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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
28, 1997 as reported on the Nasdaq National Market, was approximately $
60,265,807. For the purposes of this calculation, shares owned by officers,
directors and 5% shareholders known to the registrant have been deemed to be
owned by affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
There were 12,331,239 shares of the Registrant's Common Stock, no par value,
outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1996 Annual Report to Shareholders, a copy of
which is attached hereto as Exhibit 13.1, referred to herein as the "Annual
Report", are incorporated as provided in Part II.
(2) Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 20, 1997, referred to herein as the "Proxy
Statement", are incorporated as provided in Part III.
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PART I
ITEM 1. BUSINESS
THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS. FOR DISCUSSION OF
FACTORS WHICH MAY AFFECT THE OUTCOME PROJECTED IN SUCH STATEMENTS, PLEASE SEE
"RISKS AND UNCERTAINTIES" AT PAGES 13 THROUGH 16 OF THIS ANNUAL REPORT ON FORM
10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF
ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO RELFECT EVENTS OR
CIRCUMSTANCES ARISING AFTER THE DATE HEREOF.
Applied Digital Access Inc. ("ADA" or the "Company") was incorporated in
California in August 1987. The Company's headquarters are located at 9855
Scranton Road, San Diego, California 92121, and its telephone number is (619)
623-2200.
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' ("TSPs")
networks. ADA's products are designed to enable service providers to improve
their quality of service, to increase productivity, to lower operating expenses
and to effectively deploy new services. ADA has positioned its business to
assist service providers in addressing the rapidly increasing demand for new
services, higher bandwidth and access to the Internet. ADA's systems and
software provide network management functions such as provisioning,
configuration managment, 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 our 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 Test and Performance Monitoring System (T3AS"),
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 Traffic Data Collection and Engineering System ("TDC&E"), Fault
Management System ("FMS") and OS design services all acquired through
acquisitions, as well as Graphical Test Assistant ("GTA") and Sectionalizer.
The application of ADA's T3AS products enables TSPs telephone companies to
quickly access high-speed data and voice circuits from remote network management
centers. The Company believes its T3AS system is the only permanently-installed
system that can remotely access circuits at both the DS3 and DS1 rates to
provide an integrated suite of test and performance monitoring capabilities.
Using the T3AS system's test capabilities, customer-reported problems can be
quickly identified and localized without dispatching repair personnel. The T3AS
system's performance monitoring capabilities help TSPs detect degradation of
service and initiate action before service to the customer is interrupted. The
Company has primarily focused its sales efforts on the seven regional bell
operating companies ("RBOCs") which are under increasing competitive pressure to
provide high-quality high-speed data and voice transmission at lower costs. To
date, six of the seven RBOCs, Ameritech, BellSouth, NYNEX, Southwestern Bell,
Pacific Bell, and U S WEST, and a major interexchange carrier have approved and
are currently deploying the Company's T3AS products. The Company has sold
equipment to an independent telephone company, Sprint Central Telephone-Nevada,
and several competitive access providers, and has increased its sales and
marketing efforts aimed at independent telephone companies, competitive access
providers and interexchange carriers.
In February 1996, the Company acquired certain assets of Applied Computing
Devices, Inc. ("ACD"), a company that developed and marketed traffic management
and fault management OS to TSPs. These products are complementary to the
Company's Network Systems product line. In July, 1996, ADA purchased certain
assets of MPR Teltech Ltd. ("MPR Teltech"), a subsidiary of BC TELECOM, Inc. BC
TELECOM, Inc. is Canada's second largest telecommunications company. The assets
acquired were part of MPR Teltech's operating unit known as the Special Services
Network division ("SSN"). SSN was an OS software development group with
expertise in development of network management systems for TSPs. SSN developed
OS software primarily for Northern Telecom, Ltd. ("Nortel"). SSN has become part
of ADA's Canadian subsidiary, ADA-Canada, and develops network performance
management OS products for the Company and its customers, including Nortel. ADA
has also licensed certain technology from Nortel for Network Performance
Management applications in connection with the acquisition.
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BACKGROUND
The volume of digital information transmitted through the telecommunication
system has grown rapidly in recent years. This growth has been driven primarily
by the proliferation of personal computers and workstations, the prevalence of
networking and use of the Internet, the adoption of client/server computing, the
increase in cellular telephone and facsimile use, and the deployment of new
digital information applications including multimedia, video conferencing, and
image-processing. As a result, TSPs have been required to rapidly deploy
high-speed data and voice circuits operating at a 1.54 megabit-per-second rate,
called DS1, or T1, and at a 45 megabit-per-second rate, called DS3. The DS3
transmission rate is the highest electrical telecommunication circuit
transmission rate in North America.
The present structure of the telecommunications industry in the United
States is largely a result of the court-mandated divestiture of AT&T in 1984.
The AT&T divestiture resulted in the creation of the seven RBOCs, the
competitive long distance telephone company market, and the emergence of
competitive access providers ("CAPs") and competitive local exchange companies
("CLECs") which offer local telephone service in competition with the RBOCs or
independent telephone companies ("ITOCs"). Regulation through competition is the
philosophy that resulted in the breakup of AT&T, and it continues to be the
philosophy of the Federal Communications Commission. The passage of the
Telecommunication Bill of 1996 allows each of these telephone companies to enter
the territories and businesses of the others. While the Company believes that
the new law will bring new opportunities for network equipment suppliers, it is
too early to assess the long-term impact of this new law on the
telecommunications industry and ADA's business.
Local telephone companies have faced increased competition from both CLECs
and from the local service competitive initiatives of the long distance
telephone companies and will potentially face competition from non-traditional
providers of telephone service such as cable television companies. The Company
believes that many of the new competitive entrants will continue to focus their
efforts on corporate and government communications networks which are among the
most profitable market segments. Customers in these segments require highly
reliable data and voice communications circuits to enable them to conduct their
day-to-day business without interruption. These new competitors are often able
to offer higher-quality and lower-cost service than local telephone companies,
and as a result, have gained significant market share in these segments. This
increased competition has brought pressure on local telephone companies to
protect their existing revenue bases by improving the quality of their service
and to reduce their costs. At the same time, these local telephone companies
continue to re-engineer and downsize their organizations. The large reductions
in staff have often resulted in the loss of highly experienced and technical
people, leaving less experienced staff to operate and maintain the networks.
Prior to the divestiture, AT&T was responsible for end-to-end
telecommunication service. When problems occurred with a telephone connection,
customers called AT&T to diagnose and fix the problem. Today, however, a long
distance data or voice circuit often involves three or more TSPs: the local
telephone companies on each end and the long distance telephone company
providing the connection between the two local companies. Responsibility for
service in long distance high-speed data and voice networks is transferred from
one carrier to another at their network boundaries.
The Company believes that the segmentation of the telecommunications
network has made it more difficult for telephone companies to identify and
respond to problems in their networks. For example, many stock brokerage firms
communicate real-time stock quotes and buy and sell orders to and from their
brokers over high-speed data communications lines. Such firms monitor their own
circuits and can detect when data communications service begins to degrade. When
a degradation in service is noted, the telecommunications manager of the firm
contacts the telephone company that manages the network - typically the long
distance carrier. Initially, the long distance telephone company does not know
where the problem is located and must initiate three trouble reports, one in
each local telephone company and one in its own company. Each telephone company
then dispatches multiple repair crews with portable test equipment to attempt to
locate the problem. Typically, repair crews are dispatched to a number of
locations, including the network boundary between the long distance and the
local telephone company, the
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telephone building nearest the user, and to outside facilities such as the
cables and equipment beneath streets and on poles between the central offices
and the end-user customer. This system of maintenance results in a number of
inefficiencies. For example, the Company believes telephone company repair crews
often incur needless expense only to report "no trouble found." Despite their
best efforts, repair crews often inadvertently interrupt or damage circuits that
are working and may make unnecessary repairs.
Long distance telephone companies measure quality of service provided by
the local telephone companies in two principal ways: failure rate
(customer-reported troubles per 100 circuits per month), and
mean-time-to-restore (the time needed to respond to and resolve a customer's
complaint). These measures frequently influence long distance telephone company
and end-user customer decisions about which local telephone company to use. To
date, local telephone companies' level of services measured by these standards
has often placed them at a competitive disadvantage. In order to reduce failure
rates and improve restoration times, the Company believes telephone companies
are motivated to change the traditional methods of handling service problems as
described above. They are looking for solutions that do not require dispatching
repair crews with portable test equipment when problems occur and, instead,
allow them to monitor circuits remotely from a central management site. They are
also seeking effective methods of remotely testing and monitoring DS3 and DS1
circuits at the network boundary. Finally, telephone companies are looking to
improve their quality of service by moving from reactive maintenance to
preventive maintenance through performance monitoring. These network quality and
performance requirements have created a need for a cost-effective solution.
THE APPLIED DIGITAL ACCESS SOLUTION
ADA focuses on providing Network Performance Management solutions to TSPs.
These solutions are comprised of products that address traffic, fault,
performance, and test management. The Company has focused its research and
development activities on creating products that provide answers, instead of
data, to telecommunications service providers, and on making network management
easier.
ADA developed the T3AS, the first permanently installed network element to
remotely access the network at both the DS3 and the DS1 rates providing an
integrated suite of test and performance monitoring capabilities. ADA has
enhanced T3AS and has developed additional network elements, such as CTS, PAAS,
and Remote Module.
The Company believes its T3AS products enable TSPs to greatly improve their
reliability of service, reduce circuit repair time, reduce network management
expense, and proactively maintain network quality. By providing remote access to
DS3 and DS1 circuits located at network boundaries from the telephone company
network management centers, the T3AS products allow telephone companies to
remotely test individual circuits reported as problematic within seconds instead
of hours. The continuous monitoring capability of T3AS allows TSPs to detect
circuit degradation before receiving customer complaints, and to initiate
maintenance actions to restore the circuit to full functionality without
affecting the end-user. Finally, the Company believes proactive maintenance
enabled by performance monitoring can reduce the number of trouble reports
initiated by end-users.
ADA's Remote Module, a DS1 NIU, enables TSPs to identify where reported
troubles are located. When DS1 services are monitored with T3AS and the Remote
Module, telephone companies can nonintrusively isolate troubles on these
circuits. Additionally, these products monitor the performance of the DS1
service on a full-time basis. The Company refers to this application of its
products as Network Administrative Boundary Sectionalization. This application
addresses the multiple boundaries and multiple hand-offs that TSPs must perform
in order to provide a service or set of services to end-users.
TSPs position T3AS systems (installed at the network boundary between the
long distance telephone company and the local telephone company) in combination
with Remote Modules (installed on DS1 services at the boundary between the local
telephone company and the-end user) to immediately determine whether reported
troubles are in their network. This enables the telephone companies to reduce
their mean-time-to-restore, since responsibility for problems is immediately
localized to the responsible telephone company, and repair crews that would have
been dispatched unnecessarily can now focus on troubles that really are their
responsibility. When dispatching repair crews is necessary, the T3AS system can
localize the problem to allow more efficient deployment.
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As a result, the total number of work crews in the field is reduced, thereby
reducing the number of inadvertent interruptions of operational circuits and the
subsequent initiation of new trouble reports.
Through acquistion and internal development, the Company has added network
management software products and services that are complementary to ADA's
network element product line, customer base, and focus on Network Performance
Management.
STRATEGY
The Company seeks to maintain its leadership position as a supplier of
network performance management systems for high-speed telecommunication service
providers and to become a leading provider of OS solutions for network
management of telecommunications networks by:
1. FOCUSING SALES AND MARKETING EFFORTS ON TSPs WITH LARGE
NETWORKS.
ADA's initial sales have been to the RBOCs and their affiliates, all of which,
have a compelling need to improve the quality and reduce the cost of their
services. Competitive pressures are forcing telephone companies to move toward a
centralized network management infrastructure that uses integrated test and
performance monitoring systems. The Company has broadened Aits target market
with applications that are appropriate for CAPs, long distance telephone
companies, and other telephone service providers.
2. DEVELOPING PRODUCTS FOR NETWORK BOUNDARY APPLICATIONS.
The initial application for the Company's products has been at the network
boundary between the long distance telephone company and the local telephone
company. Installation of the T3AS system at these boundaries allows the local
telephone company to quickly determine if a reported trouble is within its
network. It also allows the local telephone companies to continuously monitor
their circuits and react to degradation of the signal before service is
affected. With the Company's Remote Module, a DS1 NIU, the boundary between the
local telephone company and the end-user can now be continuously and
nonintrusively monitored. The combination of these two products' capabilities
enables telephone companies to improve their ability to address the increasingly
competitive business environment.
3 DEVELOPING AND ENHANCING PRODUCTS AND SERVICES TO ADDRESS OS.
The Company is extending its current product line and market to address
selected applications within the OS function. OS are computer software-based
systems that provide operations support for telecommunications functions. The OS
market is very large and its applications have historically been addressed by
companies such as AT&T and Bellcore. Some of the older products from these
suppliers, called "legacy systems," can no longer provide telephone companies
with the real-time information that is needed to manage complex high-speed
telecommunications networks. The market for intelligent network management
systems has become fragmented, and the Company perceives a need for solutions
that address the OS applications of testing, surveillance, performance
monitoring and traffic management, among others.
4 EXPANDING TO OTHER APPLICATIONS.
The Company believes that there are additional applications for ADA's
product line that extend its utility to the network boundaries between the
telephone companies and other users, such as corporate customers, cellular
telephone companies, cable television companies, and other telephone service
providers.
5 DEVELOPING PRODUCTS TO ADDRESS NEW TRANSMISSION STANDARDS.
The Company intends to extend its current products and develop new products
to accommodate new telecommunication transmission standards such as SONET and
SDH optical transmission standards, which are expected to receive broad
acceptance in the North America and international markets, respectively.
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PRODUCTS
NETWORK SYSTEMS AND SENSORS
T3AS SYSTEM
The Company's first product, the T3AS system, is an integrated test and
performance monitoring system for high-speed telecommunications networks. The
T3AS system connects to the network at boundaries where many telephone circuits
are combined, and where access to individual circuits or groups of circuits is
often difficult. The Company believes its T3AS system is the only
permanently-installed network management system remotely accessing circuits at
the DS3 and DS1 rates that provides an integrated suite of test and performance
monitoring capabilities, including performance monitoring of DS3 and DS1
circuits and testing of embedded DS1, DS0 and subrate circuits. (Each DS3
circuit contains 28 DS1 circuits and 672 DS0 circuits. Each DS1 circuit contains
24 DS0 circuits. A DS0 circuit provides basic voice telephone service.) The T3AS
system interfaces with the TSPs network management OS using industry- standard
interfaces and protocols. T3AS also interfaces with digital cross-connect
systems in the telephone network to provide additional test capability when
circuit access is provided through such systems. The T3AS system supports up to
48 DS3 circuits, or 1,120 DS1 circuits when accessing the network at the DS1
rate of transmission.
A fully configured T3AS system occupies two seven-foot telephone
equipment racks. The T3AS system can be configured to meet the specific needs of
a customer by selecting an appropriate set of modules from a set of standard
modules. List prices for T3AS systems, including recommended spare modules, can
range from approximately $60,000 to $650,000, depending on the number and mix of
standard modules selected by the customer.
T3AS DISTRIBUTED SYSTEM
The Company's Distributed System allows individual High-Speed or
Low-Speed Subsystems to be installed at locations remote from the T3AS Base
System. The Distributed System supports applications where the number of DS3 or
DS1 circuits at a particular remote location does not warrant the cost of a full
T3AS system, such as at network boundaries with fewer than six DS3 circuits or
140 DS1 circuits between a local telephone company and a long distance telephone
company, and at network boundaries between the local telephone company and the
end-user. Users can easily upgrade their existing T3AS systems by adding
Distributed System hardware modules and software.
LOW-SPEED SUBSYSTEM
The Low-Speed Subsystem expands the Company's product line by providing
test and performance monitoring capabilities for DS1 circuits. This
subsystem is intended for network boundaries where circuits cross at the DS1
rate. The Low-Speed Subsystem units are interchangeable with the High-Speed
Subsystem units in the T3AS racks. Each Low-Speed Subsystem has a capacity of
140 DS1 circuits and can be deployed in a Distributed System to share
administration and test resources with the other subsystems of the T3AS Base
System.
T3AS CENTRALIZED TEST SYSTEM
The T3AS platform was designed to be a highly flexible, scalable
platform that enables TSPs to use the system in a traditional testhead
configuration. Telephone networks that employ digital cross-connect systems or
SONET add-drop multiplexers require test access for circuits that are
transported within those systems. The T3AS Centralized Test System consists of
the Test Resource Subsystem and the Administration Subsystem, in addition to
application software to provide this capability. The T3AS's full complement of
test suites is available to TSP network management centers. This product is
installed where test access is highly critical and efficient use of network
resources is important.
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PROTOCOL ANALYSIS ACCESS SYSTEM
The T3AS platform can be configured to provide access to broadband
circuits that are provisioned for advanced data services such as frame relay,
SMDS or ATM. Surveillance and testing capabilities in broadband networks may not
be as automated as they are in traditional telephone networks. Diagnosing
troubles within the network often requires coordination among multiple
organizations and dispatches to customer sites. PAAS provides circuit testing
and connects circuits to a protocol analyzer for more detailed troubleshooting.
T3AS PAAS provides a cost-effective method to access circuits from a centralized
network management center.
REMOTE MODULE
ADA's Remote Module is an intelligent DS1 NIU that non-intrusively
monitors the performance of DS1 circuits. Installed at network boundaries
between the local TSP and the end-user, the Remote Module enables the service
provider to determine whether circuit troubles originated in the service
provider's network or in the end-user's network. When installed at the local
service provider's network boundary at the customer premises, and in tandem with
a T3AS system at the network boundary between the long distance telephone
company and the local service provider, the Remote Module provides a unique
end-to-end view of the DS1 circuit. This view of service-level performance is
critical to improve service quality and reliability and to reduce costs.
Telephone network management centers can view a DS1 circuit within their network
and beyond the boundaries of their network, and can quickly identify and isolate
failures from the performance monitoring information available.
NETWORK MANAGEMENT SOFTWARE
GRAPHICAL TEST ASSISTANT
The Graphical Test Assistant (GTA) is a graphical test front-end system
to T3AS and CTS for DS0, DS1 and DS3 testing. GTA provides simple
point-and-click access to all T3AS and CTS testing functionality on a Windows NT
or Windows 95 platform. While primarily designed for service providers without
test OS, GTA also complements existing test OS by augmenting functionality.
SECTIONALIZER
Sectionalizer is the driving force behind ADA's Network Boundary
Sectionalization application. This software presents a simple graphical
representation of the DS1 circuit and highlights the portion of the circuit that
is responsible for degradation in performance. Sectionalizer also provides
second-by-second information regarding circuit performance and stores up to 30
days of circuit history for use by network management personnel to research
intermittent circuit troubles. The intelligence of network elements like the
T3AS and the Remote Module, in combination with Sectionalizer software, enables
TSPs to take a proactive perspective in managing their networks. This is the
first time that answers to identified troubles can be seen in minutes, rather
than hours.
TRAFFIC DATA COLLECTION AND ENGINEERING
Traffic Data Collection and Engineering (TDC&E) is a software
application that provides the capability to collect traffic data from a variety
of existing network elements, in addition to emerging network elements such as
ATM switches. TDC&E supports all major traffic engineering functions and lends
an accurate, quantifiable reporting mechanism to marketing and quality assurance
functions.
FAULT MANAGEMENT SYSTEM
Fault Management System (FMS), is an alarm and network surveillance OS
that is used in combination with other OS software installed in TSP networks.
This application is designed to receive and analyze information about managed
network elements. Key features of this system include real-time event and alarm
acquisition, event processing and correlation, and historical fault analysis and
reporting. In addition, automated responses can be programmed based upon
selected event occurrences. FMS provides operational system features to manage
the state of a multi-network-element, multi-vendor hybrid network.
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CUSTOMERS
The Company sells its products and services to the telecommunications
service provider network management market which consists of the seven RBOCs and
their local telephone company affiliates, the ITOCs, CAPs, CLECs, the
interexchange carriers, and enterprise networks. The Company's network systems
products conform to the North American transmission standard. Countries which
conform to this standard include the United States, Canada, Taiwan, Korea and,
at the DS1 level or below, Japan. The Company's initial marketing efforts have
focused on the RBOCs. Accordingly, at present the Company's customer base is
highly concentrated. To date, substantially all of the Company's revenues have
been derived from five RBOCs. To date, six of the seven RBOCs, Ameritech,
BellSouth, NYNEX, Pacific Bell, Southwestern Bell and U S WEST, have qualified
and deployed the Company's T3AS products. The Company has sold equipment to one
ITOC, Sprint Central Telephone-Nevada and two CAPs, and has stepped up its sales
and marketing efforts aimed at ITOCs, CAPs and long distance telephone
companies. Additionally, one system has been sold through a distributor and
deployed at the government telephone company in Taiwan. The acquisition of ACD
has brought new ITOC and CAP customers to the Company, such as GTE, Metropolitan
Fiber Systems, Teleport Communications Group, Intelcom Group Access Services,
and Frontier Communications. The SSN acquisition added Nortel and Bell Sygma as
customers for the Company's OS design services.
BellSouth, U S WEST, Ameritech and Southwestern Bell have entered into
purchase contracts with the Company. The other two RBOCs and Sprint Central
Telephone-Nevada purchase the Company's products under standard purchase orders.
Since the BellSouth, U S WEST, Ameritech and Southwestern Bell contracts may be
terminated at their convenience, the Company believes that selling to its
customers under these contracts is not materially different than purchasing
under purchase orders. The RBOCs are significantly larger than the Company and
may be able to exert a high degree of influence over the Company. In addition, a
small number of customers has historically accounted for substantially all of
the Company's revenue in any given fiscal period.
The seven RBOCs are NYNEX, Bell Atlantic, BellSouth, Ameritech,
Southwestern Bell, U S WEST and Pacific Bell. An RBOC may have several local
telephone company affiliates within its territory. Prior to selling products to
an RBOC, a vendor must first undergo a product qualification process for its
product with the RBOC. The Company typically spends from six to 18 months
discussing its T3AS products with a potential customer prior to the customer
agreeing to put the product through its qualification process. 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 and generally consists of the following phases:
- LABORATORY EVALUATION. The product's function and performance are
tested against all relevant industry standards, including Bell
Communications, Inc. ("Bellcore") standards. This process can take from two
weeks to three months depending on a variety of factors.
- FIELD TRIAL. A number of telephone lines are equipped with the
product for simulated operation in a field trial lasting from three weeks
to three months. These field trials are used to evaluate performance, to
assess the ease of installation and to establish troubleshooting
procedures. The RBOCs grant conditional product approval upon successful
completion of a field trial, enabling field personnel to order limited
quantities of the product under one-time approvals.
- FIRST OFFICE APPLICATION. In a first office application, live
circuits are placed on the T3AS system. The system is then used on live
circuits for periods ranging from one to six months to verify functionality
and operation.
- PRODUCT SELECTION AND DEPLOYMENT. Prior to product selection and
deployment which may take from one to four months, the RBOC develops and
implements a variety of methods and procedures that cover ordering,
stocking, installation, maintenance, returns and all other activities
associated with the use of the product.
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. Further, any failure on the part of any of the RBOCs to maintain
their approval of the Company's products, failure of any of the RBOCs to deploy
the Company's products or any attempt by any of the RBOCs to seek out
alternative suppliers could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, there can be
no assurance that the Company's products will be approved by new customers,
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or that such approval will not be significantly delayed. Furthermore, RBOC work
force reductions and staff reassignments have in the past delayed or
indefinitely postponed the product approval process and the Company expects such
reductions and reassignments to continue in the future. There can be no
assurance that the impact of such reductions and reassignments will not have a
material adverse effect on the Company's business, operating results and
financial condition.
TECHNOLOGY
The T3AS system consists of a real-time OS and an extensive suite of
proprietary applications software that is executed on proprietary distributed
processing hardware. The operating system implements the distributed processing
functionality of T3AS by linking, in a maximum capacity system, more than 350
dedicated microprocessors in a real-time computing environment. The T3AS
software architecture is designed to enable new system features and capabilities
to be installed easily through field software upgrades. Up to 145 simultaneous
users can be supported by the T3AS system. All performance monitoring parameters
and telephone circuit tests have been verified for compliance with
Bellcore-published technical requirements, by Bellcore, and also independently
verified by the Company's customers.
The Company's software and hardware architecture facilitates important
system capabilities such as fault tolerance and hitless access. Fault tolerance
provides a one-to-one redundant circuit path that provides backup for each DS3
and DS1 circuit. DS3 and DS1 circuits may be transferred from the online main
path to the redundant standby path without disruption of the embedded data
streams. Transfers are accomplished automatically if a hardware or software
malfunction is detected in the T3AS system. Transfers can also be accomplished
manually when telephone company personnel initiate maintenance actions. "Hitless
access" is an industry term used to describe a method of obtaining access to a
low-speed circuit embedded in a high-speed circuit without affecting any other
circuit embedded in the high-speed circuit. In the T3AS system, the Company's
proprietary technology provides access to the DS3 circuit, any embedded DS1
circuit, DS0 circuit, or other subrate circuit, without affecting any other
circuit within the DS3 circuit.
The Company has submitted contributions to the appropriate working groups
within the T1El and T1M1 standards bodies to standardize the two new status
signals for sectionalization of network trouble on DSl circuits.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes its future success will depend in part on its ability,
on a cost-effective and timely basis, to continue to enhance T3AS products, to
develop and introduce new products for the telephone network test and
performance-monitoring market and other markets, to address new industry
transmission standards and changing customer needs and to achieve broad market
acceptance for its products. Therefore, the Company intends to continue to make
significant investments in research and product development.
Product line extensions require the Company to work closely with its
current and potential customers. Using feedback received from such customers,
the Company identifies and then develops new products and enhancements to its
existing products that the Company believes will increase their usefulness or
extend their application. Examples of product extensions of the T3AS include
CTS, PAAS, Distributed System and the Low-Speed subsystem. In addition, the
Company continually seeks to reduce the manufacturing cost of its products by
taking advantage of advances in hardware technology. Finally, new technologies,
such as SONET, SDH, Frame Relay, ATM, and the newly-created standard for testing
of DS3 circuits, are the focus of significant research and product development
activity at ADA. The Company anticipates that the SONET and SDH optical
transmission standards will become the industry 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 market for the Company's products is characterized by rapid
technological advances, evolving industry transmission standards, changes in
customer requirements and frequent new product introductions and enhancements.
The introduction of telecommunications network test and performance monitoring
products involving superior technologies or the evolution of alternative
technologies or new industry transmission standards could render the Company's
existing
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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
products, to develop and introduce new products for the telecommunications
network test and performance monitoring market and other markets, to address new
industry transmission standards and changing customer needs and to achieve broad
market acceptance for its products.
The Company intends to extend its current products and develop new products
to accommodate such new transmission standards and other advances in technology,
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 in the future
adversely affect the sale and deployment of the Company's 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 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.
In fiscal 1994, 1995, and 1996, the Company spent $5.3 million, $5.8
million and $7.4 million, respectively, on internal research and development
efforts.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of material
planning and procurement, final assembly, module testing, burn-in, final system
testing and quality control. The Company procures all components from outside
manufacturers and believes it has good relationships with its suppliers. All
final assembly and tests are completed by the Company at its production
facility. The Company utilizes contract manufacturing (both consignment and
turnkey operations) for the assembly of certain sub-assemblies, including
printed circuit board modules. The Company also purchases sub-assemblies that
have been modified to the Company's specifications from original equipment
manufacturers.
In January 1997, the Company acheived ISO 9001 certification for its
headquarters facility in San Diego, California. The Company was formerly
registered to the internationally recognized ISO 9001 standards by Bellcore, its
registrar. ISO 9001 Quality Standards were developed by the International
Organization for Standardization. It is a quality system standard for ensuring a
total quality management system in engineering and manufacturing. The scope of
the Company's registration is for the design and manfacture of
telecommunications network performance management products, including associated
software that help telecommunications providers manage their networks.
All products are rigorously tested prior to shipment to customers. All
printed circuit board modules are tested individually and as part of a system.
The Company's quality control program is modeled to support the Bellcore
standards. To date, the Company has not experienced significant field failures.
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. There can be no assurance that the Company will
not experience product recalls in the future. The cost of any subsequent product
recall could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company could materially
suffer from the potential negative publicity associated with a recall.
Generally, the Company uses industry standard components for its products.
Some components, however, including VLSI ASICs, are custom made to the Company's
specifications. Certain components used in the Company's T3AS and Remote Module
products, including its VLSI ASICs, are currently available from only one source
and other components are available from only a limited number of sources. The
Company has no supply agreements and generally makes its purchases with purchase
orders. Further, certain components require an order lead time of up to one
year. Other components that currently are readily available may become difficult
to obtain in the future. Failure of the Company to order sufficient quantities
of these components in advance could prevent the Company from increasing
production of products 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
product 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 reduction in product
shipments, which in turn could have a material adverse effect on the Company's
customer relationships and operating results.
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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 to or production capacity
constraints at the Company's subcontractors could negatively affect the
Company's ability to meet its production obligations and result in increased
prices for affected parts. To procure adequate supplies of certain components,
the Company must make advance commitments to purchase relatively large
quantities of such components in a number of circumstances. The Company
believes, however, that by relying on a limited number of suppliers, it is in a
better position to control quality, reduce manufacturing costs and improve
product standardization.
To procure adequate supplies of certain components, the Company must make
advance commitments to purchase relatively large quantities of such components
in a number of circumstances. At December 31, 1996, the Company had open
noncancellable purchase commitments of approximately $3.4 million covering
several different components. A large portion of the Company's purchase
commitments consist of custom parts, some of which are sole source such as VLSI
ASICs, for which there is no alternative use or application. The inability of
the Company to incorporate such components in its products could have a material
adverse effect on the Company's business, operating results and financial
condition.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company markets its products to the RBOCs, their local telephone
company affiliates, ITOCs, CAPs and long distance companies through an
experienced direct sales force that works closely with senior management as well
as the network management departments of these customers as part of the sales
effort. As of February 28, 1997, the Company's sales organization consisted of 9
professionals, including 8 regional sales managers and one vice president. Each
of the regional sales managers operates from a site located near his or her
strategic responsibility. The sales managers are located in Arizona, Colorado,
Georgia, Illinois, Indiana, Kansas, New York and Texas.
The Company also provides engineering and installation services ("E&I") for
customers. These services are performed at the customer site and involve
assisting the customer with the installation of the Company's products into the
customers network structure. These services are performed by customer support
field applications and field support engineers.
All service, repair and technical support of the Company's products are
performed in-house. The Company also provides comprehensive on-site field
support to its customers. The Company offers technical support to its customers
on a 24-hours-a-day, 7-days-a-week basis. The Company's standard hardware
warranty is two years. Its standard software warranty is one year.
BACKLOG
At December 31, 1996, ADA had a firm backlog of approximately $1,885,000.
All of the Company's backlog at December 31, 1996 is expected to be filled
during fiscal 1997. At December 31, 1995, ADA had a firm backlog of
approximately $5,047,000. Customers have placed orders quarterly and the Company
has been operating in a book-and-ship mode, a trend the Company anticipates will
continue. There can be no assurance that the current level of backlog will
continue. In addition, since orders constituting the Company's current backlog
are subject to changes in delivery schedules, the backlog is not necessarily an
indication of future revenue.
In certain cases, ADA may permit orders to be canceled without penalty
where management believes it may be in the best interests of ADA to do so. There
have been no cases to date where ADA's management believed it to be in the best
interests of the Company to permit customers to cancel outstanding orders and
the Company does not currently expect to permit customers to cancel any such
orders in the future. To date, cancellation of system orders has not been
material.
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COMPETITION
Although other competititors provide partial testing and monitoring
solutions to the telecommunications network management market, 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.
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 there are an increasing number of
current competitors in the OS market that provide OS applications for testing,
surveillance, performance monitoring and traffic management of
telecommunications functions. In each of the NIU, CTS and OS markets,
competition is expected to increase significantly in the future. For instance,
the NIU market is fiercely competitive with respect to price, product features,
established suppliers, and conformance with industry standards. In the OS
market, improved technologies and tool sets have made the barriers to entry in
this market relatively small.
Several of the Company's competitors have long-established relationships
with the Company's current and prospective customers. 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.
PROPRIETARY RIGHTS
ADA relies on a combination of technical leadership, trade secret,
copyright and trademark protection and non-disclosure agreements to protect its
proprietary rights. Although the Company has pursued and intends to continue to
pursue patent protection of inventions that it considers important and for which
such protection is available, the Company believes its success will be largely
dependent on its reputation for technology, product innovation, affordability,
marketing ability and response to customer's needs. Currently, the Company has
six 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.
The Company believes that the rapid rate of technological change and the
relatively long development cycle for integrated circuits are also significant
factors in the protection of the Company's proprietary position. The Company's
proprietary VLSI ASICs incorporate unique system architectures and circuit
approaches that have been developed through a broad, in-depth understanding of
the telephone network. Availability of these proprietary devices, knowledge and
experience of the Company's personnel, new product development, market
recognition and product support are key factors in the protection of the
Company's proprietary position. 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 any infringement by its products or
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technology of the proprietary rights of others. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such assertions will not result in costly litigation or
require the Company to obtain a license to intellectual property rights of such
parties. There can be no assurance that any such licenses would be available on
terms acceptable to the Company, if at all. Further, litigation, regardless of
outcome, could result in substantial cost to and diversion of efforts by the
Company. Any infringement claims or litigation against the Company could
materially and adversely affect the Company's business, results of operations
and financial condition. Moreover, the laws of some foreign countries do not
protect the Company's proprietary rights in the products to the same extent as
do the laws of the United States.
EMPLOYEES
As of Feb 28, 1997, ADA had approximately 219 full-time employees,
including 127 in engineering, 44 in sales, marketing and customer support, 25 in
operations and 23 in finance and administration. 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. The
Company's President and Chief Executive Officer, Mr. Peter Savage, the Company's
Vice President, Systems Engineering, Mr. Paul Hartmann, and the Company's Vice
President, Customer Support, Mr. Donald O'Connor, have entered into severance
arrangements with the Company. No other member of the Company's senior
management is subject to an employment arrangement with the Company. The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage. The Company believes that
its employee relations are good.
RISKS AND UNCERTAINTIES
CONCENTRATION OF MAJOR CUSTOMERS; TELEPHONE COMPANY QUALIFICATION REQUIREMENTS.
The market for the Company's products currently consists of the seven RBOCs,
other local telephone companies, CAPs and long distance telephone companies. The
Company's marketing efforts to date have focused on the RBOCs which accounted
for 73% of the Company's revenue in 1996. Accordingly, at present the Company's
customer base is highly concentrated and there can be no assurance that its
customer base will become less concentrated. Further, the Company's customers
are significantly larger than the Company and may be able to exert a high degree
of influence over the Company. The loss of one or more of the Company's major
customers, the reduction of orders, or a delay in deployment of the Company's
products could materially and adversely affect the Company's business, operating
results and financial condition. Prior to selling products to a telephone
company, a vendor must first undergo a product qualification process for its
products with the telephone company. Although the qualification process for a
new product varies somewhat among these prospective customers, the Company's
experience is that the process often takes a year or more. Currently, six of the
seven RBOCs have qualified and deployed the Company's T3AS products. Any failure
on the part of any of the RBOCs or other telephone companies to maintain their
qualification of the Company's T3AS products, failure of any of the RBOCs or
other telephone companies to deploy the Company's T3AS products, or any attempt
by any of the RBOCs or other telephone companies to seek out alternative
suppliers could have a material adverse effect on the Company's business,
operating results and financial condition. BellSouth, Ameritech, Southwestern
Bell and U S West have entered into purchase contracts with the Company. Other
RBOCs, independent telephone companies, and other telephone service providers
purchase the Company's products under standard purchase orders. Since the RBOC
contracts may be terminated at the convenience of the RBOC, the Company believes
that the purchase contracts are not materially different than purchasing under
purchase orders. There can be no assurance that the Company's products will be
qualified by new customers, or that such qualification will not be significantly
delayed. Furthermore, telephone company work force reductions and staff
reassignments have in the past delayed the product qualification process, and
the Company expects such reductions and reassignments to continue in the future.
There can be no assurance that such reductions and reassignments will not have a
material adverse effect on the Company's business, operating results and
financial condition.
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HIGH DEPENDENCE ON SINGLE PRODUCT LINE. The majority of the Company's
revenue to date has been derived from the sale of T3AS products and services.
The Company expects that a majority of its revenue will continue to be derived
from T3AS products and services in the near term. However, the Company is
investing in the expansion of its product lines through the enhancement,
development and marketing of its NIU, CTS, PAAS, and OS products. Failure by the
Company to enhance either its existing T3AS products and services including CTS
and PAAS. or its NIU and OS products, and to develop new product lines and new
markets could materially and adversely affect the Company's business, operating
results and financial condition. There is no assurance that the Company will be
able to develop and market new products and technology or otherwise diversify
its source of revenue.
COMPETITION. The Company believes there are currently no competitors that
provide an integrated comprehensive solution to performance monitoring and
testing of the DS3 circuit as does the Company's T3AS system. The Company
believes the principal competitive factors in this market are conformance with
Bellcore and other industry transmission standards and specifications; product
features, including price, performance and reliability; technical support; and
the maintenance of close working relationships with customers. There can be no
assurance that the Company will compete successfully in the future with respect
to these factors and others that may arise. Although the Company believes that
there are fewer than 10 current competitors that provide partial solutions to
either performance monitoring or testing of the DS1 or DS0 circuits that make up
the DS3 circuit, this market is fiercely competitive. Such competitors and
prospective competitors include a number of companies, such as manufacturers of
DSI test and monitoring equipment, manufacturers of NIUs, manufacturers of
digital cross-connect test and performance monitoring equipment and
manufacturers of large transmission equipment. Many of these companies
manufacture products that are directly competitive with the Company's Low-Speed
Subsystems, T3AS Centralized Test Systems and Remote Module, and many of these
competitors have significantly greater technical, financial, manufacturing, and
marketing resources than the Company. In addition, the company believes that
there are an increasing number of current competitors in the OS market that
provide OS applications for testing, surveillance, performance monitoring and
traffic management of telecommunications functions. In each of the NIU, CTS and
OS markets, competition is expected to increase significantly in the future. For
instance, the NIU market is fiercely competitive with respect to price, product
features, established suppliers, and conformance with industry standards, and in
the OS market, improved technologies and tool sets have made the barriers to
entry in this market relatively small. Additionally, several of the Company's
competitors have long-established relationships with the Company's current
prospective customers. In addition, product price reductions resulting from
market share penetration initiatives or competitive pricing pressures could have
a material and adverse effect on the Company's business, operating results, and
financial condition. There can be no assurance that the Company will have the
financial resources, technical expertise or manufacturing, marketing,
distribution and support capabilities to compete successfully in the future.
MANAGEMENT OF CHANGING BUSINESS. As a result of acquisitions in 1996, the
Company obtained additional office space and hired additional personnel in both
Terre Haute, Indiana and British Columbia, Canada to support the business
operations of the new products, services and technologies acquired. The Company
faces significant management challenges related to the integration of the
operations, products and technologies acquired as well as the management of
separate geographic locations. In 1996, the Company formed two strategic
business units: the Network Systems and Sensors business unit and the Network
Management business unit. The business units are synergistic with the evolution
of the Company from a single product line to multiple product lines. The Network
Systems and Sensors business unit is built around the Company's T3AS products
and services including CTS and PAAS, as well as the Remote Module product. The
Network Management business unit focuses on OS products including TDC&E, FMS and
OS design services all acquired through acquisitions, as well as GTA and
Sectionalizer. There can be no assurance that the Company will be successful in
managing its new business unit structure. The Company is currently transitioning
portions of the OS design service business to a product-oriented business. This
transition will likely place a significant strain on the Company's management,
information systems and operations and there can be no assurance that such a
transition can be successfully managed. The acquisitions and resultant growth in
the Company's infrastructure have placed, and are expected to continue to place,
a significant strain on the Company's management, information systems and
operations. The strain experienced to date has chiefly been in hiring sufficient
numbers of qualified personnel to support the expansion of the business. The
Company is not able to forecast additional strains that may be placed on the
Company's management, information systems and operations as a result of the
acquisitions or in the future. The Company's potential inability to manage its
changing business effectively could have a material adverse effect on the
Company's business, results of operations, and financial condition.
MERGERS. Of the eight major TSPs currently involved in merger transactions,
six are customers of the Company. Several of the mergers involve companies that
purchase network systems, software and services from the Company's competitors.
Consequently, the completion of certain of these mergers may result in the loss
of business and customers for the Company. Additionally, the impact of capital
spending constraints during the merger transitions could have a material adverse
effect on the Company's business, operating results and financial condition.
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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 ATM, Frame Relay and 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 SDH optical transmission
standards will become the industry transmission standards over the coming years
for the North American and international networks, respectively. The Company's
current T3AS products do not address either the SONET or SDH transmission
standard. The Company intends to extend its current products and develop new
products to accommodate such new transmission standards, as they evolve. The
widespread adoption of SONET and/or SDH as industry transmission standards
before the Company is able to successfully develop a product which addresses
such transmission standards could adversely affect the sale and deployment of
the Company's T3AS products. Any failure by the Company to anticipate or respond
on a 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 ASICs and other components, are available
from a single source. The Company has no supply agreements and generally makes
its purchases with purchase orders. Further, certain components require an order
lead time of up to one year. Other components that currently are readily
available may become difficult to obtain in the future. Failure of the Company
to order sufficient quantities of these components in advance could prevent the
Company from increasing production in response to customer orders in excess of
amounts projected by the Company. In the past, the Company has experienced
delays in the receipt of certain of its key components, which have resulted in
delays in product deliveries. There can be no assurance that delays in key
component and part deliveries will not occur in the future. The inability to
obtain sufficient key components as required or to develop alternative sources
if and as required in the future could result in delays or reductions in product
shipments, which in turn could have a material adverse effect on the Company's
customer relationships and operating results. Additionally, the Company uses
third-party subcontractors for the manufacture of its subassemblies. This
reliance on third-party subcontractors involves several risks, including the
potential absence of adequate capacity, the unavailability of or interruption in
access to certain process technologies, and reduced control over product
quality, delivery schedules, manufacturing yields and costs. Shortages of raw
materials or production capacity constraints at the Company's subcontractors
could negatively affect the Company's ability to meet its production obligations
and could result in increased prices for affected parts. To procure adequate
supplies of certain components, the Company must make advance commitments to
purchase relatively large quantities of such components in a number of
circumstances. A large portion of the Company's purchase commitments consists of
custom parts, some of which are sole-source such as VLSI ASICs, for which there
is no alternative use or application. The inability of the Company to
incorporate such components in its products could have a material adverse effect
on the Company's business, operating results and financial condition.
PRODUCT RECALL. Producers of telecommunications 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
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experience any product recalls in the future. The cost of any subsequent product
recall and associated negative publicity could have a material adverse effect on
the Company's business, operating results and financial condition.
GOVERNMENT REGULATION. The majority of the Company's customers operate
within the telecommunications industry which is subject to regulation in the
United States and other countries. Most of the Company's customers must receive
regulatory approvals in conducting their businesses. Although the
telecommunications industry has recently experienced government deregulation,
there is no assurance this trend will continue. In fact, recent regulatory
rulings have affected the ability of the Company's customers to enter new
markets and deliver new services which could impact their ability to make
significant capital expenditures. The effect of regulatory rulings by federal
and state agencies on the Company's customers may adversely impact the Company's
business, operating results and financial condition.
PROPRIETARY TECHNOLOGY. The Company relies on a combination of technical
leadership, trade secret, copyright and trademark protection and non-disclosure
agreements to protect its proprietary rights. Although the Company has pursued
and intends to continue to pursue patent protection of inventions that it
considers important and for which such protection is available, the Company
believes its success will be largely dependent on its reputation for technology,
product innovation, affordability, marketing ability and response to customer's
needs. Currently, the Company has nine U.S. patents granted and two U.S. patent
applications allowed. One of the granted patents relates to the Company's Remote
Module product. Additionally, the Company has nine pending U.S. patent
applications and two international (Patent Cooperation Treaty) applications on
file covering various circuit and system aspects of its products. There can be
no assurance that the Company will be granted additional patents or that, if any
patents are granted, they will provide the Company's products with significant
protection or will not be challenged. As part of its confidentiality procedures,
the Company generally enters into non-disclosure agreements with its employees
and suppliers, and limits access to and distribution of its proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's technology without authorization.
Accordingly, there can be no assurance that the Company will be successful in
protecting its proprietary technology or that ADA's proprietary rights will
preclude competitors from developing products or technology equivalent or
superior to that of the Company. The telecommunications industry is
characterized by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. The Company is not aware
of infringement by its products or technology of the proprietary rights of
others. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertions will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. There can be no
assurance that any such licenses would be available on terms acceptable to the
Company, if at all. Further, litigation, regardless of outcome, could result in
substantial cost to and diversion of efforts by the Company. Any infringement
claims or litigation against the Company could materially and adversely affect
the Company's business, results of operations and financial condition. Moreover,
the laws of some foreign countries do not protect the Company's proprietary
rights in the products to the same extent as do the laws of the United States.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent, in
part, on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and the inability to attract and
retain additional key employees or the loss of one or more current key employees
could adversely affect the Company. There can be no assurance that the Company
will be successful in hiring or retaining requisite personnel.
VOLATILITY OF STOCK PRICE. The Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by public market analysts
and investors could have an immediate and significant adverse effect on the
trading price of the Company's common stock. 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,
16
<PAGE>
ITEM 2. PROPERTIES
The Company currently maintains its headquarters in a leased facility in
San Diego, California, which contains all development, engineering, assembly,
marketing and administrative functions, in 38,987 square feet of space in one
building. The lease expires in fiscal 1999. The Company also leases additional
office facilities in Terre Haute, Indiana, and Vancouver, British Columbia, both
of which house product development and customer support operations. The Company
leases 12,600 and 25,604 square feet of space in Terrre Haute and Vancouver,
respectively. The Terre Haute lease expires in September 1997, and the Vancouver
lease expires in December 1999. The Terre Haute lease includes an option to
extend the lease term one year from the September 1997 expiration date. The
Company believes that its existing facilities will be adequate to meets its
needs through 1997.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK MARKET INFORMATION
Applied Digital Access' Common Stock is listed on the NASDAQ National Market
and is traded on the over the counter market under the symbol "ADAX." The
following table set forth the high and low sales prices the Company's common
stock for the periods indicated.
<TABLE>
<CAPTION>
1996 High Low
---- ---- ---
<S> <C> <C>
First Quarter $17.00 $ 9.50
Second Quarter 19.00 9.75
Third Quarter 11.75 6.25
Fourth Quarter 8.75 4.75
<CAPTION>
1995 High Low
---- ---- ---
<S> <C> <C>
First Quarter $30.50 $ 13.00
Second Quarter 16.75 10.25
Third Quarter 17.50 10.50
Fourth Quarter 15.00 10.00
</TABLE>
There were 247 shareholders of record as of February 28, 1997.
DIVIDEND POLICY
Applied Digital Access has not declared or paid any cash dividends on it
Common Stock to date. The Company currently intends to retain all earnings, if
any, to fund the development and growth of its business and therefore does not
anticipate paying any cash dividends within the foreseeable future.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands) 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $ 7,453 $ 14,259 $ 35,597 $ 20,470 $ 24,422
Gross Profit 2,914 7,125 20,791 11,753 11,813
Operating Expenses:
Research and development 3,181 3,902 5,335 5,807 7,356
In process research and development
related to acquistions - - - - 3,286
Sales and marketing 1,916 2,406 3,363 4,234 6,312
General and administrative 1,416 1,354 2,337 2,985 3,576
----- ----- ----- ----- -----
Total operating expenses 6,513 7,662 11,035 13,026 20,530
Net income (loss) (3,621) (619) 10,620 759 (7,120)
------- ----- ------ --- -------
Net income (loss) per share $ (4.96) $ (.75) $ .88 $ .06 (.59)
-------- ------- ------- ------ ----
Net income (loss) per share, $ (.46) $ (.07) $ .88 $ .06 (.59)
supplementary (1) -------- ------- ------- ------ ----
Weighted average number of shares and
commom share equivalents (1) 730 820 12,091 12,848 12,084
Weighted average number of shares and
common share equivalents, supplementary (1) 7,914 8,693 12,091 12,848 12,804
Working Capital $ 3,082 $ 2,251 26,081 36,728 31,229
Total assets 5,389 6,878 48,919 49,936 45,972
Long-term debt 431 117 82 49 33
</TABLE>
(1) See Note 2 to the Financial Statements, a copy of which is attached
hereto as Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 14 through 17 of the Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements on pages 18 through 22 and the Notes to
Financial Statements on pages 23 through 29 of the Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors. The information under the caption
"Election of Directors," appearing in the Proxy Statement, is incorporated
herein by reference.
Identification of Executive Officers. The information under the
headings "Executive Officers," appearing in the Proxy Statement, is incorporated
herein by reference.
Compliance with Section 16(a) of the Exchange Act. Based solely upon a
review of Forms 3, 4 and 5 and amendments thereto furnished to the Registrant
and upon written representations of all individuals required to file forms
pursuant to Section 16(a), the Registrant knows of no such individual that
failed to file Forms 3, 4 and 5 on a timely basis during the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information under the headings "Executive Compensation and Other
Information," appearing in the Proxy Statement, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the headings "Principal Shareholders" and
"Common Stock Ownership of Management," appearing in the Proxy Statement, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions," appearing in
the Proxy Statement, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements of the Company, included in the
1996 Annual Report to Shareholders for the year ended December 31, 1996 are
incorporated herein by reference as required under Item 8 of this annual report
on Form 10-K:
18
<PAGE>
Report of Independent Accountants
Balance Sheets at December 31, 1995 and December 31, 1996
Statements of Operations for the years ended December 31, 1994, 1995
and 1996
Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996
Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included in Item 14
(d):
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter
of the period covered by this report.
(c) EXHIBITS
EXHIBIT PAGE
NUMBER NUMBER
------ ------
2.1(6) Asset Purchase Agreement between Applied Digital Access, --
Inc. and Applied Computing Devices, Inc. dated February
29, 1996
2.2(8) Asset Purchase Agreement between Applied Digital Access, --
Inc. and MPR Teltech, Ltd. dated July 16, 1996
3.1(1) Amended and Restated Articles of Incorporation (Exhibit 3.3). --
+3.2(1) Amended and Restated Bylaws of the Company as amended --
(Exhibit 3.4). Form of Written Consent of Holders of
Series A, Series B, Series C, Series -- 10.1(1) D and
Series E Preferred Stock to Conversion effective
immediately prior to the closing.
10.1(1) Registration Rights Agreement by and between the --
Company and certain shareholders of the Company,
dated May 22, 1992 as amended pursuant to the Amendment
to Registration Rights Agreement dated April 9, 1993.
10.2(1) Series A Preferred Stock Purchase Agreement by and --
between the Company and the purchasers identified on
Exhibit A to the Agreement, dated August 17,
1987 as amended and restated on December 24, 1987.
10.3(1) Series B Preferred Stock Purchase Agreement by and --
between the Company and the purchasers identified on
Exhibit A to the Agreement, dated January 20, 1989.
19
<PAGE>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
10.4(1) Modification Agreement and Consent by and between the --
Company and the holders of the Company's Series A
Preferred Stock, dated January 20, 1989.
10.5(1) Supplemental Series B Preferred Stock Purchase --
Agreement by and between the Company and the
Purchasers identified on Exhibit A to the Agreement, dated
January 30, 1989.
10.6(1) Stock Purchase and Capital Contribution Agreement by --
and between the Company and the purchasers identified
on Exhibit A to the Agreement, dated February 28, 1991.
10.7(1) Series D Preferred Stock Purchase Agreement by and --
between the Company and the purchasers identified on
Exhibit A to the Agreement, dated March 13, 1991.
10.8(1) Capital Contribution Agreement by and between the --
Company and the persons identified on Exhibit A to
the Agreement, dated March 13, 1991.
10.9(1) Series E Preferred Stock Purchase Agreement by and --
between the Company and the purchasers identified on
Exhibit A to the Agreement, dated May 22, 1992,
as amended pursuant to the Amendment No. One to Series
E Preferred Stock Purchase Agreement dated July 22, 1992
and the Amendment to Series E Preferred Stock
Purchase Agreement dated April 9, 1993.
10.10(1) Modification Agreement and Consent by and between the --
Company and the holders of the Company's Series A
Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock,
dated May 22, 1992.
10.11(1) Standby Loan Facility Agreement by and between --
the Company and the purchasers identified on Exhibit A
to the Agreement, dated April 9, 1993, as amended
pursuant to an Amendment to Standby Loan Facility Agreement
dated April 9, 1993. Related form of Note and form of Warrant.
10.12(1) Lease for the Company's facilities at 9855 Scranton --
Road, dated June 15, 1993.
10.13(1) Master Equipment Lease Agreement dated July 8, 1988 --
by and between the Company and Comdisco, Inc., as amended.
10.14(1) Warrant Agreement, dated July 8, 1988 by and --
between the Company and Comdisco, Inc., as amended.
10.15(1) Warrant Agreement dated August 15, 1991 by and --
between the Company and Comdisco, Inc.
10.16(1) Agreement dated July 1, 1991 by and between the --
Company and BellSouth Services Incorporated, as amended
(with certain confidential portions omitted).
10.17(1) Manufacturing Agreement dated April 30, 1993 by and --
between the Company and Comptronix Corporation.
10.18(1) Manufacturing Agreement dated November 19, 1993 --
by and between the Company and Arrow Electronics,
Inc. (with certain confidential portions omitted).
20
<PAGE>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
10.19(1) Software License Agreement dated January 16, 1992 by --
and between the Company and GCOM (with certain
confidential portions omitted).
10.20(1) Master Agreement for Operations Systems Modifications --
for the Integration of Network Elements, dated June 17,
1991 by and between the Company and Bellcore, as amended.
10.21(1) Addendum #1 to Master Agreement for Operations Systems --
Modifications for the Integration of Network
Elements, dated June 17, 1991 by and between the
Company and Bellcore dated July 10, 1991.
10.22(1) Addendum #2 to Master Agreement for Operations Systems --
Modifications for the Integration of Network
Elements, dated June 17, 1991 by and between the
Company and Bellcore dated November 19, 1993.
10.23(1) Addendum #3 to Master Agreement for Operations Systems --
Modification for the Integration of Network Elements
dated June 17, 1991 by and between the Company and
Bellcore dated December 27, 1993.
10.24(1) Sales Representative Agreement dated October 11, 1991 --
by and between the Company and Taiwan Victory Technology
Corporation (with certain confidential portions omitted).
+10.25(1) The Company's 1988 Stock Option Plan, as amended. --
+10.26(1) The Company's Restricted Stock Purchase Plan, as amended. --
+10.27(1) 1988 Stock Option Plan Form of Incentive Stock --
Option Agreement.
+10.28(1) 1988 Stock Option Plan Form of Non-Qualified Stock --
Option Agreement.
+10.29(1) 1988 Stock Option Plan Form of Stock Purchase Agreement. --
10.30(1) Stock Option Agreement dated May 22, 1991, by and --
between the Company and the Boundary Fund.
10.31(1) Stock Purchase Agreement dated September 30, --
1991, by and between the Company and the Boundary Fund.
+10.32(1) Stock Option Agreement dated May 22, 1991, by and between --
the Company and Richard E. Pospisil.
+10.33(1) Stock Purchase Agreement dated December 23, 1993, --
by and between the Company and Richard E. Pospisil.
+10.34(1) Consulting Services Agreement dated July 11, 1993 --
by and between the Company and Thomas L. Engdahl.
+10.35(1) Settlement Agreement and General Release dated --
June 11, 1993 by and between the Company and Thomas
L. Engdahl, as amended.
+10.36(1) Stock Pledge Agreement dated August 10, 1993 by --
and between the Company and Thomas L. Engdahl.
+10.37(1) Promissory Note Secured by Stock Pledge Agreement --
dated August 10, 1993 executed by Thomas L. Engdahl
in favor of the Company.
+10.38(1) Severance Agreement dated November 27, 1990 by --
and between the Company and Peter P. Savage.
21
<PAGE>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
+10.39(1) Promissory Note dated June 12, 1992 executed --
by Peter Savage in favor of the Company.
+10.40(1) Severance Agreement dated June 20, 1988 by and --
between the Company and Paul R. Hartmann.
+10.41(1) Management Team Incentive Compensation Plan. --
+10.42(1) The Company's 1994 Stock Option/Stock Issuance Plan. --
+10.43(1) 1994 Stock Option/Stock Issuance Plan Form --
of Stock Option Agreement.
+10.44(1) 1994 Stock Option/Stock Issuance Plan Form of --
Stock Issuance Agreement.
+10.45(1) 1994 Employee Stock Purchase Plan. --
+10.46(1) 1994 Stock Purchase Plan Form of Stock Purchase Agreement. --
10.47(1) Form of Employee Proprietary Information Agreement. --
+10.48(1) Form of Indemnification Agreements between the Company --
and each of its directors.
+10.49(1) Form of Indemnification Agreements between the Company --
and each of its officers.
10.50(1) Binary Software License Agreement dated March 7, --
1989 between the Company and Software Components Group,
Inc., as amended.
10.51(2) General Purchase Agreement dated April 11, 1994 --
between the Company and U.S. West Communications, Inc.
(with certain confidential portions omitted)
(Exhibit 10.1).
10.52(3) Reinstatement Agreement dated September 22, 1994 --
between the Company and BellSouth Telecommunications
Incorporated (with certain confidential
portions omitted) (Exhibit 10.2).
10.53(3) Purchase Agreement with Telecommunications Products --
and Related Services between the Company and Ameritech
Services, Inc. (with certain confidential portions
omitted) (Exhibit 10.3).
10.54(4) First Amendment to Office Lease dated September 23, --
1994 between the Company and Sorrento Tech Associates.
+10.55(4) Settlement Agreement and General Release dated --
January 17, 1995 between the Company and Charles H. Divine.
10.56(5) Purchase Agreement for Telecommunications Products --
and Related Services between Southwestern Bell
Telephone Company and Applied Digital Access,
Inc., dated September 8, 1995 (with certain
confidential portions omitted) (Exhibit 10.1).
+10.57(7) Apllied Digital Access 1994 Stock Option/Stock --
Issuance Plan, as amended.
+10.58(7) Applied Digital Access 1994 Employee Stock --
Purchase Plan, as amended
+10.59(7) Applied Digital Access 1996 Non-Qualified Option Plan --
22
<PAGE>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
10.60(9) Master Agreement between Northern Telcom, Ltd. --
and Applied Digital Access, Inc. dated July 16, 1996
10.61(9) Stock Purchase Agreement between Applied Digital --
Access, Inc. and MPR Teltech, Ltd. dated July 16, 1996.
10.62(9) License Agreement between Northern Telcom, Ltd. --
and Applied Digital Access, Inc.
10.63(9) Second Amendment to Lease between Sorrento --
Tech Associates and Applied Digital Access, Inc.
dated August 8, 1996
10.64(9) Lease Agreement between Rose Hulman Institute of --
Technology, through its authorized leaseing agent,
Ragle and Company, and Applied Digital Access, Inc.
dated September 15, 1996.
10.65(9) Agreement for Extension of Term, Amendement No. --
2 to General Purchasing Agreement between US
WEST Communications, Inc. and Applied Digital
Access, Inc. dated August 15, 1996
10.66 Sublease agreement between Applied Digital Access, --
Inc. and ENOVA Corporation dated December 9, 1996
10.67 First Amendment to Sublease between Applied --
Digital Access and ENOVA Corporation dated January 24, 1997
10.68 Agreement for Extension of Term, Amendement No. 3 to --
General Purchasing Agreement between US WEST
Communications, Inc. and Applied Digital Access,
Inc. dated January 30, 1997
10.69 Office Lease Agreement between 2725321 Canada Inc. --
and Applied Digital Access - Canada, Inc.
dated January 1, 1997.
11.1 Statement regarding computation of earnings per share.
13.1 Applied Digital Access, Inc., 1996 Annual Report to Shareholders.
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney. (See page 25).
27.1 Financial Data Schedule
+ Management contract or compensatory plan.
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-75258), as amended.
(2) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994
(File No. 0-23698).
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994
(File No. 0-23698).
(4) Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995
(File No. 0-23698).
(5) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995
(File No. 0-23698).
(6) Incorporated by reference to the Company's Current Report on
Form 8-K dated March 15, 1996 (File No. 0-23698).
(7) Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-08297), as amended
(8) Incorporated by reference to the Company's Current Report on
Form 8-K dated July 31, 1996 (File No. 0-23698).
23
<PAGE>
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996
(File No. 0-23698).
Supplemental Information
Copies of the Registrant's Proxy Statement for the Annual Meeting of
shareholders to be held May 20, 1997 and copies of the form of proxy to be used
for such Annual Meeting were furnished to the Commission prior to the time they
were distributed to the shareholders.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED DIGITAL ACCESS, INC.
Date: March 29, 1997 By: /s/ Peter P. Savage
------------------------
Peter P. Savage
President and
Chief Executive
Officer
<PAGE>
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Peter P. Savage or James L. Keefe, his or
her attorney-in-fact, with power of substitution in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Peter P. Savage President, Chief Executive March 29, 1997
- ---------------------
(Peter P. Savage) Officer and Director
(Principal Executive
Officer)
/s/ James L. Keefe Vice President, Finance and March 29, 1997
- ---------------------
(James L. Keefe) Administration, Secretary,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Kenneth E. Olson Director March 29, 1997
- ----------------------
(Kenneth E. Olson)
/s/ Christopher B. Paisley Director March 29, 1997
- ---------------------------
(Christopher B. Paisley)
/s/ Edward F. Tuck Director March 29, 1997
- -----------------------
(Edward F. Tuck)
25
<PAGE>
SUBLEASE
This Sublease is entered into by and between APPLIED DIGITAL ACCESS, a
California corporation, Sublessor, and ENOVA CORPORATION, a California
corporation, Sublessee, under that certain Lease dated June, 1993, entered into
by Sorrento Tech Associates, a California limited partnership, as Lessor, and
Sublessor under this Sublease as Lessee, as amended by that certain First
Amendment to Lease dated as of September 23, 1994, and as further amended by
that certain Second Amendment to Lease dated as of August 8, 1996. A copy of the
Lease, First Amendment to Lease and Second Amendment to Lease, collectively
hereinafter known as the Master Lease, are attached hereto as Exhibit "A."
1. INCORPORATION OF AND ASSUMPTION
OF MASTER LEASE OBLIGATIONS
Except as specifically provided in this Sublease to the contrary, this Sublease
is subject to all of the terms and conditions of the Master Lease in Exhibit
"A." Except as specifically provided in this Sublease to the contrary, Sublessee
agrees to assume and perform the obligations of Sublessor and Lessee in said
Master Lease, but only to the extent said obligations arise from or relate to
the Premises subleased pursuant to this Sublease. Sublessee shall not commit or
permit to be committed on the Premises any act or omission which shall violate
any term or condition of the Master Lease. In the event of the termination of
Sublessor's interest as Lessee under the Master Lease, for any reason, then this
Sublease shall terminate coincidentally therewith without any liability of
Sublessor to Sublessee, subject however to Lessor's agreement to grant to
Sublessee the quiet enjoyment of the Premises subleased set forth below in
Lessor's Consent.
Sublessor and Sublessee agree that Sublessee does not assume any obligations
with regard to the following sections of the Master Lease:
Lease
2.5 Rentable Area Defined
2.6 Building Rentable Area
5 Additional Charges for Expenses
6.2 Security Deposit
7 Construction [Tenant Improvements]
16.2 Tenant's Liability Insurance (Sublessee will provide evidence
of self-insurance)
16.3 Form of Policies (Sublessee will provide evidence of
self-insurance)
18.6 Assumption of Obligations
22.4 Payment of Sums Due
30.2 Financial Statements 30.10 Holding Over
First Amendment
3. Security Deposit
5. Brokers Commission
1
<PAGE>
Second Amendment
3. Acceptance of Expansion Area
6. Security Deposit
8. Broker Commissions
2. PREMISES
Sublessor leases to Sublessee and Sublessee hires from Sublessor the following
described Premises together with the appurtenances described in the Master
Lease, situated in the City of San Diego, County of San Diego, State of
California and described as:
9855 Scranton Road, Suite 100, approximately 23,381 square feet of Building 5 of
the San Diego Tech Center as shown on Exhibit "B" attached hereto and
incorporated by this reference.
3. RENTAL
Sublessee shall pay to Sublessor as rent for the Premises in advance on the
first day of each calendar month of the term of this Sublease without deduction,
offset, prior notice or demand, in lawful money of the United States, the sum of
Twenty-Seven Thousand One Hundred Twenty-One Dollars Ninety-Six Cents
($27,121.96). If the commencement date is not the first day of the month, or if
the Sublessee termination date is not the last day of the month, a prorated
monthly installment shall be paid at the then current rate for the fractional
month during which the Sublease commences and/or terminates.
In the event Sublessee continues to occupy the space after September 1, 1997,
the monthly rental rate will be $28,291.01. Sublessee shall be responsible for
their separately metered electricity.
By executing this Sublease, Sublessor hereby acknowledges receipt of $27,121.96
as the first month's rental.
4. TERM
(a) The term of this Sublease shall be for a period of six months
commencing on January 1, 1997, and ending on June 30, 1997.
(b) After June 30, 1997 Sublessee shall have the right to occupy the
Premises on a month to month basis through December 31,1997, and shall have the
right to terminate anytime during that period with thirty (30) days written
notice.
(c) In the event Sublessor is unable to deliver possession of the Premises
at the commencement of the term, Sublessor shall not be liable for any damage
caused thereby, and this Sublease shall be voidable at Sublessee's sole
discretion. If the sublease is voided by Sublessee,
2
<PAGE>
Sublessee shall not be liable for any rent due under the terms of the Sublease.
If Sublessee, with Sublessor's consent, takes possession prior to the
commencement of the term, Sublessee shall do so subject to all of the covenants
and conditions hereof except for the obligation to pay rent for the period prior
to and ending upon the commencement of the term as stated herein.
5. USE
Sublessee shall use the Premises for general office uses and for no other
purpose without the prior written consent of Sublessor, which consent shall not
be unreasonably withheld.
6. TENANT IMPROVEMENTS
Sublessee shall accept the premises in "as-is" condition, broom clean. Any
improvements must be approved by Landlord and Sublessor per Section 10 of the
Master Lease.
7. NOTICES
All notices or demands of any kind required or desired to be given by Sublessor
or Sublessee thereunder shall be in writing and shall be deemed delivered
forty-eight (48)hours after depositing the notice or demand in the United States
mail, certified or registered, postage prepaid, addressed to the Sublessor or
Sublessee respectively at the addresses set forth after their signatures at the
end of this Sublease. All rent and other payments due under the Sublease shall
be made by Sublessee to Sublessor at the same address.
Dated: 12/11/96 Dated: 12/9/96
Sublessor: Sublessee:
Applied Digital Access, Enova Corporation,
a California corporation a California corporation
By: /s/ Peter Savage By: /s/ David R. Kuzma
President Senior Vice President
9855 Scranton Road 101 Ash Street
San Diego, CA 92121 San Diego, CA 92101
LESSOR'S CONSENT
The undersigned, Lessor under the Master Lease attached as Exhibit "A," hereby
consents to the subletting of the Premises described herein on the terms and
conditions contained in this Sublease. This consent shall apply only to this
Sublease and shall not be deemed to be a consent to any other Sublease. Lessor
hereby provides to Sublessee the right to remain in the subleased
3
<PAGE>
premises under the same terms and conditions set forth in this Sublease in the
event of Sublessor's default.
Dated: 12/12/96 Lessor: Sorrento Tech Associates,
a California limited partnership
By: Barnes Canyon RPF Realty Corp.
a Connecticut corporation,
General Partner
By: /s/ Mark S. Knapp
Mark S. Knapp
Vice President
<PAGE>
FIRST AMENDMENT TO SUBLEASE
THIS FIRST AMENDMENT TO SUBLEASE ("Amendment") is made as of this 24th day
of January 1997, by and between APPLIED DIGITAL ACCESS, a California corporation
("Sublessor"), and ENOVA CORPORATION, a California corporation ("Sublessee"),
with reference to that certain Sublease being entered into by and between
Sublessor and Sublessee concurrently herewith and executed by Sublessee on
December 9, 1996 ("Sublease"). For the purposes of this Amendment, the term
"Sublease" shall mean, collectively, the Sublease and this Amendment and the
capitalized terms used herein shall have the meanings ascribed to them in the
Sublease unless otherwise indicated. Except as modified as provided herein, the
Sublease shall remain in full force and effect. To the extent that there is any
conflict between this Amendment and the Sublease, the provisions of this
Amendment shall prevail.
NOW, THEREFORE, in consideration of covenants, terms and conditions herein
set forth and for other good, valuable and sufficient consideration, receipt of
which is hereby acknowledged, the parties hereto agree as follows:
1. MASTER LANDLORD'S OBLIGATIONS. It shall be the obligation of Master
Landlord to (i) provide or cause to be provided all services and repairs to be
provided by Landlord under the terms of the Master Lease and (ii) to satisfy all
obligations and covenants of Master Landlord made in the Master Lease. Sublessee
acknowledges that Sublessor's obligation to perform services, provide utilities,
make repairs and carry insurance shall be satisfied only to the extent that the
Master Landlord under the Master Lease satisfies those same obligations;
provided, however, Sublessor, upon written notice by Sublessee, shall diligently
attempt to enforce all obligations of Master Landlord under the Master Lease.
2. LATE PAYMENT CHARGES AND INTEREST. Any payment of rent or other amount
from Sublessee to Sublessor under the Sublease which is not paid within 10 (ten)
days from the date due shall accrue interest from the date due until the date
paid at a rate equal to ten percent (10%) per year; provided, however, that if a
court of competent jurisdiction determines the above rate exceeds the highest
lawful rate of interest, then at the maximum rate permitted by law. If any
installment of rent for the subleased Premises is not paid promptly on the first
of the month, or otherwise when due, Sublessee shall pay to Sublessor a late
payment charge equal to five percent (5%) of the amount of such delinquent
payment of rent, in addition to the installment of rent then owing. This Section
3 shall not relieve Sublessee of Sublessee's obligation to pay any amount owing
hereunder at the time and in the manner provided.
3. USE -- COMPLIANCE WITH LAWS. At its own expense, Sublessee will procure,
maintain in effect and comply with all conditions of any and all permits,
licenses and other governmental and regulatory approvals required for
Sublessee's use of the Subleased Premises.
4. ASSIGNMENT AND SUBLETTING. Sublessee shall not sell, assign, encumber,
sublease or otherwise transfer by operation of law or otherwise the subleased
Premises or the Sublease without Sublessor's consent, which consent, based upon
the short term nature of this Sublease, may be withheld or conditioned by
Sublessor in its sole and arbitrary discretion. Any such sale, assignment,
encumbrance, sublease or other transfer in violation of the terns of the
Sublease shall be void and shall be of no force or effect.
5. INDEMNITY. Except to the extent caused by the negligence or willful
misconduct of the Master Landlord, the "Related Parties" (as defined in
Paragraph 22.2 of the Master Lease), and/or Sublessor, Sublessee will indemnify,
defend (by counsel reasonably acceptable to Sublessor and which may include
in-house attorneys), protect and hold Sublessor harmless from and against any
and all liabilities, claims, demands, losses, damages, costs and expenses
(including attorneys' fees) arising out of or relating to those items referred
to in Section 22.2 (a) through (g) of the Master Lease or arising out of or
related to any breach or default under the Master Lease caused by the
Sublessee's breach or default under the sub-lease.
<PAGE>
6. BROKERAGE COMMISSION. Each party warrants to the other that there are no
brokerage commissions or fees payable in connection with the Sublease except to
Colliers Iliff Thorn and Sentre Partners. Each party also agrees that payment of
the brokerage commissions will be made by the Sublessor. Each party further
agrees to indemnify and hold the other party harmless, from any cost, liability
and expense (including attorneys' fees) which the other party may incur as the
result of any claim for a fee or commission by any broker or finder claiming
through the indemnifying patty in connection with this Sublease.
7. ATTORNEYS' FEES. In the event either party shall bring any action or
proceeding for damages or for an alleged breach of any provision of the
Sublease, to recover rents or to enforce, protect or establish any right or
remedy under the Sublease, the prevailing party shall be entitled to recover
reasonable attorneys' fees and court costs as part of such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed one (1) or more copies
of this Sublease, effective as of the last date written below.
"SUBLESSOR" "SUBLESSEE"
APPLIED DIGITAL ACCESS, ENOVA CORPORATION,
a California corporation a California corporation
/S/ JAMES KEEFE /S/ DAVID R. KUZMA
James Keefe, Chief Financial Officer David R. Kuzma, Senior Vice President
ACCEPTED AND AGREED TO:
"LANDLORD"
SORRENTO TECH ASSOCIATES,
a California limited partnership
By: Barnes Canyon RPF Realty Corp.
a Connecticut corporation,
General Partner
By: /S/ MARK S. KNAPP
Mark S. Knapp
Vice Presiden
<PAGE>
----------------------------------------------
LEASE
BETWEEN:
2725321 CANADA INC.
LANDLORD
AND:
APPLIED DIGITAL ACCESS - CANADA, INC.
TENANT
----------------------------------------------
IMPERIAL SQUARE LAKE CITY
BURNABY, BRITISH COLUMBIA
----------------------------------------------
8630 - 8654 Commerce Court
Burnaby, British Columbia
<PAGE>
AGREEMENT NO. RGDCR45709
AGREEMENT FOR EXTENSION OF TERM
(AMENDMENT NO. 3)
This Agreement for Extension of Term is entered into by and between U S WEST
Business Resources, Inc., a Colorado corporation, with offices for transaction
of business located at 188 Inverness Drive West, Englewood, Colorado 80112, as
agent for U S WEST Communications, Inc. ("Customer") and Applied Digital Access,
Inc., with offices for transaction of business located at 9855 Scranton Road San
Diego, California 92121 ("Supplier").
RECITALS
Customer and Supplier entered into that certain agreement styled " General
Purchasing Agreement," dated February 15,1994, as amended by Amendment No.1
dated February 1,1996, and Amendment No. 2 dated August 17,1996 (the
"Agreement");
The term of the Agreement will automatically expire on February 16, 1997 (the
"Expiration Date"); and Customer and Supplier wish to extend the term of the
Agreement beyond the Expiration Date under the terms and conditions hereof.
AGREEMENT
In consideration of mutual promises and advantages to the parties, the parties
incorporate by reference and agree to the accuracy of the above recitals and
further agree that the Agreement shall not expire on the Expiration Date, but
shall automatically renew for an additional four (4) month period commencing on
February 17,1997, and will automatically expire on June 16, 1997. All other
terms and conditions of the Agreement remain unchanged and shall all continue in
full force and effect.
The term "Customer" as used herein may be applicable to one or more parties and
the singular shall include the plural. If there shall be more than one party
referred to as Customer herein, then their obligations shall be several, not
joint.
The parties intending to be legally bound have executed this Agreement for
Extension of Term as of the dates set forth below in multiple counterparts each
of which is deemed an original but all of which together shall constitute one
and the same instrument.
U S WEST BUSINESS RESOURCES, INC., APPLIED DIGITAL ACCESS, INC.
AS AGENT FOR U S WEST COMMUNICATIONS, INC.
By /s/ Peggy J. Berggren By /s/ James L. Keefe
- ------------------------- ----------------------
(Authorized Signature) (Authorized Signature)
Peggy J. Berggren James L. Keefe
- ----------------- ---------------
(Print or Type Name or Signatory) (Print or Type Name or Signatory)
Contract Agent Chief Financial Officer
- -------------- ----------------------
(Title) (Title)
January 30,1997 January 30,1997
- --------------- -----------------
(Execution Date) (Execution Date)
1
CONFIDENTIAL. DISCLOSURE AND DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
IMPERIAL SQUARE LAKE CITY
BURNABY, BRITISH COLUMBIA
LEASE
THIS INDENTURE made as of January 1, 1997 pursuant to the LAND TRANSFER FORM
ACT, PART 2
BETWEEN:
2725321 CANADA INC., c/o PPM Real Estate Managers (Canada) Limited,
440 - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7
(the "LANDLORD")
OF THE FIRST PART
AND:
APPLIED DIGITAL ACCESS - CANADA, INC., 9855 Scranton
Road, San Diego, California, U.S.A., 92121
(the "TENANT")
OF THE SECOND PART
ARTICLE 1
DEFINITIONS AND INTERPRETATION
DEFINITIONS
1.1 The parties agree that the following words shall have the meanings set
forth below and used in this Lease.
ADDITIONAL RENT means all amounts payable by the Tenant hereunder
excluding Basic Rent;
AGREEMENT TO LEASE means the agreement between the parties hereto
pursuant to which they have entered into this Lease;
AREA OF THE DEMISED PREMISES means as of the date hereof the number of
square feet set out in Schedule "A" hereto subject to revision in
accordance with such Schedule;
BASIC RENT means the fixed annual rental payable pursuant to paragraph
3.1 hereof;
<PAGE>
BUILDING means the building situate upon the Lands within which the
Demised Premises are located;
COMMENCEMENT DATE means the date on which the Term commences, as set
out in paragraph 2.1;
COMMON AREAS AND FACILITIES means those portions of the Development and
the facilities therein or thereon from time to time not occupied by the
Tenant or other tenants as their exclusive premises or otherwise
designated by the Landlord as being for the benefit of or for use by
the Tenant in common with others entitled to the use or benefit of the
same;
DEMISED PREMISES means those premises described in Schedule "A"
attached hereto;
DEVELOPMENT means the Lands and the Project;
GST means the Goods and Services Tax contained in Part IX of the EXCISE
TAX ACT, S.C. 1990, or any similar tax in substitution therefor or
addition thereto;
LANDS means those certain parcels or tracts of land located in the
Municipality of Burnaby, in the Province of British Columbia, and more
particularly described in Schedule "B" attached hereto;
OPERATING COSTS means an amount equivalent to the total amount (without
duplication) paid or payable whether by the Landlord or others on
behalf of the Landlord for managing, operating and maintaining the
Development including all of the component parts thereof such as are in
keeping with maintaining the standard of a first class industrial
complex including without limiting the generality of the foregoing, all
repairs and replacements required for such maintenance, other than
repairs to and replacements of the structure of the Building and other
buildings on the Project, the costs of providing electricity, water,
gas, fuel and other services and utilities (including heating and
air-conditioning) not otherwise paid by the tenants of the Project, the
costs of painting interior areas not normally rented to tenants and the
costs of painting and otherwise maintaining the outside of the Building
(including the roof thereof) and all other buildings on the Project
(other than those parts for which the Tenant is responsible), the costs
of maintaining roadways and parking areas lying in or adjacent to the
Project, snow removal, landscape maintenance, refuse removal and other
costs in connection with the maintenance of the Common Areas and
Facilities, sprinkler protection, fire, casualty, liability, rental and
other insurance costs (including self-insurance premiums not in excess
of normal insurance costs), security protection, the amount of all
salaries, wages, fringe benefits and other employment costs or payments
made paid to employees engaged in the maintenance or operation of the
Project, amounts paid to independent contractors for or in relation to
any services in connection with such maintenance or operation, the cost
of direct supervision and of management and other indirect expenses to
the extent allocable to the maintenance and operation of the Project,
the reasonable rental value of and costs associated with
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<PAGE>
(having regard to the rentals prevailing from time to time for similar
space) space utilized by the Landlord or its property manager in
connection with the management, operation or maintenance of the
Project and all other expenses paid or payable by the Landlord in
connection with the operation of the Development and all of the
component parts thereof together with a fee for the administration and
management of the Project equal to the actual cost paid by the
Landlord to a third party to administer and manage the Project (which
shall be a commercially reasonable fee, having regard to the nature of
the management services performed and the operation of the Project as
a first class industrial complex) or, if the Landlord itself manages
the Project, a fee equal to the amount the Landlord might reasonably
pay to a third party for the administration and management of the
Project, but Operating Costs shall not include interest on debt or
capital retirement of debt or any amounts directly chargeable by the
Landlord to any tenant or tenants as otherwise provided herein. For
greater certainty, Operating Costs shall not include the cost of
structural and roof repairs or replacements (other than relating to
the roof membrane, asphalt or insulation, which will be included in
Operating Costs).
If the Landlord sells 100% of a legally subdivided portion of the
Development, as of the date of sale, the Operating Costs shall be
determined on the basis of the legally subdivided portion of
Development retained by the Landlord;
PROJECT means the improvements constructed or to be constructed on the
Lands from time to time, including without limitation, the Building;
PROPORTIONATE SHARE means the fraction, the numerator of which is the
Area of the Demised Premises and the denominator of which is the
aggregate area in square feet of all rentable premises from time to
time physically existing in the Project, whether actually rented or
not, including the Demised Premises;
RENT means Basic Rent, Additional Rent and all other amounts payable
to the Landlord hereunder;
TAXES means an amount equal to all taxes, rates, duties, levies and
assessments whatsoever, whether municipal, provincial, parliamentary
or otherwise, levied, imposed or assessed against the Lands and the
Project or upon the Landlord on account thereof, or from time to time,
levied, imposed or assessed for education, schools and local
improvements and including all costs and expenses incurred by the
Landlord in good faith in contesting, resisting or appealing any such
taxes, rates, duties, levies or assessments, but excluding Tenant's
Taxes and excluding income or profits taxes upon the income of the
Landlord to the extent that such taxes are not levied in lieu of
taxes, rates, duties, levies and assessments against the Lands and
Project or upon the Landlord on account thereof;
TENANT'S TAXES means without limitation all taxes, licences, rates,
duties and assessments imposed or levied by lawful authority in
respect of the use or occupancy of the Demised Premises by the Tenant
relating to or in respect of personal property in the Demised Premises
or the Building or the Project and all other business and trade
3
<PAGE>
fixtures, machinery and equipment, cabinetwork, furniture and movable
partitions owned or installed by the Tenant at the expense of the
Tenant or being the property of the Tenant in the Demised Premises or
the Building or the Project, or relating to or in respect of
improvements to the Demised Premises built, made or installed by the
Tenant or the Landlord or at the Landlord's or Tenant's request,
whether any such taxes are payable by law by the Tenant or by the
Landlord and whether such taxes are included by lawful authority in
the taxes, licences, rates, duties and assessments imposed or levied
on or with respect to the Lands or the Project. "Tenant's Taxes" shall
also include any and all penalties or other like charges for late
payment thereof;
TERM means the term of this Lease, as set out in paragraph 2.2, plus if
any extension thereof is provided for herein and such extension right
(or rights) is exercised by the Tenant in accordance herewith, the
period of such exercised extension (or extensions).
SCHEDULES
1.2 The provisions of Schedules hereto are incorporated herein and form
part of this Lease.
GOVERNING LAW
1.3 This Lease shall be construed and governed by the laws of the province
in which the Demised Premises are located, and each of the parties hereto
severally attorns to the jurisdiction of the courts of such province. Should any
provisions of this Lease be illegal or unenforceable it should be considered
separate and several from the Lease and its remaining provisions shall remain in
force and be binding upon the parties hereto as though the illegal or
unenforceable provision had never been included.
HEADINGS
1.4 The headings in this Lease form no part of this Lease and shall be
deemed to have been inserted for convenience of reference only.
INTERPRETATION
1.5 Unless the context otherwise requires, the word "Landlord" wherever
it is used herein shall be construed to include and shall mean the Landlord, its
successors and/or assigns, the word "Tenant" shall be construed to include and
shall mean the Tenant and the executors, administrators, successors and/or
assigns of the Tenant and when there are two or more Tenants or two or more
persons bound by the Tenant's covenants herein contained their obligations
hereunder shall be joint and several, the word "Tenant" and the personal pronoun
"it" relating thereto and used therewith shall be read and construed as Tenants,
and "his", "her", "its" or "their" respectively, as the number and gender of the
party or parties referred to each require and the number of the verb agreeing
therewith, shall be construed and agree with the said word or pronoun so
substituted.
4
<PAGE>
USE OF "HEREIN", "HEREOF", ETC.
1.6 In this Lease, "herein", "hereof", "hereby", "hereunder",
"hereto", "hereinafter" and similar expressions refer to this Lease and not to
any particular paragraph, section or other portion thereof, unless there is
something in the subject matter or context inconsistent therewith. Paragraphs
referred to by number are the paragraphs so numbered in this Lease. TERMS AS
COVENANTS
1.7 All terms of this Lease and obligations of the parties hereunder
shall be deemed to be covenants of the parties hereto, whether or not so stated
in this Lease.
ARTICLE 2
DEMISE, TERM AND USE
DEMISE
2.1 In consideration of the rents, covenants, conditions and
agreements hereinafter reserved and contained on the part of the Tenant to be
paid, observed and performed the Landlord does demise and lease unto the Tenant
all and singular the Demised Premises, upon the terms and conditions herein
contained. The Tenant acknowledges that the Demised Premises are leased on an
"as is, where is" basis, and that the Landlord is not required to expend any
money or perform any work with respect to the same.
TERM
2.2 TO HAVE AND TO HOLD the Demised Premises for and during the
term (the "Term") of three years commencing on January 1, 1997 (the
"Commencement Date") and ending on December 31, 1999.
USE
2.3 The Demised Premises shall be used by the Tenant for the purpose
of administrative office, research and manufacturing of electronic equipment and
for no other use whatsoever without the prior written consent of the Landlord,
which consent may be withheld by the Landlord, acting reasonably.
USE OF COMMON AREAS AND FACILITIES, ETC.
2.4 In addition to the leasehold interest herein granted, the Tenant shall
have and the Landlord hereby grants to the Tenant its employees, agents,
customers and invitees, in common with the Landlord and all other persons
authorized by the Landlord from time to time, a licence over the Common Areas
and Facilities for the purpose of gaining access to and better using the Demised
Premises, provided however that this right shall in no way restrict the
5
<PAGE>
Landlord from maintaining or improving the Common Areas and Facilities or of
changing the location of or adding to the Building or any other building on or
constructing a new building or buildings on the Lands. Without limiting the
generality of the foregoing, but subject to the above limitations, the Tenant
shall have the following rights in common with all others from time to time
entitled thereto:
(a) the right to use the driveways situate upon the Lands hereto for
the purpose of ingress and egress from the Demised Premises; and
(b) the right to park its passenger motor vehicles and those of its
employees and customers upon the Lands subject always, however,
to any restrictions thereon which the Landlord may from time to
time impose (which the Landlord may do) including, without
limitation the designation of parking spaces for the exclusive
use of other tenants of the Project and their employees and
customers.
POSSESSION
2.5 DELETED.
EXAMINATION OF DEMISED PREMISES
2.6 The Tenant shall examine the Demised Premises and the Building before
taking possession hereunder and such taking of possession will be, in the
absence of agreement in writing to the contrary, evidence that on the
Commencement Date the Demised Premises and the Building were in good order and
satisfactory condition. No promise of the Landlord to alter, remodel or improve
the Demised Premises or the Building and no representation respecting the
condition of the Demised Premises or the Building has been made by the Landlord
other than those contained herein or made a part hereof.
OVERHOLDING
2.7 If at the expiration of the Term of this Lease the Tenant shall
hold over with the consent of the Landlord, the tenancy of the Tenant thereafter
shall, in the absence of written agreement to the contrary, be from
month-to-month only at a rental per month equal to one-tenth of the Rent payable
for the year immediately preceding such expiration, payable monthly in advance
on the first day of each month and shall be subject to all other terms and
conditions of this Lease.
6
<PAGE>
ARTICLE 3
RENT AND OTHER PAYMENTS
BASIC RENT
3.1 YIELDING AND PAYING THEREFOR yearly and every year during the said
Term set out in paragraph 2.2 (for clarity, not inclusive of extensions thereof
if any are provided for herein) as Basic Rent unto the Landlord the sum of
$307,248.00 in lawful money of Canada to be paid in advance in equal consecutive
monthly instalments of $25,604.00 on the first day of each and every month
during the Term (but not any extensions thereof) to the Landlord, but subject
however to the provisions of paragraph 5 of Schedule "F" hereto. If the Term
commences on any day other than the first or ends on any day other than the last
day of a calendar month, the Basic Rent and Additional Rent for the fractions of
a month at the commencement and at the end of the Term shall be adjusted on a
per diem basis.
PAYMENTS TO LANDLORD
3.2 All payments required to be made to the Landlord by the Tenant under
or in respect of this Lease shall be made in lawful currency of Canada, to the
agent of the Landlord, PPM Real Estate Managers (Canada) Limited at the address
set out on page 1 hereof or at such place or places or other agent as the
Landlord may designate in writing.
ADDITIONAL RENT
3.3 All amounts payable by the Tenant pursuant to paragraphs 4.3, 4.4
and 4.5 hereof shall be payable as Additional Rent. In addition, all sums paid
or expenses incurred hereunder by the Landlord, which ought to have been paid or
incurred by the Tenant, or for which the Landlord hereunder is entitled to
reimbursement from the Tenant, and any interest owing to the Landlord hereunder
may be recovered by the Landlord as Additional Rent by any and all remedies
available to it for the recovery of Rent in arrears.
PAYMENTS TO OTHERS
3.4 If the Tenant is required hereunder to make any payments other than
to the Landlord, the Tenant shall make such payments promptly and before any
interest or penalty for non-payment attaches thereto. In addition, the Tenant
shall produce to the Landlord from time to time at the request of the Landlord
evidence satisfactory to the Landlord acting reasonably of the due payment by
the Tenant of all payments required to be made by the Tenant under this Lease.
INTEREST ON OVERDUE AMOUNTS
3.5 The Tenant shall pay to the Landlord interest at the rate of six
percent (6%) per annum over the prime rate being charged by the Landlord's bank,
from time to time on all payments of rent and other sums required to be made
under the provisions of this Lease which
7
<PAGE>
have become overdue so long as such payments remain unpaid, provided that the
provisions of this paragraph shall not limit any other rights or remedies of the
Landlord.
DISPUTES
3.6 In the event of a dispute as to the amount of Operating Costs,
or the inclusion of any cost, expense or amount in Operating Costs, then such
dispute shall be referred to the Landlord's auditor, whose decision shall be
final and binding upon the parties hereto.
DEPOSIT
3.7 The Landlord hereby acknowledges receipt from the Tenant of the
sum of $73,011.09 (the "Deposit"), which shall be applied firstly toward Rent
and GST thereon for the second month of the Term, with the balance to be held by
the Landlord without interest as security for the payment of Rent and
performance of the Tenant's obligations under this Lease. If at any time the
Tenant is in default of its obligations hereunder, the Landlord may, either
before or after terminating this Lease, apply the whole or any part of the
Deposit to cure such default or to compensate the Landlord for any loss or
expense incurred by the Landlord as a result thereof, and such application of
the Deposit shall be without prejudice to the Landlord's right to pursue any
other remedy set forth in this Lease or available at law. If the whole or any
part of the Deposit is so applied by the Landlord, the Tenant will forthwith pay
to the Landlord a sufficient amount to restore the Deposit to the amount thereof
prior to such application by the Landlord. If the Tenant promptly pays all Rent
as it falls due and performs all of its obligations under this Lease, the
Landlord will repay the Deposit to the Tenant within 60 days after the
termination of this Lease. The Landlord may deliver and assign the Deposit to
any purchaser of the Landlord's interest in the Demised Premises and thereupon
the Landlord will be discharged of any further liability with respect to such
Deposit.
ARTICLE 4
MISCELLANEOUS COVENANTS OF THE TENANT
The Tenant covenants with the Landlord as follows:
PAY RENT
4.1 The Tenant shall, during the Term, pay unto the Landlord the Basic
Rent hereby reserved in the manner hereinbefore mentioned without any set-off or
deduction whatsoever save as specifically provided for herein, together with all
GST payable in respect of this Lease as and when required to do so by the
Landlord.
PAY TENANT'S TAXES
4.2 The Tenant shall pay all Tenant's Taxes on or before the due date
thereof. If the Tenant neglects or refuses to pay any Tenant's Taxes, the
Landlord may, at its option, pay
8
<PAGE>
the same and recover the amount paid by all remedies available to it for the
recovery of Rent in arrears.
PAY UTILITIES
4.3 The Tenant shall pay all rates and charges for water, gas and electric
light and/or power, heating, fuel, telephone or other utilities supplied to or
used in the Demised Premises as separately metered or separately invoiced by the
supplier thereof, and, if not so separately metered or invoiced, the Tenant's
Proportionate Share of such rates and charges; PROVIDED HOWEVER that if the
Landlord, acting reasonably, determines that an allocation of such rates or
charges on a Proportionate Share basis would not be equitable, the Landlord may
allocate such rates and charges on a reasonable basis amongst the various
tenants of the Building or of the Development, and the Tenant shall pay its
share of the same as reasonably determined by the Landlord.
PAY PROPORTIONATE SHARE OF TAXES
4.4 The Tenant shall during and in respect of the Term pay its
Proportionate Share of Taxes. The Tenant's Proportionate Share of Taxes shall be
estimated by the Landlord for such period as the Landlord may determine (not to
exceed 12 months) and the Tenant shall pay the same to the Landlord in equal
monthly instalments together with the regular monthly instalments of Basic Rent
as set out in paragraph 3.1. The Landlord shall furnish to the Tenant an
estimate of the Proportionate Share of Taxes payable by the Tenant during the
period so determined by the Landlord. At the end of such period, the Landlord
shall furnish the Tenant with a statement showing the actual amount of the
Proportionate Share of Taxes paid and payable by the Tenant and if an
overpayment has been made by the Tenant, the Landlord shall credit such amount
to the Tenant's Proportionate Share of Taxes for the ensuing period and if there
is no ensuing period such amount shall be paid to the Tenant and if an amount
remains owing to the Landlord in respect of the Tenant's Proportionate Share of
Taxes, the Tenant shall forthwith pay such amount to the Landlord.
PAY PROPORTIONATE SHARE OF OPERATING COSTS
4.5 The Tenant shall during and in respect of the Term pay its
Proportionate Share of Operating Costs as follows: the Tenant's Proportionate
Share of Operating Costs shall be estimated by the Landlord for such period as
the Landlord may determine (not to exceed 12 months) and the Tenant shall pay
the same to the Landlord in equal monthly instalments together with the regular
monthly instalments of Basic Rent as set out in paragraph 3.1. The Landlord
shall furnish to the Tenant an estimate of the Proportionate Share of Operating
Costs payable by the Tenant during the period so determined by the Landlord. At
the end of such period, the Landlord shall furnish the Tenant with a statement
showing the actual amount of the Proportionate Share of Operating Costs paid and
payable by the Tenant, and the Landlord and Tenant covenant and agree each with
the other that if an overpayment of the Tenant's Proportionate Share of
Operating Costs has been made by the Tenant, the Landlord shall credit such
amount to the Tenant's Proportionate Share of Operating Costs for the ensuing
period and if there is no ensuing period such amount shall be paid to the Tenant
and if an amount remains
9
<PAGE>
owing to the Landlord in respect of the Tenant's Proportionate Share of
Operating Costs, the Tenant shall forthwith pay such amount to the Landlord.
NO NUISANCE
4.6 The Tenant shall not at any time during the Term, use, exercise or
carry on or permit or suffer to be used, exercised or carried on, in or upon the
Demised Premises or any part thereof any noxious, noisome or offensive act,
trade, business, occupation or calling, and no act, matter or thing whatsoever
shall at any time during the Term be done in or upon the Demised Premises or any
part thereof which shall or may be or grow to the annoyance, nuisance, damage or
disturbance of the occupiers or owners of the Lands, Project or adjoining land
and properties.
COMPLY WITH LAWS, ETC.
4.7 The Tenant shall comply promptly at its expense with all laws,
ordinances, regulations, requirements and recommendations which may be
applicable to the Tenant or to the manner of use of the Demised Premises, and
shall comply with any and all federal, provincial, civic, municipal and other
authorities or association of insurance underwriters or agents and all notices
in pursuance of same and whether served upon the Landlord or the Tenant. Without
limiting the generality of the foregoing, the Tenant shall comply fully with the
provisions of Schedule "D" hereto.
COMPLY WITH RULES AND REGULATIONS
4.8 The Tenant shall observe and comply with the rules and regulations
attached hereto as Schedule "C" with such reasonable variations, modifications
and additions as shall from time to time be made by the Landlord and any other
and further reasonable rules and regulations that may be made by the Landlord
and communicated to the Tenant in writing, and the Tenant shall cause its
agents, servants or employees to observe and comply with the same. All such
rules and regulations shall be read as forming part of the terms and conditions
of this Lease as if the same were embodied herein as covenants of the Tenant,
and the Tenant's failure to keep and observe such rules and regulations shall
constitute a breach of this Lease.
GOODS, CHATTELS, ETC. NOT TO BE REMOVED
4.9 The Tenant agrees that all goods, chattels and fixtures when moved
into the Demised Premises shall not except in the normal course of business, be
removed from the Demised Premises until all Rent due or to become due during the
Term of this Lease and all utility charges are fully paid. The Tenant further
covenants and agrees that if the Tenant shall at any time be in default under
any of the terms, covenants or agreements contained herein, the Landlord shall
have a lien on all of the Tenants goods, chattels and fixtures located in the
Demised Premises, but excluding however electronic data storage equipment,
backup tapes and software media, as security against loss or damage resulting
from any such default, and such goods, chattels and fixtures shall not be
removed from the Demised Premises by the Tenant until such default is cured
unless the Landlord directs otherwise.
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USE OF DEMISED PREMISES
4.10 The Tenant shall not use the Demised Premises nor suffer or permit
the Demised Premises to be used for any other purpose than that provided for in
paragraph 2.3, nor shall the Tenant use the Demised Premises in any way which
will impair the efficient and proper operation of the sprinkler system in the
Building.
CONTINUOUS OCCUPATION
4.11 The Tenant shall commence the use of the Demised Premises referred
to in paragraph 2.3 within 30 days from the Commencement Date and shall carry on
such use continuously during the Term.
SIGNS
4.12 The Tenant shall not, without the Landlord's prior written
permission, paint, display, inscribe, place or affix any sign, picture,
advertisement, notice, lettering or direction on any part of the outside of the
Building or the Project or visible from the outside of the Building or the
Project or in any corridor, hallway, entrance or other public part of the
Building or Project; PROVIDED THAT the Landlord shall prescribe a uniform
pattern for identification signs for tenants to be placed on the outside of the
main door leading into the Demised Premises; FURTHER PROVIDED THAT at the
request of the Tenant and at the Tenant's expense, the Landlord shall cause such
a sign to be placed in position.
PEACEFUL SURRENDER
4.13 The Tenant shall, at the expiration or sooner termination of the
said Term, peaceably surrender and yield up unto the Landlord the Demised
Premises with the appurtenances, together with all fixtures or erections which
at any time during the said Term shall be made therein or thereon (other than
tenant's or trade fixtures removed pursuant to paragraph 4.15 or Alterations
which the Landlord requires to be removed pursuant to paragraph 7.2(b)) in good
and substantial repair and condition, reasonable wear and tear and damage by
fire or other insured peril excepted, and deliver to the Landlord all keys to
the Demised Premises which the Tenant has in its possession.
CONDITION AT EXPIRATION
4.14 The Tenant shall immediately before the expiration or sooner
termination of the Lease wash the floors, windows, doors, walls and woodwork of
the Demised Premises. The Tenant further covenants that the Tenant will not upon
such expiration or sooner termination leave upon the Demised Premises any
rubbish or waste material and will leave the Demised Premises in a clean and
tidy condition. Without limiting the generality of the foregoing, the Tenant
shall ensure that all trade fixtures and other items which the Tenant has the
right or obligation hereunder to remove from the Demised Premises are fully
removed, and any damaged caused by such removal is fully made good, on or before
the last day of the Term.
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REMOVAL OF FIXTURES
4.15 Subject to paragraph 4.9 hereof the Tenant may at the expiration
of the Term hereby granted, take, remove and carry away from the Demised
Premises all fixtures, fittings, shelving, counters or other articles upon the
Demised Premises in the nature of trade or tenants' fixtures, but the Tenant
shall in such removal do no damage to the Demised Premises, or shall make good
any damage which the Tenant may occasion thereto; PROVIDED THAT the Tenant shall
not remove or carry away from the Demised Premises any part of the Building or
any plumbing, heating, air-conditioning or ventilating plant or equipment or
other Building services; PROVIDED FURTHER that notwithstanding anything herein
contained the Landlord shall have the right upon the termination of this Lease
by effluxion of time or otherwise to require the Tenant to remove its
installations, alterations, additions, partitions and fixtures or anything in
the nature of leasehold improvements made or installed by the Tenant or by the
Landlord on behalf of the Tenant and to make good any damage caused to the
Demised Premises by such removal.
USE OF WASHROOMS
4.16 The Tenant shall keep and maintain the washrooms in a sanitary
condition, and shall not use the washrooms, or suffer or permit its customers,
licensees, invitees, servants, agents, or employees to use the washrooms for any
purpose other than the purpose for which they were designed.
OVERLOADING
4.17 The Tenant shall not do or suffer or permit any waste or
damage, disfigurement or injury to the Demised Premises or the fixtures and
equipment thereof or permit or suffer any overloading of any floor thereof, and
shall not place in, on or about the Demised Premises any fixtures, equipment,
machinery or materials of a weight beyond the capacity for which the Building is
designed, or to the extent that will cause damage to the Building or cause
excessive vibration. The Tenant shall repair any damage done to the Demised
Premises or the Building by reason of any excessive weight placed in the Demised
Premises or excessive vibration caused in the Demised Premises.
NUISANCE AND WASTE
4.18 The Tenant shall not cause or suffer or permit any oil or grease
or any harmful, objectionable, dangerous, poisonous or explosive matter or
substance to be discharged into the Demised Premises or the Building or the
Development or into the driveways, common areas, ditches, water courses,
culverts, drains or sewers in or adjacent thereto, and will take all reasonable
measure for insuring that any effluent discharged will not be corrosive,
poisonous or otherwise harmful, or cause obstruction, deposit or pollution
within the Demised Premises, or the Building, or the Development or the
driveways, common areas, ditches, water courses, culverts, drains, or sewers
thereof. Without limiting the generality of the foregoing, the Tenant shall
comply fully with the provisions of Schedule "D" hereto.
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ACCESS
4.19 The Tenant shall not permit any vehicles belonging to the Tenant,
its customers, invitees, licensees, agents or servants to cause obstruction on
any roads, driveways or common areas in the neighbourhood of the Development or
prevent the ingress or egress to all other tenants in the Building and the
Development and will use its best endeavours to ensure that persons doing
business with the Tenant and its servants and workers shall not permit any
vehicles to cause such obstruction as aforesaid.
USE OF YARD AREAS
4.20 The Tenant shall not place, nor suffer or permit its customers,
invitees, licensees, agents or servants to place any materials in the yard or
yards of the Project or the adjacent driveways, parking or common areas thereof
and shall cause no obstruction to vehicles operating on the said adjacent
driveways, parking or common areas.
NO AUCTION
4.21 The Tenant shall not at any time permit any sale by auction
to be held within the Demised Premises or upon the Lands or any part thereof.
ESTOPPEL CERTIFICATES
4.22 To provide within 15 calendar days of the request and at the
cost of the Landlord (such cost to be reasonable) an estoppel certificate for
the Landlord, addressed to the Landlord and any potential buyer or mortgagee,
binding upon the Tenant, in the Landlord's standard form containing such
statements as the Landlord may reasonably require with reasonable promptness
upon request by the Landlord.
LANDLORD MAY PERFORM TENANT'S COVENANTS
4.23 If the Tenant shall fail to perform or cause to be performed each
and every one of the covenants and obligations of the Tenant in this Lease
contained the Landlord shall have the right (but shall not be obligated) to
perform or cause the same to be performed and to do or cause to be done such
things as may be necessary or incidental thereto (including without limiting the
foregoing, the right to make repairs, installations, erections and expend
moneys) and all payments, expenses, charges, fees and disbursements, including
reasonable solicitors' fees and disbursements, incurred or paid by or on behalf
of the Landlord in respect thereof shall be paid by the Tenant to the Landlord
forthwith.
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ARTICLE 5
LANDLORD'S COVENANTS
The Landlord covenants with the Tenant as follows:
QUIET ENJOYMENT
5.1 The Tenant, paying the Rent hereby reserved and performing the
covenants herein on the Tenant's part contained, shall and may peaceably possess
and enjoy the Demised Premises for the Term hereby granted without any
interruption or disturbance from the Landlord or any other person or persons
lawfully claiming by, from or under the Landlord; SUBJECT ALWAYS to the terms,
covenants and conditions contained in this Lease.
TAXES
5.2 The Landlord shall pay or cause to be paid Taxes subject to
contribution by the Tenant as provided in paragraph 4.4 hereof.
MANAGEMENT, OPERATION AND MAINTENANCE
5.3 The Landlord acting reasonably shall manage, operate, maintain, repair
and replace the Project and Lands subject to the cost and expense thereof being
contributed to by the Tenant as provided in paragraph 4.5 hereof.
ARTICLE 6
INSURANCE AND INDEMNITY
TENANT INSURANCE
6.1 The Tenant shall, at its expense, provide and maintain in force
during the Term:
(a) plate glass insurance, for the benefit of the Landlord and the Tenant,
covering all plate glass in the Demised Premises, including plate glass
windows and doors, in an amount equal to the full insurable value thereof;
(b) owned automobile insurance with respect to all motor vehicles owned by
the Tenant and operated in its business;
(c) comprehensive general liability of not less than $3,000,000.00 per
occurrence and property damage insurance, including fire, tenant's legal
liability insurance, for the benefit of injury or death to one or more
persons, or property damage, occurring in the Demised Premises or the
Building or on the Development; and
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(d) insurance in respect of fire and such other perils as are from time to
time defined in the usual extended coverage endorsement covering the
Tenant's leasehold improvements, trade fixtures and furniture and equipment
to the full insurable value thereof.
DETAILS OF POLICIES
6.2 All policies of insurance required to be maintained by the Tenant
shall have the following provisions or characteristics:
(a) all insurance shall be effected with insurers and brokers and
upon terms and conditions satisfactory to the Landlord, acting
reasonably;
(b) to the extent applicable, all policies of insurance shall
contain a waiver of subrogation clause in favour of the Landlord
and shall also contain a clause requiring the insurer not to
cancel or change the insurance without first giving the Landlord
30 days' prior written notice thereof; and
(c) all policies of insurance shall be written to protect the
Landlord and its mortgagees, if any, and the Tenant,
notwithstanding any act or neglect of such parties which might
otherwise result in the forfeiture of such policies or any of
them.
PROOF OF INSURANCE
6.3 The Tenant shall provide, upon request, proof of new or continued
insurance to the Landlord at least 7 days prior to the expiration date recited
in any of the Tenant's insurance policies, such proof to be in form and content
satisfactory to the Landlord, acting reasonably. The Tenant agrees that if it
does not provide or maintain in force such insurance, the Landlord may, but
shall not be obligated to, take out the necessary insurance and pay the premium
therefor for periods of one year at a time, and the Tenant shall pay to the
Landlord as Additional Rent the amount of such premium immediately on demand. In
the event the Landlord takes out insurance as aforesaid, the Landlord shall in
no way be responsible for the sufficiency of such insurance.
PRIORITY OF CLAIMS
6.4 If both the Landlord and the Tenant have claims to be indemnified
under any such insurance, the indemnity shall be applied first to the settlement
of the claim of the Landlord and the balance, if any, to the settlement of the
claim of the Tenant.
ACTS CONFLICTING WITH INSURANCE
6.5 The Tenant shall not do or permit to be done any act or thing
which may render void or voidable or conflict with the requirements of any
policy or policies of insurance, including any regulations of fire insurance
underwriters applicable to such policy or policies, whereby the Demised Premises
or the Building or the Development are insured or which may cause any increase
in premium to be paid in respect of any such policy. If any such policy or
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policies is or are cancelled by reason of any act or omission of the Tenant, the
Landlord shall have the right at its option to terminate this Lease forthwith by
giving written notice of termination to the Tenant, and if the premium to be
paid in respect of any such policy is increased by any act or omission of the
Tenant (including the use of the Demised Premises described in paragraph 2.3),
the Tenant shall pay to the Landlord the amount by which said premium shall be
so increased.
INDEMNITY TO THE LANDLORD
6.6 The Tenant shall indemnify and save harmless the Landlord from any
and all liabilities, damages, costs, claims, suits or actions arising out of:
(a) any breach, violation or non-performance of any covenant,
condition or agreement in this Lease set forth and contained on the
part of the Tenant to be fulfilled, kept, observed or performed;
(b) any occurrence in, upon, about or at the Demised Premises, except
to the extent caused by the negligence or wilful misconduct of the
Landlord;
(c) any and all costs incurred by the Landlord in making good any
damage caused to the Development including the furnishing and
amenities thereof as a result of the negligent or wilful act or
omission of the Tenant or any person for whom the Tenant is in law
responsible; and
(d) any injury to any licensee, invitee, agent or employee of the
Tenant, including death resulting at any time therefrom, occurring in
or about the Development, except to the extent caused by the
negligence or wilful misconduct of the Landlord;
and this indemnity shall survive the expiry or sooner termination of this Lease.
FURTHER INDEMNITY
6.7 Notwithstanding anything to the contrary herein contained, if the
Project or the Building or any part thereof or any appurtenance thereto, becomes
damaged or destroyed through the negligence or wilful act or omission of the
Tenant or any person for whom the Tenant is in law responsible, then all
necessary repairs, replacements or alterations shall at the sole option of the
Landlord, be made either by the Landlord or the Tenant, but in any event, the
expense thereof shall be borne by the Tenant who shall pay the same to the
Landlord forthwith on demand and the same shall be collectible by the Landlord
from the Tenant as if Rent in arrears; the provisions of paragraph 7.1(c) shall
apply to this paragraph if the Tenant is required to carry out the repairs,
replacements or alterations pursuant to this paragraph.
LANDLORD NOT RESPONSIBLE FOR INJURIES, LOSS, DAMAGE
6.8 The Landlord shall not be responsible in any way for any injury
(including death) to any person or for any loss of or damage to any property
belonging to the Tenant or to other occupants of the Demised Premises or to
their respective customers, invitees,
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licensees, agents, servants or any other persons from time to time attending at
the Demised Premises while such person or property is in or about the Building
or Development or any roadways, parking areas, lawns, sidewalks, steps,
truckways, platforms, corridors, or stairways in connection therewith, including
without limiting the foregoing, any loss of or damage to any such property
caused by theft or breakage, or by steam, water, rain or snow which may leak
into, issue or flow from any part of the Building or Development or any adjacent
or neighbouring lands or premises or from any other place or quarter or for any
loss of or damage caused by or attributable to the condition or arrangement of
any electric or other wiring or for any damage caused by smoke or anything done
or omitted to be done by the Landlord or by any other tenant of premises in the
Building or the Project or for any other loss whatsoever with respect to the
Demised Premises and/or any business carried on therein.
NO LIABILITY FOR INDIRECT DAMAGES
6.9 Under no circumstances shall the Landlord be liable for
indirect or consequential damage or damages for personal discomfort, illness or
death by reason of the non-performance or partial performance of any covenants
of the Landlord herein contained including, without limiting the generality of
the foregoing, the heating of the Demised Premises or the operation of the
air-conditioning equipment, plumbing or other equipment in the Building or the
Demised Premises.
LANDLORD INSURANCE
6.10 The Landlord shall take out and keep in force during the Term
insurance with respect to the Development except for the leasehold improvements
in the Demised Premises. The insurance to be maintained by the Landlord shall be
in respect of periods and to amounts and on terms and conditions which from time
to time are insurable at a reasonable premium and which are normally insured by
reasonably prudent owners of properties similar to the Development, all as from
time to time determined at reasonable intervals by insurance advisors selected
by the Landlord, and whose opinion shall be conclusive. Unless and until the
insurance advisors shall state that any such perils are not customarily insured
against by owners of properties similar to the Development, the perils to be
insured against by the Landlord shall include, without limitation, public
liability, boilers and machinery and fire and extended perils and may include at
the option of the Landlord losses suffered by the Landlord in its capacity as
Landlord through business interruption.
ARTICLE 7
REPAIRS AND ALTERATIONS
REPAIRS
7.1 (a) The Tenant shall, during the Term and at the Tenant's sole cost and
expense, well and sufficiently renew, rebuild, repair, replace,
operate, maintain, paint and keep the Demised Premises, with the
appurtenances and all fixtures including plumbing, electrical, heating,
air-conditioning and other facilities and systems, in good and
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substantial repair when, where and so often as need shall be,
reasonable wear and tear and damage by fire and other risks against
which the Landlord is insured only excepted.
(b) The Landlord and its agents shall have the right at all reasonable
times during the Term, to enter the Demised Premises to examine the
condition thereof, and the Tenant shall well and sufficiently repair
and make good the Demised Premises according to notice from the
Landlord, such repairs to be made as expeditiously as possible but in
any event within the time provided for by the Landlord.
(c) The Tenant shall, when necessary and whether upon receipt of notice
from the Landlord or not, effect and pay for such repairs, replacements
or alterations as may be the responsibility of the Tenant under this
Lease by the use of contractors or other qualified workers designated
or approved by the Landlord in writing. If the Tenant fails to comply
with the Landlord's request to effect such repairs, replacements or
alterations within the time provided for by the Landlord, then the
Landlord may cause such repairs, replacements or alterations to be
undertaken. In that event, or in the event that the Landlord elects to
make the repairs, replacements or alterations referred to in paragraph
6.7, then the Landlord shall be entitled to recover from the Tenant a
fee of supervision for the carrying out of such repairs, replacements
or alterations, such fee to be an amount equal to 15% of the moneys
expended or of the cost of repairs, replacements or alterations carried
out by or under the supervision of the Landlord, which amount shall be
in addition to the cost of such work or moneys expended, and the cost
of such work or moneys expended together with the said fee shall be
collectible by the Landlord from the Tenant as if Rent in arrears. The
Rent hereunder shall in no wise abate while such repairs, replacements
or alterations are being made by reason of loss or interruption of the
business of the Tenant because of the prosecution of any such work.
(d) The Tenant shall throughout the term operate and maintain the
heating, ventilating, air-conditioning and humidity control equipment
(herein referred to as "HVAC") within or serving the Demised Premises
in such a manner as to maintain reasonable conditions of temperature,
air circulation and humidity within the Demised Premises as determined
by the Landlord. The Tenant shall comply with such reasonable rules and
regulations as the Landlord shall make from time to time respecting the
maintenance, repair and operation of the HVAC and shall, upon the
request of the Landlord and at the cost of the Tenant, obtain and
maintain throughout the term a preventative maintenance contract for
the HVAC with a maintenance company acceptable to the Landlord.
ALTERATIONS
7.2 (a) The Tenant shall not without the prior written consent of the
Landlord, which consent shall not be unreasonably withheld, make any
installations, alterations, repairs or improvements in or to the
Demised Premises (collectively "Alterations"). The Tenant shall submit
to the Landlord detailed plans and specifications of any Alterations
when applying for consent, and the Landlord reserves the right to
recover from the
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Tenant the cost of having its architects or engineers examine such
plans and specifications. The Landlord may require that any or all
work to be done, or materials to be supplied hereunder shall be done
or supplied by the Landlord's contractors and/or workers provided that
the cost of such work or materials shall be reasonable or by
contractors and/or workers engaged by the Tenant but first approved by
the Landlord. In any event, any or all work to be done or materials to
be supplied hereunder shall be at the sole cost and expense of the
Tenant and shall be done and supplied and paid for in the manner and
according to such terms and conditions, if any as the Landlord may
prescribe. Any connections of apparatus to the electrical system other
than a connection to an existing base receptacle shall be deemed to be
an Alteration within the meaning of this paragraph. No connection to
an existing base receptacle shall be made if such connection would, if
made, overload the capacity of such receptacle.
(b) Any Alterations, business and trade fixtures, machinery and
equipment, cabinet work, furniture or immovable partitions attached to
the Demised Premises in any way other than by their own weight and all
plumbing or wiring installed by or on behalf of the Tenant shall be
deemed to become the Landlord's property forthwith upon their being so
attached. Notwithstanding the foregoing, the Landlord may by written
notice to the Tenant at least 60 days prior to the expiry of the Term
elect to require the Tenant to remove all or any part of the
Alterations, business and trade fixtures, machinery and equipment,
cabinet work, furniture or immovable partitions owned or installed by
the Tenant at the expiration of this Lease, in which case such removal
shall be done at the Tenant's expense and the Tenant shall, at its
expense, repair any damage to the Demised Premises caused by such
removal. If the Tenant does not remove such property forthwith upon
written notice from the Landlord, the Landlord may remove the same,
and the cost of such removal and the cost of repairing any damage to
the Demised Premises occasioned thereby shall be paid to the Landlord
by the Tenant forthwith upon demand, and the Landlord will not be
responsible for any loss or damage to such property caused by such
removal.
(c) The Tenant shall promptly pay all charges incurred by the Tenant
for any work, materials or services that may be done, supplied or
performed in respect of the Demised Premises and shall forthwith
discharge any liens at any time filed against the Lands or any part
thereof and shall keep the Lands free from liens. If the Tenant fails
to do so, the Landlord may, but shall be under no obligation to, pay
into Court the amount required to obtain a discharge of any such lien
in the name of the Tenant and any amount so paid together with all
disbursements and costs in respect of such proceedings on a solicitor
and client basis shall be forthwith due and payable by the Tenant to
the Landlord as Additional Rent. The Tenant shall allow the Landlord
to post and keep posted on the Demised Premises any notices that the
Landlord may desire to post under the provisions of applicable
builders' or mechanics' lien or other legislation.
(d) The Tenant shall not without the prior written consent of the
Landlord put up any window drapes, blinds, awnings or other similar
things or cover the floors with anything other than loose rugs.
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NOTICE OF ACCIDENTS, DEFECTS, ETC.
7.3 The Tenant shall give the Landlord prompt written notice of any damage
to or defect in the heating and air-conditioning apparatus, water pipes, gas
pipes, telephone lines, electric light or other wires or other casualty.
CARE OF DEMISED PREMISES
7.4 (a) The Tenant shall take good care of the Demised Premises and keep
same in a clean, tidy and healthy condition.
(b) The Tenant shall at its own expense be responsible for and shall
maintain and replace from time to time as may be reasonably necessary
during the Term of this Lease all light fixtures, bulbs, tubes,
ballasts, starters and fuses in the Demised Premises. Notwithstanding
the foregoing, the Landlord shall have the right to attend to such
maintenance and replacements, but the expense thereof shall remain the
responsibility of the Tenant.
(c) The Tenant shall at its own expense replace or repair, under the
direction and to the reasonable satisfaction of the Landlord, the
glass, locks and trimmings of the doors and window in or upon the
Demised Premises which become damaged or broken.
(d) The Tenant shall not allow any ashes, refuse, garbage or other
loose or objectionable material to accumulate in or about the Demised
Premise.
(e) The Tenant shall place in containers of a type approved by the
Landlord all garbage and refuse and such containers shall be deposited
for pick-up at such times and places as are designated in writing from
time to time by the Landlord.
(f) The Tenant shall maintain in good operating condition and to the
satisfaction of the Landlord the water, sewer and gas connections and
all other mechanical systems in the Demised Premises and shall keep the
same in clean and good working order. It is understood and agreed that
in case the said fixtures and equipment or any part thereof shall be
damaged or destroyed or become incapable of performing their function,
the Tenant shall repair or replace the same to the satisfaction of the
Landlord.
(g) The Tenant shall make all repairs and replacements to the Demised
Premises made necessary by reason of burglary or attempted burglary.
(h) The Tenant shall heat the Demised Premises at all reasonable times
and shall maintain such heat at a temperature required to prevent
damage of any nature or kind whatsoever to the Demised Premises, and if
damage does occur to the Demised Premises due to the Tenant's failure
to heat, the Tenant agrees to pay for the repairs arising thereby.
(i) The Tenant shall keep well painted the painted portions of the
interior of the Demised Premises.
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LANDLORD'S RIGHT TO DO WORK
7.5 (a) The Landlord shall have the right to make additions to and/or
improvements or installations in and/or repairs to the Building and/or
the Project and/or the Common Areas and Facilities and whenever
reference is made in this Lease to the Building or the Project or the
Common Areas and Facilities, it shall mean the Building and/or Project
and/or the Common Areas and Facilities as the same may be changed,
added to or improved from time to time and in relation to any such
additions, improvements, installations, or repairs the Landlord may
cause such reasonable obstructions of and interference with the use or
enjoyment of the Project, the Building, the Demised Premises and/or
Common Areas and Facilities as may be reasonably necessary for the
purposes aforesaid and may interrupt or suspend the supply of
electricity, water or other services when necessary and until said
additions, improvements, installations or repairs shall have been
completed, there shall be no abatement in Rent nor shall the Landlord
be liable by reason thereof.
(b) The Landlord and any persons authorized by the Landlord shall have
the right to use, install, maintain and/or repair pipes, wires, ducts
or other installations in, under or through the Demised Premises for or
in connection with the supply of any services to the Demised Premises
or any other premises in the Building. Such services shall include,
without limiting the generality of the foregoing, gas, electricity,
water, sanitation, telephone, heating, air-conditioning and
ventilation. There shall be no abatement of Rent while such use,
installation, maintenance and/or repair is being carried out, by reason
of loss or interruption of the business of the Tenant because of the
prosecution of any such work.
(c) The Landlord and any persons authorized by the Landlord shall have
the right to enter upon the Demised Premises to make such decorations,
repairs, alterations, improvements or additions as it may deem
advisable and the Landlord or any persons authorized by the Landlord
shall be allowed to take all material into and upon the Demised
Premises that may be required therefor. There shall be no abatement of
Rent while such decorations, repairs, alterations, improvements or
additions are being made by reason of loss or interruption of the
business of the Tenant because of the prosecution of any such work.
(d) The Landlord shall provide reasonable advance notice prior to
exercising its rights under the preceding provisions of this paragraph
7.05 save in the case of a real or apprehended emergency, when no such
notice shall be required, and all additions, improvements, installation
or repairs performed by the Landlord under the preceding provisions of
this paragraph 7.05 shall be made as expeditiously as reasonably
possible and in a manner which interferes as little as possible with
the Tenant's permitted use of the Demised Premises.
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LANDLORD'S RIGHT TO INSPECT AND DISPLAY SIGN
7.6 During the Term hereby created any person or persons may inspect the
Demised Premises and all parts thereof at all reasonable times on producing a
written order to that effect signed by the Landlord or its agents. In addition,
the Landlord shall have the right during the last three months of the Term to
show the Demised Premises to prospective tenants during normal business hours
upon reasonable advance notice and to place upon the Demised Premises a notice
of reasonable dimensions and reasonably placed so as not to interfere with the
business of the Tenant, stating that the Demised Premises are for rent and
further provided that the Tenant will not remove such notice or permit the same
to be removed and will co-operate with the Landlord in the showing of the
Demised Premises.
LANDLORD'S REPAIRS
7.7 The Landlord covenants with the Tenant:
(a) subject to Article 9, to keep in a good and reasonable state
of repair, and consistent with the general standards of buildings of
similar age, character and comparable location in British Columbia:
(i) the Building (other than the Demised Premises and
premises of other tenants) including the foundation,
roof, exterior walls including exterior glass portions
thereof, the systems for interior climate control, the
elevators, entrances, stairways, corridors and lobbies
and washrooms and other Common Areas and Facilities
from time to time provided for use in common by the
Tenant and other tenants of the Building and the
systems provided for bringing utilities to the Demised
Premises; and
(ii) the structural members or elements of the Building; and
(b) to repair defects in construction performed or installations made
by the Landlord in the Demised Premises and damage in respect of fire
or other perils against which the Landlord is required to or has in
fact maintained insurance coverage hereunder.
ARTICLE 8
TRANSFER AND ASSIGNMENT
ASSIGNING OR SUBLETTING
8.1 The Tenant shall not assign this lease or sublet, part with or
share possession of the Demised Premises or by licence permit any other person
or corporation to occupy the Demised Premises in whole or in part and shall not
mortgage this Lease or any right hereunder or interest herein (herein a
"Transfer") without the prior written consent of the Landlord, which consent,
subject as hereinafter provided shall not be unreasonably withheld. At the time
that the Tenant requests the consent of the Landlord, the Tenant shall deliver
to the Landlord
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such information in writing as the Landlord may reasonably require respecting
the proposed assignee, subtenant, occupant or licensee (herein the "Transferee")
including without limitation:
(a) the identity of the proposed Transferee;
(b) the specific terms and conditions of such proposed assignment,
sublease or other dealing;
(c) the names and addresses of the beneficial owners of the shares
of any proposed corporate Transferee;
(d) current information on the financial affairs and business
experience of the proposed Transferee, including references; and
(e) such other information as the Landlord may reasonably require.
Within 15 days of receiving all of the information required as set out above,
the Landlord shall by written notice advise the Tenant that the Landlord
consents or does not consent to the Transfer or, alternatively, that the
Landlord has elected to exercise its right under paragraph 8.4.
NO RELEASE
8.2 In no event shall any Transfer, whether the Landlord has consented
to the same or not, release or relieve the Tenant from its obligations to
perform fully all of the terms, covenants and conditions of this Lease on its
part to be performed and in any event the Tenant shall be liable for the
Landlord's reasonable costs incurred in connection with the Tenant's request for
consent.
CHANGE OF CONTROL
8.3 If the Tenant is a non-reporting or closely held company, any change
in control of such company shall be deemed to be a Transfer for the purposes
hereof.
RIGHT OF LANDLORD TO TERMINATE
8.4 Notwithstanding anything to the contrary herein contained, upon the
Landlord receiving a request from the Tenant to consent to a Transfer, the
Landlord shall have the right to terminate this Lease with respect to the
portion of the Demised Premises which is the subject of the Transfer, such right
to be exercised by written notice within 15 days of the Landlord receiving all
of the information required pursuant to paragraph 8.1. Should the Landlord
exercise its right of termination as aforesaid, the Tenant shall have a further
period of 15 days from receipt of the Landlord's notice to withdraw its request
for consent to the Transfer, failing which this Lease shall terminate with
respect to the portion of the Demised Premises which is the subject of the
Transfer as of the date set out in the Landlord's notice of termination (which
shall be not less than 30 nor more than 60 days from the date of such
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notice), and the Tenant shall pay Rent to the date of termination for such
portion of the Demised Premises, following which this Lease shall cease with
respect to such portion and all obligations hereunder (save such as have arisen
prior to the date of termination) shall cease.
SALE BY LANDLORD
8.5 In the event of a sale or conveyance by the Landlord of the Lands on
which the Building is located or in the event of an assignment of this Lease by
the Landlord, then to the extent such purchaser or assignee assumes the
obligations of the Landlord hereunder the same shall operate to release the
Landlord from any future liability upon any of the covenants or conditions,
express or implied, herein contained on the part of the Landlord, and in such
event the Tenant agrees to look solely to the responsibility of the successor in
interest of the Landlord. If any security is given by the Tenant to secure
performance of the Tenant's covenants hereunder, the Landlord may transfer such
security, to the purchaser of the reversion and thereupon the Landlord shall be
discharged from any further liability in reference thereto.
ARTICLE 9
DAMAGE OR DESTRUCTION
DAMAGE OR DESTRUCTION WITHOUT TERMINATION
9.1 If during the Term hereby demised or any extension thereof the Demised
Premises shall be damaged or destroyed by a peril or perils in respect of which
the Landlord is insured, the Rent shall abate in proportion to that part of the
Demised Premises rendered unfit for occupancy bears to the whole of the Demises
Premises until the Demised Premises are rebuilt; and the Landlord agrees that it
will with reasonable diligence repair the Demised Premises unless the Tenant is
obligated to repair under the terms hereof or unless this Lease is terminated as
hereinafter provided; subject always to the provisions of paragraph 9.2 or 9.3.
DAMAGE OR DESTRUCTION WITH TERMINATION
9.2 If the Demised Premises or the Building of which the Demised Premises
form a part or the Project are damaged or destroyed by any cause whatsoever and
if in the opinion of the Landlord reasonably arrived at, the Demised Premises
cannot be repaired, rebuilt or made fit for the purposes of the Tenant or any
other premises in the Building or the Project cannot be repaired, rebuilt or
made fit for the purposes of other tenants, in either case within 90 days of the
damage or destruction, the Landlord may, at its option, terminate this Lease by
giving the Tenant within 30 days of such damage or destruction notice of
termination and thereupon the Basic Rent, Additional Rent and any other payments
for which the Tenant is liable under this Lease shall be apportioned and paid to
the date of such damage or destruction and the Tenant shall immediately deliver
up possession of the Demised Premises to the Landlord; PROVIDED THAT
notwithstanding the termination of this Lease as in this paragraph set forth,
the Tenant shall remain liable for any outstanding obligations of the Tenant
under this Lease as at the time of such termination.
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DAMAGE OR DESTRUCTION OF BUILDING
9.3 If the Building or part thereof shall be damaged or destroyed and
such damage or destruction, in the opinion of the Landlord, materially
interferes with the enjoyment of the Demised Premises by the Tenant, the Rent in
respect of the Demised Premises shall abate in proportion to such interference
during the period such interference shall continue.
ARTICLE 10
DEFAULT AND RE-ENTRY
RE-ENTRY
10.1 (a) It is hereby expressly agreed that if and whenever the Rent hereby
reserved, or any part thereof, shall be unpaid for seven days after the
date on which the same ought to have been paid, although no formal
demand shall have been made therefor, or in case of the breach or
non-performance of any of the covenants or agreements herein contained
on the part of the Tenant which breach or non-performance continues for
a period of 15 days after written notice from the Landlord, or if the
Demised Premises are vacated or become vacant or remain unoccupied for
five days or are not used for the purpose specified then and in any of
such cases the Landlord shall have the immediate right to re-enter and
take possession of the Demised Premises whereupon, at the Landlord's
option, the balance of the Term shall be forfeit and the Landlord may
remove all persons and property from the Demised Premises and such
property so removed may be stored wherever the Landlord chooses at the
Tenant's cost and expense.
(b) Should the Landlord elect to re-enter, as herein provided, or
should it take possession pursuant to legal proceedings or pursuant to
any notice provided for by law, it may either terminate this Lease or
it may from time to time without terminating this Lease make such
alterations and repairs as may be necessary in order to relet the
Demised Premises, and may relet the Demised Premises or any part
thereof for such term or terms (which may be for a term extending
beyond the Term of this Lease) at such rental or rentals and upon such
other terms and conditions as the Landlord in its sole discretion may
deem advisable; upon each such reletting, all rents received by the
Landlord from such reletting for the unexpired portion of the Term
shall be applied, first, to the payment of any indebtedness other than
Rent due hereunder from the Tenant to the Landlord; secondly, to the
payment of any costs and expenses of such reletting, including
brokerage fees and solicitors' fees and of costs of such alterations
and repairs; thirdly, to the payment of Basic Rent and Additional Rent
due and unpaid hereunder and the residue, if any, shall be held by the
Landlord and applied in payment of future Rent as the same may become
due and payable hereunder. If such rents received from such reletting
during any month are less than that required to be paid during that
month by the Tenant hereunder, the Tenant shall pay all such deficiency
to the Landlord. Such deficiency shall be calculated and paid monthly.
No such re-entry
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or taking possession of the Demised Premises by the Landlord shall be
construed as an election on its part to terminate this Lease unless a
written notice of such intention be given to the Tenant or left on the
Demised Premises. Notwithstanding any such reletting without
termination, the Landlord may at any time thereafter elect to
terminate this Lease for such breach. Should the Landlord at any time
terminate this Lease for any breach, in addition to any other remedies
it may have it may recover from the Tenant all damages it may incur by
reason of such breach, including the cost of re-entering the Demised
Premises, reasonable solicitors' fees and including the worth at the
time of such termination of the excess, if any, of the amount of rent
charges equivalent to Rent reserved in this Lease for the remainder of
the Term over the then reasonable rental value of the Demised Premises
for the remainder of the Term, all of which amounts shall be
immediately due and payable by the Tenant to the Landlord.
BANKRUPTCY
10.2 If the Term hereby granted shall be at any time seized or
taken in execution or in attachment by any creditor of the Tenant or if the
Tenant shall make any assignment for the benefit of creditors, or becoming
bankrupt or insolvent shall take the benefit of any Act that may be in force for
bankrupt or insolvent debtors, or if the Tenant should abandon the Demised
Premises then in any such case the said Term shall at the option of the
Landlord, immediately become forfeited and void and the then current month's
Rent and Rent for the three months next following shall immediately become due
and payable and in such case it shall be lawful for the Landlord at any time
thereafter to re-enter into or upon the Demised Premises, or any part thereof,
and the same to have again, repossess and enjoy as of its former estate anything
herein contained to the contrary notwithstanding, and neither this Lease nor any
interest therein nor any estate created hereby shall pass to or enure to the
benefit of any trustee in bankruptcy or any receiver or any assignee for the
benefit of creditors or otherwise by operation of law. For the purposes of
section 65.2(3)(a) of the BANKRUPTCY AND INSOLVENCY ACT (Canada) the Tenant
acknowledges that the six months rent referred to therein shall mean six months
Rent hereunder calculated from the date on which the repudiation of this Lease
takes effect pursuant to such Act.
WAIVER OF EXEMPTION FROM DISTRESS
10.3 In consideration of the premises and of the leasing and letting
by the Landlord to the Tenant of the Demised Premises for the Term hereby
created (and it is upon that express understanding that these presents are
entered into), notwithstanding anything contained in any Statute or in any
Statute which may hereafter be passed, none of the goods or chattels of the
Tenant at any time during the continuance of the Term hereby created on the
Demised Premises shall be exempt from levy by distress for Rent in arrears by
the Tenant as provided for in any such Statute or any amendment or amendments
thereto upon any claim being made for such exemption by the Tenant or on
distress being made by the Landlord this covenant and agreement may be pleaded
as an estoppel against the Tenant in any action brought to test the right to the
levying upon any such goods as are named as exempted in any such Statute or
amendment or amendments thereto; the Tenant waives, as the Tenant hereby does,
all and every benefit that could or might have accrued to the Tenant under and
by virtue of any such statute or any amendment or amendments thereto but for
this covenant.
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FOLLOW CHATTELS
10.4 In case of removal by the Tenant of the goods and chattels of the
Tenant from the Demised Premises, the Landlord may follow the same for 30 days
or such longer period of time as may be permitted by law.
OVERLOOKING AND CONDONING
10.5 Any condoning, excusing or overlooking by the Landlord of any
default, breach or non-observance by the Tenant at any time or times in respect
of any covenant, proviso or condition herein contained shall not operate as a
waiver of the Landlord's rights hereunder in respect of any subsequent default,
breach or non-observance nor as to defeat or affect in any way the rights of the
Landlord hereunder in respect of any subsequent default, breach or
non-observance.
ARTICLE 11
SUBORDINATION
SUBORDINATION
11.1 The Tenant covenants and agrees with the Landlord that the Tenant
shall from time to time upon the written request of the Landlord, enter into an
indenture:
(a) subordinating the Term hereby demised and the rights of the Tenant
hereunder to any mortgage, including any deed of trust and mortgage and
all indentures supplemental thereto, or any ground lease, present or
future, which includes the Demised Premises; or at the option of the
Landlord
(b) agreeing that the Term hereby demised shall be prior to any such
mortgage, including any deed of trust and mortgage and all indentures
supplemental thereto, or ground lease,
provided if the Tenant fails to execute any such indenture with reasonable
promptness upon request by the Landlord, the Tenant hereby irrevocably
authorizes and appoints the Landlord as its attorney to execute the same on the
Tenant's behalf. Notwithstanding any such postponement or subordination as
aforesaid, the Tenant agrees that its obligations under this Lease shall remain
in full force and effect notwithstanding any action at any time taken by a
mortgagee or head landlord of the Lands or any part thereof to enforce the
security of any such mortgage, including any deed of trust and mortgage and all
indentures supplemental thereto, or ground lease; PROVIDED ALWAYS however, that
any postponement or subordination given hereunder shall reserve to the Tenant
the right to continue in possession of the Demised Premises under the Terms of
this Lease so long as the Tenant shall not be in default hereunder.
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ARTICLE 12
NOTICES
NOTICES
12.1 Any notice, advice, document or writing required or contemplated
by any provision hereof shall be given in writing and if to the Landlord, either
delivered personally or transmitted by facsimile to an officer of the Landlord's
agent, PPM Real Estate Managers (Canada) Limited or mailed by prepaid mail
addressed to the Landlord care of PPM Real Estate Managers (Canada) Limited at
the following address:
PPM Real Estate Managers (Canada) Limited
440 - 1090 West Georgia Street
Vancouver, British Columbia
V6E 3V7
(facsimile number: (604) 682-5425)
with a copy to:
PPM Real Estate Managers (Canada) Limited
1200, 141 Adelaide Street West
Toronto, Ontario
M5H 3L9
(facsimile number: (416) 362-1431)
Attention: Senior Vice-President
and if to the Tenant, either delivered personally to the Tenant (or to an
officer of the Tenant, if a corporation) or mailed by prepaid mail addressed to
the Tenant at the Demised Premises, or if an address of the Tenant is shown in
the description of the Tenant above, to such address. Every such notice, advice,
document or writing shall be deemed to have been given when delivered
personally, upon the usual confirmation of transmission and receipt if sent by
facsimile, or if mailed as aforesaid, upon the fifth day after being mailed save
and except in the event of a labour dispute or other disruption affecting postal
service occurring within five days of the date of mailing in which event notice
will not be deemed to have been received until actually received. The Landlord
may from time to time by notice in writing to the Tenant designate another
address as the address to which notices are to be mailed to it, or specify with
greater particularity the address and persons to which such notices are to be
mailed and may require that copies of notices be sent to an agent designated by
it. The Tenant may, if an address of the Tenant is shown in the description of
the Tenant above, from time to time by notice in writing to the Landlord,
designate another address as the address to which notices are to be mailed to
it, or specify with greater particularity the address to which such notices are
to be mailed.
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<PAGE>
ARTICLE 13
MISCELLANEOUS PROVISIONS
UNAVOIDABLE FAILURES OR DELAYS
13.1 Notwithstanding anything to the contrary in the Lease contained, if
either party hereto shall be bona fide delayed or hindered in or prevented from
the performance of any term, covenant or act required hereunder by reason of
strikes, labour troubles inability to procure materials or services, failure of
power, restrictive governmental laws or regulations, riots, insurrection,
sabotage, rebellion, war, act of God, or other reason whether of a like nature
or not, not the fault of the party delayed in performing work or doing acts
required under the terms of this Lease, then performance of such terms,
covenants or acts shall be extended for a period equivalent to the period of
such delay. The provisions of this paragraph shall not operate to excuse the
Tenant from the prompt payment of Basic Rent, Additional Rent, or any other
amounts which it is required by the terms of this Lease to pay. This paragraph
shall not be construed to include in the reasons for any such delays, financial
impecuniosity or incapacity.
ENTIRE AGREEMENT
13.2 This Lease and the Schedules (including the rules and
regulations) attached hereto and which form part hereof set forth all the
covenants, promises, agreements, conditions and understandings, between the
Landlord and the Tenant concerning the Demised Premises and there are no
covenants, promises, agreements, conditions or understandings, either oral or
written, between them other than are herein set forth. Except as herein
otherwise provided, no subsequent alteration, amendment, change or addition to
this Lease shall be binding upon the Landlord or the Tenant unless in writing
and signed by each of them except the rules and regulations adopted and
promulgated by the Landlord and in accordance with the provisions of this Lease.
SUBDIVISION
13.3 The Tenant will at the request of the Landlord and at no expense
to the Tenant execute all consents, sign all subdivision plans and do all things
necessary to permit the subdivision of the Lands.
REGISTRATION
13.4 The Tenant shall not have the right to register this Lease
without the prior consent of the Landlord, which consent may be withheld in the
Landlord's sole discretion, and the Landlord shall not be obliged to deliver
this Lease in registrable form. Should the Landlord consent to such
registration, or should the Landlord require this Lease to be registered, then
the parties shall re-execute this Lease in registrable form and such
registration and the preparation of any plan necessary therefore shall be done
by and at the sole cost and expense of the party desiring to register this
Lease.
29
<PAGE>
NET LEASE INTENT
13.5 The Tenant acknowledges and agrees that it is intended that this
Lease shall be a completely carefree net lease for the Landlord except as
expressly herein set out and that the Landlord shall not be responsible during
the Term hereof for any costs, charges, expenses and outlays of any nature
whatsoever arising from or relating to the Demised Premises, or the contents
thereof and without limiting the generality of the foregoing, the Tenant shall
be liable for the payment of all charges, impositions and expenses of every
nature and kind relating to the Demised Premises and the contents thereof and
its Proportionate Share of all charges, impositions, and expenses of every
nature and kind relating to those parts of the Building, Project and Lands not
intended for leasing and the Tenant covenants with the Landlord accordingly.
TIME OF ESSENCE
13.6 Time shall be of the essence of this Lease.
BINDING EFFECT
13.7 This Lease and everything herein contained shall enure to the benefit
and be binding upon the heirs, executors, administrators, successors, assigns
and other legal representatives, as the case may be of each of the parties
hereto, subject to the granting of consent by the Landlord as provided in
paragraph 8.1 to any assignment or sublease.
RELOCATION OF DEMISED PREMISES
13.8 DELETED.
IN WITNESS WHEREOF the parties hereto have executed this Lease as of the day and
year first above written.
The Corporate Seal of )
2725321 CANADA INC. )
was affixed in the presence of: )
)
/s/ Mary B. Aubrey )
- ----------------------- ) C/S
Mary B. Aubrey )
Vice President )
)
/s/ Paul A. Brundage )
- ----------------------- )
Paul A. Brundage )
Vice President )
30
<PAGE>
The Corporate Seal of APPLIED )
DIGITAL ACCESS - CANADA, INC. )
was affixed in the presence of: )
)
/s/ James L. Keefe )
- ----------------------- ) C/S
James L. Keefe, Chief Financial Officer )
)
)
)
- ----------------------- )
Authorized Signatory )
31
<PAGE>
SCHEDULE "A"
Referred to in the attached Lease made as of January 1, 1997 between 2725321
CANADA INC. as Landlord, and APPLIED DIGITAL ACCESS - CANADA, INC. as Tenant.
The Demised Premises are that part of the Building situate on the Lands legally
described in Schedule "B" hereto. The Demised Premises are shown outlined in
heavy black line on the sketch plan attached to this Schedule "A".
The Demised Premises shall exclude the outside face of all perimeter walls of
the Demised Premises but shall include windows and doors in the perimeter wall.
In calculating the Area of the Demised Premises or of the Building the
calculation shall be computed by measuring from the exterior surface of the
Building, in the case of exterior walls, and to the centre of partitions that
separate the Demised Premises from adjoining rentable areas or Common Areas and
Facilities. There shall be no deduction for vestibules or other recesses inside
the building line or for columns, ducts, projection or other structural elements
necessary to the Building. The Demised Premises includes all installations,
fixtures, furnishings and amenities located within the Demised Premises.
The Area of the Demised Premises is hereby estimated to be 25,604 square feet,
provided the Landlord may have the Area of the Demised Premises measured by its
architect or engineer, and if the same is different from the figure set forth
above then Basic Rent and the Tenant's Proportionate Share shall be adjusted
accordingly, such adjustment to be retroactive to the Commencement Date.
<PAGE>
[ATTACH SKETCH PLAN OF BUILDING]
[NOTE: OUTLINE THE DEMISED PREMISES IN HEAVY BLACK LINE]
<PAGE>
SCHEDULE "B"
Referred to in the attached Lease made as of January 1, 1997 between 2725321
CANADA INC. as Landlord, and APPLIED DIGITAL ACCESS - CANADA, INC. as Tenant.
LEGAL DESCRIPTION OF LANDS
Lots A and B
District Lot 10
Group 1, New Westminster District
Plan 72477
MUNICIPAL ADDRESS OF DEMISED PREMISES
8630 - 8654 Commerce Court
Burnaby, B.C.
V5A 4N6
<PAGE>
SCHEDULE "C"
Referred to in the attached Lease made as of January 1, 1997 between 2725321
CANADA INC. as Landlord, and APPLIED DIGITAL ACCESS - CANADA, INC. as Tenant.
RULES AND REGULATIONS
1. Tenants shall not burn any trash or garbage in or about the Demised
Premises or anywhere within the confines of the Lands.
2. Tenants shall not keep or display any merchandise on or otherwise obstruct
any part of the Lands except as is specifically permitted in this Lease.
3. Floors shall not be overloaded.
4. All loading and unloading of merchandise, supplies, materials, garbage,
refuse and other chattels shall be made only through or by means of such
doorways as the Landlord shall designate in writing from time to time.
5. Tenants shall in connection with their advertising in relation to the
business carried on in the Demised Premises use and promote the name
IMPERIAL SQUARE LAKE CITY or such other name as the Landlord may from time
to time designate and in using such name in any advertisement, sign,
poster, printing or other writing tenants will print, write or designate
the same in a manner to be determined from time to time by the Landlord and
in no other manner. Tenant shall not use such name in regard to any
business other than their business upon the Demised Premises. Tenants agree
that they will not carry on or permit to be carried on any business in the
Demised Premises under a name or style other than their own name or call or
permit the Demised Premises or any business carried on therein to be called
any name other than their own name, without the prior written consent of
the Landlord.
6. Tenants shall, upon written notice from the Landlord, within five days
furnish the Landlord with the current Provincial License Number of any
vehicle owned or used by employees of tenants.
7. Tenants shall not bring upon their premises any equipment, motor or any
other thing which may damage the Building or the Project.
8. No merchandise, supplies, materials, garbage, refuse or other chattels
shall be allowed to remain on any common area, and must at all time be
contained within the Demised Premises.
9. The Tenant shall not use or occupy in any manner whatsoever the area of
recess, if any, between the lease line of the Demised Premises and the
store front of the Demised Premises, and the Landlord reserves the entire
control over such area.
<PAGE>
10. Wherever any window area is not used for the purpose of entrances, offices
or show areas, the Tenant must construct at its own expense, enclosures or
decorative screens as specified and approved by the Landlord, so as to
protect the windows in that area from damage.
11. If any additional locks or bolts of any kind shall be placed upon any of
the doors or windows of the Demised Premises, or if any changes shall be
made in existing locks or mechanisms thereof, the Tenant shall provide the
Landlord with a duplicate key or keys so as to allow the Landlord access to
the Demised Premises as and when required. The Tenant shall at the end of
the Term or renewal term as the case may be, return to the Landlord all
keys to the Demises Premises and to all other areas of the Building or the
Project which may have been supplied to the Tenant.
12. No animals or motor vehicles shall be brought into the Demised Premises or
the Building.
13. DELETED.
14. The doors and windows or other apertures that reflect or admit light or air
into the passageways or into any portion of the Demised Premises or the
Building shall not be covered or obstructed by the Tenant in any manner
whatsoever.
15. Windows shall not be left open so as to admit rain or snow.
16. It shall be the responsibility of the Tenant to prevent any person from
throwing objects out of windows or into the ducts or stairwells of the
Demised Premises or the Building, and the Tenant shall pay for any cost,
damage or injury resulting from any such act or acts.
17. Keys or other devices which are made available to the Tenant for the
purpose of providing access to the exterior doors of the Building shall not
be duplicated and shall be returned to the Landlord immediately upon
termination of this Lease.
The foregoing rules and regulations as from time to time amended, are not
necessarily of uniform application but may be waived in whole or in part in
respect of other tenants without affecting their enforceability with respect to
the Tenant or the Demised Premises. For the benefit and welfare of all or any
tenants of premises upon the Lands as it may exist from time to time, the
Landlord shall have the right to issue further Rules and Regulations and such
further Rules and Regulations shall thereupon be binding on all tenants.
2
<PAGE>
SCHEDULE "D"
Referred to in the attached Lease made as of January 1, 1997 between 2725321
CANADA INC. as Landlord, and APPLIED DIGITAL ACCESS - CANADA, INC. as Tenant.
HAZARDOUS SUBSTANCES
DEFINITIONS
1. In this Schedule "D":
"HAZARDOUS SUBSTANCE" means:
(a) any radioactive material;
(b) any explosive;
(c) any substance that, if added to any water, would degrade or
alter or form part of a process of degradation or alteration of
the quality of that water to the extent that it is detrimental to
its use by man or by any animal, fish or plant;
(d) any solid, liquid, gas or odour or combination of any of them
that, if emitted into the air, would create or contribute to the
creation of a condition of the air that:
(i) endangers the health, safety or welfare of persons
or the health or animal life;
(ii) interferes with normal enjoyment of life or property; or
(iii) causes damage to plant life or to property;
(e) any toxic substance;
(f) any substance declared to be hazardous or toxic under any
Law, Regulation or Order (as defined below) now or hereafter
enacted or promulgated by any governmental authority having
jurisdiction over the Landlord, the Tenant, the Demised Premises
or the Development of which the Demised Premises form a part; and
(g) any other substance which is or may become hazardous,
dangerous or toxic to persons or property;
"LAWS" means all applicable federal, provincial, state, municipal, or local
laws, by-laws, statutes, or ordinances, including, without limitation, the
following: the Canadian ENVIRONMENTAL PROTECTION ACT, the British Columbia WASTE
MANAGEMENT ACT and other applicable laws relating to the environment,
occupational safety, product liability and transportation;
<PAGE>
"REGULATIONS" mean all rules, regulations or the like promulgated under or
pursuant to any Laws; and
"ORDERS" mean all applicable orders, decisions, or the like rendered by any
ministry, department or administrative or regulatory agency.
TENANT'S COVENANT AS TO USE
2. Without limiting the generality of the covenants of the Tenant in the
Lease contained, the Tenant covenants and agrees that the Tenant will not bring
upon the Demised Premises or any part thereof any Hazardous Substances and if at
any time, notwithstanding the foregoing covenant of the Tenant, there shall be
any Hazardous Substances upon the Demised Premises or a part thereof whether or
not brought thereupon by the Tenant, the Tenant shall, at its own expense:
(a) immediately give the Landlord notice specifying the nature and
location of the Hazardous Substances and thereafter give the Landlord
from time to time written notice of the extent and nature of the
Tenant's compliance with the following provisions of this paragraph;
(b) promptly remove the Hazardous Substances from the Demised Premises
in a manner which conforms with all Laws, Regulations and Orders
governing the movement of the same and the reasonable requirements of
the Landlord in connection with the movement; and
(c) if requested by the Landlord, obtain at the Tenant's cost and
expense from an independent consultant designated or approved by the
Landlord verifying the complete and proper removal thereof from the
Demised Premises or, if such is not the case, reporting as to the
extent and nature of any failure to comply with the foregoing
provisions of this paragraph.
COMPLIANCE WITH LAWS
3. Without limiting the generality of the covenants of the Tenant in the
Lease contained, the Tenant shall, at its own cost and expense, comply with all
Laws, Regulations and Orders from time to time in force relating to the
Landlord, the Tenant, the business of the Tenant, the Demised Premises or the
Development relating to Hazardous Substances and the protection of the
environment and shall immediately give written notice to the Landlord of the
occurrence of any event in the Demised Premises or on the Development which is
in breach of any such Laws, Regulations or Orders or a contravention thereof
and, if the Tenant shall, either alone or with others, cause the occurrence of
such event, the Tenant shall, at its own expense:
2
<PAGE>
(a) immediately give the Landlord notice of the occurrence and the
contravention and thereafter give the Landlord from time to time
written notice of the extent and nature of the Tenant's compliance with
the following provisions of this paragraph;
(b) promptly remedy the contravention in a manner which conforms with
all Laws, Regulations and Orders governing the movement of the same;
and
(c) if requested by the Landlord, obtain at the Tenant's cost and
expense from an independent consultant designated or approved by the
Landlord verifying the complete and proper remedying of the
contravention or, if such is not the case, reporting as to the extent
and nature of any failure to comply with the foregoing provisions of
this paragraph.
The Tenant shall, at its own expense, remedy any damage to the Demised Premises
and the Development caused by such event within the Demised Premises or by the
performance of the Tenant's obligations under this paragraph as a result of such
occurrence. If the Tenant fails to do so, the Landlord may at its option remedy
the damage, and may recover its cost and expenses of so doing from the Tenant as
Additional Rent under the Lease.
If any governmental authority having jurisdiction shall require the clean-up of
any Hazardous Substances held, released, spilled, abandoned or placed upon the
Demised Premises or the Development or released into the environment by the
Tenant in the course of the Tenant's business or as a result of the Tenant's use
or occupancy of the Demised Premises, then the Tenant shall, at its own expense,
prepare all necessary studies, plans and proposals and submit the same for
approval, provide all bonds and other security required by governmental
authorities having jurisdiction and carry out the work required and shall keep
the Landlord fully informed and provide to the Landlord full information with
respect to the proposed plans and comply with the Landlord's reasonable
requirements with respect to such plans. The Tenant agrees that if the Landlord
determines, in its own discretion, that the Landlord, its property or its
reputation is placed in any jeopardy by the requirement for any such work, the
Landlord may itself undertake such work or any part thereof at the cost and
expense of the Tenant.
ENQUIRIES BY LANDLORD
4. The Tenant hereby authorizes the Landlord to make enquiries from time
to time of any government or governmental agency with respect to the Tenant's
compliance with any and all laws and regulations pertaining to the Tenant, the
Tenant's business and the Demised Premises including without limitation Laws,
Regulations and Orders pertaining to Hazardous Substances and the protection of
the environment; and the Tenant covenants and agrees that the Tenant will from
time to time provide to the Landlord such written authorization as the Landlord
may reasonably require in order to facilitate the obtaining of such information.
Without limiting the generality of the foregoing, the Landlord shall have the
right, during the last 3 months of the Term, to cause an independent
environmental audit or assessment of the Demised Premises or the Building to be
performed, and if such audit or assessment indicates
3
<PAGE>
the presence of Hazardous Substances the Tenant shall bear the cost of such
audit or assessment, together with the cost of the clean-up, removal,
containment, treatment, detoxification or neutralization, as the case may be, of
such Hazardous Substances.
EVENT OF DEFAULT
5. The presence of any Hazardous Substances in the Demised Premises
without the prior written approval of the Landlord shall be considered to be an
event of default for the purposes of the Lease.
OWNERSHIP OF HAZARDOUS SUBSTANCES
6. If the Tenant shall bring or create upon the Development or the
Demised Premises any Hazardous Substance or if the conduct of the Tenant's
business shall cause thereto be any Hazardous Substance upon the Development or
the Demised Premises then, notwithstanding any rule of law to the contrary, such
Hazardous Substance shall be and remain the sole and exclusive property of the
Tenant and shall not become the property of Landlord notwithstanding the degree
of affixation of the Hazardous Substance or the goods containing the Hazardous
Substance to the Demised Premises or the Development and notwithstanding the
expiry or earlier termination of this Lease.
SURVIVAL OF COVENANTS
7. The obligations of the Tenant hereunder relating to Hazardous
Substances shall survive the expiry or earlier termination of this Lease save
only that, to the extent that the performance of those obligations requires
access to or entry upon the Demised Premises or the Development or any part
thereof, the Tenant shall have such entry and access only at such times and upon
such terms and conditions as the Landlord may from time to time specify; and the
Landlord may, at the Tenant's cost and expense, itself or by its agents,
servants, employees, contractors and subcontractors, undertake the performance
of any necessary work in order to complete such obligations of the Tenant; but
having commenced such work, the Landlord shall have no obligation to the Tenant
to complete such work.
4
<PAGE>
SCHEDULE "E"
Referred to in the attached Lease made as of January 1, 1997 between 2725321
CANADA INC. as Landlord, and APPLIED DIGITAL ACCESS - CANADA, INC. as Tenant.
INDEMNITY AGREEMENT
THIS AGREEMENT made as of January 1, 1997,
BETWEEN:
APPLIED DIGITAL ACCESS, INC., 9855 Scranton Road, San Diego,
----------------------------
California, U.S.A. 92121
(hereinafter called the "Covenantor")
AND:
2725321 CANADA INC., c/o PPM Real Estate Managers (Canada) Limited,
-------------------
1090 West Georgia Street, Vancouver, B.C. V6E 3V7.
(hereinafter called the "Landlord")
In consideration of the Landlord entering into the lease (the "Lease") made as
of January 1, 1997 between the Landlord and APPLIED DIGITAL ACCESS - CANADA,
INC. (the "Tenant") and of other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged by the Covenantor, the
Covenantor hereby represents and warrants to the Landlord that it is financially
interested in the affairs of the Tenant and covenants and agrees with the
Landlord as follows:
1. The Covenantor is financially interested in the affairs of the Tenant,
and the granting of this Indemnity Agreement is in the best interests of the
Covenantor.
2. The Covenantor shall indemnify and save harmless the Landlord in
respect of any default by the Tenant in the carrying out of each and every one
of the Tenant's covenants and agreements in the Lease set out.
3. If any default is made by the Tenant under the Lease the Covenantor
shall on demand of the Landlord forthwith remedy such default.
4. The Covenantor shall indemnify and save harmless the Landlord with
respect to all losses, costs, expenses, claims, liabilities and damages that may
be suffered or incurred by the Landlord by reason of or relating to, directly or
indirectly, any default by the Tenant under the Lease.
<PAGE>
5. This indemnity is absolute and unconditional.
6. The Landlord shall not be bound or required to proceed against the
Tenant or any other obliged person or to have recourse to or exhaust any
security from time to time held by it for the performance of the covenants or
agreements of the Tenant in the Lease contained or to pursue any other remedy
whatsoever which may be available to the Landlord before proceeding against the
Covenantor.
7. The obligations of the Covenantor under this Agreement shall extend
to the Term of the Lease and any overholding by the Tenant and to any renewal or
extension of the Term of the Lease, whether such renewal or extension is entered
into by the Tenant or by an assignee of the Tenant.
8. No proceeding under this Agreement and no recovery made as a result
thereof will be a bar or a defence to any further proceeding under this
Agreement.
9. The Covenantor waives the right to receive notice of any default
by the Tenant under the Lease.
10. The obligations of the Covenantor under this Agreement shall in no way
be released, discharged, reduced or otherwise affected by:
(a) modifications, releases or discharges granted to the Tenant in
respect of its obligations to keep, observe or perform its covenants
and agreements under the Lease;
(b) any agreement or other dealing between the Landlord and the Tenant
having the effect of amending or altering the Lease or the obligations
of the Tenant thereunder;
(c) any neglect, delay or forbearance of the Landlord in demanding,
requiring or enforcing the keeping, observance or performance by the
Tenant of any of its covenants or agreements under the Lease or by the
Covenantor of any of its obligations under this Agreement;
(d) granting any extension of time, waivers, or indulgences;
(e) any assignment of the Lease or subletting by the Tenant or any
trustee in bankruptcy, receiver or other successor or any consent of
the Landlord to any assignment or subletting;
(f) bankruptcy, insolvency or dissolution of the Tenant or the
Covenantor;
(g) any other compromising, modifying or releasing of the Tenant's
obligations under the Lease through the operation of any statute or
law;
2
<PAGE>
(h) any event or occurrence which would have the effect at law of
terminating or rendering unenforceable any covenants or agreements of
the Tenant in the Lease contained or of the Covenantor hereunder;
(i) any failure by the Landlord to give notice to the Covenantor of
any default by the Tenant under the Lease;
(j) any re-entry by the Landlord onto the premises demised under, or
termination of, the Lease;
(k) any change in the constitution of the Tenant, if a partnership; or
(l) any other matter, thing, act or omission of the Landlord
whatsoever.
11. Without limiting the generality of the foregoing, the Covenantor
shall be bound by the terms and provisions of the Lease in the same manner as
though the Covenantor were the tenant named in the Lease.
12. Except in the case of a surrender accepted by the Landlord, if the
lease is terminated, or if the Lease is disclaimed pursuant to any statute, or
if the Lease is repudiated by the Tenant pursuant to the provisions of the
BANKRUPTCY AND INSOLVENCY ACT (Canada), then and in any of such cases at the
option of the Landlord to be exercised at any time within 6 months thereafter
the Covenantor shall execute and deliver a new lease of the premises demised
under the Lease between the Landlord as landlord and the Covenantor as tenant
for a term equal in duration to the residue of the Term of the Lease remaining
unexpired immediately prior to the effective date of such termination,
disclaimer or repudiation. Such new lease shall contain the same landlord's and
tenant's obligations respectively and the same covenants, obligations and
agreements, terms and conditions in all respects (including the proviso for
re-entry) as are contained in the Lease. If the Covenantor fails to execute and
deliver a new lease as aforesaid, the Covenantor shall be deemed to have
executed and delivered the same.
13. The benefit of the Covenantor's covenants herein may, from time to
time, be assigned, collaterally, conditionally or otherwise, to any other entity
to whom the Landlord assigns the benefits of the Lease and such other assignee
shall be entitled to enforce the provisions hereof against the Covenantor as
though such assignee were the original contracting party hereto with the
Covenantor.
14. This Agreement shall extend to and be binding upon the Covenantor,
its heirs, executors, administrators, successors and assigns and shall enure to
the benefit of and may be enforced by the Landlord, its successors and assigns
and any mortgagee, chargee, or other encumbrancer of all or any part of the
premises demised under the Lease.
15. This Agreement shall be construed in accordance with the laws of the
Province of British Columbia.
3
<PAGE>
IN WITNESS WHEREOF this Agreement has been executed by the Covenantor as of the
day and year first above written.
The Corporate Seal of APPLIED )
DIGITAL ACCESS, INC. )
was hereunto affixed in the presence of: )
)
) C/S
- --------------------------------------- )
)
)
- --------------------------------------- )
)
4
<PAGE>
SCHEDULE "F"
Referred to in the attached Lease made as of January 1, 1997 between 2725321
CANADA INC. as Landlord, and APPLIED DIGITAL ACCESS - CANADA, INC. as Tenant.
SPECIAL PROVISIONS
1. EXTENSION OF TERM - Provided the Tenant has not been in default in the
performance of its obligations pursuant to the Lease, and provided the Tenant is
Applied Digital Access - Canada, Inc. and is itself in possession of the whole
of the Demised Premises or has sublet the Demised Premises, or a portion
thereof, in accordance with the Lease, the Tenant will have the right to extend
the Term, upon giving the Landlord notice of its intention to do so no earlier
than March 31, 1999 and no later than June 30, 1999, for a further period of two
years (the "Extended Term") upon the same terms and conditions as are set out in
the Lease, except that:
(a) there will be no further right to extend the Term following
the expiration of the Extended Term;
(b) any requirement on the Landlord's part to do any Landlord's Work or
pay to the Tenant any construction allowance, inducement, loan or other
amount in connection with the Lease or improvements in the Demised
Premises, and any right of first refusal, will not apply during the
Extended Term; and
(c) the annual Basic Rent shall be mutually agreed upon between the
Landlord and the Tenant based upon the current market Basic Rent for
comparably sized and improved premises in similar buildings in the
area, as designated by the Landlord as at October 1, 1999, provided
that the annual Basic Rent for the Extended Term shall not be less than
the annual Basic Rent payable by the Tenant for the last 12 months of
the initial Term, and provided further that if the parties are unable
to agree to such annual Basic Rent by no later than 30 days prior to
the expiry of the initial Term, then the annual Basic Rent shall be
determined by arbitration in accordance with the COMMERCIAL ARBITRATION
ACT of British Columbia as then in force and applying the criteria set
out above. If the annual Basic Rent has not been determined by the
commencement of the Extended Term, the Tenant shall pay Basic Rent at
the rate applicable to overholding as set out in the Lease, and within
10 days after the Basic Rent for the Extended Term is determined, the
parties shall retroactively adjust the Basic Rent owing from the
commencement of the Extended Term.
If the Tenant fails to exercise this option to extend the Term in accordance
with the foregoing, or if the foregoing conditions are not satisfied, this
option to extend shall be null and void.
2. AVAILABLE SPACE - The Landlord shall undertake to use reasonable efforts to
keep the Tenant informed on the availability of any space available for lease
direct from the Landlord in the Building. Notwithstanding the foregoing, the
failure by the Landlord to so inform the Tenant shall not give rise to any
liability whatsoever to the Tenant on the part of the Landlord.
<PAGE>
3. ACCESS - the Tenant shall have access to the Demised Premises 24 hours per
day each and every day of the year throughout the Term, except for unforeseen
Building emergencies, and subject to the Landlord's security procedures. The
Tenant shall have the right to have heating, ventilating, air-conditioning,
hydro and elevator service as it may require outside of normal business hours,
upon reasonable request and any reasonable cost(s) related thereto shall be the
Tenant's responsibility.
4. PARKING - So long as the Tenant is Applied Digital Access - Canada, Inc. and
is itself in occupation of the whole of the Demised Premises or has sublet the
Demised Premises, or a portion thereof, in accordance with the Lease, and
provided the Tenant has not been in default in the performance of its
obligations pursuant to the Lease, the Landlord will make available to the
Tenant for its use 51 reserved parking spaces identified by the Tenant's name in
a location to be designated by the Landlord from time to time at no cost to the
Tenant throughout the Term or any extension thereof.
5. FREE BASIC RENT - Provided the Tenant is in possession of the Demised
Premises, has executed the Lease and is not in default thereunder, the Tenant
shall not be required to pay Basic Rent for the first month of the Term,
provided the Tenant shall pay all Additional Rent provided for in the Lease
throughout such period.
2
<PAGE>
I N D E X
ARTICLE DESCRIPTION PAGE
- ------- ----------- ----
ARTICLE 1 DEFINITIONS AND INTERPRETATION
1.1 Definitions............................................1
1.2 Schedules..............................................4
1.3 Governing Law..........................................4
1.4 Headings...............................................4
1.5 Interpretation.........................................4
1.6 Use of "herein", "hereof", etc.........................5
1.7 Terms as Covenants.....................................5
ARTICLE 2 DEMISE, TERM AND USE
2.1 Demise.................................................5
2.2 Term...................................................5
2.3 Use....................................................5
2.4 Use of common areas and facilities, etc................6
2.5 Possession.............................................6
2.6 Examination of Demised Premises........................6
2.7 Overholding............................................6
ARTICLE 3 RENT AND OTHER PAYMENTS
3.1 Basic Rent.............................................7
3.2 Payments to Landlord...................................7
3.3 Additional Rent........................................7
3.4 Payments to Others.....................................7
3.5 Interest on Overdue Amounts............................8
3.6 Disputes...............................................8
3.7 Deposit................................................8
ARTICLE 4 MISCELLANEOUS COVENANTS OF THE TENANT
4.1 Pay Rent...............................................8
4.2 Pay Tenant's Taxes.....................................9
4.3 Pay Utilities..........................................9
4.4 Pay Proportionate Share of Taxes.......................9
4.5 Pay Proportionate Share of Operating Costs.............9
4.6 No Nuisance...........................................10
4.7 Comply with Laws, etc.................................10
4.8 Comply with Rules and Regulations.....................10
4.9 Goods, Chattels, etc. Not to be removed...............11
4.10 Use of Demised Premises...............................11
4.11 Continuous Occupation.................................11
4.12 Signs.................................................11
4.13 Peaceful Surrender....................................11
4.14 Condition at Expiration...............................12
4.15 Removal of Fixtures...................................12
4.16 Use of Washrooms......................................12
4.17 Overloading...........................................12
4.18 Nuisance and Waste....................................13
<PAGE>
ARTICLE DESCRIPTION PAGE
- ------- ----------- ----
4.19 Access................................................13
4.20 Use of Yard Areas.....................................13
4.21 No Auction............................................13
4.22 Estoppel Certificates.................................13
4.23 Landlord May Perform Tenant's Covenants...............14
ARTICLE 5 LANDLORD'S COVENANTS
5.1 Quiet Enjoyment.......................................14
5.2 Taxes.................................................14
5.3 Management, Operation and Maintenance.................14
ARTICLE 6 INSURANCE AND INDEMNITY
6.1 Tenant Insurance......................................15
6.2 Details of Policies...................................15
6.3 Proof of Insurance....................................16
6.4 Priority of Claims....................................16
6.5 Acts Conflicting with Insurance.......................16
6.6 Indemnity to the Landlord.............................16
6.7 Further Indemnity.....................................17
6.8 Landlord not Responsible for Injuries, Loss, Damage...17
6.9 No Liability for Indirect Damages.....................17
6.10 Landlord Insurance....................................18
ARTICLE 7 REPAIRS AND ALTERATIONS
7.1 Repairs...............................................18
7.2 Alterations...........................................19
7.3 Notice of Accidents, Defects, etc.....................20
7.4 Care of Demised Premises..............................20
7.5 Landlord's Right to do Work...........................21
7.6 Landlord's Right to Inspect and Display Sign..........22
7.7 Landlord's Repairs....................................23
ARTICLE 8 TRANSFER AND ASSIGNMENT
8.1 Assigning or Subletting...............................23
8.2 No Release............................................24
8.3 Change of Control.....................................24
8.4 Right of Landlord to Terminate........................24
8.5 Sale by Landlord......................................25
ARTICLE 9 DAMAGE OR DESTRUCTION
9.1 Damage or Destruction Without Termination.............25
9.2 Damage or Destruction with Termination................25
9.3 Damage or Destruction of Building.....................26
<PAGE>
ARTICLE DESCRIPTION PAGE
- ------- ----------- ----
ARTICLE 10 DEFAULT AND RE-ENTRY
10.1 Re-entry 26
10.2 Bankruptcy............................................27
10.3 Waiver of Exemption from Distress.....................27
10.4 Follow Chattels.......................................28
10.5 Overlooking and Condoning.............................28
ARTICLE 11 SUBORDINATION
11.1 Subordination.........................................28
ARTICLE 12 NOTICES
12.1 Notices .............................................29
ARTICLE 13 MISCELLANEOUS PROVISIONS
13.1 Unavoidable Failures or Delays........................30
13.2 Entire Agreement......................................30
13.3 Subdivision...........................................30
13.4 Registration..........................................31
13.5 Net Lease Intent......................................31
13.6 Time of Essence.......................................31
13.7 Binding Effect........................................31
13.8 Relocation of Demised Premises........................32
Schedule "A" Demised Premises
Schedule "B" Legal and Municipal Descriptions
Schedule "C" Rules and Regulations
Schedule "D" Hazardous Substances
Schedule "E" Indemnity Agreement
Schedule "F" Special Provisions
<PAGE>
EXHIBIT 11.1
APPLIED DIGITAL ACCESS, INC.
----------------------------
STATEMENT REGARDING COMPUTATION OF
NET INCOME (LOSS) PER SHARE
(Amounts in thousands, expect per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss)........................... $10,620 $759 ($7,120)
======= ==== =======
Reconciliation of weighted average
number of shares outstanding to amount
used in net income (loss) per share computation:
Weighted average number of
common share outstanding.................... 10,542 11,806 12,084
Weighted average number of options and
warrants outstanding........................ 1,549 1,042 --
----- ----- -----
Weighted average number of common shares
and common share equivalents outstanding.... 12,091 12,848 12,084
====== ====== ======
Net income (loss) per share................. $0.88 $0.06 ($0.59)
===== ===== ======
</TABLE>
- --------------------------------
Computational Notes:
See Note 2 to Financial Statements
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for the historical information contained herein, the matters
discussed in this Annual Report may contain forward-looking statements which
involve risk and uncertainties. Factors that may affect the Company's results of
operations are discussed in detail in "Risks and Uncertainties" below, including
but not limited to customer delays in reengineering programs, decreased capital
expenditures by several of the Company's customers, the impact of
reorganizations, restructurings and reductions-in-force at several of the
Company's RBOC customers; deregulation of the telecommunications industry; and
the highly competitive market surrounding the Company's CTS and NIU products.
The Company believes that deregulation and the resulting increased number of
competitors providing telecommunications services could result in an expansion
of the Company's customer base and increased competition with regard to service
levels and costs, ultimately causing an increased demand for the Company's
products. However, additional delays in the deployment of the Company's products
and continued uncertainty surrounding the telecommunications industry may have a
material adverse impact on the Company's business, operating results and
financial condition. As a result of the uncertainties faced by the Company's
customers, the Company continues to have limited visibility with regard to
future customer orders and the timing of such orders. Customers have been
placing orders quarterly and the Company has been operating in a book and ship
mode. With a small customer base and fluctuating order size, this trend has
resulted in quarter-to-quarter revenue fluctuations that are likely to continue
for the foreseeable future. While the outlook contained in any forward-looking
statements represents management's current judgment on the future direction of
the business, the risks and uncertainties discussed herein could cause actual
results to differ materially from any future performance suggested herein. The
Company undertakes no obligation to revise or update these forward-looking
statements to reflect events or circumstances arising after the date hereof.
OVERVIEW
In October 1996, the U.S. Patent and Trademark Office granted the
Company a patent for technology used in the Company's Remote Module product, a
unique DS1 Network Interface Unit ("NIU"). The Remote Module, when used with the
Company's T3AS Performance Monitoring and Test System, and Sectionalizer
Operations Systems ("OS") software, enables service providers to determine
whether circuit troubles originated in their network or the customers'.
On July 16, 1996, the Company acquired certain assets of MPR Teltech
Ltd., ("MPR Teltech") a subsidiary of BC TELECOM, Inc. The assets acquired were
part of MPR Teltech's operating unit commonly known as the Special Services
Networks division ("SSN"). The Company and its Canadian subsidiary, Applied
Digital Access - Canada, Inc. ("ADA-Canada"), acquired the assets for $4.2
million in cash and 150,000 shares of the Company's common stock. The total
purchase valuation was $5.3 million. The Company also incurred $.2 million in
related acquisition costs. SSN was an operations systems software development
group with expertise in development of network management systems for public
carriers. SSN developed operations systems ("OS") software primarily for
Northern Telecom Limited ("Nortel"). SSN became part of ADA-Canada which
provides development services related to network performance management OS
software products for the Company and its customers, including Nortel. The
Company incurred a $2.1 million one-time charge in the third quarter of 1996 for
purchased research and development related to the asset acquisition. In
connection with the acquisition, the Company also licensed certain technology
from Nortel for Network Performance Management applications.
On February 29, 1996, the Company acquired certain assets of Applied
Computing Devices, Inc. ("ACD"), a company that developed and marketed OS
software used primarily by independent telephone companies to manage certain
functions in their networks. The customer set and products of ACD complemented
those of ADA, and ADA has continued to market and enhance these products. The
Company acquired the assets for $1.7 million in cash and incurred approximately
$.2 million in related costs. The assets were acquired at an auction held in
Federal Bankruptcy Court, Southern District of Indiana. After filing for
bankruptcy in September 1995, ACD did not generate significant revenue. The
Company recorded a one-time charge of approximately $1.2 million associated with
purchased research and development in the first quarter of 1996 as a result of
the acquisition.
1
<PAGE>
In February 1996, the settlement of a class action lawsuit filed against
the Company and two of its officers in March 1995 was finalized and received
court approval. The litigation was settled for $1.5 million, of which the
Company was obligated to pay approximately $.4 million with the remainder paid
by the Company's directors' and officers' liability insurance carrier. The
costs associated with the suit were accrued in 1995.
Taking the developments discussed above and the elements discussed
elsewhere, both individually and in the aggregate, there can be no assurance
that the Company will maintain current revenue or operating results levels or
that revenue or operating results will increase.
2
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as
a percent of revenue, for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue................................ 100% 100% 100%
Cost of revenue........................ 52% 43% 42%
--- --- ----
Gross profit........................... 48% 57% 58%
Operating Expenses:
Research and development............... 30% 28% 15%
Purchased in-process
research and
development related to 13% - -
acquisitions.....
Sales and marketing.................... 26% 21% 9%
General and administrative............. 5% 14% 7%
--- --- ---
Total operating expenses............... 84% 63% 31%
---- ---- ----
Operating income (loss)................ (36)% (6)% 27%
Other income (expense), net............ 7% 10% 4%
--- ---- ---
Income (loss) before (29)% 4% 31%
income taxes...........................
Provision for income taxes............. - - (1)%
--- --- -----
Net income (loss)...................... (29)% 4% 30%
===== ===== ===
</TABLE>
1996 COMPARED WITH 1995
Revenue totaled $24,422,000 in 1996, a 19% increase from $20,470,000
in 1995. The increase is primarily the result of revenue generated from network
management OS software design services and products acquired through
acquisitions during 1996. Revenue from the Company's T3AS products and services
totaled $18,144,000 in 1996, an 11% decrease from $20,470,000 in 1995. The
decrease was the result of lower T3AS sales compared to last year due to
decreased capital expenditures by several of the Company's customers, the highly
competitive market for the Company's CTS and NIU products, and the impact of
regulatory actions on the Company's customers. Revenue from OS services and
products totaled $6,278,000 in 1996. The Company did not have any OS product
revenue in 1995. In 1996, US WEST, NYNEX, and Northern Telecom accounted for
31%, 23%, and 15% of the Company's revenue, respectively. In 1995, U S WEST,
Ameritech, NYNEX and Bell South accounted for 45%, 19%, 18% and 13% of the
Company's revenue, respectively. The Company expects that revenue from sales of
the T3AS product family and recently acquired OS products and services will
account for a majority of the Company's revenue for the foreseeable future.
Gross profit totaled $11,813,000 in 1996, a slight increase from
$11,753,000 in 1995. Gross profit as a percent of revenue was 48% in 1996
compared to 57% in 1995. The decrease in gross profit as a percent of revenue
resulted primarily from a product mix weighted toward lower margin T3AS products
and services and lower-margin revenue from OS software design services. The
majority of the Company's Canadian subsidiary's operations supported OS software
design services. Since the cost of design services revenue includes both direct
and indirect costs of supplying the services, the majority of the Canadian
subsidiary's operating costs are included in cost of revenue. There can be no
assurance that the Company will be able to maintain current gross profit or
gross profit as a percent of revenue levels. Factors which may materially and
adversely affect the Company's gross profit in the future include its level of
revenue, competitive pricing pressures in the telecommunication network
management
3
<PAGE>
market, new product introductions by the Company or its competitors, potential
inventory obsolescence and scrap, possible recalls, production or quality
problems, timing of development expenditures, changes in material costs,
disruptions in sources of supply, regulatory changes, seasonal patterns of
bookings, capital spending, and changes in general economic conditions.
Research and development expenses totaled $7,356,000 in 1996, a 27%
increase from $5,807,000 in 1995. The increase was primarily due to the addition
of research and development personnel as a result of the ACD asset acquisition,
increases in depreciation expense, and increases in non-recurring engineering
(NRE) expenses due to timing of planned development projects during 1996
compared to 1995. Research and development personnel expenses increased 26%
compared to 1995, mostly related to the ACD asset acquisition. The Company
believes that
its future success depends on its ability to maintain its technological
leadership through enhancement of its existing products and development of
innovative new products and services that meet customer needs. Therefore, the
Company intends to continue to make significant investments in research and
product development in association with planned development projects.
In 1996, the Company recorded one-time charges for purchased research
and development costs related to the ACD asset acquisition and the SSN asset
acquisition of $1,186,000 and $2,100,000, respectively.
Sales and marketing expenses totaled $6,312,000 in 1996, a 49% increase
from $4,234,000 in 1995. The majority of the increase resulted from the addition
of technical customer support personnel, the addition of customer support and
marketing personnel related to the ACD asset acquisition, and increased
promotional expenses. The Company expects that sales and marketing expenses will
continue to increase in absolute dollars as the Company continues to hire
additional sales, marketing and technical support personnel to support planned
product introductions in both the network systems and network management
business areas.
General and administrative expenses totaled $3,576,000 in 1996, a 20%
increase from $2,985,000 in 1995. The majority of the increase is the net result
of increased expenses for the amortization of goodwill and intangibles related
to the SSN asset acquisition and increased personnel expenses related to this
year's acquisitions offset by a decrease in legal expenses compared to 1995 as a
result of greater legal expense in 1995 related to the suit settlement. The
Company expects that general and administrative expenses will increase in
absolute dollars as the Company invests in the expansion of its internal
networking capabilities related to the ACD and SSN asset acquisitions and the
expected need for additional support personnel.
Interest income totaled $1,673,000 in 1996, a 17% decrease from
$2,023,000 in 1995. The decrease is the result of a decrease in cash investments
during 1996 compared to 1995.
In 1996, the Company provided for income taxes related to the operations
of the Company's Canadian subsidiary, based on an effective Canadian tax rate of
46%. The Company did not provide for U.S. income taxes in 1996 or 1995 due to
net losses for income tax purposes. At December 31, 1996, the Company had
federal income tax- loss carry-forwards of approximately $12,987,000 and
California state income tax-loss carry-forwards of approximately $5,835,000. The
Company's use of approximately $1,166,000 of its federal tax-loss
carry-forwards, and $408,000 of its federal and $105,000 of its California tax
credit carryforwards are significantly limited as a result of ownership changes
associated with equity financings in January 1989 and March 1991. Management is
not able to estimate levels of tax deductions which will be generated as a
result of these transactions in future periods. See Note 11 of Notes to
Financial Statements.
As a result of the factors discussed above, the Company incurred a net
loss of $7,120,000, or $.59 per share in 1996 compared to net income of
$759,000, or $.06 per share in 1995. Excluding $3,286,000 in one-time charges
for purchased research and development costs associated with the ACD and SSN
asset acquisitions, the Company incurred a net loss of $3,834,000, or
$.32 per share in 1996.
4
<PAGE>
1995 COMPARED WITH 1994
Revenue totaled $20,470,000 in 1995 a 42% decrease from $35,597,000 in
1994. The decrease is attributable to decreased sales of the Company's T3AS
products. In 1995, US WEST, Ameritech, NYNEX and Bell South accounted for 45%,
19%, 18% and 13% of the Company's revenue, respectively. In 1994, U S WEST,
Ameritech, NYNEX and Bell South accounted for 36%, 32%, 16% and 14% of the
Company's revenue, respectively. The majority of the Company's revenue in 1995
and 1994 was derived from the sale of T3AS products.
Factors which may have contributed to the decrease in sales of the
Company's products during 1995 include one major customer delaying its
reengineering program; decreased capital spending at two of the Company's other
customers; seasonal capital spending freezes at one of the Company's customers;
reorganizations, restructuring and reductions in force at several of the
Company's RBOC customers; the negotiations with labor unions establishing new
union contracts at six of the seven RBOC's during 1995; the uncertainties
surrounding the telecommunications deregulation bill; and the delay in receiving
the FCC's informal assessment on the Company's Remote Module product.
Gross profit totaled $11,753,000 in 1995, a 43% decrease from
$20,791,000 in 1994. The decrease in gross profit was due primarily to decreased
sales of the Company's T3AS products. As a percent of revenue, gross profit was
57% in 1995 compared to 58% in 1994.
Research and development expenses totaled $5,807,000 in 1995, a 9%
increase from $5,335,000 in 1994. Research and development personnel related
expenses increased 19% in 1995 compared to 1994. The increases were primarily
the result of the addition of research and development personnel, partially
offset by decreases in non-recurring engineering expenses caused by timing of
planned development projects compared to 1994.
Sales and marketing expenses totaled $4,234,000 in 1995, a 26% increase
from $3,363,000 in 1994. The increase in 1995 was primarily the result of
increases in technical support, marketing, and sales personnel, increased travel
expenses and increased promotional activity offset by lower commission
expenses owing to decreased revenue levels.
General and administrative expenses totaled $2,985,000 in 1995, a 28%
increase from $2,337,000 in 1994. The increase was primarily the result of a
non-recurring charge for the settlement of a class action law suit filed against
the Company in March 1995, and increased consulting expenses related to the
Company's recruiting efforts for additional personnel. The increases were
partially offset by decreases in travel and professional services expense.
Interest income totaled $2,023,000 in 1995, a 67% increase from
$1,212,000 in 1994. The increase was due primarily to an increase in investment
income from the investment of cash proceeds from the Company's initial public
offering of common stock completed in April 1994, as well as the investment of
cash provided from operations.
The Company did not provide for income tax expenses in 1995 due to a net
loss for income tax purposes. In 1994, the Company's effective tax rate was 3%.
The Company's low effective tax rate for 1994 was a result of the utilization of
operating loss carryforwards and tax credits and the tax benefit resulting from
the recognition of certain deferred tax assets which had previously been
reserved for in recognition of concerns over the Company's ability to realize
these assets under the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 allows the Company
to utilize available tax-loss carry-forwards as a direct reduction of its income
tax expense. During 1994, the Company's income taxes payable were reduced as a
result of tax deductions generated from certain stock option transactions which
are not reflected in the statement of operations. Under generally accepted
accounting principles, such amounts are recorded as additional paid-in capital.
As a result of the factors discussed above, 1995 net income totaled
$759,000, or $.06 per share, a 93% decrease from net income of $10,620,000, or
$.88 per share in 1994.
QUARTERLY RESULTS
5
<PAGE>
The Company has experienced significant fluctuations in bookings,
revenue and operating results from quarter to quarter due to a combination of
factors and expects such fluctuations to continue in future periods. Factors
that may cause the Company's bookings, revenue and operating results to vary
significantly from quarter to quarter include, among others: dependence on a
single product lines in the Network Systems and Network Management business
units; dependence on a small group of major customers; the timing of significant
orders; the timing of shipments; competition and pricing in the
telecommunication network management market; new product introductions by the
Company or its competitors; possible recalls; production or quality problems;
timing of development expenditures; further expansion of marketing and service
operations; changes in material costs; disruptions in sources of supply;
regulatory changes; seasonal patterns of bookings, capital spending and payment
by customers; and changes in general economic conditions. Because of the
relatively fixed nature of most of the Company's costs, including personnel and
facilities costs, any unanticipated shortfall in revenue in any fiscal quarter
would have a proportionately greater impact on the Company's operating income in
that quarter and may result in
fluctuations in the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments totaled $21,461,000 at December 31, 1996 and
$31,847,000 at December 31, 1995. The 1996 decrease in cash and investments
compared to 1995 is primarily due to cash payments related to the SSN and ACD
asset acquisitions,
and 1996 operating losses.
Net working capital totaled $31,229,000 at December 31, 1996 and
$36,728,000 at December 31, 1995. The 1996 decrease in working capital compared
to 1995 was primarily the result of cash payments related to the SSN and ACD
asset acquisitions.
The Company's 1996 operating activities used $2,265,000 in cash
primarily as a result of net operating losses. In 1995, operating activities
used $4,384,000 in cash due to decreased net income compared to 1994 and
increases in accounts receivable and inventory compared to 1994.
In 1996, cash used for the ACD and SSN asset acquisitions and related
acquisition costs totaled $1,900,000 and $4,456,000, respectively. The majority
of tangible assets acquired from ACD and SSN consisted of computer equipment.
Cash used for capital expenditures totaled approximately $1,709,000 in 1996 and
$1,948,000 in 1995. Most of the capital equipment additions were for the
purchase of computer and lab equipment to support the Company's expanded
research and development efforts. The Company did not acquire any capital
equipment through capital lease arrangements in 1996 or 1995. The Company
expects that the level of capital expenditures will increase in 1997 as a result
of planned facility moves in Vancouver, British Columbia, Canada, and planned
development projects.
Assuming no material changes in the Company's current operating plans,
the Company believes that cash generated from operations and the total of its
cash and investments, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. Significant
additional capital resources, however, may be required to fund acquisitions of
complementary businesses, products or technologies. Alternatively, the Company
may need to issue additional shares of its capital stock or incur indebtedness
in connection with any such acquisitions. At present, the Company does not have
any agreements or commitments with respect to any such acquisition.
The Company believes the impact of inflation on its business activities
has not been significant to date.
6
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands)
YEARS ENDED DECEMBER 31, 1996 1995
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,504 $ 1,673
Investments 19,957 25,079
Accounts receivable, less allowance for
doubtful accounts of $50 6,798 5,358
Inventory, net 7,363 6,572
Deferred income taxes 130 750
Prepaid expenses and other current assets 1,089 1,296
-------- -------
Total current assets 36,841 40,728
Investment - non-current --- 5,095
Property and equipment, net 4,936 3,361
Intangible assets, net 2,823 ---
Deferred income taxes 1,372 752
Total assets -------- -------
$ 45,972 $49,936
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,120 $ 1,820
Accrued expenses 1,491 843
Accrued warranty 1,398 1,305
Current portion of obligations under capital leases 16 32
Deferred revenue 587 ---
-------- -------
Total current liabilities 5,612 4,000
Obligation under capital leases, net of
current portion 33 49
-------- -------
Total liabilities 5,645 4,049
-------- -------
Commitments and contingency
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, 11.899,216 and
12,255,334 shares issued and outstanding
at December 31, 1995 and
1996, respectively 50,631 49,000
Additional paid-in capital 2,492 2,492
Unrealized gain on investments 25 147
Deferred compensation (50) (101)
Accumulated deficit (12,771) (5,651)
-------- -------
Total shareholders' equity 40,327 45,887
-------- -------
Total liabilities and shareholders' equity $ 45,972 $ 49,936
======== ========
</TABLE>
The accompanying notes are an integral part of the financial
statements
7
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per-share date)
YEARS ENDED DECEMBER 31, 1996 1995 1994
<S> <C> <C> <C>
Revenue $ 24,422 $ 20,470 $ 35,597
Cost of revenue 12,609 8,717 14,806
-------- ---------- --------
Gross profit 11,813 11,753 20,791
-------- ---------- --------
Operating expenses:
Research and development 7,356 5,807 5,335
In-process research and
development related to
acquisitions 3,286 --- ---
Sales and marketing 6,312 4,234 3,363
General and administrative 3,576 2,985 2,337
-------- ---------- --------
Total operating expenses 20,530 13,026 11,035
-------- ---------- --------
Operating income (loss) (8,717) (1,273) 9,756
Interest income 1,673 2,023 1,212
Other income (expenses), net 47 9 (32)
-------- ---------- --------
Income (loss) before
income taxes (6,997) 759 10,936
Provision for income taxes 123 --- 316
-------- ---------- --------
Net income (loss) $ (7,120) $ 759 $ 10,620
-------- ---------- --------
Net income (loss) per share $ ( .59) $ .06 $ .88
======== ========== ========
Shares used in per-share
computations 12,084 12,848 12,091
======== ========== ========
</TABLE>
The accompanying notes are an integral part of the financial
statements
8
<PAGE>
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
CONVERTIBLE PREFERRED STOCK
SERIES A SERIES B SERIES C SERIES D SERIES E COMMON STOCK
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 1,000 $ 5,000 $ 768 $ 7,773 $ 4,664 $ 88
Issuance of 2,590,000 shares of common stock
initial public offering, net of costs -- -- -- -- -- 28,357
Conversion of preferred stock into 7,872,199
shares of common stock upon completion of
intial public offering (1,000) (5,000) (768) (7,773) (4,664) 19,205
Excercise of stock options and warrants for
592,026 shares of common stock -- -- -- -- -- 95
Issuance of 52,134 shares of common stock
under stock purchase plan -- -- -- -- -- 536
Unrealized loss on investments -- -- -- -- -- --
Amoritization of deferred compensation
related to stock options -- -- -- -- -- --
Repayment of note receivable -- -- -- -- -- --
Tax effect of options excercised -- -- -- -- -- --
Net income -- -- -- -- -- --
BALANCE, DECEMBER 31, 1994 -- -- -- -- -- 48,281
Excercise of stock options and warrants for
261,662 shares of common stock -- -- -- -- -- 76
Issuance of 62,493 shares of common stock
under stock purchase plan -- -- -- -- -- 643
Unrealized gain on investments -- -- -- -- -- --
Amoritization of deferred compensation related
to stock options -- -- -- -- -- --
Net income -- -- -- -- -- --
BALANCE DECEMBER 31, 1995 -- -- -- -- -- 49,000
Excercise of stock options for 149,263 shares
of common stock -- -- -- -- -- 115
Issuance of 56,857 shares of common stock
under stock purchase plan -- -- -- -- -- 428
Unrealized loss on investments -- -- -- -- -- --
Amoritization of deferred compensation related
to stock options -- -- -- -- -- --
Issuance of 150,000 shares of common stock
in connection with acquisition -- -- -- -- -- 1,088
Net loss -- -- -- -- -- --
BALANCE, DECEMBER 31, 1996 -- -- -- -- -- $ 50,631
</TABLE>
<TABLE>
DOLLARS IN THOUSANDS
NOTES
UNREALIZED RECEIVABLE
ADDITIONAL GAIN (LOSS) ON DEFERRED FROM COMMON ACCUMULATED
PAID-IN CAPITAL INVESTMENTS COMPENSATION SHAREHOLDERS DEFICIT TOTAL
--------------- ----------- ------------ ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 1,043 $ -- $ (205) $ (19) $ (17,030) $ 3,082
Issuance of 2,590,000 shares of common stock
initial public offering, net of costs -- -- -- -- -- 28,357
Conversion of preferred stock into 7,872,199
shares of common stock upon completion of
intial public offering -- -- -- -- -- --
Excercise of stock options and warrants for
592,026 shares of common stock -- -- -- -- -- 95
Issuance of 52,134 shares of common stock
under stock purchase plan -- -- -- -- -- 536
Unrealized loss on investments -- (436) -- -- -- (436)
Amoritization of deferred compensation
related to stock options -- -- 52 -- -- 52
Repayment of note receivable -- -- -- 19 -- 19
Tax effect of options excercised 1,449 -- -- -- -- 1,449
Net income -- -- -- -- 10,620 10,620
BALANCE, DECEMBER 31, 1994 2,492 (436) 153 -- (6,410) 43,774
Excercise of stock options and warrants for
261,662 shares of common stock -- -- -- -- -- 76
Issuance of 62,493 shares of common stock
under stock purchase plan -- -- -- -- -- 643
Unrealized gain on investments -- 583 -- -- -- 583
Amoritization of deferred compensation related
to stock options -- -- 52 -- -- 52
Net income -- -- -- -- 759 759
BALANCE DECEMBER 31, 1995 2,492 147 (101) -- (5,651) 45887
Excercise of stock options for 149,263 shares
of common stock -- -- -- -- -- 115
Issuance of 56,857 shares of common stock
under stock purchase plan -- -- -- -- -- 428
Unrealized loss on investments -- (122) -- -- -- (122)
Amoritization of deferred compensation related
to stock options -- -- 51 -- -- 51
Issuance of 150,000 shares of common stock
in connection with acquisition -- -- -- -- -- 1,088
Net loss -- -- -- -- (7,120) (7,120)
BALANCE, DECEMBER 31, 1996 $ 2,492 $ 25 $ (50) $ -- $ (12,771) $40,327
</TABLE>
The accompanying notes are an integral part
of the financial statements.
9
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,120) 759 10,620
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
In-process research and development
related to acquisitions 3,286 --- ---
Depreciation and amortization 1,819 904 708
Amortization of discount or premium on investments 95 119 (132)
Amortization of deferred compensation 51 52 52
Change in accounts receivable and
inventory reserves (68) 103 133
Changes in operating assets and liabilities
Accounts receivable (1,440) (2,792) (150)
Inventory (732) (2,232) (3,070)
Deferred income taxes --- --- (52)
Prepaid expenses and other current assets 207 (327) (825)
Accounts payable 300 (440) 381
Accrued expenses 648 (515) 467
Accrued warranty 93 (15) 834
Deferred revenue 587 --- ---
---------- --------- ---------
Net cash provided (used) by
operating activities (2,265) (4,384) 8,966
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (20,923) (33,863) (48,166)
Maturities of investments 30,923 38,595 13,419
Purchases of property and equipment (1,709) (1,948) (1,888)
Purchase costs related to asset acquisitions (6,356) --- ---
Purchase of license agreement (350) --- ---
---------- --------- ---------
Net cash provided (used) by
investing activities 1,585 2,784 (36,635)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on obligations under capital leases (32) (126) (522)
Proceeds from repayment of note receivable from related party --- --- 19
Proceeds from exercise of stock options and warrants 115 76 95
Proceeds from issuance of common stock, net of costs 428 643 28,893
---------- --------- ---------
Net cash provided by financing activities 511 593 28,485
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents (169) (1,007) 816
Cash and cash equivalents at beginning of year 1,673 2,680 1,864
---------- --------- ---------
Cash and cash equivalents at end of year $ 1,504 $ 1,673 $ 2,680
========== ========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
10
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Applied Digital Access, Inc. and subsidiary (the "Company") designs, engineers
and manufactures network test and performance monitoring systems, software and
services for the management and test of telecommunication circuits. Current
sales are concentrated with "Regional Bell Operating Companies" or affiliated
companies in the United States and Canada.
The market for the Company's products is characterized by rapid technological
advances, evolving industry transmission standards, changes in customer
requirements and frequent new product introductions and enhancements. The
introduction of telephone network test and performance monitoring products
involving superior technologies or the evolution of alternative technologies or
new industry transmission standards could render the Company's existing
products, as well as products currently under development, obsolete and
unmarketable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Applied Digital Access - Holding, Inc. and its
wholly-owned subsidiary, Applied Digital Access - Canada, Inc. ("ADA-Canada").
All intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments with
original maturities of 90 days or less when purchased.
INVENTORY
Inventory is stated at the lower of cost or market using the first-in, first-out
method. The Company currently buys certain key components of its products from a
limited number of suppliers. Although there are a limited number of suppliers of
the components, management believes that other suppliers could provide similar
key components on comparable terms. A change in suppliers, however, could cause
a delay in manufacturing and a possible loss of sales, which would adversely
affect operating results.
INVESTMENTS
The Company determines the appropriate classification of its debt securities at
the time of purchase and re-evaluates such designations at each balance sheet
date. Investments are classified as "available for sale" and are carried at
their fair value. Realized gains and losses are determined using the specific
identification method and are included in other income. Gross unrealized holding
gains or losses are excluded from earnings and reported, net of the related tax
effect, as a separate component of shareholders' equity. The amortized cost of
debt securities is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income. Fair
value is determined based on quoted market prices.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (3 to 7 years) using the straight-line method. Leased
property meeting certain criteria is capitalized and the present value of the
related lease payments is recorded as an obligation. Amortization of capitalized
leased assets is computed on the straight-line method over the shorter of the
lease term or the assets' estimated useful lives. Maintenance and repairs are
charged to expense as incurred. Upon the retirement or other disposition, the
property and related accumulated depreciation or amortization are removed from
the accounts and any resulting profit or loss is reflected in income.
11
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INTANGIBLE ASSETS
The Company amortizes costs in excess of fair value of net assets of businesses
acquired using the straight-line method over 3 to 5 years. Recoverability is
reviewed annually or sooner if events or changes in circumstances indicate that
the carrying value may exceed fair value.
REVENUE RECOGNITION
Revenue is generally recognized at the time of shipment or delivery, based on
specified shipping terms, or when services have been performed. When customer
acceptance criteria are specified in the customer order, revenue recognition is
deferred until the acceptance criteria are met.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years
for differences between the tax basis of assets and liabilities ("temporary
differences") and their financial reporting amounts at each year end based on
enacted tax laws and statutory rates applicable to the periods in which the
temporary differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising expense was
approximately $88,000, $141,000 and $217,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations.
Accordingly, options granted at below fair market value result in deferred
compensation to the extent of the difference between the fair market value at
the date of grant and the exercise price. The deferred compensation is charged
to earnings ratably over the vesting period. During the three year period ended
December 31, 1996, no options were granted at below fair market value.
PER SHARE INFORMATION
Net income (loss) per share is computed using the weighted average number of
common shares and common equivalent shares (when the effect is dilutive)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimates.
12
<PAGE>
3. STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
Non-cash investing and financing activities are as follows:
Years Ended December 31,
------------------------
(Dollars in thousands) 1994 1995 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Property and equipment acquired with
capital lease financing $ 189 $- $ -
Conversion of preferred stock
upon completion
of initial public offering 19,205 - -
Issuance of stock in connection
with acquisition - - 1,088
Cash payments for interest and income taxes are as follows:
Years Ended December 31,
------------------------
(Dollars in thousands) 1994 1995 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Interest $ 53 $ 13 $ 7
Income taxes 144 506 -
</TABLE>
4. INVESTMENTS:
Marketable securities at December 31, 1995 and 1996 consist of obligations of
the U.S. Government and its agencies and are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(Dollars in thousands) 1995 1996
---- ----
<S> <C> <C>
Cost $ 30,027 $ 19,936
Gross unrealized gains 148 57
Gross unrealized losses (1) (36)
--------- -------
Estimated fair value $ 30,174 $19,957
========= =======
</TABLE>
5. INVENTORY:
Inventory at December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1996
---------------------- ---- ----
<S> <C> <C>
Raw materials $3,483 $4,211
Work-in-process 2,314 2,558
Finished goods 1,313 1,063
------ ------
7,110 7,832
Less inventory reserve (538) (469)
------ ------
$6,572 $7,363
====== ======
</TABLE>
13
<PAGE>
6. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1996
---------------------- ---- ----
<S> <C> <C>
Computers $2,500 $4,254
Machinery, furniture and equipment 2,716 3,614
Purchased computer software 729 894
Leasehold improvements 640 766
------ ------
6,585 9,528
Less accumulated depreciation
and amortization (3,224) (4,592)
------ ------
$3,361 $4,936
====== ======
</TABLE>
Property and equipment acquired under capital leases totaled approximately
$444,000 and $216,000 at December 31, 1995 and 1996, respectively. Accumulated
amortization related to assets under capital leases totaled approximately
$299,000 and $106,000 as of December 31, 1995 and 1996, respectively.
7. INTANGIBLE ASSETS:
Intangible assets at December 31,1996 consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996
<S> <C>
Goodwill and know-how $2,588
Purchased technology, customer contracts 337
License agreement 350
------
3,275
Less accumulated amortization (452)
------
$2,823
======
</TABLE>
8. ACCRUED EXPENSES:
Accrued expenses at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1996
---------------------- ---- ----
<S> <C> <C>
Accrued payroll and related costs $ 489 $ 443
Income taxes - 444
Accrued vacation 316 431
Other 38 173
----- ------
$ 843 $1,491
===== ======
</TABLE>
14
<PAGE>
9. COMMITMENTS AND CONTINGENCY:
LEASES
The Company leases office space and equipment under operating leases. Certain of
these leases include renewal or purchase options. Rent expense related to these
leases was approximately $288,000, $386,000 and $613,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
The Company also leases certain property and equipment under capital leases.
Minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Operating Capital
Year ending December 31, Leases Lease
------------------------ ------ -----
<S> <C> <C>
1997 $ 788 $20
1998 1,064 20
1999 1,049 15
2000 732 -
2001 756 -
Thereafter 1,392 -
-------- ------
Total minimum
lease payments $5,781 55
======== ======
Less amounts representing interest (6)
------
Obligations under capital leases 49
Less current portion (16)
------
$33
======
</TABLE>
PURCHASE COMMITMENTS
At December 31, 1996, the Company has open purchase commitments of approximately
$3,731,000 which include approximately $2,264,000 of cancelable purchase
commitments.
LEGAL PROCEEDING
In March 1995, a class action lawsuit was filed against the Company and two of
its officers, one of whom is also a director of the Company, in the U.S.
District Court for the Southern District of Southern California. The suit
alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange
Act of 1934, as amended (the "Act"), arising out of alleged misrepresentations
and omissions made by the Company and the named officers. The suit also alleged
violation of Section 20(a) of the Act arising out of alleged "control" of the
Company by the officer defendants. The suit was brought on behalf of purchasers
of the Company's securities during the period October 10, 1994 through March 29,
1995, and sought unspecified damages. In December 1995, the Company entered into
a settlement agreement pursuant to which all claims were dismissed with
prejudice. The total settlement amount was approximately $1,500,000, of which
the Company paid approximately $446,000 with the remaining amount paid by the
Company's Directors' and Officers' liability insurance carriers. Obligations of
the Company with respect to this matter were provided for in the financial
statements during the year ended December 31, 1995 and paid during the year
ended December 31, 1996.
10. SHAREHOLDERS' EQUITY:
In April 1994, the Company completed the initial public offering of its shares
of common stock, at a price of $12.00 per share including 2,200,000 which were
sold by the Company and 400,000 which were sold by existing shareholders. In
addition, the Company's underwriters also exercised an option to purchase an
additional 390,000
15
<PAGE>
shares to cover over-allotments. The net proceeds realized by the Company from
this offering were $28.4 million after deducting the underwriting discount and
expenses payable by the Company related to the offering.
Effective upon the closing of the offering, 55,105,577 shares of preferred stock
were converted into 7,872,199 shares of common stock after giving effect to the
1-for-7 reverse stock split.
In March 1994, the Company's Articles of Incorporation were amended authorizing
30,000,000 shares of common stock, no par value, and 7,500,000 shares of
preferred stock, no par value. The preferred stock may be issued from time to
time in one or more series with the Board of Directors authorized to fix or
alter the designation, powers, preferences and rights of the shares of each
series.
STOCK COMPENSATION PLANS
At December 31, 1996, the Company has stock-based compensation plans which are
described below. The Company applies Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans and its stock purchase plan. Had compensation
costs for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards in 1995 and 1996 under those plans
consistent with the methods of SFAS No. 123, the Company's net income (loss) and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1996
<S> <C> <C>
Net income (loss):
As reported $ 759 $(7,120)
Pro forma (195) (8,352)
Net income (loss) per common share:
As reported $.06 $(.59)
Pro forma (.02) (.69)
</TABLE>
FIXED STOCK OPTION PLANS
In May 1996, the Company adopted the 1996 Non-Qualified Stock Option Plan (the
"1996 Plan"). The 1996 Plan does not affect the 1994 Plan. Under the 1996 Plan,
the Company is authorized to issue 400,000 shares of common stock. The 1996 Plan
is intended to promote the interests of the Company or its parents or subsidiary
corporations. Under the 1996 Plan, eligible individuals may be granted options
to purchase shares of the Company's common stock at not less than 85% of the
fair market value of such shares on the date of grant. Such options shall be
exercisable in one or more installments as specified in the Notice of Grant and
have a maximum term of 10 years. Persons eligible to receive stock options under
the 1996 Plan are key employees of the Company other than officers who are
responsible for the growth and financial success of the Company and consultants
and other independent contractors who provide valuable services to the Company.
In February 1994, the Company adopted the 1994 Stock Option/Stock Issuance Plan
(the "1994 Plan"). The 1994 Plan supersedes and consolidates the 1988 Stock
Option Plan and Restricted Stock Purchase Plan (the "1988 Plan"). Outstanding
stock options and unvested share issuances under the 1988 Plan were incorporated
into and assumed in the 1994 Plan. In May of 1996, the Board of Directors
received shareholder approval to increase the authorized shares to 3,800,000
under the 1994 Plan. The 1994 Plan is divided into three separate components:
the Discretionary Option Grant Program (the "Discretionary Program"); the
Automatic Option Grant Program (the "Automatic Program") and the Stock Issuance
Program (the "Issuance Program"). Under the Discretionary Program, eligible
individuals may be granted options to purchase shares of the Company's stock at
not less than 85% of the fair market value of such shares on the date of grant.
Under the Automatic Program, non-employee Directors will automatically be
granted options to purchase common stock at 100% of the fair market value on the
grant date. Under the Issuance Program, eligible individuals may be allowed to
purchase shares of the Company's common stock at discounts from the fair market
value of such shares of up to 15%. Such shares may be issued as fully-vested
shares or as shares to vest over time and have a maximum term of 10 years (5
years for options granted to a 10% shareholder). Persons eligible to receive
stock issuances under the Issuance Program and/or option grants under the
Discretionary Program are officers and other key employees of the Company and
certain consultants or other
16
<PAGE>
independent contractors, as defined in the plan. The individuals eligible to
receive option grants under the Automatic Program are individuals who are
elected, re-elected or appointed as non-employee Board members.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: no dividend yield; expected
volatility; risk-free interest rates on or about the date of grant represented
by the interest rate on U.S. Treasury Bills with a term of maturity equal to the
vesting period of the options, and expected lives of 5 years.
The following table summarizes stock option transactions for each of the three
years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at
January 1, 1994 1,711,492 $.39 44,587 $.14
Granted 319,665 $17.36 --- ---
Exercised (509,029) $.18 (17,000) $.14
Canceled (82,384) $.43 --- ---
------------- ------------
Outstanding at
December 31, 1994 1,439,744 $4.22 27,587 $.14
Granted 737,025 $12.30 --- ---
Exercised (205,068) $.35 (10,500) $.14
Canceled (300,392) $18.30 --- ---
-------- ------ ------- ------
Outstanding at
December 31, 1995 1,671,309 $5.63 17,087 $.14
Granted 874,887 $9.01 --- ---
Exercised (149,261) $.77 --- ---
Canceled (598,732) $12.01 --- ---
-------- ------ ------ ------
Outstanding at
December 31, 1996 1,798,203 $5.54 17,087 $.14
========= ======
</TABLE>
The range of exercise prices of stock options outstanding at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$.14 - $.28 366,413 4.81 $.16 362,585 $.16
$.42 - $1.05 325,590 6.57 $.46 268,798 $.45
$2.80 - $6.50 304,142 8.85 $5.67 53,374 $3.07
$6.63 - $8.40 460,504 9.54 $8.05 14,005 $7.35
$11.25 - $16.13 341,554 8.72 $12.65 132,264 $12.29
-------------- ------- ------ --------- -------- -------
$.14 - $16.13 1,798,203 7.77 $5.54 831,026 $2.49
==== ====== ========= ==== ===== ======= =====
</TABLE>
17
<PAGE>
At December 31, 1995 and 1996, 571,106 and 1,191,381 shares, respectively, are
available for granting of options under the 1994 and 1996 Plans.
STOCK PURCHASE PLAN The Amended 1994 Employee Stock Purchase Plan, originally
adopted in February 1994 (the "Stock Purchase Plan"), authorizes the Company to
issue up to 300,000 shares of common stock to participating employees. The Stock
Purchase Plan is intended to provide qualifying employees with the opportunity
to acquire an interest in the Company by accumulating amounts for the employees'
account through payroll deductions and the periodic application of such amounts
to the purchase of shares of the Company's common stock. Under the terms of the
Stock Purchase Plan, qualified employees can choose each year to have up to 15%
of their annual base earnings withheld to purchase the Company's common stock.
The purchase price of the stock will be equal to 85% of the lower fair market
value of the common stock on (i) the commencement date of the offering period or
(ii) the purchase date. The Stock Purchase Plan terminates on December 31, 2003.
Under the Stock Purchase Plan, the Company sold 62,493 and 56,857 shares to
employees in 1995 and 1996, respectively. There are 128,516 shares of common
stock available for purchase under the Stock Purchase Plan at December 31, 1996.
In order to disclose the pro forma net income and earnings per share as required
by SFAS No. 123 (see Stock Compensation Plans above), the fair value of the
employees' purchase rights is estimated using the Black-Scholes model with the
following assumptions for 1995 and 1996: no dividend yield, expected volatility
risk-free interest rates on the date of grant represented by the interest rate
on U.S. treasury bills with a term of maturity equal to the period from the
subscription date to the purchase date. The weighted-average fair value of those
purchase rights granted in 1995 and 1996 was $13.89 and $9.56, respectively.
11. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1994, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1995 1996
---------------------- ---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ 897 $ - $ -
State 320 - -
Foreign - - 123
---- ---- ----
1,217 - 123
----- ---- ----
Deferred:
Federal (786) - -
State (115) - -
Foreign - - -
------ ---- ----
(901) - -
------ ---- ----
$ 316 $ - $123
======= ==== ====
</TABLE>
18
<PAGE>
Differences between the statutory rate and the effective tax rate for the year
ended December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------
<S> <C> <C> <C>
Taxes at federal statutory rate 34.0% 34.0% (34.0%)
Foreign income taxes - % - % 1.8%
Net operating loss carryforwards and research and
development tax credits (utilized) not utilized (23.4%) (33.0%) 33.0%
Change in valuation allowance (13.6%) (33.0%) - %
Other 5.9% (1.0%) 1.0%
------- ------- ------
Provision for income taxes 12.9% - % 1.8%
==== ====== =====
</TABLE>
The components of the deferred tax assets at December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1996
---------------------- ---- ----
<S> <C> <C>
Allowances and reserves $ 760 $ 773
Vacation accrual 128 146
Capitalized research and development 723 2,211
Net operating loss carryforwards 2,819 4,774
Tax credits 1,200 1,429
Accelerated depreciation (164) (252)
Other 8 10
------- ------
Total gross deferred tax asset 5,474 9,091
Less valuation allowance (3,972) (7,589)
Net deferred tax asset $1,502 $1,502
===== =====
</TABLE>
The Company has recorded a net deferred tax asset of $1,502,000 as of December
31, 1996. Realizability is dependent on generating sufficient taxable income
prior to expiration of the net operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $12,987,000, of which $5,161,000 is
attributable to disqualifying dispositions of stock options. The Company also
has net operating loss carryforwards for California tax purposes of
approximately $5,835,000 at December 31, 1996, of which $2,508,000 is
attributable to disqualifying dispositions of stock options. The amount
attributable to the disposition of stock options will not impact the Company's
effective tax rate in future periods as the impact will be reflected as a
component of equity when recognized.
The Company also has research and development tax credit carryforwards of
approximately $1,087,000 for federal and $255,000 for California tax purposes at
December 31, 1996. These carryforwards will begin expiring, if unused, in 2003.
The Internal Revenue Code (the "Code") imposes limits on the availability of net
operating loss carryforwards and certain tax credits that arose prior to certain
cumulative changes in a corporation's ownership resulting in a change of control
of the Company. The Company's use of approximately $1,166,000 of its federal net
operating loss carryforwards and $408,000 of its federal and $105,000 of its
California tax credit carryforwards are significantly limited because the
Company underwent "ownership-changes" in January 1989 and March 1991. In each
year following the change, the Company will be able to offset taxable income by
a limited amount of the pre-ownership
19
<PAGE>
change carryforwards. This limitation is determined by the value of the Company
immediately prior to the ownership change multiplied by the long-term tax-exempt
rate. Net operating losses and tax credits that are unavailable in any year as a
consequence of this limitation may be carried forward for future use subject to
certain restrictions.
12. EMPLOYEE BENEFITS: The Company has a 401(k) defined contribution plan
available to all employees who have been with the Company for more than one
month. Employees may contribute up to 15% of their salary each year and the
Company may elect to make a discretionary contribution to the plan once a year.
All plan participants who are employed at the end of the plan year and have
completed 1,000 hours of service in that plan year are eligible to receive a
share of the employer contribution. Participant's rights to the employer
contributions vest 25% per year of service with the participant being fully
vested at the end of the fourth year of service. The Company did not make a
discretionary contribution in 1994, 1995 or 1996.
In 1995, the Company adopted a profit sharing plan available to all employees.
The plan provides financial benefits to employees when the Company exceeds
certain targeted objectives. The Compensation Committee of the Board of
Directors annually determines the maximum amount that is allocated to the plan.
Employees are eligible to participate in the plan at the start of the quarter
following their employment at the Company. The Company did not make any
allocation to the profit sharing plan in 1995 or 1996.
13. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, investments and
trade receivables.
The Company has approximately $858,000 of cash and cash equivalents in excess of
FDIC insured limits at two financial institutions at December 31, 1996. The
Company has not experienced any losses on its cash and cash equivalents.
All of the Company's investments, all of which mature in 1997, are in
obligations of the U.S. Government and its agencies at December 31, 1996.
At December 31, 1995 and 1996, the Company's trade receivables are concentrated
with "Regional Bell Operating Companies" or affiliated companies in the United
States, all of which management believes are large companies with substantial
financial resources. Sales are typically made on credit, with terms that vary
depending upon the customer and the nature of the product. The Company does not
hold collateral to secure payment. Although the Company maintains a reserve for
uncollectible receivables that it believes to be adequate, a payment default on
a significant sale or customer receivable could materially and adversely affect
its operating results and financial condition.
Sales to major customers for each year are as follows (% of revenue):
<TABLE>
<CAPTION>
1994 1995 1996
------------------------
<S> <C> <C> <C>
Nynex 16% 18% 23%
Bell South 14% 13% 7%
US West 36% 45% 31%
Ameritech 32% 19% 9%
Nortel - - 15%
</TABLE>
Sales to an affiliate of a shareholder during the years ended December 31, 1994,
1995 and 1996 were approximately $11,320,000, $3,836,000 and $2,263,000,
respectively, of which $186,000 and $140,000 are included in accounts receivable
at December 31, 1995 and 1996, respectively.
20
<PAGE>
14. ACQUISITIONS:
In February 1996, the Company acquired certain assets of Applied Computing
Devices, Inc. ("ACD"), a company that developed and marketed operations systems
software used primarily by independent telephone companies to manage certain
functions in their networks. The customer set and products of ACD complement
those of the Company and the Company intends to continue to market and enhance
these products. The Company acquired the assets for $1,700,000 in cash and
incurred approximately $200,000 in related costs. The assets were acquired at an
auction held in Federal Bankruptcy Court, Southern District of Indiana. The
transaction, which was accounted for as a purchase, included the acquisition of
in-process research and development valued at approximately $1,200,000, property
and equipment valued at approximately $377,000 and purchased technology valued
at approximately $337,000. The Company recorded a one-time charge in the first
quarter of 1996 for the $1,200,000 associated with purchased research and
development costs.
In July 1996, the Company acquired certain assets of MPR Teltech, a subsidiary
of BC TELCOM, Inc. The assets acquired were part of MPR Teltech's operating unit
commonly known as the Special Services Network division ("SSN"). The Company and
its Canadian subsidiary, ADA-Canada, acquired the assets for $4,200,000 million
in cash and 150,000 shares of the Company's common stock, and incurred
approximately $200,000 in related costs. SSN was an operations systems software
development group with expertise in development of network management systems
for public carriers. SSN developed operations systems software primarily for
Northern Telecom ("Nortel"). SSN has become part of ADA-Canada and will develop
network performance management operations systems software products for the
Company and its customers, including Nortel. The transaction, which was
accounted for as a purchase, included the acquisition of in-process research and
development valued at approximately $2,100,000, property and equipment valued at
approximately $900,000 and goodwill and know-how valued at approximately
$2,588,000. The Company recorded a one-time charge in the third quarter of 1996
for the $2,100,000 associated with purchased research and development costs.
The following condensed pro forma results of operations information
has been presented to give effect to the acquisitions as if such
transactions had occurred at the beginning of each of the periods
presented. The historical results of operations have been adjusted to
reflect additional depreciation and amortization expense based upon
the value allocated to assets acquired in the purchases.
The pro forma results of operations information is presented for
information purposes only and is not necessarily indicative of the
operating results that would have occurred had the acquisitions been
consummated as of the beginning of the periods presented, nor is
it necessarily indicative of future operating results.
<TABLE>
<CAPTION>
CONDENSED PRO FORMA RESULTS OF OPERATIONS
-----------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Years Ended December 31, 1995 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $38,747 $29,660
Net loss (8,521) (7,474)
Net loss per share (.71) (.61)
Weighted average shares used in computation 11,956 12,165
</TABLE>
Sales to Canadian customers, generated from both the Company's United States and
Canadian operations in fiscal 1997 were $4,351,000, from which operating income
of $434,000 was derived. The identifiable assets of the Company's Canadian
operations at December 31, 1997 were $970,000
21
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
VALLUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1995 and 1996
----------
<TABLE>
<CAPTION>
Balance at
Beginning Balance at
Description Year of Year Additions Deductions End of Year
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts 1994 $ 50,000 $ -- $ -- $ 50,000
1995 50,000 -- -- 50,000
1996 50,000 -- -- 50,000
Inventory reserve 1994 301,476 247,661 (114,520) 434,617
1995 434,617 150,000 (47,055) 537,562
1996 537,562 -- (68,092) 469,470
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of Applied Digital
Access, Inc. and subsidiary as of December 31, 1995 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Digital Access, Inc. and subsidiary as of December 31, 1995 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coppers & Lybrand
San Diego, California
January 18, 1997
22
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Applied Digital Access, Inc. on Form S-8 of our report dated January 18, 1997 on
our audits of the financial statements and financial statement schedule of
Applied Digital Access, Inc. as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994, which report is included in the Annual
Report on Form 10-K of Applied Digital Access, Inc. for the year ended December
31, 1996.
/s/ Coopers & Lybrand
San Diego, California
March 31, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<CASH> 1,054
<SECURITIES> 19,957
<RECEIVABLES> 6,848
<ALLOWANCES> (50)
<INVENTORY> 7,363
<CURRENT-ASSETS> 36,841
<PP&E> 9,528
<DEPRECIATION> (4,592)
<TOTAL-ASSETS> 45,972
<CURRENT-LIABILITIES> 5,612
<BONDS> 0
0
0
<COMMON> 50,631
<OTHER-SE> 2,467
<TOTAL-LIABILITY-AND-EQUITY> 45,972
<SALES> 24,422
<TOTAL-REVENUES> 24,422
<CGS> 12,609
<TOTAL-COSTS> 12,609
<OTHER-EXPENSES> 20,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,997)
<INCOME-TAX> 123
<INCOME-CONTINUING> (7,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,120)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
