARE CERTAIN EXPENSES ON AN EQUAL BASIS. ADA and Nortel
agree and acknowledge that each is responsible for and agrees to pay an equal
share of the total aggregate Development Costs as defined and calculated in
Section 7.2 below, payable as described in Section 7.4. Included in the Binder
under the heading entitled "Expense Analysis" is the initial Expense Analysis
for the Initial Project, which Expense Analysis shall be amended and finalized
in accordance with the provisions of Section 3 above. The Expense Analysis has
been prepared for the purpose of permitting the parties to plan for project
expenditures related to Development Costs hereunder, and does not represent a
"fixed price maximum" or other guaranteed maximum cost of the development
required for the Initial Project or any Additional Project.
7.2. DEVELOPMENT COSTS. Each party shall be entitled to reimbursement as
provided in Section 7.4 for development costs, calculated in accordance with
this Section 7.2, as follows:
7.2.1. Definition of Development Costs. As used herein, "Development
Cost" will mean, and such costs shall include, the following:
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a. cost for labor (plus the applicable overhead charge for such
labor) paid to software designers, software engineers, hardware designers,
hardware engineers, and other personnel (whether employee or independent
contractor), including Project Managers and personnel engaged to perform QA
Testing, for the Project;
b. capital equipment, the purchase or leasing of which as been
approved as a part of the development cost estimate, provided that the costs of
any capital equipment used for purposes other than Projects hereunder shall be
pro-rated according to such use and the parties agree to meet from time to time
to review the capital equipment required;
c. engineering prototypes and manufacturing pilot modules
required for the Project;
d. * sets of preproduction systems for lab and customer
demonstrations and * OC-3 units;
e. Product documentation;
f. BellCore approvals;
g. * OA&M development on an * system;
h. courier and mail service fees for delivery of items between
ADA and Nortel;
i. digital transport fees for delivery of the Deliverables
between the parties; and
j. travel, lodging and reasonable per diem expenses for employee
and consultants of ADA or Nortel incurred in furtherance of their activities
hereunder in producing Deliverables, providing training or participating on a
committee to the extent such costs are not included within the overhead charge
applicable to labor costs.
k. Such other categories as the parties may agree from time to
time.
7.2.2. Non-Reimbursable Costs. Unless otherwise agreed by the parties,
the term "Development Costs" shall not include hiring or relocation costs with
respect to personnel (whether employees or independent contractors) and such
expenses shall not be counted toward the cost to be shared by the parties. Each
party shall be responsible for the payment of its own such expenses.
7.2.3. Rates and Charges. The estimated rates at which the parties shall
be reimbursed for labor incurred in furtherance of the Project hereunder shall
be at the rates and charges described on the attached Exhibit 7.2.3. The amounts
reimbursed to each party shall be reviewed and adjusted to reflect actual costs
not more frequently than every * months during the term hereof. In addition,
either party shall have the right to request a change in the estimated rates and
charges as reflected on the attached Exhibit 7.2.3, used for reimbursement
purposes, by
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submitting to the other party a request for change, specifying in reasonable
detail the experience during the immediately preceding * months and justifying
the proposed increase. No party may unreasonably withhold request for increase
in rates and charges reflective of the actual increase in costs experienced by
the other party in the immediately preceding * month period. Promptly upon
receipt of any such requested change, the parties shall implement the Approval
Process.
7.2.4. Reimbursement of Expenses. Each party has already incurred, prior
to the Effective Date, Development Costs in anticipation of the Project or
otherwise. The Development Costs incurred by ADA prior to the Effective Date,
and the Development Costs incurred by Nortel prior to the Effective Date are set
forth in the Expense Analysis. The parties agree that each will reimburse the
other for such Development Costs, as described in Section 7.4 below.
7.3. BOOKS AND RECORDS. Each party shall keep accurate books of account and
records covering all transactions relating to this Agreement at its principal
place of business for a period of five (5) years after the applicable period
covered thereby. Each party shall allow the other and its representatives, at
reasonable times and on reasonable prior written notice, to audit said books of
account and records (but not more often than annually or on any payment
milestone, if milestones occur more than once annually). Such right to audit
shall extend only to books and records relating to the Project and the
determination of Development Costs hereunder. Information disclosed in any audit
conducted pursuant to this Section 7.4 ("Books and Records") shall be treated as
confidential under the confidentiality provisions of Section 16
("Confidentiality") hereof.
7.4. PAYMENT OF DEVELOPMENT COSTS.
7.4.1. Milestones. Notwithstanding the date on which Development Costs
are incurred by either party, the parties agree that the parties' respective pro
rata share of Development Costs will be paid on a milestone basis at the times
and in the amounts designated for such payment as are more particularly
described in the Development Schedule. The parties agree that the Management
Committees shall meet quarterly to review and adjust the Development Schedule,
including the dates for specific milestones. Any recommended change to the
Development Schedule shall be subject to the Approval Process.
7.4.2. Invoices. Each party shall submit to the other, on or before 30
days prior to the date specified on the Development Schedule for a reimbursement
milestone payment, an invoice setting forth the Development Costs incurred to
date and not yet reimbursed as provided herein, providing reasonable detail for
any Development Costs not previously invoiced and requesting payment of 50% of
the total amount. Each party shall pay on or before the date specified therefor
on the Development Schedule an amount equal to the lesser of (i) the Development
Costs reflected on the invoice submitted to such party on account of such
milestone payment (together with amounts reflected on earlier invoices not
previously reimbursed) or (ii) the amount of the milestone payment described on
the attached Development Schedule. To the extent that a reimbursement milestone
payment is inadequate to cover the total Development Costs incurred to date by a
party, then each party shall carry over the balance to the next subsequent
milestone payment(s) until finally reimbursed in full.
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7.4.3. Net Amounts. A party shall have the right to net any unreimbursed
invoices for Development Costs, against any reimbursement for Development Costs
which such party is owed by the other party, for the purposes of calculating a
net amount due under this Section 7.4.
8. USE OF FACILITIES
8.1. USE OF FACILITIES. ADA and Nortel agree that substantial majority of
the Project shall occur at such ADA locations and at such times as ADA shall
determine in its sole discretion. ADA agrees that it will make available its
facilities for use for the Project to the extent that space is available and it
is commercially reasonable to do so, as determined by ADA in its sole
discretion. ADA agrees to make available at ADA's location one office with
agreed upon computer equipment for use by of Nortel's Project Manager and one
visiting Nortel employee.
8.2. RIGHT TO REVIEW WORK IN PROGRESS. Each party shall be entitled, but
not obligated, to conduct periodic on-site reviews (including reviews at
facilities of the other party), with reasonable notice and during normal
business hours, of the work being performed by the other party under the terms
of this Agreement.
9. DISTRIBUTION RIGHTS.
9.1. TECHNOLOGY LICENSE AGREEMENT. The parties shall negotiate a Technology
License Agreement as described in Section 5.1, under which (i) ADA will license
to Nortel certain ADA Contributed Technology more particularly described in
Exhibit 5.1-1, and (ii) Nortel will license to ADA certain Nortel Contributed
Technology more particularly described in Exhibit 5.1-2, all for the purpose of
permitting the other to make or have made, import, offer for sale, sell or have
sold, lease or otherwise transfer the Products, as permitted under the
Technology License Agreement. As consideration for the license of technology as
more particularly described herein and in the Technology License Agreement, and
for the joint development activities carried out hereunder, the selling party
will pay to the other party a royalty in the amount of * of the gross sales
price charged by the selling party for the Product, all as is more particularly
described in the Technology License Agreement, and subject to the reporting and
audit requirements and all other provisions thereof. No royalty shall be
applicable to sales and/or licensing by a party of products which incorporate
the Jointly Developed Technology, other than Products.
9.2. MANUFACTURING. The parties intend that Nortel be the preferred
manufacturer of the chassis and circuit modules, so long as Nortel provides such
modules at no more than then competitively available prices. Each party shall
have the right, in its discretion, to do final systems assembly and testing
(including systems burn-in) individually, but shall have the right to request
that the other party provide such service at a price to be agreed. Promptly upon
the Completion Date with respect to each Product, Nortel shall provide ADA with
a fixed price quote for the manufacture of such Product. If ADA accepts such
price quote, then the parties will enter into a Manufacturing Services Agreement
mutually acceptable to the parties for the manufacture of such Product at such
price.
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9.3. LICENSE OF JOINTLY DEVELOPED TECHNOLOGY.
9.3.1. License for Products within and outside * Field. Each party
hereby grants to the other party a personal, nontransferable, indivisible,
worldwide, irrevocable (except as described in Section 17) license to use,
modify and copy the Jointly Developed Technology owned by the licensing party
pursuant to Sections 12 ("Rights in Intellectual Property") and 13 ("Protection
of Intellectual Property") to make or have made, import, offer for sale, sell or
have sold, lease, or otherwise transfer through the parties' customary channels
of distribution the following:
a. (x) Products developed hereunder into which such Jointly
Developed Technology is incorporated, (y) products in production and
distribution as of the Effective Date, and (z) future products, not in
production and distribution as of the Effective Date, except no license is
granted with respect to future products within the * Field, unless such future
products are Additional Products hereunder. If such products are not Additional
Product hereunder, then the license, if any, is subject to terms and conditions
to be agreed upon and evidenced in a separate agreement between the parties; and
b. spare parts solely for the repair of Products, or other
products which incorporate Jointly Developed Technology, manufactured by either
party in accordance with this Agreement.
9.3.2. Terms of License. The terms of the license granted hereunder in
Jointly Developed Technology shall be more particularly described in the
Technology License Agreement negotiated and finalized between the parties under
the terms of Section 5.1 above, and shall be royalty-free, provided that the
parties shall be required to pay royalties for sales of Products as provided in
Section 9.1. The license to Jointly Developed Technology shall be subject to the
restrictions set forth in Section 12.4.
10. MARKETING AND SALES OF THE PRODUCTS.
10.1. DELIVERY. ADA shall deliver to Nortel and Nortel shall deliver to
ADA, as applicable, any Jointly Developed Technology developed by ADA or Nortel,
respectively, within ten (10) days after the completed development of such
Jointly Developed Technology.
10.2. SALES OF PRODUCTS. Each party shall have the worldwide right to sell
and/or license the Products, subject to the provisions hereof and, with respect
to any ADA Technology and ADA Improvements or Nortel Technology and Nortel
Improvements, the provisions of the Technology License Agreement and Component
Supply Agreement.
10.3. MARKETING. Each party agrees that its marketing, public relations and
advertising efforts will be of high quality, in good taste, and will preserve
the professional image and reputation of the other party and of the Product
Line. A party shall not release without the prior written approval of the other
any advertising or other publicity relating to this Agreement or the Products
wherein such other party may reasonably be identified. Each party will bear the
entire
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costs and expense of conducting all of its marketing and sales activities under
this Agreement, unless otherwise agreed to in writing between the parties.
10.4. MARKETING MATERIALS. Each party shall have the right to prepare
marketing and sales materials that are unique to that party. Marketing
materials, including sales brochures, customer presentations and other sales
collateral material may be developed, in each party's discretion, and at each
party's own cost.
11. BRANDING PROGRAM
11.1. MANAGEMENT COMMITTEE TASK. The parties have, as of the Effective
Date, given the Product Line the name "*". The parties recognize the importance
and value attributable to the branding program associated with the Product Line
and agree, as part of their marketing and sales efforts with respect to the
Products, to appoint to the Management Committee the task of making
recommendations to the parties with respect to the branding of the Product Line.
The parties agree to develop, register and use a unique trademark or marks,
logos or names (separate and apart from the marks used by either party in
connection with the marketing and sale of its own products) in the marketing and
sale of the Product Line, and each Product therein.
11.2. TRADEMARK REGISTRATION AND LICENSING. The parties agree that, without
respect to which party registers the trademark, trade name, logos or other
design agreed upon between the parties for the marketing and sale of the
Products, the registrant will and hereby does license to the other the
royalty-free, nontransferable right during the term of this Agreement to use
such marks in connection with the manufacture, sale, distribution and
advertisement of the Products.
12. RIGHTS IN INTELLECTUAL PROPERTY.
12.1. OWNERSHIP
12.1.1. Prior Rights. All intellectual property rights, including
patents, patent applications, copyrights and trade secrets, owned by a party as
of the Effective Date shall remain the property of such party and no licenses or
other rights with respect to such intellectual property are granted to the other
party except as expressly set forth in this Agreement and the Technology License
Agreement. Without limiting the foregoing, ADA shall own all right, title and
interest in and to the ADA Contributed Technology, and Nortel shall own all
right, title and interest in and to the Nortel Contributed Technology, subject
only to the terms of this Agreement and the Technology License Agreement.
12.1.2. Statutory IP Rights in ADA Field Technology; Nortel Field
Technology and * Field Technology. Subject to the terms of this Agreement and
the Technology License Agreement, title to all Statutory IP Rights in Jointly
Developed Technology (i) in the ADA Field shall vest with ADA, and (ii) in the
Nortel Field shall vest in Nortel, and (iii) in the * Field (but not in the ADA
Field) shall vest with Nortel. Title shall vest in Nortel as provided in this
Section 12.1.2 upon payment by Nortel of any milestone payment (as provided in
Section 7) for such Jointly Developed Technology which has been created up to
the date of achievement of the milestone to which such payment relates.
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12.1.3. Non-Statutory IP Rights in Jointly Developed Technology. Subject
to Section 12.1.2 ("Statutory Rights in ADA Field Technology; Nortel Field
Technology and * Field Technology"), Section 13 ("Protection of Intellectual
Property"), and the terms of this Agreement and the Technology License
Agreement, title to all Non-statutory IP Rights in Jointly Developed Technology
shall be owned jointly between the parties. Except as provided in the last
sentence of this Section 12.1.3, each party shall have an undivided ownership
interest in all right, title and interest in and to such Non-statutory IP
Rights, immediately upon the development of such Jointly Developed Property.
Nortel hereby assigns to ADA and ADA hereby assigns to Nortel any right, title
and interest in and to the Non-statutory IP Rights to Jointly Developed
Technology, as is necessary or appropriate to assure that ADA and Nortel,
respectively, has full joint ownership of the Non-statutory Rights in Jointly
Developed Technology, subject only to the terms of this Agreement. Title shall
vest in Nortel as provided in this Section 12.1.3 upon payment by Nortel of any
milestone payment (as provided in Section 7) for such Jointly Developed
Technology which has been created up to the date of achievement of the milestone
to which such payment relates.
12.2. LICENSE TO TECHNOLOGY.
12.2.1. ADA Contributed Technology; Nortel Contributed Technology. The
parties agree that ADA Contributed Technology and the Nortel Contributed
Technology are included within the scope of the Technology License Agreement,
and ADA hereby licenses to Nortel, and Nortel hereby licenses to ADA, the ADA
Contributed Technology and Nortel Contributed Technology, respectively, on the
terms and conditions more particularly described in this Agreement and in the
Technology License Agreement
12.2.2. Improvements; Sustaining Engineering. The parties agree that
sustaining engineering Improvements created by a party during the term of this
Agreement (including Jointly Developed Technology, ADA Improvements and Nortel
Improvements) are hereby licensed to the other, and are included within the
scope of the Technology License Agreement, and each party licenses to the other
sustaining engineering Improvements, on the terms and conditions more
particularly described in this Agreement and in the Technology License
Agreement. As used in this section, "sustaining engineering" Improvements are
those Improvements which do not result in the addition to the Products of
substantially different features and/or functionality, but which are sustaining
engineering changes for the purpose of "bug fixes", minor enhancements and
routine small repairs.
12.2.3. Improvements; New Features, Functionalities and Capabilities.
The parties agree that neither party has any obligation to include any
Improvements (whether developed during or after the expiration of the term of
this Agreement) within the scope of the Technology License Agreement which do
not represent sustaining engineering made by either party, except ADA
Improvements and Nortel Improvements, respectively. Without limiting the
foregoing, any Improvements, other than ADA Improvements and Nortel
Improvements, which result in the addition to the Products of substantially
different features and/or functionality and/or capabilities are not included
within the grant of license under this Agreement or the Technology License
Agreement.
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12.3. FURTHER ACTS. Each party agrees to take any and all further actions,
file any applications and execute and deliver any further documents that the
other party may reasonably request in order for the other party, and any of the
successors and assigns, to secure its intellectual property rights, including
but not limited to patent and copyright, in the intellectual property as more
particularly described in this Section 12 and in Section 13 below. In the event
a party fails to execute any and all documents which the other party reasonably
requests, then such party hereby irrevocably appoints the other party as its
attorney in fact to execute such documents or instruments to accomplish, secure
or confirm the foregoing or to confirm, perfect, assert and defend the filing
party's rights in the applicable technology.
12.4. RESTRICTIONS ON DISTRIBUTION OF JOINTLY DEVELOPED TECHNOLOGY. Each
party agrees that it shall not sell, license or otherwise transfer the Jointly
Developed Technology unless such Jointly Developed Technology is integrated with
other existing or future products owned by or licensed to such party otherwise
permitted under the provisions of Section 9.3.1 above. For greater certainty,
each party agrees that it shall not sell, license or otherwise transfer the
Jointly Developed Technology on a stand-alone basis.
13. PROTECTION OF INTELLECTUAL PROPERTY.
13.1. INTELLECTUAL PROPERTY PROTECTION FOR ADA CONTRIBUTED TECHNOLOGY;
NORTEL CONTRIBUTED TECHNOLOGY . ADA shall, in its discretion, determine what if
any intellectual property protection it desires to obtain with respect to ADA
Contributed Technology, including without limitation the decision whether or
not, and in what countries, to apply for, prosecute and obtain patent
protection. Nortel shall, in its discretion, determine what if any intellectual
property protection it desires to obtain with respect to Nortel Contributed
Technology, including without limitation the decision whether or not, and in
what countries, to apply for, prosecute and obtain patent protection.
13.2. INTELLECTUAL PROPERTY PROTECTION FOR ADA IMPROVEMENTS; NORTEL
IMPROVEMENTS. ADA shall, in its discretion, determine what if any intellectual
property protection it desires to obtain with respect to ADA Improvements,
including without limitation the decision whether or not, and in what countries,
to apply for, prosecute and obtain patent protection. Nortel shall, in its
discretion, determine what if any intellectual property protection it desires to
obtain with respect to Nortel Improvements, including without limitation the
decision whether or not, and in what countries, to apply for, prosecute and
obtain patent protection.
13.3. PATENT PROTECTION FOR STATUTORY IP RIGHTS IN JOINTLY DEVELOPED
TECHNOLOGY.
13.3.1. Certain Definitions. As used in this Section 13, the following
terms and phrases shall have the meanings set forth below:
a. the "First Option Party" means the party granted in this
Section 13 the first option and opportunity to file for patent protection on
Jointly Developed Technology in any one or more jurisdictions in which such
patent protection is available.
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b. The "Second Option Party" means the party who elects to file
for patent prosecution on Jointly Developed Technology after the First Option
Party shall have failed to exercise its first option within the time specified
in this Section 13 therefor.
c. The First Option Party with respect to Statutory IP Rights in
the ADA Field Technology is ADA. The First Option Party with respect to
Statutory IP Rights in the Nortel Field Technology and with respect to Statutory
IP Rights in the * Field Technology (which is not ADA Field Technology) is
Nortel.
d. The party which pursues patent protection, whether by
exercising its first option or by exercising its right after the First Option
Party shall have failed to exercise its first option, shall be referred to as
the "Patenting Party."
13.3.2. Expenses of Patent Prosecution. The Patenting Party shall bear
independently the expenses of preparing, filing, prosecuting and maintaining any
patent applications and registrations with respect to the Jointly Developed
Technology as to which such Party shall have rightfully exercised its option to
obtain patent protection.
13.3.3. Further Acts. At the request of the Patenting Party, the other
party shall provide all signatures and documents reasonably required by the
Patenting Party to obtain patent protection within such time as will enable the
Patenting Party to make timely filings.
13.3.4. Patent Prosecution; First Option Party. Within ninety (90) days
following (i) the date of invention or (ii) the date upon which ownership vests
in the First Option Party under Section 12 of this Agreement, whichever is later
("option notice period"), the First Option Party shall notify the other of its
intention to file any patent applications for the applicable Jointly Developed
Technology and, if it intends to do so, of the countries in which it intends to
file. The First Option Party shall, in its own name, file any such applications
within ninety (90) days of giving such notice, or such additional period as may
be agreed by ADA and Nortel ("filing period"). Where the First Option Party
files such a patent application or registration in any country, the First Option
Party shall be the owner of the resulting patent, and shall grant to the other a
license under such patent pursuant to the terms of this Agreement and the
Technology License Agreement.
13.3.5. Patent Prosecution; Second Option Party. In respect of any
particular Jointly Developed Technology, the Second Option Party may file
applications for such Jointly Developed Technology in its own name,
a. immediately upon the expiration of the notice period, in any
country other than those in which the First Option Party has provided notice of
its intention to file an application, and
b. immediately upon the expiration of the First Option Party
filing period, in any country in which the First Option Party has not filed an
application despite the First Option Party's notice of its intention to do so.
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Where the Second Option Party files such a patent application or registration in
any country, the Second Option Party shall be the owner of the resulting patent,
and shall grant to the other a license under such patent pursuant to the terms
of this Agreement and the Technology License Agreement.
13.3.6. Cessation. In the event that a party which filed a patent for
Jointly Developed Technology intends to cease maintenance of that patent in a
specific country, that party shall notify the other party of its decision in
sufficient time to permit the other party, at its own expense, to assume
maintenance of such patent and, if requested by the other party, shall, to the
extent possible, assign all rights in, to and under such patent to the other
party. In the event the patent is so assigned, the assignee party shall assume
all rights inherent in ownership, while the assignor party shall obtain the
rights granted a non-owning party in subsection 13.3.4 above.
13.4. INTELLECTUAL PROPERTY PROTECTION FOR NON-STATUTORY IP RIGHTS. Each
party agrees to treat all Jointly Developed Technology as a trade secret and
afford all Jointly Developed Technology with trade secret protection to the
extent possible. Except with respect to the patent protection of Statutory IP
Rights in Jointly Developed Technology (which is governed by the terms of
Section 13.3 above), each party shall have the right to pursue such intellectual
property right protection, including without limitation copyright, trade secret,
know-how and mask work protection, as it deems necessary or appropriate for the
Jointly Developed Technology. Without limiting the foregoing, in the event of a
conflict between the parties as to the appropriate protection to obtain for
Jointly Developed Technology (i) ADA shall decide with respect to ADA Field
Technology, and (ii) Nortel shall decide with respect to Nortel Field
Technology, and (iii) both parties may obtain any and all protection deemed
appropriate for the jointly owned Jointly Developed Technology in the * Field
(which is in neither the ADA Field nor the Nortel Field).
13.5. TRADEMARK, TRADE NAME AND BRANDING. As used in this Section 13,
trademark, trade name and branding of the Product Line is not included in the
concept of intellectual property protection. Trademark, trade name and other
branding of the Product Line (including * Field Technology) is governed by
Section 9.3.
13.6. INFRINGEMENT ENFORCEMENT.
13.6.1. Notification of Infringement. If either party learns of an
infringement by a third party of a Jointly Developed Technology (other than a
customer of such party), such party shall promptly notify the other party and
shall provide the other party with available evidence of such infringement.
13.6.2. Enforcement by the Parties. Within sixty (60) days of the notice
referred to in Section 13.6.1, the parties will decide whether to institute
proceedings against the third party. In the event that the parties are unable to
so agree, each party (the "Enforcing Party"), at its expense, shall have the
right, but not the obligation, to bring and maintain any action alleging that a
third party has infringed or misappropriated the intellectual property rights in
the Jointly Developed Technology. In any such action, the other party shall
assist, as requested by the Enforcing Party and at the Enforcing Party's expense
of out-of-pocket expenses, in the
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prosecution of any such action. If the Enforcing Party finds it necessary or
desirable for the other party to be joined as a party plaintiff, the other party
agrees to execute all papers or perform such other acts as may reasonably be
required by the Enforcing Party. There shall be no accounting to the other party
in the event of a favorable judgment or award in such action. Each party
acknowledges that the other party is free to settle any such dispute as deemed
appropriate by the party bringing suit so long as such settlement is consistent
with the intellectual property rights of the other party.
14. INDEMNIFICATION; COVENANTS REGARDING INFRINGEMENT.
14.1. ADA CONTRIBUTED TECHNOLOGY. ADA agrees to indemnify and hold harmless
Nortel and its officers, directors and employees against any claims, actions or
demands, alleging that use of the ADA Contributed Technology infringes any
patent, copyright or trade secret in the United States.
14.2. NORTEL CONTRIBUTED TECHNOLOGY. Nortel agrees to indemnify and hold
harmless ADA and its officers, directors and employees, against any claims,
actions or demands, alleging that use of the Nortel Contributed Technology
infringes any patent, copyright or trade secret in the United States.
14.3. JOINTLY DEVELOPED TECHNOLOGY. Each party agrees to indemnify and hold
harmless the other and its officers, directors and employees, against any
claims, actions or demands, alleging that use of the Jointly Developed
Technology infringes any patent, copyright or trade secret in the United States
where such alleged infringement arises directly from the indemnifying party's
willful or knowing infringement.
14.4. LIMITATIONS. The obligations of a party to indemnify (the
"indemnifying party") the other (the "indemnified party") is contingent upon (i)
the indemnified party giving prompt written notice to the indemnifying party of
any such claim, action or demand, (ii) the indemnified party allowing the
indemnifying party to control the defense and related settlement negotiations,
and (iii) the indemnified party cooperating in the defense. The indemnifying
party will have no obligation under this Agreement for any such claims, actions
or demands to the extent that such claims, demands or actions result from (i)
the use of the Jointly Developed Technology (other than claims under Section
14.3); (ii) the use of its proprietary rights in a combination with materials or
products not supplied by the indemnifying party; (ii) the modification or
attempted modification of materials or processes by third parties; or (iii) the
use or distribution of such modified materials or processes. In the event that
any such claim, action or demand is made, the indemnifying party will promptly
furnish the indemnified party with copies of any and all documents (inclusive of
all correspondence and pleadings other than related attorney-client
communications). The indemnifying party will also keep the indemnified party
continuously and fully informed in a timely manner as to the status of the same
and will provide the indemnified party with copies of any additional documents.
14.5. NOTICE REGARDING INFRINGEMENT. During the course of the development
of the Products, each party agrees to inform the other party of any infringement
or alleged infringement of any patents, copyrights, trade secrets or other
intellectual property that it has reason to believe
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<PAGE> 27
*CONFIDENTIAL*
TREATMENT REQUESTED
may result from the use or licensing of the Products in the form then being
developed or contemplated by the parties.
14.6. SOLE AND EXCLUSIVE REMEDY. THIS SECTION 14. STATES NORTEL'S AND
ADA'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF INFRINGEMENT OF
PROPRIETARY RIGHTS OF ANY KIND.
14.7. LIMITATIONS ON DAMAGES. Notwithstanding any other provisions of this
Agreement, each party's liability to the other under this Agreement is limited
to *. FURTHERMORE, NEITHER PARTY WILL BE LIABLE TO THE OTHER OR ANY OTHER PARTY
FOR ANY LOSS OF USE, INTERRUPTION OF BUSINESS OR ANY INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST PROFITS),
REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING
NEGLIGENCE), STRICT PRODUCT LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. NOTHING IN THIS SECTION SHALL LIMIT
THE LIABILITY OF A PARTY FOR DAMAGES FOR BREACH OF THE * HEREOF.
15. REPAIR AND RETURN. The parties shall meet and discuss, whether a single
repair and return center staffed by personnel of ADA or personnel of Nortel or
otherwise, would provide better customer service and more economic and prompt
service.
16. CONFIDENTIALITY.
16.1. CONFIDENTIALITY OBLIGATIONS. Each party acknowledges that in the
course of the performance of this Agreement, it may obtain the Confidential
Information of the other party. The Receiving Party shall, at all times, both
during the term of this Agreement and for a period of * from the Completion Date
keep in confidence and trust all of the Disclosing Party's Confidential
Information received by it. The Receiving Party shall not use the Confidential
Information of the Disclosing Party other than as expressly permitted under the
terms of this Agreement or by a separate written agreement. The Receiving Party
shall take all reasonable steps to prevent unauthorized disclosure or use of the
Disclosing Party's Confidential Information and to prevent it from falling into
the public domain or into the possession of unauthorized persons. The Receiving
Party shall not disclose Confidential Information of the Disclosing Party to any
person or entity other than its officers, employees, consultants and permitted
sublicensees who need access to such Confidential Information in order to effect
the intent of this Agreement and who have entered into written confidentiality
agreements with the Receiving Party which protects the Confidential Information
of the Disclosing Party. The Receiving Party shall immediately give notice to
the Disclosing Party of any unauthorized use or disclosure of Disclosing Party's
Confidential Information. The Receiving Party agrees to assist the Disclosing
Party in remedying such unauthorized use or disclosure of its Confidential
Information.
16.2. LIMITATION. These obligations shall not apply to that portion of
the Confidential Information which is information which:
a. is already known to the Receiving Party at the time of
disclosure, which pre-existing knowledge the Receiving Party shall have the
burden of proving;
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<PAGE> 28
*CONFIDENTIAL*
TREATMENT REQUESTED
b. is, or through no act or failure to act of the Receiving
Party, becomes publicly known;
c. is received by the Receiving Party from a third party without
restriction or disclosure and without breach by such third party with an
obligation to Disclosing Party;
d. is independently developed by the Receiving Party without
reference to the Confidential Information of the Disclosing Party, which
independent development the Receiving Party will have the burden of proving;
e. is approved for release by the Receiving Party by written
authorization of the Disclosing Party; or
f. is required to be disclosed by a government agency to further
the objectives of this Agreement or by a proper order of a court of competent
jurisdiction; provided, however, that the Receiving Party will advise Disclosing
Party prior to any such disclosure and use its best efforts to minimize such
disclosure and will consult with and assist the Disclosing Party in obtaining a
protective order prior to such disclosure.
16.3. ORAL DISCLOSURES. With respect to oral disclosures, the party
claiming that a disclosure of Confidential Information was made orally shall
have the burden of proving such disclosures was in fact made to the other party,
except where such oral disclosure was preceded or followed, within 40 days of
the disclosure, with a written summary to the other party of the disclosures so
made.
16.4. STANDARD OF CARE. Neither party shall be liable for disclosure of
Confidential Information provided that it has exercised the same degree of care
that it normally exercises to preserve its own confidential information,
provided that such degree of care shall in no case be less than the prevailing
standard of care in the Receiving Party's industry for similar information.
17. EFFECTIVE DATE; TERM; TERMINATION.
17.1. TERM OF AGREEMENT. This Agreement shall become effective on the
Effective Date and shall continue in effect for a period of * thereafter, unless
sooner terminated in accordance with the provisions hereof.
17.2. TERM OF EACH PROJECT. The term of the Initial Project commences on
the Effective Date and terminates on the Completion Date of all Products
encompassed in the Initial Project. The term of each Additional Project
commenced on the approval of the Statement of Work applicable to such Additional
Project and terminates on the Completion Date of all Products encompassed in
such Additional Project. The parties' obligations to share development costs
shall continue with respect to any Project, notwithstanding the expiration of
the term of that particular Project.
17.3. TERMINATION FOR DEFAULT; ENTIRE AGREEMENT.
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<PAGE> 29
17.3.1. Termination . Either party (the "nondefaulting party") has the
right, upon written notice to the other party (the "defaulting party"), to
terminate this Agreement, and certain of its further obligations under this
Agreement as described in Section 17.3.2 below, upon the occurrence of any of
the following events of default (subject to the defaulting party's ability to
cure or remedy such event as described in Section 17.8 ("Right to Cure Event of
Default")). The written notice shall state that the notice of termination is
with respect to the Agreement as a whole and specify in reasonable detail the
reasons for therefor.
a. The defaulting party is involved in any voluntary or
involuntary bankruptcy proceeding or other formal proceeding concerning
insolvency, and the proceeding is not dismissed within sixty (60) days;
b. The defaulting party ceases doing business or becomes
insolvent or unable to pay its debts as they mature in the ordinary course of
business or makes an assignment for the benefit of its creditors; or
c. The defaulting party is in material default or breach of any
material provision hereof, including without limitation the provisions of
Sections 7, 9, 12, 13, 15 or 16 of this Agreement.
17.3.2. Effect of Termination; Entire Agreement. Upon any such
termination of the Agreement as a whole for default under this Section 17.3:
a. The non-defaulting party's rights under this Agreement, the
Technology License Agreement and the Component Supply Agreement shall remain in
full force and effect unchanged except that the right to distribute products
(including Products) shall be royalty-free, subject only to (i) the obligation
of the non-defaulting party to pay the price of the products acquired from the
defaulting party under the Component Supply Agreement, and (ii) any provision of
the Technology License Agreement which, by its express terms, survives
termination for default under this Agreement.
b. The defaulting party shall return to the other all copies of
Confidential Information.
c. The defaulting party's rights under this Agreement, the
Technology License Agreement and the Component Supply Agreement shall terminate
and be of no further force and effect.
d. The defaulting party's right to use or otherwise exercise any
right as a joint owner of the Non-statutory IP Rights in Jointly Developed
Technology shall cease. If Nortel is the defaulting party, Nortel's rights to
use or otherwise exercise any right as the owner of Statutory IP Rights in
Jointly Developed Technology shall cease.
e. The defaulting party shall pay to the nondefaulting party, in
addition to any other rights or remedies available to the nondefaulting party at
law or equity, promptly upon receipt of an invoice therefor, an amount equal to
(i) all Development Costs accrued to date for which an invoice has been rendered
(whether or not a Milestone payment is
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<PAGE> 30
then due and payable on account of such Development Costs), (ii) Development
Costs not yet invoiced but incurred, and (iii) an amount determined by the
non-defaulting party to represent the costs of winding down the development
Projects then under way.
17.4. TERMINATION FOR DEFAULT; INITIAL PROJECT AND ADDITIONAL PROJECTS.
17.4.1. Termination . Either party (the "nondefaulting party") has the
right, upon written notice to the other party (the "nondefaulting party"), to
terminate any particular Project under this Agreement, including the Initial
Project and any Additional Project, and certain of its further obligations under
this Agreement as described in Section 17.4.2 below, if the defaulting party is
in material default or breach of any material provision hereof applicable to the
specific Project which the nondefaulting party desires to terminate (subject to
the defaulting party's ability to cure or remedy such event as described in
Section 17.8 ("Right to Cure Event of Default")). The written notice shall state
that the notice of termination is with respect to a particular Project and
specify in reasonable detail the specific Project and the reasons for
termination thereof.
17.4.2. Effect of Termination; Projects. Upon any such termination of a
particular Project under this Section 17.4:
a. The non-defaulting party's rights under this Agreement, the
Technology License Agreement, Manufacturing Services Agreement and the Component
Supply Agreement shall remain in full force and effect unchanged.
b. The defaulting party's rights under this Agreement, the
Technology License Agreement, the Manufacturing Services Agreement and the
Component Supply Agreement with respect to all Products, other than Products
encompassed within the terminated Project, shall remain in full force and effect
unchanged.
c. The defaulting party's rights under this Agreement, the
Technology License Agreement, Manufacturing Services Agreement and the Component
Supply Agreement with respect to all Products encompassed within the terminated
Project, shall terminate and be of no further force and effect. The defaulting
party shall pay, in addition to any other rights or remedies available to the
nondefaulting party at law or equity, promptly upon receipt of an invoice
therefor, to the other party an amount equal to (i) all Development Costs
accrued to date in the terminated Project for which an invoice has been rendered
(whether or not a Milestone payment is then due and payable on account of such
Development Costs), (ii) Development Costs not yet invoiced but incurred in the
terminated Project, and (iii) an amount determined by the non defaulting party
to represent the costs of winding down the terminated Project.
17.5. TERMINATION FOR CONVENIENCE.
17.5.1. Termination . Either party (the "terminating party") has the
right, upon three (3) months' written notice to the other party (the
"nonterminating party"), to terminate this Agreement, or to terminate any
particular Project under this Agreement, including the Initial Project and any
Additional Project, and certain of its further obligations under this Agreement
as described in Section 17.5.2 and 17.5.3 below. It is the intention of the
parties that the non-
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<PAGE> 31
terminating party be provided with the notice set forth in this Section 17.5 in
order to provide it with the opportunity to find a suitable entity to replace
the terminating party, if it so wishes:
17.5.2. Effect of Termination; Projects. Upon any such termination of a
particular Project for convenience under this Section 17.5:
a. The non-terminating party's rights under the Technology
License Agreement and the Component Supply Agreement shall remain in full force
and effect unchanged, provided that the obligation of the non-terminating party
to pay royalties on sales of Products under the Technology License Agreement for
Products developed under the terminated Project shall cease, and the license
shall become nonroyalty-bearing, when the nonterminating party shall have paid
royalties in an amount equal to the total Development Costs paid by the
terminating party hereunder with respect to the terminated Project.
b. The terminating party's rights under this Agreement, the
Technology License Agreement, the Manufacturing Services Agreement and the
Component Supply Agreement with respect to all Products, other than Products
encompassed within the terminated Project, shall remain in full force and effect
unchanged.
c. The terminating party's rights under this Agreement, the
Technology License Agreement, Manufacturing Services Agreement and the Component
Supply Agreement with respect to all Products encompassed within the terminated
Project, shall terminate and be of no further force and effect, other than the
right to receive royalties as described in paragraph 17.5.2(a).
d. During the notice period, the terminating party shall
continue to perform its obligations under this Agreement, unless otherwise
agreed by the parties in writing. Upon the effective date of termination of the
terminated Project, the terminating party shall pay, promptly upon receipt of an
invoice therefor, to the nonterminating party an amount equal to (i) all
Development Costs accrued to date in the terminated Project for which an invoice
has been rendered (whether or not a Milestone payment is then due and payable on
account of such Development Costs) and (ii) Development Costs not yet invoiced
but incurred in the terminated Project.
17.5.3. Effect of Termination; Entire Agreement. Upon any such
termination of the Agreement as a whole for convenience under this Section 17.5:
a. The non-terminating party's rights under the Technology
License Agreement and the Component Supply Agreement shall remain in full force
and effect unchanged, except that the right to distribute products (including
Products) shall become nonroyalty bearing when the nonterminating party shall
have paid royalties in an amount equal to the total Development Costs paid by
the terminating party hereunder (calculated on a prorata basis, among the
Products then being distributed by the nonterminating party). In addition, the
nonterminating party's rights thereunder shall be subject only to the
obligations therein which by their terms expressly survive the termination of
this Agreement.
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<PAGE> 32
b. The terminating party shall return to the nonterminating
party all copies of Confidential Information.
c. The terminating party's right to use or otherwise exercise
any right as a joint owner of the Non-statutory IP Rights in Jointly Developed
Technology shall cease. Nortel's rights to use or otherwise exercise any right
as the owner of Statutory IP Rights in Jointly Developed Technology shall cease.
d. The terminating party's rights under this Agreement, the
Technology License Agreement, the Manufacturing Services Agreement and the
Component Supply Agreement shall terminate and be of no further force and effect
other than the right to receive royalties as described in paragraph 17.5.3(a).
During the notice period, the terminating party shall continue to perform its
obligations under this Agreement, unless otherwise agreed by the parties in
writing. Upon termination of this Agreement, the terminating party shall pay,
promptly upon receipt of an invoice therefor, to the other party an amount equal
to (i) all Development Costs accrued to date for which an invoice has been
rendered (whether or not a Milestone payment is then due and payable on account
of such Development Costs) and (ii) Development Costs not yet invoiced but
incurred.
17.5.4. For the purposes of subsections 17.5.2(d) and 17.5.3(d), the
terminating party shall not be required to pay to the non-terminating party any
amount in respect of Development Costs incurred during the notice period in
excess of the amount scheduled to be incurred during such period under the
Statement of Work.
17.6. PROVISIONS SURVIVING ANY TERMINATION. Regardless of the basis of any
termination, or which party is in default, the rights and obligations of the
parties under Sections 12, 13, 14, 16, 17, and 21 shall survive any termination
or expiration of this Agreement.
17.7. RIGHT TO CURE EVENT OF DEFAULT. Upon the occurrence of any event of
default entitling a party to terminate this Agreement, the non-defaulting party
may send notice of event of default, specifying in reasonable detail the nature
of the default, to the nondefaulting party. The defaulting party will have
thirty (30) days following the date of receipt of such notice within which to
cure the breach or event of default, or to propose a plan to cure such breach or
event of default, which plan shall be to the non-defaulting party's reasonable
satisfaction, and to promptly commence and pursue such plan to completion.
Failure to cure the default or event of default within such time periods will
result in termination (of the Agreement or applicable Project, as the case may
be) without further notice by the non-defaulting party, unless such
non-defaulting party extends the cure period by written notice or withdraws the
default notice.
17.8. REMEDIES IN EVENT OF DEFAULT. Other than with respect to breaches of
the confidentiality provisions hereof, neither party shall be entitled to
exercise any remedy otherwise available to it at law or in equity unless and
until such party shall have provided the other party with notice of such event
of default, reasonably specifying the nature of the default, and any applicable
period of time for cure thereof shall have expired without cure, and the
procedures defined in Section 18 ("Escalation Procedure") shall have been first
exhausted.
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18. ESCALATION PROCEDURE.
18.1. OBLIGATION TO IMPLEMENT ESCALATION PROCEDURES . Notwithstanding the
provisions of Section 17 ("Effective Date; Term; Termination") above except
paragraphs 17.3(a) and (b) and Subsection 17.5, neither party shall have a right
to terminate this Agreement until the provisions of this Section 18 shall have
been exhausted. The provisions of this Section 18 shall not be required to be
exhausted in order for a party to terminate under paragraphs 17.3(a) and (b) and
Subsection 17.5.
18.2. NOTIFICATION. In the event of any dispute arising out of or relating
to this Agreement, the Technology License Agreement, the Components Supply
Agreement, Manufacturing Services Agreement or any exhibit, schedule or appendix
hereto or thereto or the binder, either Project Manager (referred to for
convenience in this Section as the "Delivering Party") shall notify the other
Project Manager (referred to for convenience as the "Receiving Party") in
writing of the dispute, specifying such dispute in reasonable detail (the
"Dispute Notice").
18.3. RESPONSE. The receiving party shall respond to the notice in
writing within ten (10) business days of delivery thereof.
a. If the receiving party acknowledges the default, the response
shall specify the steps the receiving party will take to resolve such matters
and the time schedule for such resolution. The parties agree to consider all
good faith and reasonable solutions and to exercise all reasonable efforts to
resolve such matters; or
b. If the receiving party states that no such default has
occurred, the Project Managers of the parties will meet in person as soon as is
reasonably possible but in any event within two (2) business days of the
delivery of such, with the sole task of endeavoring to determine whether a
default has occurred, and, if so, what steps the receiving party should take to
resolve the default. The Project Managers shall meet as often as reasonably
necessary and shall gather and furnish to the other party all relevant
information reasonably necessary and appropriate to resolve the Dispute.
18.4. ESCALATION. In the event (i) the officers specified below of each
party are unable to reach resolution of the Dispute, within the number of
business days from receipt of the receiving party's response to the Dispute
Notice (at Level 1) or from failure of the immediately preceding Level to
resolve the Dispute within the applicable number of business days, or (ii) the
receiving party has not taken the steps mutually agreed to by the parties
pursuant to Section 18.3 above ("Response") in accordance with the agreed time
schedule, if applicable, then the parties shall escalate the Dispute through the
following levels:
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*CONFIDENTIAL*
TREATMENT REQUESTED
<TABLE>
<CAPTION>
Level Officer Days
---- ------- ----
<S> <C> <C> <C>
Level 1:
ADA: Project Manager 5
Nortel: Project Manager
Level 2:
ADA * 2
Nortel: *
Level 3:
ADA: * 10
Nortel: *
</TABLE>
Each party shall cause the officer(s) specified above to meet with the specified
officer(s) of the other party as soon as possible but at most within the number
of business days specified above to discuss and attempt to reach a mutually
satisfactory resolution of the Dispute.
18.5. DISPUTE RESOLUTION PRIOR TO FORMAL COURT PROCEEDINGS. Each party
agrees that the initiation of formal proceedings for resolution of such disputes
shall not be commenced until the procedures set forth in this Section 18
("Escalation Procedure") have been exhausted.
19. ASSIGNMENT AND ACQUISITIONS.
19.1. ASSIGNMENT.
19.1.1. Consent. Neither party may assign, voluntarily, by operation of
law or otherwise, any rights or delegate any duties under this Agreement without
the other party's prior written consent, except as is described in Section
20.1.2. Any attempt to do so without that consent will be void. This Agreement
will bind and inure to the benefit of the parties and their respective
successors and permitted assigns. As used herein, the following shall be
included in the definition of an assignment: (i) the sale, transfer or other
disposition of all or substantially all of the assets of a party, or of all or
substantially all of the assets of that party involved in the sale or
disposition of the Product Line, or (ii) a change in the person or entities who
control 50% or more of the equity securities or voting interest of such party.
Notwithstanding the foregoing, ADA acknowledges that Nortel will be delegating
certain development and other duties hereunder to Bell-Northern Research, Ltd.,
and hereby consents thereto.
19.1.2. Permitted Assignments. No party may withhold consent to a
proposed assignment under the provisions above in the case of a merger,
acquisition or sale of all or substantially all of the assets of the party,
subject to the new entity expressly assuming the
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obligations of the assigning party. Notwithstanding the foregoing, either party
may withhold consent, in its sole discretion, to a proposed assignment to a
competitor of such party.
19.1.3. Affiliates. Nortel may not extend any benefits of this Agreement
to any entity which is a competitor of ADA, notwithstanding, that such entity
may otherwise fall with the definition of Affiliate hereunder.
20. EXPORT CONTROLS. Each party assures the other party that it will not
knowingly, without prior authorization, if required, of the Office of Export
Administration, U.S. Department of Commerce, 14th and Constitution Avenue, N.
W., Washington, D.C. 20230, export or reexport (as defined in Section
779.1(b)-(c) of the Export Administration Regulations ("Regulations") and any
amendments thereto) the technical data related to the products to be developed
under this Agreement to Afghanistan, the People's Republic of China or to any
Group Q, S. W, Y or Z country specified in Supplement No. 1 to Section 770 of
the Regulations as amended from time to time.
21. GENERAL.
21.1. GOVERNING LAW; FORUM. This Agreement is governed in all respects by
the laws of the United States of America and the State of California as such
laws are applied to agreements entered into and to be performed entirely within
California between California residents.
21.2. INDEPENDENT CONTRACTOR. ADA's relationship with Nortel is that of an
independent contractor, and nothing in this agreement is intended to, or should
be construed to, create a partnership, agency, joint venture or employment
relationship.
21.3. ATTORNEY'S FEES. The prevailing party shall be entitled to attorneys'
fees and its litigation or related expenses in any suit or proceeding with
respect to the subject matter of the contract or arising out of or related to
it, or to interpret or enforce such contract.
21.4. NOTICES. All notices or reports permitted or required under this
Agreement shall be in writing and shall be by personal delivery, telegram,
telex, telecopier, facsimile transmission, or by certified or registered mail,
return receipt requested, and deemed given upon personal delivery, five (5) days
after deposit in the mail, or upon acknowledgment of receipt of electronic
transmission. Notices shall be sent to the addresses set forth in the Preamble
of this Agreement or such other address as either party may specify in writing.
Notices shall be sent to the applicable designated person identified in the
applicable Project Assignment.
21.5. SEVERABILITY. If any provision of this Agreement is unenforceable or
invalid under any applicable law or be so held by applicable court decision,
such unenforceability or invalidity shall not render this Agreement
unenforceable or invalid as a whole. In such event, such provision shall be
changed and interpreted so as to best accomplish the objectives of such
unenforceable or invalid provision within the limits of applicable law or court
decisions.
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21.6. WAIVER. The failure of either party to require performance by the
other party of any provision hereof shall not affect the full right to require
such performance at any time thereafter; nor shall the waiver by either party of
a breach of any provision hereof be taken or held to be a waiver of the
provision itself.
21.7. FORCE MAJEURE. Neither party shall be liable hereunder by reason of
any failure or delay in the performance of its obligations hereunder (except for
the payment of money) on account of strikes, shortages, riots, insurrection,
fires, flood, storm, explosions, acts of God, war, governmental action, labor
conditions, earthquakes, material shortages, or any other similar cause beyond
the reasonable control of such party.
21.8. ENTIRE AGREEMENT. This Agreement completely and exclusively states
the agreement of the parties regarding its subject matter. It supersedes, and
its terms govern, all prior proposals, agreements, or other communications
between the parties, oral or written, regarding such subject matter. This
Agreement shall not be modified except by a subsequently dated written amendment
or supplemental Project Assignment signed on behalf of ADA and Nortel by their
duly authorized representatives, and any provision on a purchase order
purporting to supplement or vary the provisions hereof shall be void.
21.9. COUNTERPARTS. This Agreement may be executed in counterparts, all
of which taken together shall constitute one single agreement between the
parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and the person signing below warrant that they are duly authorized to
sign for and on behalf of the respective parties.
ADA Nortel
APPLIED DIGITAL ACCESS, INC. NORTHERN TELECOM INC.
a California corporation a Delaware corporation
By:________________________ By:____________________
Its:_______________________ Its:___________________
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*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 1.1
ADA FIELD
*
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*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 1.13-1
ADA COMPONENTS
Component Description
- -------- -----------
* *
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*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 1.13-2
NORTEL COMPONENTS
Component Description
- -------- ------------
* *
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*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 1.27
NORTEL FIELD
*
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EXHIBIT 2.21
ADDITIONAL PRODUCT APPENDIX
Name of Additional Product: ______________________
This appendix sets forth additional and different terms and conditions
particular to the Additional Product described below and shall be incorporated
by reference into the Joint Development Agreement ("Agreement") between ADA and
Nortel effective as of________________________________________________________
________________. Such different or additional terms are applicable only to the
Additional Product described below and in no way alter the terms and conditions
applicable to other Products incorporated into the Agreement by addition of an
appendix.
All the terms used in this appendix shall retain the same meaning as defined in
the Agreement and such definitions are incorporated herein by reference.
1. GENERAL DESCRIPTION OF THE ADDITIONAL PRODUCT:
2. COMPONENTS OF THE ADDITIONAL PRODUCT TO BE CONTRIBUTED BY THE PARTIES:
ADA contribution:
Nortel contribution:
3. SERVICES DESCRIPTION AND TESTING EXPECTATIONS:
4. MILESTONE DESCRIPTION AND SCHEDULE:
<TABLE>
<CAPTION>
Milestone # Milestone Description Schedule
----------- --------------------- --------
<S> <C> <C> <C>
(1)
(2)
(3)
(4)
</TABLE>
5. DEFINITION OF MILESTONE SCHEDULE TERMS:
6. COMPENSATION.
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7. PROJECT MANAGERS. Representatives can change upon notification to the other
party provided that the substitute representative has qualifications at least
equivalent to the person he/she is replacing.
1. Technically qualified ADA representative who will respond to
information requests by Nortel:
------------------------------------------
(name and telephone number)
2. Technically qualified Nortel representative who will respond to
information requests by ADA :
3. ADA's designated representative for Continuing Support:
------------------------------------------
(name and telephone number)
4. ADA Contract Representative:
------------------------------------------
(name and telephone number)
5. Nortel Contract Representative:
------------------------------------------
(name and telephone number)
6. ADA financial contact for invoicing and payment:
------------------------------------------
(name and telephone number)
42
<PAGE> 43
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and the person signing below warrant that they are duly authorized to
sign for and on behalf of the respective parties.
ADA Nortel
APPLIED DIGITAL ACCESS, NORTHERN TELECOM, INC.
a California corporation a Delaware corporation
By:_______________________ By:___________________
Its:______________________ Its:__________________
43
<PAGE> 44
EXHIBIT 5.1
TECHNOLOGY LICENSE AGREEMENT
not yet finalized
44
<PAGE> 45
*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 5.1-1
ADA CONTRIBUTED TECHNOLOGY
Technology Description
- --------- -----------
* *
45
<PAGE> 46
*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 5.1-2
NORTEL CONTRIBUTED TECHNOLOGY
Technology Description
- ---------- -----------
* *
46
<PAGE> 47
EXHIBIT 5.2
COMPONENT SUPPLY AGREEMENT
not yet finalized
47
<PAGE> 48
*CONFIDENTIAL*
TREATMENT REQUESTED
EXHIBIT 7.2.3
RATES AND CHARGES
<TABLE>
<CAPTION>
* *
----------- -----------
<S> <C> <C> <C>
ADA E1 - Junior Engineer $* $*
E2 - Senior Engineer $* $*
E3 - Lead Engineer $* $*
Support $* $*
Manager $* $*
NORTEL $* $*
----------- -----------
</TABLE>
48
<PAGE> 1
EXHIBIT 11.1
APPLIED DIGITAL ACCESS, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($526) ($3,165) ($4,349) ($5,473)
======== ======== ======== ========
Reconciliation of weighted average
number of shares outstanding to amount
used in net income per share computation:
Weighted average number of
common shares outstanding 12,512 12,175 12,425 12,033
Weighted average number of
options and warrants outstanding, - - - -
-------- -------- -------- --------
Weighted average number of
shares outstanding 12,512 12,175 12,425 12,033
======== ======== ======== ========
Net income (loss) per share ($0.04) ($0.26) ($0.35) ($0.45)
======== ======== ======== ========
</TABLE>
See Note 3 to Condensed Financial Statements
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,658
<SECURITIES> 11,911
<RECEIVABLES> 9,812
<ALLOWANCES> (53)
<INVENTORY> 8,171
<CURRENT-ASSETS> 34,444
<PP&E> 11,763
<DEPRECIATION> (5,995)
<TOTAL-ASSETS> 44,690
<CURRENT-LIABILITIES> 7,915
<BONDS> 0
0
0
<COMMON> 51,339
<OTHER-SE> 2,537
<TOTAL-LIABILITY-AND-EQUITY> 44,690
<SALES> 23,302
<TOTAL-REVENUES> 23,302
<CGS> 10,795
<TOTAL-COSTS> 10,795
<OTHER-EXPENSES> 17,482
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> (15)
<INCOME-PRETAX> (4,242)
<INCOME-TAX> 107
<INCOME-CONTINUING> (4,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,349)
<EPS-PRIMARY> ($0.35)
<EPS-DILUTED> ($0.35)
</TABLE>
