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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-23698
APPLIED DIGITAL ACCESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 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, $0.001 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. ___
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, 1998 as reported on the Nasdaq National Market, was approximately
$58,670,158. 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 12,629,469 shares of the Registrant's Common Stock, $0.001 par
value, outstanding as of February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 21, 1998, referred to herein as the "Proxy
Statement", are incorporated by reference as provided in Part III.
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PART I
ITEM 1. BUSINESS
THE STATEMENTS CONTAINED IN THIS FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD LOOKING STATEMENTS. STATEMENTS WHICH USE THE WORDS
"OBJECTIVE," "SEEK," "INTEND," "WILL," "ANITICPATE," "CAN," "CONTINUE," AND
"EXPECT," ARE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS,
INCLUDING STATEMENTS REGARDING THE COMPANY'S (i) PLANS FOR DEVELOPMENT OR
ACQUISITION OF NEW PRODUCTS OR ENHANCEMENT OF EXISTING PRODUCTS, (ii)
STRATEGY AND (iii) EXPANDED MARKETING EFFORTS, ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT. IT IS IMPORTANT TO
NOTE THAT THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN
SUCH FORWARD LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY ARE THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISKS AND UNCERTAINTIES."
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' ("TSP") networks. ADA's products are designed to enable TSPs 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 TSPs 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 circuit provisioning,
network configuration management, network performance management, circuit
testing, and traffic management of the public switched network. ADA has
addressed the industry demand for network management products with a
three-faceted approach: (1) network systems that provide testing and
performance monitoring functions as well as selected transport functions; (2)
network management software that enables TSPs to manage their network
operations; and (3) services that are customized to meet the evolving needs
of our TSP market. The Company has two business units: the Network Systems
business unit and the Network Management business unit. The business units
are the result of the evolution of the Company from a single product line to
multiple product lines. The Network Systems business unit is built around the
Company's test and performance management products and services including its
T3AS Test and Performance Monitoring System ("T3AS"), Centralized Test System
("CTS"), Remote Module, a DS1 network interface unit ("NIU"), and Protocol
Analysis Access System ("PAAS"). The Network Management business unit focuses
on Operations Systems ("OS") software products including .Provisioner, Test
OS, Graphical Test Assistant ("GTA"), Sectionalizer, Fault Management System
("FMS"), Traffic Data Collection and Engineering System ("TDC&E"), and OS
design services.
ADA's network systems products are deployed by a number of TSPs,
including the five regional bell operating companies ("RBOCs"), several long
distance or "interexchange carriers" ("IXCs"), including MCI, Worldcomm and
IXC Communications, several competitive local exchange carriers ("CLECs") and
competitive access providers ("CAPs"), including Brooks Fiber and
Consolidated Communications, international carrier Chunghwa Telecom of
Taiwan, and several independent telephone companies ("ITOCs"). Some of the
Company's customers for its network management OS products and services
include MCI, Worldcomm, British Columbia Telecom ("BC TEL"), Fujitsu
Australia, OPTUS, GTE, Sprint/Centel Telephone, Metropolitan Fiber Systems
("MFS"), Teleport Communications Group ("TCG"), MGC Communications ("MGC"),
TDS Telecom ("TDS"), IntelCom Group ("ICG"), several enterprise networks and
several other TSPs.
RECENT DEVELOPMENTS
In September 1997, the Company entered in to a Joint Development
Agreement ("JDA") with Northern Telecom, Inc. ("Nortel") to develop unique
Synchronous Optical Network ("SONET") products for the telecommunications
industry. Nortel and the Company will each contribute technology and
development resources to projects conducted under the JDA. The companies will
equally share development costs, estimated to be several million dollars per
quarter. Development of the first product under the JDA has commenced with
initial availability expected in the first half of 1999. The JDA also
contemplates additional projects as agreed to in the future by Nortel and
ADA. However, there can be no assurance that the Company will be able to
develop the initial product or any future products on a timely basis or that
its development efforts will result in commercially successful products.
Operating expenses for the year ended December 31, 1997 include a $2.2
million offset to research and development
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costs representing Nortel's proportionate share of development costs that
were incurred through December 31, 1997 in connection with the initial
project being conducted under the JDA.
In June 1997, the Company acquired from Northern Telecom an
exclusive worldwide license to Northern Telecom's DSS II OS software product,
subject to certain residual rights retained by Northern Telecom. The Company
markets and supports the DSS II product under the new name, .Provisioner. The
product is an OS software application for provisioning and configuration
management for transport networks comprised of multiplexers, digital
cross-connect systems ("DCSs") and other transport elements. The Company
acquired the license and related assets for $3.1 million in cash. As part of
the transaction, the Company also issued Nortel a warrant to purchase 150,000
shares of the Company's common stock at an exercise price of $12 per share.
The warrant has a 3 year term. In June 1997, the Company recorded a $1.6
million charge for purchased research and development associated with the
license and asset acquisition. The acquisition of .Provisioner was part of
the Company's strategic plan to build upon its portfolio of network
management OS products essential to the operation of TSP networks.
BACKGROUND
The Telecommunications Deregulation Act of 1996 (the "1996
Telecommunications Act") has greatly increased the competitive nature of the
telecommunications industry and has changed traditional supplier-customer
relationships among local telphone companies and long distance providers.
TSPs, which include the RBOCs, IXCs, CLECs, CAPs, ITOCs, Internet servive
providers ("ISPs"), and emerging carriers are entering the territories and
businesses of each other, fiercely competing to supply business customers
with highly profitable telecommunications networks and services. The
competitive climate has created significant challenges for TSPs as they
strive to meet objectives of increasing revenue and market share, while
retaining current customers and lowering operating costs.
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,
telephone companies have been required to rapidly deploy new 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 or T3. The DS3
transmission rate is the highest electrical telecommunication circuit
transmission rate currently available 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 RBOCs, the
competitive long distance telephone company market, and the emergence of CAPs
and CLECs who offer local telephone service in competition with the RBOCs or
ITOCs. Regulation through competition is the philosophy that resulted in the
breakup of AT&T, and the Company believes it continues to be the philosophy
of the Federal Communications Commission ("FCC"). The passage of the 1996
Telecommunications Act allows each of these telephone companies to enter the
territories and businesses of the others and has resulted in an unprecedented
number of mergers and acquisitions among TSPs. 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. RBOCs 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 RBOCs to protect their existing
revenue bases by improving the quality of their service and to reduce their
costs. At the same time, the RBOCs 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 1984 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
telephone companies: the local telephone companies
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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 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 TSPs, and on making network management easier.
ADA's test and monitoring systems, intelligent NIUs, and OS
software, in stand-alone applications, and in integrated solutions, help TSPs
improve performance to their business customers. The Company's products help
TSPs provide better service to their business customers by providing new
services faster, restoring service faster when circuits fail, optimizing
performance on in-service circuits, and maximizing the performance of the
public switched telephone network. When competing for profitable business
customers, the integration of network management functions are valuable
assets to TSPs. Without efficient integrated network management systems, TSPs
are hard pressed to increase market share.
The Company provides TSPs with network performance management
products to provision new circuits, test circuits, monitor telephone network
building blocks such as digital switches, digital cross-connect systems and
SONET transmission systems, monitor transmission performance on high-speed
digital circuits, and manage transmission facilities to optimize the
performance of the telephone network in the era of increased demand from
Internet usage. The Company believes its network systems products enable TSPs
to greatly improve their reliability of service, reduce circuit repair time,
reduce network management expense, and proactively maintain network quality.
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STRATEGY
The Company seeks to maintain a leadership position as a supplier of
network performance management solutions for high-speed TSPs and to become a
leading provider of OS solutions for network management of telecommunications
networks:
1. DEVELOPING AND ENHANCING PRODUCTS FOR NETWORK BOUNDARY APPLICATIONS.
The initial application for the Company's products has been at the
network boundary between the IXC and the local TSP. Installation of the T3AS
system at these boundaries allows the local TSP to quickly determine if a
reported trouble is within its network. It also allows the local TSP 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
monitored nonintrusively, either in a standalone application or continuously
monitored as part of an integrated system using the Company's test and
monitoring systems or test and monitoring capabilities in systems from other
suppliers. While the Remote Module provides valuable information about
circuit performance when used in a standalone mode, it provides better
information when used in conjunction with a test and monitoring system
elsewhere in the network. The Company believes the Remote Module provides the
most valuable information when used in conjunction with test and monitoring
systems also made by the Company. The combination of the products'
capabilities enables TSPs to improve their ability to address the
increasingly competitive business environment.
2. FOCUSING SALES AND MARKETING EFFORTS ON A BROADER RANGE OF TSPS.
ADA's initial sales have been to the RBOCs and their affiliates, all
of whom 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 its target
market with applications that are appropriate for IXCs, CLECs, CAPs, and
other TSPs.
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3. DEVELOPING AND ENHANCING PRODUCTS TO ADDRESS DATA PROTOCOLS.
The Company believes that there are additional applications for
ADA's product lines that extend its utility to new service offerings by its
customers that address data protocols including frame relay, asynchronous
transfer mode ("ATM") and Internet protocols. The Company's PAAS system
currently provides customers with testing and monitoring capabilities for
broadband networks. The Company has additional protocol monitoring and
analysis products under development.
4. 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," are limited in their
ability to provide TSPs 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.
The Company further believes that additional value can be provided to its TSP
customers through integration of multiple OS applications, and through
integration of the Company's OS applications with existing legacy systems,
often using custom software development provided by the Company's design
services group.
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. The
Company entered into the JDA with Nortel to develop new products focused on
SONET optical transmission standards. The Company does not expect to complete
the first phase of development under the JDA until 1999. See "Risks and
Uncertainties--Rapid Technological Change and Dependence on New Products."
6. EXPANDING TO OTHER APPLICATIONS.
The Company believes that there are additional applications for
ADA's product lines that extend its utility to network boundaries between
TSPs and other users, such as corporate customers, cellular telephone
companies, and cable television companies.
PRODUCTS
NETWORK SYSTEMS
CENTRALIZED TEST SYSTEM (CTS)
CTS is a sophisticated digital test system device for voice
frequency ("VF"), digital data service ("DDS"), high-capacity digital service
("HCDS"), DS3, and packet based services, such as frame relay and ATM. CTS
functions as a remote test unit ("RTU") and a test system controller for
circuits transported through digital cross-connect systems. CTS accesses DS0,
DS1 and DS3 circuits carried through synchronous or asynchronous interfaces
on DCS. CTS is designed for applications with both centralized and
distributed architectures. Its modular design, scalability test suite and
integrated testing and fault isolation functions provide an economic and
flexible solution for DCS or non-DCS based test and performance monitoring.
CTS's evolutionary platform can be reconfigured as an in-line T3AS system
without obsolescence of original modules to add new capabilities and
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full-time performance monitoring and non-intrusive testing. CTS is installed
where test access is highly critical and efficient use of network resources
is important.
T3AS TEST AND PERFORMANCE MONITORING SYSTEM (T3AS)
T3AS consists of digital test access units ("DTAU") that can be
co-located or placed at network boundaries between TSPs. The performance
monitoring capabilities of T3AS provide visibility to the services carried by
the network. T3AS is physically located at network boundaries between TSPs to
quickly isolate, identify and report the location of circuit troubles in
these networks. The Company believes T3AS is the only integrated test and
performance monitoring device that interfaces to the network at both the DS1
and DS3 transport rates while providing visibility down to DS0, and subrate
DSO, circuits. T3AS' technology and flexible architecture enable T3AS to
function either as a DTAU or RTU. The T3AS system interfaces with the TSPs
network management OS using industry-standard interfaces and protocols. T3AS
can also function as a CTS to interface 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. T3AS's distributed architecture allows individual
high-speed or low-speed subsystems to be installed at locations remote from
the T3AS base system. T3AS' distributed architecture 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. The low-speed subsystem expands the Company's
product line by providing test and performance monitoring capabilities
similar to the high-speed subsystem, but 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.
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 nonintrusively
monitors the performance of T1 circuits. Installed at network boundaries
between the local TSP and the end-user, the Remote Module enables the TSP to
determine whether circuit troubles originated in the TSP's network or in the
end-user's network. When installed at the local TSP's network boundary at the
end-user 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 servicelevel 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. The Remote Module can provide
similar, although less extensive functionality, in a standalone mode, or in
conjunction with DTAUs and RTUs provided by other suppliers.
NETWORK MANAGEMENT SOFTWARE
TEST OS
Test OS is a browser-based test management operating system that
provides fast test access through point-and-click graphical user interfaces
("GUI") that replace cumbersome test commands and hide distinctions in test
equipment and software to simplify ease of use. Test OS is a highly scalable,
flexible application that supports multiple users at
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varying access levels for tests at DS0, DS1 and DS3 rates. Graphical Test
Assistant ("GTA") is a Test OS application that functions as 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 TSPs without
a test management OS, GTA also complements existing test OSs by augmenting
functionality.
SECTIONALIZER
Sectionalizer is expert system software that non-intrusively
identifies the location of DS1 circuit troubles and provides answers in
seconds rather than hours. Sectionalizer correlates and processes extended
superframe performance monitoring data and presents that information
pictorially to technicians enabling them to isolate problems in real time to
determine whether they are on the customer's premises or other portions of
the network. Hard to isolate sporadic troubles are identified through the
software's correlation of historical circuit events. Sectionalizer
complements the deployment of Remote Modules, T3AS and CTS by utilizing the
equipment to rapidly identify and isolate network troubles and take a
proactive perspective in networks management. Sectionalizer is the driving
force behind ADA's Network Boundary Sectionalization application.
Sectionalizer executes on T3AS, CTS, and Remote Module platforms.
.PROVISIONER
.Provisioner is an OS software application that provides service
initiation and service management capability for transport networks comprised
of multiplexers, DCSs, and other transport elements. .Provisioner enables
TSPs to activate new circuits and services, and to manage transport networks
from a single user interface concentrating on end-to-end services rather than
on individual network elements. .Provisioner is a turn-key solution for
multi-vendor operations. The modular architecture and object-oriented
software support current and future applications, including management of
frame relay and ATM networks.
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 alarm
messages, fault messages, and information from 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 reactions and 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.
TRAFFIC DATA COLLECTION AND ENGINEERING
Traffic Data Collection and Engineering ("TDC&E") is a traffic
management OS that provides the capability to collect traffic data from a
variety of existing network elements, predominantly central office switches,
in addition to emerging network elements such as ATM and frame relay
switches. TDC&E supports all major traffic engineering functions and provides
an accurate, quantifiable reporting mechanism for marketing and quality
assurance functions.
CUSTOMERS
The Company sells its network perfomance management products and
services to the TSP market and several enterprise networks. Historically, the
Company's network test and performance monitoring products have been sold to
the RBOCs. The RBOCs accounted for approximately 99%, 73% and 31% of the
Company's total revenue in years 1995, 1996 and 1997, respectively. In 1997,
the Company expanded its customer base for its network test and performance
monitoring products to include the long distance, or IXC, market with sales
of these products to MCI and Worldcomm. In 1996 and 1997, the Company
acquired and developed several network management OS software products. The
acquisitions added over 30 new customers to the Company's customer base.
Customers for the Company's network management OS software products and
services include MCI, Worldcomm, BC TEL, Fujitsu Australia, OPTUS, GTE,
Sprint/Centel Telephone, MFS, TCG, MGC, TDS, ICG and other TSPs and
enterprise networks. The Company has provided software design services to
Northern Telecom's Network Management Services Division, Telus, BC Tel and
Bell Canada. The Company has increased its sales and marketing efforts aimed
at CLECs, CAPs, IXCs, and enterprise networks. There can be no assurance that
these efforts will be successful. See "Risks and Uncertainties--Competition."
The Company currently has purchase contracts with MCI, BellSouth,
Ameritech and Southwestern Bell. MCI has also entered into license agreements
with the Company. Other TSPs purchase the Company's systems products and
license OS products under standard purchase orders. Since the MCI, BellSouth,
Ameritech and Southwestern Bell contracts may be terminated at either the
customers' or the Company's convenience, the Company believes that these
purchase and license contracts are not materially different than purchasing
or licensing under purchase orders. Most of the Company's customers are
significantly
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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. In 1997, Northern Telecom, MCI and Bell South accounted for 20%, 18%,
and 17% of the Compay's revenue, respectively. In 1996, US WEST, NYNEX, and
Northern Telecom accounted for 31%, 23%, and 15% of the Company's revenue,
respectively.
Prior to selling products to RBOCs and certain IXCs and ITOCs, a
vendor must often first undergo a product qualification process for its
product with these carriers. The Company typically spends from six to 18
months or more discussing its 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 BellCore standards. This process can take from two weeks
to three months or more 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 or more. These field trials are used to
evaluate performance, to assess the ease of installation and to
establish troubleshooting procedures. The evaluating carriers 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 system under evaluation. The system
is then used on live circuits for periods ranging from one to six
months or more to verify functionality and operation.
- PRODUCT SELECTION AND DEPLOYMENT. Prior to product
selection and deployment which may take from one to four months or
more, the evaluating carrier 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 Company's
customers to maintain their approval of the Company's products, failure of
any of the Company's customers to deploy the Company's products or any
attempt by any of the Company's customers 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, or that such
approval will not be significantly delayed. Furthermore, work force
reductions and staff reassignments by the Company's customers 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 operating system 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
telephone company 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
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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 CTS contains many of the core technology building blocks present
in the T3AS. The T3AS is optimized for large cross sections of circuits and
is positioned in series with the network DS3 and DS1, or T1 traffic. CTS, by
contrast, contains DS3/T1/DS0 test resources that are shared among a cross
section of circuits that are passing through DCSs. CTS interfaces to DCS
systems to provide test capability. CTS provides firewall technology by
taking in commands from a tester in a centralized maintenance center and
translating these commands into a sequence of instructions that are sent to
the DCS to configure the circuit access appropriately. In this fashion, the
risk of improper circuit manipulation is minimized since the CTS system
isolates the test technician from the details of the access and automatically
configures the DCS appropriately.
Both the in-line T3AS and the CTS systems are modularly expandable
and support distributed configurations. Subsystems can be optionally
co-located in a common rack or the individual subsystems can be located in
remote locations many miles away and connected to the base system via a
packetized T1 link that is used for transport of control information and DS0
circuits under test. This technology provides for a virtual single network
element configuration with a single interface to the OS while at the same
time allowing the flexibility to locate modular subsystems in smaller remote
locations. In addition, this technology provides a significant cost benefit
since the cost of the common equipment located in the base location is shared
among all remote subsystems. The subsystems can then be configured in a low
cost streamlined fashion since they can rely on the shared base system to
provide a significant amount of functionality.
The Company has evolved it's performance management technology,
originally focusing on the physical layer, and moving to higher levels
addressing logical layers and higher protocol layers. This technology
provides for end-to-end circuit performance management in a diverse network
containing multiple hierarchical transport protocols.
The Company's Remote Module introduces new technology that serves to
extend the performance management capabilities of the T3AS to the customer
premises boundary for use in NIU products. This capability facilitates
sectionalization of network faults on T1 circuits. This technology provides
support for T1 performance monitoring ("PM") and the ability to convey PM
information into the network from the customer premises in a fashion that is
completely transparent to the customer's data. This new technology has been
offered up for standardization and the Company is working closely with the
ANSI, T1R1 and T1M1 standards bodies on incorporating this technology into
the new T1 standards. However, there can be no assurances that this new
technolgy will be adopted by the ANSI, T1R1 and T1M1 standards bodies as an
industry standard.
The Company's OS software products include systems that perform
digital cross connect and add-drop multiplexer service activation, circuit
provisioning, node surveillance and switched fault management, and traffic
data collection and reporting. The products provide capabilities as stand
alone products or can be integrated into a total solution offering with other
ADA products or a TSP's legacy or standards based service management
framework. The software products are designed using the latest
object-oriented methodologies from Booch. The development life cycle process
is well documented and has been registered as ISO 9001 compliant. The
enhanced products are written to support the latest in Relational Database,
ODBC, JDBC, Corba compliant and client server technologies. GUI versions of
the TDC&E and .Provisioner products support JAVA web browser enabling
technology and all products have year 2000 compliance support activities
scheduled in 1998. There can be no assurance that the Company will be
successful in implementing its year 2000 modifications in a timely manner.
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 its
products, to develop and introduce new products for the telecommunications
network performance management market, to address new industry 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 Company's
T3AS test and performance monitoring system include CTS, PAAS, distributed
system and the low-speed subsystem. In addition, the Company continually
seeks to reduce the manufacturing costs of its products by taking advantage
of advances in hardware technology. Finally, new technologies, such as SONET,
frame relay, and ATM 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 network circuit test and performance monitoring systems
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, changing
regulatory environments, price-competitive bidding, 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 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 performance management 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 products which address such transmission standards could in the
future adversely affect the sale and deployment of the Company's network
circuit test and performance monitoring 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 1995, 1996, and 1997, the Company spent $5.8 million, $7.4
million and $9.2 million, respectively, on research and development efforts.
MANUFACTURING AND SUPPLIERS
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The Company's manufacturing operations focus on network systems
products and 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 achieved 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 manufacture of
telecommunications network performance management products, including
associated software that help TSPs 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,
CTS, PAAS 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 few supply agreements and generally
makes its purchases with purchase orders. Further, certain components require
an order lead time of up to one year. Other components that currently are
readily available may become difficult to obtain in the future. Failure of
the Company to order sufficient quantities of these components in advance
could prevent the Company from increasing production 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.
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, 1997, the Company
had open noncancelable purchase commitments of approximately $2.5 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
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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 IXCs 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, 1998, the Company's sales organization consisted of 14
professionals, including 13 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 Company also provides engineering and installation services
("E&I") for customers. These services are performed at the customer site and
involve assisting the customers with the installation of the Company's
products into the customer's 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 and software warranties are two years and one year, respectively.
BACKLOG
At December 31, 1997, the Company had a firm backlog of
approximately $2,672,000, all of which is expected to be filled during fiscal
1998. At December 31, 1996, backlog was approximately $1,885,000. The Company
does not believe the year-to-year increase in backlog is meaningful. The
Company has been operating in a book and ship mode for network systems
products, a trend the Company anticipates will continue. Orders for network
management OS products generally have longer lead times than network systems
products but are generally delivered within six months of the order
placement. 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. To date, cancellation of orders has not
been material.
COMPETITION
Competition in the Company's markets is intense and is characterized
by rapidly changing technologies, conformance with evolving industry
standards, frequent new product introductions and enhancements, rapid changes
in customer requirements, and price-competitive bidding. To maintain and
improve its competitive position, the Company must continue to develop and
introduce, in a timely and cost-effective manner, new products and features
that keep pace with increasing customer requirements. The Company expects
competition in its markets to increase from existing competitors and from
other companies which may enter the Company's current or future markets.
The Company believes the principal competitive factors affecting the
market for its network systems test and performance monitoring products are
product features, price, conformance with BellCore and other industry
transmission standards and specifications; performance and reliability;
technical support; and the maintenance of close working relationships with
customers. The Company's network systems products, especially CTS and Remote
Module, are currently focused in highly competitive market niches. The
environment for CTS and Remote Module is fiercely competitive with respect to
price, product features, established customer-supplier relationships and
conformance with industry standards. The Company believes the current
competitors that provide partial solutions to either performance monitoring
or testing of the DS3, and the DS1 and DS0 circuits that make up the DS3
circuit, include Hekimian Laboratories, Inc. ("Hekimian"), Telecommunications
Techniques Corporation ("TTC"), Anritsu Wiltron Corporation ("Wiltron") and
some of the manufacturers of large transmission equipment and digital
cross-connect test and performance monitoring equipment such as Lucent
Technologies, Inc. ("Lucent"), Alcatel Data Networks ("Alcatel"), Ericsson
Communications Inc. ("Ericsson"), ADC Telecommunications, and Tellabs, Inc.
The Company's Remote Module product addresses the DS1 NIU market in which
current competitors include Westell Inc., Teltrend Inc., and Troncom, Inc.
Many of these
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competitors have significantly greater technical, financial, manufacturing,
and marketing resources than the Company. In addition, in 1997, ANSI adopted
certain of the Company's technology as an industry standard. As a result, the
Company is obligated to grant licenses of this technology to third parties,
including competitors, on fair and equitable terms and may also face
competition from the licensees of its own technology.
The Company believes there are an increasing number of current
competitors in the network management OS market that provide network
management and OS applications for circuit and services provisioning and
services management, testing and test management, fault and alarm management
and surveillance, network and circuit performance monitoring and traffic data
collection and management telecommunications functions. The OS market is
characterized by a wide range of companies that have varying degrees of
market influence. The nature of the network management and OS market is such
that improved technologies and tool sets have made the barriers to entry in
this market relatively small resulting in fierce competition. The principal
competitive factors affecting the Company's network management and OS
products include product quality, performance, price, customer support,
corporate reputation, and product features such as scalability,
interoperability, functionality and ease of use. The Company's existing and
potential competitors offer a variety of solutions to address network
management needs. Competitors include suppliers of standard off-the-shelf
products, custom software developers, large telecommunications equipment
vendors, such as Lucent, Northern Telecom, Fujitsu, and Ericcson, that offer
software applications to manage their own and other suppliers' equipment,
hardware and software vendors including IBM, Sun Microsystems and Hewlett
Packard, and providers of specific network management and OS applications
such as BellCore, Objective Systems Integrators ("OSI"), TCSI Corporation
("TCSI"), Architel and others. Additionally, many of the Company's existing
and potential customers continuously evaluate whether they should develop
their own network management and OS applications or license them from outside
vendors. The Company expects competition in the OS market to increase
significantly in the future.
Additionally, several of the Company's competitors have
long-established relationships with the Company's current and prospective
customers which may adversely affect the Company's ability to successfully
compete for business with these 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.
PROPRIETARY RIGHTS
ADA relies on a combination of technical leadership, trade secret,
patent, 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
customers needs. Currently, the Company has eleven U.S. patents granted (each
of which has a minimum of twelve years remaining) and three U.S. patent
applications allowed. One of the granted patents relates to the Company's
Remote Module product. Additionally, the Company has six pending U.S. patent
applications and four international (Patent Cooperation Treaty and European
Patent Office) 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, consultants 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. 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
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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 February 28, 1998, ADA had approximately 272 full-time
employees, including 149 in engineering, 68 in sales, marketing and customer
support, 24 in operations and 31 in finance, and network and general
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. Certain of the
Company's executive officers 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
COMPETITION. Competition in the Company's markets is intense and is
characterized by rapidly changing technologies, conformance with evolving
industry standards, frequent new product introductions and enhancements,
rapid changes in customer requirements, and price-competitive bidding. To
maintain and improve its competitive position, the Company must continue to
develop and introduce, in a timely and cost-effective manner, new products
and features that keep pace with increasing customer requirements. The
Company expects competition in its markets to increase from existing
competitors and from other companies which may enter the Company's current or
future markets. The Company believes the principal competitive factors
affecting the market for its network systems test and performance monitoring
products are product features, price, conformance with BellCore and other
industry transmission standards and specifications; performance and
reliability; technical support; and the maintenance of close working
relationships with customers. The Company's network systems
products,especially CTS and Remote Module, are currently focused in highly
competitive market niches. The environment for CTS and Remote Module is
fiercely competitive with respect to price, product features, established
customer-supplier relationships and conformance with industry standards. The
Company believes the current competitors that provide partial solutions to
either performance monitoring or testing of the DS3, and the DS1 and DS0
circuits that make up the DS3 circuit, include Hekimian, TTC, Wiltron and
some of the manufacturers of large transmission equipment and digital
cross-connect test and performance monitoring equipment such as Lucent,
Alcatel, Ericsson, ADC Telecommunications, and Tellabs, Inc. The Company's
Remote Module product addresses the DS1 NIU market in which current
competitors include Westell Inc., Teltrend Inc., and Troncom, Inc. Many of
these competitors have significantly greater technical, financial,
manufacturing, and marketing resources than the Company. In addition, in
1997, ANSI adopted certain of the Company's technology as an industry
standard. As a result, the Company is obligated to grant licenses of this
technology to third parties, including competitors, on fair and equitable
terms and may also face competition from the licensees of its own technology.
The Company believes there are an increasing number of current
competitors in the network management OS market that provide network
management and OS applications for circuit and services provisioning and
services management, testing and test management, fault and alarm management
and surveillance, network and circuit performance monitoring and traffic
management telecommunications functions. The OS market is characterized by a
wide range of companies that have varying degrees of market influence. The
nature of the network management OS market is such that improved technologies
and tool sets have made the barriers to entry in this market relatively small
resulting in fierce competition. The principal competitive factors affecting
the Company's network management OS products include product quality,
performance, price, customer support, corporate reputation, and product
features such as scalability, interoperability, functionality and ease of
use. The Company's existing and potential competitors offer a variety of
solutions to address network management needs. Competitors include suppliers
of standard off-the-shelf products, custom software developers, large
telecommunications equipment vendors that offer software applications to
manage their own and other suppliers' equipment, such as Lucent, Northern
Telecom, Fujitsu, and Ericsson, hardware and software vendors, including IBM,
Sun Microsystems and Hewlett Packard, and providers of specific network
management and OS applications, such as BellCore, OSI, TCSI, Architel and
others. Additionally, many of the Company's existing and potential customers
continuously evaluate whether they should develop their own network
management and OS applications or license them from outside vendors. The
Company expects competition in the OS market to increase significantly in the
future. Additionally, several of the Company's competitors have
long-established relationships with the Company's current and prospective
customers which may adversely affect the Company's ability to successfully
compete for business with these 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.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; HISTORY OF LOSSES. 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 results of operations to vary significantly from quarter
to quarter include but are not limited to the size and timing of customer
orders and subsequent shipment of systems products and implementation of OS
software products to major customers, timing and market acceptance of product
introductions or enhancements by the Company or its competitors, customer
order deferrals in anticipation of new products, technological changes in the
telecommunications industry, competitive pricing pressures, changes in the
Company's operating expenses, personnel changes, management of a changing
business, changes in the mix of products sold and licensed, disruption in
sources of supply, changes in pricing policies by the Company's suppliers,
regulatory changes, capital spending, delays of payments by customers and
general economic conditions. The Company believes that in late 1997 it began
experiencing seasonality in its product shipments and OS software licensing.
Generally, TSPs place more orders for products and licenses in the second and
fourth quarters, with the orders significantly down in the first quarter and
relatively flat in the third quarter of each year. The Company expects that
revenue may begin to reflect these seasonal order cycles more closely, which
could result in quarterly fluctuations. There can be no assurance that the
TSPs will not defer or delay orders contrary to the historical seasonal
pattern or that they will not change their ordering patterns. 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.
As the impact of the Company's Network Management business unit on the
Company's revenue increases, the Company may be faced with greater
fluctuations in operating income. The licensing and implementation of the
Company's OS products generally involves a significant capital expenditure
and a commitment of resources by prospective customers. Accordingly, the
Company is dependent on its customers' decisions as to the timing and level
of commitment and expenditures. In addition, the Company typically realizes a
significant portion of license revenues in the last weeks or even days of a
quarter. As a result, the magnitude of quarterly fluctuations in the Network
Management business unit may not become evident until late in, or after the
close of, a particular quarter. In addition, the Company does not recognize
service revenues until the services are rendered. The time required to
implement the Company's OS products can vary significantly with the needs of
its customers and is generally a process that extends for several months.
Because of their complexity, larger implementations may take multiple
quarters to complete. Additionally, quarter-to-quarter product mix
variations, customer orders tending to be placed in late in the quarter, and
competitive pressures on pricing could have a materially adverse effect on
the Company's operating results in any one quarter. The Company's expenses
are based in part on the Company's expectations as to future revenues and to
a large extent are fixed in the short term. If revenues do not meet
expectations, the Company's business, operations and financial condition are
likely to be materially adversely affected. The Company has experienced
losses in the past and there can be no assurance that the Company will not
experience losses in the future.
CONCENTRATION OF MAJOR CUSTOMERS; TELEPHONE COMPANY QUALIFICATION
REQUIREMENTS. The market for the Company's products and services currently
consists of the five RBOCs, IXCs, LECs, CLECs, CAPs, ISPs, enterprise
networks and other TSPs. Historically, the Company's marketing efforts
focused primarily on the RBOCs, which accounted for approximately 99%, 73%
and 31% of the Company's total revenue in 1995, 1996, and 1997, respectively.
However, the Company's strategy has been to focus its efforts on diversifying
its customer base. RBOCs, IXCs and enterprise customers accounted for 31%,
27% and 20% of the Company's total revenue in 1997, respectively. The
increased customer base is primarily a function of the Company's acquisitions
in 1996 of Applied Computing Devices, Inc. ("ACD") and the Special Services
Network ("SSN") division of MPR Teltech Inc. and the acquisition of the DSS
II license from Northern Telecom in 1997. As a result of these acquisitions,
the Company added OS related products and services that the Company has been
able to market to a wider group of customers. In addition, the Company added
a number of TSPs that were new customers to the Company. To date, the OS
customers tend to be long distance telephone companies, CAPs and enterprise
vendors who have not invested in legacy systems from BellCore. While the
Company believes its customer base diversification is beneficial to the
Company, there can be no assurances that the Company will be able to continue
expanding the distribution of its OS and system products and services to
additional prospective customers. In addition, 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, a delay in deployment of the Company's
products or the cancellation, modification or non-renewal of license or
maintenance agreements could materially and adversely affect the Company's
business, operating results and financial condition. BellSouth, Ameritech,
Southwestern Bell and MCI have entered into purchase contracts with the
Company. MCI has also entered into license agreements with the Company. Other
TSPs purchase the Company's network system products and license OS products
under standard purchase orders. Since the RBOC and MCI contracts may be
terminated at either the customer's or the Company's convenience of the RBOC
or MCI, the Company believes that the purchase contracts and license
agreements are not materially different than purchasing or licensing under
purchase orders. Prior to selling products to RBOCs and certain other TSPs, a
vendor must often first undergo a product qualification process with the TSP
for its products. Although the qualification process for a new product varies
somewhat among these prospective customers, the Company's experience is that
the process often takes a year or more. Currently, the five RBOCs, MCI,
Worldcomm and several other customers have qualified the Company's products,
when required. Any failure on the part of any of the Company's customers to
maintain their qualification of the Company's products, failure of any of the
TSPs to deploy the Company's products, or any attempt by any of the TSPs to
seek out alternative suppliers could have a material adverse effect on the
Company's business, operating results and financial condition. 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,
work force reductions and staff reassignments by some of the Company's
customers have in the past delayed the product qualification process, and the
Company expects such reductions and reassignments to continue in the future.
There can be no assurance that such reductions and reassignments will not
have a material adverse effect on the Company's business, operating results
and financial condition.
HIGH DEPENDENCE ON TWO PRODUCT LINES. Historically, the majority of the
Company's revenue has been derived from the sale of its network systems
products and services. However, as a result of acquisitions completed in 1996
and 1997, the Company added additional product lines and derived revenue from
a product mix of both network systems products and services and network
management OS software products and services. Revenue from network systems
products and services, including CTS, T3AS and Remote Module generated 74%
and 50% of the Company's total revenues in 1996 and 1997, respectively.
Revenue from network management OS products and services, including software
design services, .Provisioner, Test OS, TDC&E and FMS generated 26% and 50%
of the Company's total revenue in 1996 and 1997, respectively. However, there
can be no assurance that the Company's future revenues will not be heavily
dependent on sales from one of its primary product lines. The Company is
investing in the expansion of these two product lines through the
enhancement, development and marketing of its NIU, CTS, PAAS, T3AS and OS
products. Failure by the Company to enhance either its existing products and
services or 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.
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 continues to face significant management challenges related to
the integration of the business operations of the new organizations'
personnel, products, services and technologies acquired. In 1996, the Company
formed two business units: the Network Systems business unit and the Network
Management business unit. The business units are a result of the evolution of
the Company from a single product line to multiple product lines. The Network
Management business unit focuses on OS software products including
.Provisioner, Test OS, GTA. Sectionalizer, FMS, TDC&E, and OS design
services. The Network Systems business unit is built around the
-15-
<PAGE>
Company's test and performance management products, including T3AS, CTS,
Remote Module and PAAS products. There can be no assurance that the Company
will be successful in managing its new business unit structure. In June 1997,
the Company acquired a license from Nortel to its DSS II software product and
technology. The Company markets and supports the DSS II product and
technology under the new name .Provisioner. The Company is integrating the
licensed technology into new product development. The acquisition of the
software license has generated a shift in the Company's Canadian subsidiary's
operations from a software design services business to a product business and
the transition will likely place a significant strain on the Company's
management, information systems and operations and there can be no assurance
that such a transition can be successfully managed. In addition, in November
1997, the Company opened an office in Richardson, Texas to expand new product
development efforts. 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 management of
a geographically distributed organization, and in hiring sufficient numbers
of qualified personnel to support the expansion of the business. The Company
may also make future acquisitions where it believes it can acquire new
products or otherwise rapidly enter new or emerging markets. Mergers and
acquisitions of high technology companies are inherently risky and can place
significant strains on the Company's management, information systems and
operations. The Company is not able to forecast additional strains that may
be placed on the Company's management, information systems and operations as
a result of recent or future acquisitions or in the future. The Company's
potential inability to manage its changing business effectively could have a
material adverse effect on the Company's business, operating results, and
financial condition.
CUSTOMER MERGERS. Of the nine major TSPs currently involved in or that
have recently completed merger transactions, seven are customers of the
Company. Several of the mergers involve companies that purchase network
systems and software products 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 and thereafter
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, future merger transactions
involving or contemplated by the Company's current or prospective
-16-
<PAGE>
customers may cause increased concentration among some of the Company's major
customers or delays or decreases in their capital spending decisions, any of
which could have a material adverse effect on the Company's business,
operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS. The market
for the Company's products is characterized by rapid technological advances,
evolving industry transmission standards, changing regulatory environments,
price-competitive bidding, changes in customer requirements, and frequent new
product introductions and enhancements. The introduction of
telecommunications network test and performance management products involving
superior technologies or the evolution of alternative technologies or new
industry transmission standards could render the Company's existing products,
as well as products currently under development, obsolete and unmarketable.
The Company believes its future success will depend in part upon its ability,
on a cost-effective and timely basis, to continue to enhance its products, to
develop and introduce new products for the telecommunications network and
performance management market, to address new industry 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 network circuit test and performance
monitoring systems do not address either the SONET or SDH transmission
standards. The Company intends to extend its current products and develop new
products to accommodate such new transmission standards 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 products which address such transmission standards could in the
future adversely affect the sale and deployment of the Company's products.
The Company's OS products are designed to operate on a variety of
hardware and software platforms and with a variety of databases employed by
its customers in their networks. The Company must continually modify and
enhance its OS products to keep pace with changes in hardware and software
platforms and database technology. As a result, uncertainties related to the
timing and nature of new product announcements, introductions or
modifications by systems vendors, particularly, Sun Microsystems and Hewlett
Packard, and by vendors of relational database software, particularly, Oracle
Corporation could materially adversely impact the Company's business,
operations and financial condition. In addition, the failure of the Company's
OS products to operate across the various existing and evolving versions of
hardware and software platforms and database environments employed by
customers would have a material adverse effect on the Company's business,
operations and financial condition.
The introduction or announcement of products by the Company or one or
more of its competitors embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's existing
products and solutions obsolete and unmarketable. The introduction of new or
enhanced versions of its products requires the Company to manage the
transition from older products in order to minimize disruption in customer
ordering. There can be no assurance that the introduction or announcement of
new product offerings by the Company or its competitors will not cause
customers to defer licensing or purchasing of existing Company products or
engaging the Company's services. Any deferral of revenues could have a
material adverse effect on the Company's business, operations and financial
condition.
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. Certain components used in
the Company's T3AS, CTS, PAAS and Remote Module products, including its VLSI
ASICs, are available from a single source and other components are available
from only a limited number of sources. The Company has few supply agreements
and generally makes its purchases with purchase orders. Further, certain
components require an order lead time of up to one year. Other components
that currently are readily available may become difficult to obtain in the
future. Failure of the Company to order sufficient quantities of these
components in advance could prevent the Company from increasing production in
response to customer orders in excess of amounts projected by the Company. In
the past, the Company has experienced delays in the receipt of certain of its
key components, which have resulted in delays in product deliveries. There
can be no assurance that delays in key component and part deliveries will not
occur in the future.
-17-
<PAGE>
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.
HIGH INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS. To
respond to anticipated customer demand, the Company maintains high inventory
levels. Maintaining high inventory levels substantially increases the risk
that the Company's profitability and results of operations may from time to
time be materially and adversely affected by inventory obsolescence. To
procure adequate supplies of certain products or components, the Company must
make advance commitments to purchase relatively large quantities of such
products or components in a number of circumstances. A large portion of the
Company's purchase commitments consists of custom parts, some of which are
sole-source such as VLSI ASICs, for which there is no alternative use or
application. The inability of the Company to sell such products or
incorporate such components in its other products could have a material
adverse effect on the Company's business, operating results and financial
condition.
YEAR 2000 COMPLIANCE. Many installed computer systems and software
products are coded to accept only two digit entries in the date code field.
As the year 2000 approaches, these code fields will need to accept four digit
entries to distinguish years beginning with "19" from those beginning with
"20" dates. As a result, in less than two years, computer systems and/or
software products used by many companies may need to be upgraded to comply
with such year 2000 requirements. The Company is assessing its products, as
well as its internal management information systems in order to identify and
modify those products and systems that are not year 2000 compliant. Based
upon a preliminary assessment, the Company expects such modifications will be
made on a timely basis and does not believe that the cost of such
modifications will have a material effect on the Company's operating results
or financial condition. There can be no assurance, however, that the
Company's preliminary assessment is accurate. If the Company encounters any
unanticipated delays in or costs associated with the implementation of such
changes, in particular with respect to the Company's products, the Company's
business, operating results and financial condition could be materially
adversely affected.
PRODUCT RECALL AND DEFECTS. Producers of telecommunications network
performance management products 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 many of its customers. The
Company's products are also required to interface in a complex and changing
environment with telecommunication network equipment made by numerous other
suppliers. Since many of these suppliers are competitors of the Company,
there can be no assurance that they will cooperate with the Company. In the
event there are material deficiencies or defects in the design or manufacture
of the Company's systems, or if the Company's systems become incompatible
with existing third-party network equipment, the affected products could be
subject to a recall. The Company has experienced two significant product
recalls in its history and there can be no assurance that the Company will
not experience any product recalls in the future. The cost of any subsequent
product recall and associated negative publicity could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company's development and enhancement of its
complex OS products entails substantial risks of product defects. There can
be no assurance that software errors will not be found in existing or new
products or releases after commencement of commercial licensing, which may
result in delay or loss of revenue, loss of market share, failure to achieve
market acceptance, or may otherwise adversely impact 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. Moreover, the federal and
state courts and the FCC continue to interpret and clarify the provisions of
the 1996 Telecommunications Act. 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 judicial or regulatory rulings by federal
and state agencies on the Company's customers may adversely impact the
Company's business, operating results and financial condition.
-18-
<PAGE>
POTENTIAL COMPETITION FROM RBOCS. The 1996 Telecommunications Act has
generally eliminated the restrictions which had previously prohibited the
RBOCs from manufacturing telecommunications equipment (subject to first
satisfying certain conditions designed to facilitate local exchange
competition and receipt of prior approval by the FCC). These restrictions had
been imposed under the Modification of Final Judgment, which governed the
structure of the 1984 divestiture by AT&T of its local operating telephone
company subsidiaries. The passage of the 1996 Telecommunications Act may have
an adverse effect on the Company because the RBOCs, which are presently the
Company's principal customers, may now become manufacturers of some or all of
the products currently manufactured and sold by the Company and,
consequently, may no longer purchase telecommunications equipment produced by
the Company at the levels historically experienced.
PROPRIETARY TECHNOLOGY. The Company relies on a combination of
technical leadership, patent, trade secret, copyright and trademark
protection and non-disclosure agreements to protect its proprietary rights.
Although the Company has pursued and intends to continue to pursue patent
protection of inventions that it considers important and for which such
protection is available, the Company believes its success will be largely
dependent on its reputation for technology, product innovation,
affordability, marketing ability and response to customers needs. Currently,
the Company has eleven U.S. patents granted and three U.S. patent
applications allowed. One of the granted patents relates to the Company's
Remote Module product. Additionally, the Company has six pending U.S. patent
applications and four international (Patent Cooperation Treaty and European
Patent Office) applications on file covering various circuit and system
aspects of its products. There can be no assurance that the Company will be
granted additional patents or that, if any patents are granted, they will
provide the Company's products with significant protection or will not be
challenged. Additionally, should a third party challenge any of the Company's
current or future patents, there can be no assurance that the Company will be
successful in defending its patents or that any litigation, regardless of
outcome, will not result in substantial cost to and diversion of efforts by
the Company. As part of its confidentiality procedures, the Company generally
enters into non-disclosure agreements with its employees, consultants 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 currently not party to any litigation
regarding any patents or other intellectual property rights. However, there
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertions will not result
in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties. There can be no assurance that
any such licenses would be available on terms acceptable to the Company, if
at all. Further, litigation, regardless of outcome, could result in
substantial cost to and diversion of efforts by the Company. Any infringement
claims or litigation by or against the Company could materially and adversely
affect the Company's business, operating results and financial condition.
Moreover, the laws of some foreign countries do not protect the Company's
proprietary rights in the products to the same extent as do the laws of the
United States.
The Company relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurance that these third party software licenses will continue to
be available to the Company on commercially reasonable terms or that such
licenses will not be terminated. Although the Company believes that
alternative software is available from other third party suppliers, the loss
of or inability of the third parties to enhance their products in a timely
and cost-effective manner could result in delays or reductions in product
shipments by the Company until equivalent software could be developed
internally or identified, licensed, and integrated, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
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
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<PAGE>
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.
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 62,368
square feet of space in one building. The lease expires in 2003. The
Company has sub-leased a portion of the San Diego facility through 1998. The
Company also leases additional office facilities in Terre Haute, Indiana,
Burnaby, British Columbia and Richardson, Texas, all of which house product
development and customer support operations. The Company leases 12,600,
25,604 and 14,750 square feet of space in Terre Haute, Burnaby and
Richardson, respectively. The Terre Haute, Burnaby and Richardson leases
expire in September 1998, December 1999 and January 2005, respectively. The
Terre Haute lease includes an option to extend the lease term one year from
the September 1998 expiration date. The Company believes that its existing
facilities will be adequate to meets its needs through 1998.
ITEM 3. LEGAL PROCEEDINGS
From time to time, ADA may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this Annual Report, the Company is not a party to any legal
proceedings.
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 sets forth the high and low sales prices the Company's common
stock for the periods indicated.
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
First Quarter $ 8.50 $ 4.88
Second Quarter 9.38 3.63
Third Quarter 10.00 6.50
Fourth Quarter 11.88 5.00
1996 High Low
---- ---- ---
First Quarter $17.00 $ 9.50
Second Quarter 19.00 9.75
Third Quarter 11.75 6.25
Fourth Quarter 8.75 4.75
</TABLE>
There were 237 shareholders of record as of February 28, 1998.
Dividend Policy
Applied Digital Access has not declared or paid any cash dividends on its
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.
-20-
<PAGE>
Use of Proceeds
The following information is being provided in accordance with Rule 463
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
and Item 701 of Regulation S-K under the Securities Act.
The Company registered 2,590,000 shares of Common Stock (the "Shares") on
registration statement No. 33-75258 which was declared effective on March 29,
1994 (the "Offering"). The co-managing underwriters of the Offering were
Alex. Brown & Sons Incorporated and Hambrecht & Quist Incorporated. The
Company sold 2,590,000 Shares with an aggregate offering price of $31,080,000
(or $12.00 per share). The net offering proceeds to the Company after
deducting estimated total expenses were $28,334,000. From the effective date
of the Offering to December 31, 1997, the Company has used all of the net
proceeds for working capital, as was originally anticipated in the Offering.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands) 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $14,259 $35,597 $20,470 $24,422 $34,050
Gross Profit 7,125 20,791 11,753 11,813 15,116
Operating Expenses:
Research and development 3,902 5,335 5,807 7,356 9,164
In process research and development related
to acquisition - - - 3,286 1,578
Sales and marketing 2,406 3,363 4,234 6,312 7,995
General and administrative 1,354 2,337 2,985 3,576 5,252
------- ------- ------- ------- -------
Total operating expenses 7,662 11,035 13,026 20,530 23,989
Net income (loss) (619) 10,620 759 (7,120) (4,283)
------- ------- ------- ------- -------
Net income (loss) per share, basic (1) $ (.75) $ 1.01 $ .06 $ (.59) $ (.34)
------- ------- ------- ------- -------
Net income (loss) per share, diluted (1)
$ (.07)(2) $ .88 $ .06 $ (.59) $ (.34)
------- ------- ------- ------- -------
Weighted average number of shares,
basic (1) 820 10,542 11,806 12,084 12,460
Weighted average number of shares,
diluted (1) 8,693(2) 12,091 12,848 12,084 12,460
Working Capital $ 2,251 $26,081 $36,728 $31,229 $26,788
Total assets 6,878 48,919 49,936 45,972 46,283
Long-term debt 117 82 49 33 15
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing net income per share. Amounts have been restated for the
adoption of Statement of Financial Accounting Standard No. 128 "Earnings
Per Share".
(2) Weighted average shares outstanding includes 55,105,577 shares of preferred
stock which converted into 7,872,199 shares of common stock in connection
with the Company's initial public offering in March 1994 after giving
effect to the 1-for-7 reverse stock split, immediately prior to the
closing of the initial public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Developments
In September 1997, the Company entered into a JDA with Nortel to develop
unique SONET network products for the telecommunications industry. Nortel and
ADA will each contribute technology and development resources to projects
conducted under the JDA. The companies will equally share development costs,
estimated to be several million dollars per quarter. Development of the first
product under the JDA has commenced with initial availability expected in the
first half of 1999. The agreement also contemplates additional projects as
agreed to in the future by Nortel and ADA. Operating expenses for the year
ended December 31, 1997 include a $2.2 million offset to research and
development costs representing Nortel's proportionate share of development
costs that have been incurred through December 31, 1997 in connection with
the initial project being conducted under the JDA.
In June 1997, the Company acquired an exclusive worldwide license to Northern
Telecom's DSS II OS software product, subject to certain residual rights
retained by Northern Telecom. The Company acquired the license and certain
assets related to the DSS II product for a net amount of $3.1 million in
cash, $2.2 million of which was paid in 1997 and $0.9 million of which was
paid in January 1998. In June 1997, the Company recorded a charge of
approximately $1.6 million for purchased research and development associated
with the acquisition of the license and assets. As part of the transaction,
the Company also issued Northern Telecom a warrant to purchase 150,000 shares
of the Company's common stock at an exercise price of $12 per share. The
warrant has a three year term. Northern Telecom retained the right to and
will continue to support its current DSS II customer base outside of North
America as part of its integrated network management portfolio for broadband
network solutions. The Company obtained exclusive worldwide rights to market
and sell the DSS II product under the new name, .Provisioner, and acquired
all of Northern Telecom's North American DSS II customer relationships. The
acquisition of .Provisioner was part of the Company's strategic plan to build
upon its portfolio of network management OS software products essential to
the operation of TSP networks. The first part of the plan involved the
acquisition by the Company of its Vancouver-based development team known as
British Columbia Group ("BCG") from MPR Teltech, Ltd., a subsidiary of BC
Telecom, Inc., in July 1996. BCG has been responsible for design,
development, and maintenance of DSS II and its predecessor DSS since 1986,
most recently under contract to Northern Telecom's Network Services
Management Division.
In June 1997, the Company signed a three year supply contract with MCI for
the Company's systems and services products. This contract is a standard
supply contract which specifies the terms and conditions under which MCI will
order and the Company will supply products and services. The contract is not
a commitment contract and does not guarantee any purchases of products and
services or any level of purchases. Although MCI has purchased certain
products of the Company under the terms of this contract, the Company is
uncertain whether this contract will result in any future orders for the
Company's products, or if it does, whether the orders will result in
significant revenue.
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<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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue 100% 100% 100%
Cost of revenue 44% 52% 43%
--- --- ---
Gross profit 56% 48% 57%
Operating Expenses:
Research and development 27% 30% 28%
Purchased in-process research and
development related to acquisitions 5% 13% -
Sales and marketing 23% 26% 21%
General and administrative 15% 5% 14%
--- --- ---
Total operating expenses 70% 84% 63%
--- --- ---
Operating income (loss) (15)% (36)% (6)%
Other income (expense), net 3% 7% 10%
--- --- ---
Income (loss) before income taxes (12)% (29)% 4%
Provision for income taxes (1)% - -
--- --- ---
Net income (loss) (13)% (29)% 4%
--- --- ---
--- --- ---
</TABLE>
1997 COMPARED WITH 1996
Revenue totaled $34,050,000 in 1997, a 39% increase from $24,422,000
in 1996. The increase is primarily the result of revenue generated from
network management OS software design services and products acquired through
acquisitions during 1997 and 1996. Revenue from the Company's network systems
products and services totaled $17,061,000 in 1997, a 6% decrease from
$18,144,000 in 1996. The decrease was the net result of decreased sales of
the Company's T3AS system offset by sales of the Company's CTS products to
MCI and Worldcomm and increased sales of the Company's Remote Module to
BellSouth. Revenue from network management OS services and products totaled
$16,989,000 in 1997, a 171% increase from $6,278,000 in 1996. The majority of
the increase was the result of increased sales of software design services to
Northern Telecom and sales of the Company's .Provisioner software product to
BC Tel and MCI. Since the Company acquired its software design services
business in July 1996, the increased revenue in 1997 was mostly the result of
a full year of software design services revenue. The license of .Provisioner
was acquired from Northern Telecom in June 1997. The acquisition of the
software license from Northern Telecom has generated a shift in the Company's
BCG operations from a software design services business to a product
business. The Company markets and supports the DSS II product and technology
under the new name .Provisioner. The Company also intends to integrate the
licensed technology into new product development. Although the Company has
continued to market and develop the software design services business, future
revenue levels for software design services are expected to be significantly
lower than in the past due to the shift in BCG's operations. Although the
Company believes it will be successful in transitioning the majority of its
OS operations from a software design services business to a product business,
there can be no assurance the Company will be able to maintain historical OS
revenue levels in the future. As a result, the Company may experience
quarterly revenue fluctuations in the future that could have a material
adverse effect on the Company's business, operating results and financial
condition. In 1997, Northern Telecom, MCI and Bell South accounted for 20%,
18%, and 17% of the Company's revenue, respectively. In 1996, US WEST, NYNEX,
and Northern Telecom accounted for 31%, 23%, and 15% of the Company's
revenue, respectively.
Gross profit totaled $18,934,000 in 1997, a 60% increase from
$11,813,000 in 1996. Gross profit as a percent of revenue was 55% in 1997
compared to 48% in 1996. The increases in gross profit and gross profit as a
percent of revenue resulted primarily from increased sales of higher margin
network management OS software products partially offset by decreased sales
of network systems products as well as a change in product mix for network
systems products from T3AS systems to a product mix weighted toward the
Company's CTS and Remote Module NIU products which carry lower product
margins compared to the Company's T3AS system. The highly competitive CTS and
NIU markets are subject to severe pressures which have contributed to
significantly lower overall gross profits on these products. Additionally,
gross profit for the year increased due to the shift of a majority of
engineering labor previously associated with design services revenue from the
cost of revenue line to research and development operating expenses as a
result of the transition of most of BCG's operations from design services to
product development. During 1997, the Company transitioned the majority of
BCG's operations from OS software design services to OS product development
as a result of the acquisition of the license to the DSS II product from
Northern Telecom. There can be no assurance that the Company will be able to
maintain the current gross profit margins 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
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.
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Research and development expenses totaled $9,164,000 in 1997, a 25%
increase from $7,356,000 in 1996. The increase was primarily due to a shift
of a majority of engineering labor previously associated with design services
revenue from the cost of revenue line to research and development operating
expenses as a result of the transition of most of BCG's operations from
design services to product development as discussed above in the gross profit
analysis, and the addition of research and development personnel as part of
the JDA with Nortel. Research and development personnel expenses increased
57% compared to 1996, mostly related to the shift in the BCG's operations to
a product oriented business. 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. The competition
for highly qualified engineering personnel is intense. There can be no
assurance that the Company will be successful in attracting and retaining key
personnel required to develop new products which could have a material
adverse effect on the Company's future operating results.
In 1997, the Company recorded a one-time charge for purchased
research and development costs related to the acquisition of the DSS II
software license and related assets of $1,578,000. In 1996, the Company
acquired certain assets of both ACD in Terre Haute, Indiana and the SSN
division of MPR Teltech, in Vancouver, British Columbia. See Note 14 of Notes
to Consolidated Financial Statements for additional information. In
conjunction with the ACD and SSN acquisitions, the Company recorded one-time
charges for purchased research and development costs of $1,186,000 and
$2,100,000, respectively.
Sales and marketing expenses totaled $7,995,000 in 1997, a 27%
increase from $6,312,000 in 1996. The increase is due to increased personnel
costs in the network management business unit supporting the shift from a
design services business to a product based business, a full year of expenses
for the personnel acquired in 1996 and increased commission expenses as a
result of increased sales. 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 units.
General and administrative expenses totaled $5,260,000 in 1997, a
47% increase from $3,576,000 in 1996. The majority of the increase was
attributable to the amortization of goodwill and intangible assets associated
with the SSN acquisition in the third quarter of 1996 and the license
acquisition from Northern Telecom in June 1997, as well as increased
personnel and infrastructure expenses required to support the expanded
operations of the Company as a result of the 1996 and 1997 acquisitions. 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 to integrate the Company's geographically distributed
organization.
Interest income totaled $904,000 in 1997, a 46% decrease from
$1,673,000 in 1995. The decrease is the result of a decrease in cash
investments during 1997 compared to 1996.
In 1997 and 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%. At December 31, 1997, the Company had federal
income tax-loss carry-forwards of approximately $15,644,000 and California
state income tax-loss carry-forwards of approximately $7,561,000. 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. See
Note 11 of Notes to Consolidated Financial Statements. 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 Consolidated
Financial Statements.
As a result of the factors discussed above, the Company incurred a
net loss of $4,283,000, or $.34 per basic and diluted share in 1997 compared
to net loss of $7,120,000, or $.59 per basic and diluted share in 1996.
Excluding $1,578,000 in one-time charges for purchased research and
development costs associated with the license acquisition from Northern
Telecom, the Company would have recorded a net loss of $2,705,000, or $.22
per basic and diluted share in 1997. Excluding $3,286,000 in one-time charges
for purchased research and development costs associated with the ACD and SSN
asset acquisitions, the Company would have recorded a net loss of $3,834,000,
or $.32 per basic and diluted share in 1996.
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
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last year due to continued capital constraints at 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.
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.
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.
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.
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 acquisitions in 1996 offset by a decrease in legal expenses compared
to 1995 as a result of greater legal expense in 1995 related to the
settlement of a shareholder suit.
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
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<PAGE>
tax-loss carry-forwards of approximately $12,987,000 and California state
income tax-loss carry-forwards of approximately $5,835,000.
As a result of the factors discussed above, the Company incurred a
net loss of $7,120,000, or $.59 per basic and diluted share in 1996 compared
to net income of $759,000, or $.06 per basic and diluted 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 would have recorded a net loss of $3,834,000, or $.32 per basic and
diluted share in 1996.
Quarterly Results
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 results of operations to vary significantly from
quarter to quarter include but are not limited to the size and timing of
customer orders and subsequent shipment of systems products and
implementation of OS software products to major customers, timing and market
acceptance of product introductions or enhancements by the Company or its
competitors, customer order deferrals in anticipation of new products,
technological changes in the telecommunications industry, competitive pricing
pressures, changes in the Company's operating expenses, personnel changes,
management of a changing business, changes in the mix of products sold and
licensed, disruption in sources of supply, changes in pricing policies by the
Company's suppliers, regulatory changes, capital spending, delays of payments
by customers and general economic conditions. The Company believes that in
late 1997 it began experiencing seasonality in its product shipments and OS
software licensing. Generally, TSPs place more orders for products and
licenses in the second and fourth quarters with the orders significantly down
in the first quarter and relatively flat in the third quarter of each year.
The Company expects that revenue may begin to reflect these seasonal order
cycles more closely, which could result in quarterly fluctuations. There can
be no assurance that the TSPs will not defer or delay orders contrary to the
historical seasonal pattern or that they will not change their ordering
patterns. 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.
As the impact of the Company's Network Management business unit on
the Company's revenue increases, the Company may be faced with greater
fluctuations in operating income. The licensing and implementation of the
Company's OS products generally involves a significant capital expenditure
and a committment of resources by prospective customers. Accordingly, the
Company is dependent on its customers' decisions as to the the timing and
level of commitment and expenditures. In addition, the Company typically
realizes a significant portion of license revenues in the last weeks or even
days of a quarter. As a result, the magnitude of quarterly fluctuations in
the Network Management business unit may not become evident until late in, or
after the close of, a particular quarter. In addition, the Company does not
recognize service revenues until the services are rendered. The time required
to implement the Company's OS products can vary significantly with the needs
of its customers and is generally a process that extends for several months.
Because of their complexity, larger implementations may take multiple
quarters to complete. Additionally, quarter-to-quarter product mix
variations, customer orders tending to be placed late in the quarter, and
competitive pressures on pricing could have a materially adverse effect on
the Company's operating results in any one quarter. The Company's expenses
are based in part on the Company's expectations as to future revenues and to
a large extent are fixed in the short term. If revenues do not meet
expectations, the Company's business, operations and financial condition are
likely to be materially adversely affected.
Liquidity and Capital Resources
Cash and investments totaled $13,179,000 at December 31, 1997 and
$21,461,000 at December 31, 1996. The 1997 decrease in cash and investments
compared to 1996 is primarily due to cash payments for the acquisition of the
DSS II license from Northern Telecom, purchases of property and equipment and
1997 operating losses.
Net working capital totaled $26,788,000 at December 31, 1997 and
$31,229,000 at December 31, 1996. The 1997 decrease in working capital
compared to 1996 was primarily the result of a decrease in cash and
investments and increased accounts payable associated with inventory
purchases for fourth quarter revenue shipments, partially offset by an
increase in accounts receivable.
The Company's 1997 operating activities used $3,528,000 in cash
primarily the result of increased accounts receivable resulting from a
majority of the Company's fourth quarter sales occurring late in the quarter
and increased operating expenses related to internal funding of the JDA with
Nortel, partially offset by increased accounts payable and decreased
inventory levels. In 1996, the Company's operating activities used $2,265,000
in cash primarily as a result of net operating losses.
In 1997, the purchase cost of the DSS II license acquisition totaled
$3,383,000, of which all but $867,000 had been paid in cash by year end. The
tangible assets acquired as part of the DSS II license acquisition consisted
mostly of computer and lab equipment. Cash used for capital expenditures
totaled approximately $2,432,000 in 1997 and $1,709,000 in 1996. Most of the
capital additions were for the purchase of computers, lab equipment and
software tool kits to support the Company's expanded research and product
development efforts, improvements to the Company's internal network
infrastructure to support the Company's multiple locations and the BCG
operations move to a new facility in February 1997. The Company did not
acquire any capital equipment through capital lease arrangements in 1997 or
1996. The Company expects that the level of capital expenditures will
increase in 1998 as a result of planned facility moves in Richardson, Texas
and planned research and 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 and there can be no assurance that the Company will
be able to obtain such agreements or commitments on reasonable terms, or at
all.
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The Company believes the impact of inflation on its business
activities has not been significant to date.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined
as the change in equity in a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS
No. 131 requires publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operating decision
maker. Specific information to be reported for individual segments includes
profit or loss, certain revenue and expense items and total assets. The
impact of adopting SFAS No. 130 and SFAS No. 131, both effective for the
Company in 1998, has not yet been determined.
In October 1997, the American Institute of Certified Public
Accountants issued State of Position 97-2 ("SOP 97-2"), SOFTWARE REVENUE
RECOGNITION. This statement establishes requirements for revenue recognition
for software companies for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the impact of SOP 97-2 and has not
determined the result, if any, on the Company's financial position, results
of operations or cash flows.
The Company has adopted the provisions of SFAS No. 128, EARNINGS PER
SHARE, effective December 31, 1997. SFAS No. 128 requires the presentation of
basic and diluted earnings per share. Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed giving
effect to all dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the conversion of convertible preferred stock
(using the "if converted") method) and exercise of stock options and warrants
for all periods. All prior period earnings per share amounts have been
restated to comply with SFAS No. 128.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth on pages F-1 through F-24 of
this Annual Report.
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
"Director Nominees," appearing in the Proxy Statement, is incorporated
herein by reference.
Identification of Executive Officers. The information under the
caption "Executive Officers," appearing in the Proxy Statement, is
incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance. The
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance," appearing in the Proxy Statement, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Matters," appearing in the Proxy Statement, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Security Ownership of Certain
Beneficial Owners and 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 are included on
pages F-1 through F-24 of this Annual Report on Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and December 31,
1997
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997
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Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
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
The Company filed a report on Form 8-K on December 23, 1997
in connection with its reincorporation in Delaware.
(c) EXHIBITS
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<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
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<S> <C> <C>
2.1(5) Asset Purchase Agreement between Applied Digital Access, Inc. and Applied --
Computing Devices, Inc. dated February 29, 1996
2.2(7) Asset Purchase Agreement between Applied Digital Access, Inc. and MPR --
Teltech, Ltd. dated July 16, 1996
2.3(11) Asset Purchase Agreement between the Company and Northern Telecom --
Limited dated June 27, 1997 (the "Asset Purchase Agreement") (with certain
confidential portions omitted).
3.3(13) Certificate of Incorporation of the Company. --
3.4(14) Certificate of Agreement of Merger of the Company and its California --
predecessor.
+3.5(15) Bylaws of the Company. --
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) Lease for the Company's facilities at 9855 Scranton Road, dated June 15, 1993. --
10.3(1) Agreement dated July 1, 1991 by and between the Company and BellSouth
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
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<S> <C> <C>
Services Incorporated, as amended (with certain confidential portions omitted). --
10.4(1) Software License Agreement dated January 16, 1992 by and between the --
Company and GCOM (with certain confidential portions omitted).
10.5(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.
10.6(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.
10.7(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.
10.8(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.
+10.9(1) Severance Agreement dated November 27, 1990 by and between the Company --
and Peter P. Savage.
+10.10(1) Severance Agreement dated June 20, 1988 by and between the Company and --
Paul R. Hartmann.
+10.11(1) 1994 Stock Option/Stock Issuance Plan Form of Stock Option Agreement. --
+10.12(1) 1994 Stock Option/Stock Issuance Plan Form of Stock Issuance Agreement. --
+10.13(1) 1994 Employee Stock Purchase Plan Form of Stock Purchase Agreement. --
+10.14(1) Form of Employee Proprietary Information Agreement. --
10.15(1) Binary Software License Agreement dated March 7, 1989 between the --
Company and Software Components Group, Inc., as amended.
10.16(2) Reinstatement Agreement dated September 22, 1994 between the Company and --
BellSouth Telecommunications Incorporated (with certain confidential portions
omitted) (Exhibit 10.2).
10.17(2) Purchase Agreement for Telecommunications Products and Related Services --
between Ameritech Services, Inc. (with certain confidential portions omitted)
(Exhibit 10.3).
10.18(3) First Amendment to Office Lease dated September 23, 1994 between the --
Company and Sorrento Tech Associates.
10.19(4) Purchase Agreement for Telecommunications Products and Related Services
between Southwestern Bell Telephone Company and the Company, dated
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<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------ ------
<S> <C> <C>
September 8, 1995 (with certain confidential portions omitted) --
+10.20(6) Applied Digital Access, Inc. 1994 Stock Option/Stock Issuance Plan, as --
amended.
10.21(8) Master Agreement between Northern Telcom, Ltd. and Applied Digital Access, --
Inc. dated July 16, 1996.
10.22(8) Stock Purchase Agreement between Applied Digital Access, Inc. and MPR --
Teltech, Ltd. dated July 16, 1996.
10.23(8) License Agreement between Northern Telcom, Ltd. and Applied Digital --
Access, Inc. dated July 16, 1996
10.24(8) Second Amendment to Lease between Sorrento Tech Associates and Applied --
Digital Access, Inc. dated August 8, 1996.
10.25(8) Lease Agreement between Rose Hulman Institute of Technology, through its --
authorized leasing agent, Ragle and Company, and Applied Digital Access,
Inc. dated September 15, 1996.
10.26(9) Sublease agreement between the Company and ENOVA Corporation dated --
December 9, 1996.
10.27(9) First Amendment to Sublease between the Company and ENOVA Corporation --
dated January 24, 1997.
10.28(9) Office Lease Agreement between 2725321 Canada Inc. and Applied Digital --
Access - Canada, Inc. dated January 1, 1997.
10.29(10) License Agreement between Northern Telecom, Ltd. and the Company dated --
as of January 24, 1997 [(with certain confidential portions omitted)][VERIFY CT
DONE-NOT NOTED ON 10Q].
10.30(11) License Agreement between Northern Telecom, Ltd. and the Company dated --
as of June 27, 1997 (with certain confidential portions omitted).
10.31(11) Applied Digital Access, Inc. 1997 Registration Rights Agreement between the --
Company and Northern Telecom, Ltd. dated as of June 27, 1997.
10.32(11) Stock and Warrant Purchase Agreement between the Company and Northern --
Telecom, Ltd. dated as of June 27, 1997.
10.33(11) Master Purchase Agreement between MCI Telecommunications Corporation --
and the Company dated June 16, 1997 (with certain confidential portions
omitted).
10.34(11) Master Agreement between Northern Telecom, Ltd. and the Company dated as --
of June 26, 1997 (with certain confidential portions omitted).
10.35(12) Joint Development Agreement between Northern Telecom, Inc. and the --
Company dated September 30, 1997 (with certain confidential portions
omitted).
+10.36(15) Applied Digital Access, Inc. Amended and Restated 1996 Non-qualified Stock
Option Plan
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<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
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<S> <C> <C>
+10.37(15) Amended and Restated 1996 Non-qualified Stock Option Plan Form of Stock
Option Agreement.
+10.38 Severance Agreement dated March 24, 1995 by and between the Company and
Donald J. O'Connor.
+10.39 Severance Agreement dated March 12, 1997 by and between the Company and
Steven F.X. Murphy.
10.40 Lease Agreement between Campbell Creek, Ltd. and the Company dated as of
October 1, 1997.
10.41 First Amendment to Lease Agreement between Campbell Creek, Ltd. and the
Company dated as of January 22, 1998.
10.42 Second Amendment to Sublease between the Company and ENOVA
Corporation dated December 31, 1997.
+10.43 Form of Indemnification Agreements between the Company and each of its
directors.
+10.44 Form of Indemnification Agreements between the Company and each of its
officers.
+10.45 Applied Digital Access, Inc. 1994 Employee Stock Purchase Plan, as amended.
+10.46 Management Team Incentive Compensation Plan, as amended.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See page 32).
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 September 30, 1994 (File No.
0-23698).
(3) 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).
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 (File No.
0-23698).
(5) Incorporated by reference to the Company's Current Report on Form 8-K dated March 15, 1996
(File No. 0-23698).
(6) Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-08297), as amended
(7) Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 1996
(File No. 0-23698).
(8) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 (File No.
0-23698).
(9) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No.
0-23698).
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 (File No.
0-23698).
(11) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File No.
0-23698).
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------ ------
<S> <C> <C>
(12) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997
(File No. 0-23698).
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated December 23,
1997(File No. 0-23698).
(14) Incorporated by reference to the Company's Current Report on Form 8-K/A dated January 12, 1998
(File No. 0-23698).
(15) Incorporated by reference to the Company's Registration
Statement on Form S-8 (File No. 333- 48105).
</TABLE>
-31-
<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 30, 1998 By: /s/ Peter P. Savage
------------------------
Peter P. Savage
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter P. Savage President, Chief Executive March 30, 1998
- -------------------------- Officer and Director
(Peter P. Savage) (Principal Executive
Officer)
/s/ James L. Keefe Vice President, Finance and March 30, 1998
- -------------------------- Administration, Secretary,
(James L. Keefe) Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Kenneth E. Olson Director March 30, 1998
- --------------------------
(Kenneth E. Olson)
/s/ Christopher B. Paisley Director March 30, 1998
- --------------------------
(Christopher B. Paisley)
/s/ Edward F. Tuck Director March 30, 1998
- --------------------------
(Edward F. Tuck)
</TABLE>
-32-
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
----------
REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants ......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997........................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997........................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997........................................... F-6
Notes to Consolidated Financial Statements................................. F-7
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 31, 1995, 1996 and 1997............................... F-24
</TABLE>
F-1
<PAGE>
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, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1996 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
San Diego, California
January 23, 1998
F-2
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
----------
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................$ 1,504 $ 4,400
Investments - available for sale............................................ 19,957 8,779
Accounts receivable, less allowance for doubtful
accounts of $50 ....................................................... 6,798 12,981
Inventory, net.............................................................. 7,363 5,859
Deferred income taxes....................................................... 130 130
Prepaid expenses and other current assets................................... 1,089 3,775
-------- --------
Total current assets............................................. 36,841 35,924
Property and equipment, net....................................................... 4,936 6,165
Intangible assets, net............................................................ 2,823 2,822
Deferred income taxes............................................................. 1,372 1,372
-------- --------
Total assets.....................................................$ 45,972 $ 46,283
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................$ 2,120 $ 3,478
Accrued expenses ........................................................... 1,491 2,846
Accrued warranty............................................................ 1,398 1,323
Current portion of obligations under capital leases......................... 16 18
Deferred revenue............................................................ 587 1,471
-------- --------
Total current liabilities........................................ 5,612 9,136
Obligations under capital leases, net of current portion.......................... 33 15
-------- --------
Total liabilities................................................ 5,645 9,151
-------- --------
Commitments and contingency
Shareholders' equity:
Preferred stock, no par value, 7,500,000 shares authorized,
no shares issued....................................................... - -
Common stock, $0.001 par value, 30,000,000 shares authorized,
12,255,334 and 12,605,082 shares issued and outstanding at
December 31, 1996 and 1997, respectively............................... 50,631 51,610
Additional paid-in capital.................................................. 2,492 2,492
Unrealized gain on investments ............................................. 25 84
Deferred compensation....................................................... (50) -
Accumulated deficit......................................................... (12,771) (17,054)
-------- --------
Total shareholders' equity....................................... 40,327 37,132
-------- --------
Total liabilities and shareholders' equity.......................$ 45,972 $ 46,283
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-3
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
----------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue ......................................................................... $20,470 $24,422 $34,050
Cost of revenue ......................................................................... 8,717 12,609 15,116
------- ------- -------
Gross profit......................................................................... 11,753 11,813 18,934
------- ------- -------
Operating expenses:
Research and development............................................................. 5,807 7,356 9,164
In-process research and development related
to acquisitions.................................................................. - 3,286 1,578
Sales and marketing.................................................................. 4,234 6,312 7,995
General and administrative........................................................... 2,976 3,529 5,252
------- ------- -------
Total operating expenses................................................. 13,017 20,483 23,989
------- ------- -------
Operating loss........................................................... (1,264) (8,670) (5,055)
------- ------- -------
Interest income ......................................................................... 2,023 1,673 904
------- ------- -------
Income (loss) before income taxes........................................ 759 (6,997) (4,151)
------- ------- -------
Provision for income taxes................................................................ - 123 132
------- ------- -------
Net income (loss)........................................................ $ 759 $(7,120) $(4,283)
------- ------- -------
------- ------- -------
Net income (loss) per share, basic and diluted .......................... $.06 $(.59) $(.34)
---- ----- ------
---- ----- ------
Shares used in per share computations ................................... 12,848 12,084 12,460
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-4
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
----------
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN
COMMON PAID-IN (LOSS) ON DEFERRED ACCUMULATED
STOCK CAPITAL INVESTMENTS COMPENSATION DEFICIT TOTAL
----- ------- ----------- ------------ ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995......................$48,281 $2,492 $(436) $(153) $ (6,410) $43,774
Exercise of stock options and warrants
for 261,662 shares of common stock............ 76 - - - - 76
Issuance of 62,493 shares of common
stock under stock purchase plan............... 643 - - - - 643
Unrealized gain on investments................ - - 583 - - 583
Amortization of deferred compensation
related to stock options...................... - - - 52 - 52
Net income ................................... - - - - 759 759
------- ------ ------ ----- -------- -------
Balance, December 31, 1995.................... 49,000 2,492 147 (101) (5,651) 45,887
Exercise of stock options for 149,261
shares of common stock........................ 115 - - - - 115
Issuance of 56,857 shares of common
stock under stock purchase plan............... 428 - - - - 428
Unrealized loss on investments................ - - (122) - - (122)
Amortization of deferred compensation
related to stock options...................... - - - 51 - 51
Issuance of 150,000 shares of common
stock in connection with acquisition.......... 1,088 - - - - 1,088
Net loss ..................................... - - - - (7,120) (7,120)
------- ------ ------ ----- -------- -------
Balance, December 31, 1996.................... 50,631 2,492 25 (50) (12,771) 40,327
Exercise of stock options for 221,235
shares of common stock........................ 381 - - - - 381
Issuance of 128,513 shares of common
stock under stock purchase plan............... 598 - - - - 598
Unrealized gain on investments................ - - 59 - - 59
Amortization of deferred compensation
related to stock options...................... - - - 50 - 50
Net loss ..................................... - - - - (4,283) (4,283)
------- ------ ------ ----- -------- -------
Balance, December 31, 1997....................$51,610 $2,492 $ 84 $ - $(17,054) $37,132
------- ------ ------ ----- -------- -------
------- ------ ------ ----- -------- -------
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-5
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ 759 $(7,120) $(4,283)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
In-process research and development related to acquisitions.................. - 3,286 1,578
Depreciation and amortization................................................ 904 1,819 3,089
Amortization of discount or premium on investments........................... 119 95 (119)
Amortization of deferred compensation........................................ 52 51 50
Change in accounts receivable and inventory reserves......................... 103 (68) 101
Changes in operating assets and liabilities:
Accounts receivable...................................................... (2,792) (1,440) (6,183)
Inventory................................................................ (2,232) (723) 1,403
Prepaid expenses and other current assets................................ (327) 207 (2,686)
Accounts payable......................................................... (440) 300 1,358
Accrued expenses......................................................... (515) 648 1,355
Accrued warranty ........................................................ (15) 93 (75)
Deferred revenue......................................................... - 587 884
------ ------ ------
Net cash used by operating activities................................. (4,384) (2,265) (3,528)
------ ------ ------
Cash flows from investing activities:
Purchases of investments............................................................ (33,863) (20,923) (18,517)
Maturities of investments........................................................... 38,595 30,923 29,792
Purchases of property and equipment................................................. (1,948) (1,709) (2,432)
Purchase costs related to asset acquisitions........................................ - (6,356) (3,382)
Purchase of license agreement....................................................... - (350) -
------ ------ ------
Net cash provided by investing activities............................. 2,784 1,585 5,461
------ ------ ------
Cash flows from financing activities:
Principal payments on obligations under capital leases.............................. (126) (32) (16)
Proceeds from exercise of stock options and warrants................................ 76 115 381
Proceeds from issuance of common stock, net of costs............................... 643 428 598
------ ------ ------
Net cash provided by financing activities............................. 593 511 963
------ ------ ------
Net increase (decrease) in cash and cash equivalents.................. (1,007) (169) 2,896
Cash and cash equivalents at beginning of year.......................................... 2,680 1,673 1,504
------ ------ ------
Cash and cash equivalents at end of year..................................... $1,673 $1,504 $4,400
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-6
<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
telecommunication service providers 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 subsidiaries. All significant 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.
F-7
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
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.
F-8
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 $141,000, $217,000 and $250,000 for the years
ended December 31, 1995, 1996 and 1997, 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, 1997, no options were
granted at below fair market value.
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.
F-9
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity in a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. SFAS No. 131 requires publicly-held
companies to report financial and other information about key
revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker.
Specific information to be reported for individual segments includes
profit or loss, certain revenue and expense items and total assets. The
impact of adopting SFAS No. 130 and SFAS No. 131, both effective for the
Company in 1998, has not yet been determined.
In October 1997, the American Institute of Certified Public Accountants
issued State of Position 97-2 ("SOP 97-2"), SOFTWARE REVENUE
RECOGNITION. This statement establishes requirements for revenue
recognition for software companies for fiscal years beginning after
December 15, 1997. The Company is currently evaluating the impact of SOP
97-2 and has not determined the result, if any, on the Company's
financial position, results of operations or cash flows.
The Company has adopted the provisions of SFAS No. 128, EARNINGS PER
SHARE, effective December 31, 1997. SFAS No. 128 requires the
presentation of basic and diluted earnings per share. Basic EPS is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential
common shares consist of the incremental common shares issuable upon the
conversion of convertible preferred stock (using the "if converted")
method) and exercise of stock options and warrants for all periods. All
prior period earnings per share amounts have been restated to comply
with SFAS No. 128.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
F-10
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
3. STATEMENTS OF CASH FLOWS:
Non-cash investing and financing activities for the years ended December
31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Issuance of stock in connection with acquisition $ - $1,088 $ -
</TABLE>
Cash payments for interest and income taxes for the years ended December
31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest $ 13 $ 7 $ 4
Income taxes 506 - 229
</TABLE>
4. INVESTMENTS:
Marketable securities at December 31, 1996 and 1997 consist of
obligations of the U.S. Government and its agencies and are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cost $19,936 $8,767
Gross unrealized gains 57 31
Gross unrealized losses (36) (19)
------- ------
Estimated fair value $19,957 $8,779
------- ------
------- ------
</TABLE>
5. INVENTORY:
Inventory at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials $4,211 $3,419
Work-in-process 2,558 2,223
Finished goods 1,063 787
------ ------
7,832 6,429
Less inventory reserve (469) (570)
------ ------
$7,363 $5,859
------ ------
------ ------
</TABLE>
F-11
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
6. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computers $ 4,254 $ 5,655
Machinery, furniture and equipment 3,614 4,782
Purchased computer software 894 1,371
Leasehold improvements 766 911
-------- -------
9,528 12,719
Less accumulated depreciation and amortization (4,592) (6,554)
-------- -------
$ 4,936 $ 6,165
-------- -------
-------- -------
</TABLE>
Property and equipment acquired under capital leases totaled
approximately $216,000 at December 31, 1996 and 1997. Accumulated
amortization related to assets under capital leases totaled
approximately $106,000 and $140,000 as of December 31, 1996 and 1997
respectively.
7. INTANGIBLE ASSETS:
Intangible assets at December 31,1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Goodwill and know-how $2,588 $ 3,619
Purchased technology, customer contracts 337 337
License agreement 350 350
------ -------
3,275 4,306
Less accumulated amortization (452) (1,484)
------ -------
$2,823 $2,822
------ -------
------ -------
</TABLE>
F-12
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
8. ACCRUED EXPENSES:
Accrued expenses at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related costs $ 443 $ 902
Income taxes 444 388
Accrued vacation 431 583
Other 173 973
------ ------
$1,491 $2,846
------ ------
------ ------
</TABLE>
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 $386,000, $613,000 and
$673,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
The Company also leases certain property and equipment under capital
leases.
Minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASE
------------------------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1998 $1,006 $ 20
1999 1,297 16
2000 980 -
2001 1,004 -
2002 1,034 -
Thereafter 1,127 -
------ ----
Total minimum lease payments $6,448 36
------
------
Less amounts representing interest (3)
----
Obligations under capital leases 33
Less current portion (18)
----
$ 15
----
----
</TABLE>
F-13
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
9. COMMITMENTS AND CONTINGENCY:
PURCHASE COMMITMENTS
At December 31, 1996 and 1997, the Company has open purchase commitments
of approximately $3,731,000 and $4,413,000 respectively, which include
approximately $2,264,000 and $1,938,000 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:
STOCK COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its stock-based compensation 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, 1996 and 1997 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:
F-14
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
10. SHAREHOLDERS' EQUITY, CONTINUED:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss):
As reported $ 759 $(7,120) $(4,283)
Pro forma (195) (8,352) (6,830)
Net income (loss) per common share:
As reported, basic $.06 $(.59) $(.34)
As reported, diluted .06 (.59) (.34)
Pro forma, basic and diluted (.02) (.69) (.55)
</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
described below. 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
F-15
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
10. SHAREHOLDERS' EQUITY, CONTINUED:
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 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 1996 and 1997: 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, 1997:
<TABLE>
<CAPTION>
1994 AND 1996 PLANS OTHER
------------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at
January 1, 1995 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) $18.30 - -
--------- -------
Outstanding at
December 31, 1996 1,798,203 $5.54 17,087 $.14
Granted 1,404,976 $6.58 - -
Exercised (252,337) $6.34 - -
Canceled (299,984) $7.65 -
--------- -------
Outstanding at
December 31, 1997 2,650,858 $6.20 17,087 $.14
--------- -------
--------- -------
</TABLE>
F-16
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
10. SHAREHOLDERS' EQUITY, CONTINUED:
The range of exercise prices of stock options outstanding at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------ ----------- ---------------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
$.14 - $1.05 544,785 4.60 $ .30 544,785 $ .30
$2.80 - $6.44 568,613 9.40 6.06 30,707 5.70
$6.50 - $6.63 320,543 8.56 6.51 65,811 6.51
$6.88 533,721 9.12 6.88 143,244 6.88
$7.00 - $16.13 700,283 8.26 0.09 417,912 10.25
--------- ---- ------ --------- ------
$.14 - $16.13 2,667,945 7.97 $ 6.16 1,202,459 $ 5.02
--------- ---- ------ --------- ------
--------- ---- ------ --------- ------
</TABLE>
At December 31, 1996 and 1997, 1,191,381 and 339,959 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 56,857 and 97,413 shares to employees in 1996 and 1997,
respectively. There are 31,102 shares of common stock available for
purchase under the Stock Purchase Plan at December 31, 1997.
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 1996 and 1997: no
dividend yield, expected volatility of 69.76%; 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 1996 and 1997 was $9.56 and $6.58,
respectively.
F-17
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
11. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1996 and
1997 consists of current taxes for foreign operations.
Differences between the statutory rate and the effective tax rate for
the year ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rate 34.0% (34.0%) (34.0%)
Foreign income taxes - % 1.8% 3.2%
Net operating loss carryforwards and research and
development tax credits (utilized) not utilized (33.0%) 33.0% 33.0%
Change in valuation allowance - % - % - %
Other (1.0%) 1.0% 1.0%
----- ----- -----
Provision for income taxes - % 1.8% 3.2%
----- ----- -----
----- ----- -----
</TABLE>
The components of the deferred tax assets at December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowances and reserves $ 773 $ 780
Vacation accrual 146 178
Capitalized research and development 2,211 2,577
Net operating loss carryforwards 4,774 5,908
Tax credits 1,429 1,991
Accelerated depreciation (252) (287)
Other 10 10
------- -------
Total gross deferred tax asset 9,091 11,157
Less valuation allowance (7,589) (9,655)
------- -------
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, 1997 and 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.
F-18
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
11. INCOME TAXES, CONTINUED:
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $15,644,000, of which
$5,378,000 is attributable to disqualifying dispositions of stock
options. The Company also has net operating loss carryforwards for
California tax purposes of approximately $7,561,000 at December 31,
1997, of which $2,724,000 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 $1,620,000 for federal and $371,000 for California tax
purposes at December 31, 1997. 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 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 1995,
1996 or 1997.
F-19
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
12. EMPLOYEE BENEFITS, CONTINUED:
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 allocated $-0-, $-0- and approximately $418,000 in 1995,
1996 and 1997, respectively.
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 $4,908,000 of cash and cash equivalents in
excess of FDIC insured limits at two financial institutions at December
31, 1997. The Company has not experienced any losses on its cash and
cash equivalents.
All of the Company's investments, all of which mature in 1998, are in
obligations of the U.S. Government and its agencies at December 31,
1997.
At December 31, 1996 and 1997, the Company's trade receivables are
concentrated with "Regional Bell Operating Companies" and independent
phone companies and suppliers 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>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Nynex 18% 23% 8%
Bell South 13% 7% 17%
US West 45% 31% 4%
Ameritech 19% 9% 3%
Nortel - 15% 20%
MCI - - 18%
</TABLE>
F-20
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
13. CONCENTRATION OF CREDIT RISK, CONTINUED:
Sales to an affiliate of a shareholder during the years ended December
31, 1995, 1996 and 1997 were approximately $3,836,000, $2,263,000 and
$922,000 respectively, of which approximately $140,000 and $342,800 are
included in accounts receivable at December 31, 1996 and 1997,
respectively.
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.
F-21
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
14. ACQUISITIONS, CONTINUED:
In June 1997, the Company acquired an exclusive worldwide license to
Nortel's Digital Support System II(TM) ("DSSII") operations system
software product, subject to certain residual rights retained by Nortel.
The Company acquired the license and certain assets related to the DSSII
product for an amount of $3,100,000, $2,232,000 of which was paid in
cash and the remainder of which is payable in cash and/or stock at the
Company's option on January 15, 1998. The Company recorded a charge of
approximately $1,578,000 for purchased research and development
associated with the acquisition of the license and the assets. As part
of the transaction, the Company also issued Nortel a warrant to purchase
150,000 shares of the Company common stock at an exercise price of $12
per share. The warrant has a three year term.
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.
CONDENSED PRO FORMA RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
<S> <C> <C>
Revenue $29,660 $34,050
Net loss ( 7,474) (4,283)
Net loss per share, basic and diluted (.61) (.34)
Weighted average shares used in computation 12,165 12,605
</TABLE>
Sales to Canadian customers, generated from both the Company's United
States and Canadian operations in fiscal 1996 and 1997 were
approximately $4,351,000 and $9,861,000, respectively. The identifiable
assets of the Company's operations at December 31, 1996 and 1997 were
approximately $970,000 and $1,997,000, respectively.
F-22
Continued
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
15. EARNINGS PER SHARE ("EPS") DISCLOSURES:
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Numerator - basic and diluted EPS:
Net income (loss) $ 759 $(7,120) $(4,283)
Denominator - basic and diluted EPS:
Weighted average common stock
outstanding 11,899 12,255 12,605
------- ------- -------
Basic and diluted earnings per share $.06 $(.59) $(.34)
---- ----- ------
---- ----- ------
</TABLE>
F-23
<PAGE>
SCHEDULE II
APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------
<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 1995 $ 50,000 $ - $ - $ 50,000
1996 50,000 - - 50,000
1997 50,000 - - 50,000
Inventory reserve 1995 434,617 150,000 (47,055) 537,562
1996 537,562 - (68,092) 469,470
1997 469,470 312,496 (211,966) 570,000
</TABLE>
F-24
<PAGE>
March 24, 1995
Mr. Don O'Connor
64 Tallmadge Ave
Chatham, NJ 07928
Dear Don:
We are very pleased to offer you the position of Vice President Customer
Support with Applied Digital Access, Inc., reporting to Pete Savage, Chief
Executive Officer. We are very excited that you will be joining the ADA team
as a regular full-time employee. Your compensation will be $5,208.33, paid
semimonthly (equivalent to $125,000.00 on an annualized basis). In addition,
you will receive the other benefits afforded to all regular full-time
employees of ADA. These include two weeks paid vacation, partially paid
health insurance coverage through participation in ADA's Section 125
Cafeteria Plan, the opportunity to participate in a 401(k) plan, and the
opportunity to participate in ADA's Stock Purchase Plan.
When you report on board as a regular full-time employee of ADA, we will pay
to you a one-time bonus of $10,000.
As Vice President Customer Support, you will be an officer of the Company and
will participate in the Management Team Incentive Compensation Plan. This
plan provides for a cash payment of 30% of base salary at plan as approved by
the Compensation Committee of the Board of Directors.
As a key part of your compensation package, we will recommend to the Board of
Directors that you be granted an option to purchase 50,000 shares of ADA
common stock in accordance with ADA's Incentive Stock Option Plan. This
stock will vest over a four-year period, with one-fourth fully vested at the
end of your first twelve months of employment at ADA and the remainder
vesting monthly thereafter. The exercise price of shares granted under ADA's
Incentive Stock Option Plan will be determined at the time your option is
granted by ADA's Board of Directors.
To assist you in relocating to San Diego, we will provide reimbursement for
up to $50,000 for relocation and interim living expenses as incurred. This
amount will be subject to Federal and State withholding regulations. We will
reimburse you for the those taxes to be paid up to a maximum of $20,000. If
you leave ADA before the end of two years from your date of hire, this
relocation assistance will be deemed subject to prorated repayment based on
the number of months you work at ADA.
We will guarantee, upon acceptance of this offer of employment, that you will
be employed by ADA for a minimum of twelve months. Thereafter, you will be
entitled to three months salary as severance in the
<PAGE>
event of your involuntary separation of employment from ADA, or the severance
arrangement in force, whichever is greater.
Except as noted above, employment with Applied Digital Access is not for a
specific term and can be terminated by you or by ADA at any time for any
reason, with or without cause. Any contrary representations which may have
been made to you are superseded by this offer. Any modification to this
at-will term of your employment must be in writing and signed by you and by
ADA's President.
ADA is committed to a drug-free workplace and has a zero-tolerance drug
policy. Illegal possession or use of drugs of any kind, at any time, on or
off company premises within or outside of working hours may result in
immediate dismissal.
Smoking is not permitted on company property or at any company off-premises
events.
This offer is contingent on your executing the enclosed Proprietary
Information and Inventions Agreement and providing ADA with the legally
required proof of your identity and authorization to work in the United
States. Please sign both copies of this letter, retain one copy for your
files, and return the second copy to us as soon as possible. Don, we are
delighted to have you join our team. We look forward to working with you,
and to enjoying the success our team will realize together.
Sincerely,
/s/ Peter P. Savage /s/ Richard W. Carter
- ------------------------- ----------------------
Peter P. Savage Richard W. Carter
President - CEO Vice President, Finance
Please indicate your acceptance of this offer by signing below: My first day
of employment will be 5/30/95 or before.
Accepted /s/ D. J. O'Connor Date 3/25/95
-------------------- -------
Don O'Connor
<PAGE>
March 12, 1997
Mr. Steven F. X. Murphy
5023 Reno Road N.W.
Washington, DC 20008
Dear Steve:
I am pleased to offer you the position of Vice President - Sales and
Marketing with Applied Digital Access, Inc., reporting to me. Everyone at
ADA is enthusiastic about you joining the ADA team as a regular full-time
employee.
Your compensation will be $6,250.00, paid semimonthly (equivalent to
$150,000.00 annualized). In addition, you will receive the other benefits
afforded to all regular full-time employees of ADA. These include two weeks
paid vacation, partially paid health insurance coverage through participation
in ADA's Section 125 Cafeteria Plan, the opportunity to participate in a
401(k) plan, and the opportunity to participate in ADA's Stock Purchase Plan.
As Vice President - Sales and Marketing, you will be an officer of the
Company and will participate in the Management Team Incentive Compensation
Plan. The Sales Management Incentive Compensation portion of the Plan
provides for incentive compensation of up to $125,000 at plan, and up to
$175,000 at 110% of plan as approved by the Compensation Committee of the
Board of Directors. The incentive compensation is earned depending on actual
performance against company and business unit objectives as described in the
attached compensation plan summary. You will be entitled to draw up to
$50,000 of this incentive compensation semimonthly. In the unlikely event of
you not earning the amount you actually draw, at the discretion of the
Compensation Committee, you may be required to refund to the company amounts
drawn which are greater than your earnings under the plan.
As a key part of your compensation package, I will recommend to the Board of
Directors that you be granted an option to purchase 75,000 shares of ADA
common stock in accordance with ADA's Incentive Stock Option Plan. This
stock will vest over a four-year period, with one-fourth fully vested at the
end of your first twelve months of employment at ADA and the remainder
vesting monthly thereafter. The exercise price of shares granted under ADA's
Incentive Stock Option Plan will be the closing price of ADA stock on the
NASDAQ exchange on the day your option is granted by ADA's Board of Directors.
<PAGE>
To assist you in relocating to San Diego, we will provide reimbursement for
up to $50,000 for documented and reasonable relocation and interim living
expenses as incurred. This amount will be subject to Federal and State
withholding regulations. We will reimburse you for those taxes to be paid up
to a maximum of $20,000. If you voluntarily leave ADA before the end of two
years from your date of hire, this relocation assistance will be deemed
subject to prorated repayment based on the number of months you work at ADA.
Employment with Applied Digital Access is not for a specific term and can be
terminated by you or by ADA at any time for any reason, with or without
cause, and with or without prior notice. Any contrary representations which
may have been made to you are superseded by this offer. No person affiliated
with ADA has the authority to enter into any verbal agreement to change the
at will nature of your employment. Longevity of employment, promotions, pay
raises, bonuses, and positive performance evaluations will not change the
at-will status of your employment with ADA. Any modification to this at-will
term of your employment must be expressed in writing and signed by you and by
me.
In the event your employment is terminated by the company for any reason
other than Cause (as defined below), you will be entitled to a continuation
of base salary (less applicable taxes, other required withholdings and any
amount owed by you to the company) for a period of three months from the date
of termination, such three month period to be known as the severance term.
Severance payments shall be payable in equal installments monthly commencing
one month after the date of termination. The Company's obligation to make
severance payments will terminate upon the earlier of (1) the date three
months after termination of employment or (2) the date on which you commence
employment with another employer. During the severance term, you will
continue to be treated as a company employee for purposes of all company
provided employee benefits, other than incentive compensation, bonus, profit
sharing or similar plans, stock option vesting and vacation eligibility.
In the event your employment is terminated by the company for any reason
other than Cause, you also will be entitled to be paid, at the same time such
payments are made to other officers of the Company, your pro rata share for
any bonus or profit sharing plans in which you participated for the portion
of the year that you remained employed by the Company to the extent not
inconsistent with the terms of any such plan.
In the event your employment is terminated by the company for any reason
other than Cause, you will be relieved of your obligation to repay relocation
expenses to the company, and to repay any draw that is in excess of earned
amounts, up to the date of your termination.
<PAGE>
For these purposes, "Cause" means:
(i) failure by you to substantially perform your duties herein, other than
failure resulting from complete or partial incapacity due to physical
or mental illness or impairment,
(ii) an act by you which constitutes misconduct and/or which is injurious
to the company, or
(iii) a violation of federal or state laws or regulation applicable to the
business of the Company, or
(iv) any violation of the Company's Proprietary Information and Inventions
Agreement.
ADA is committed to a drug-free workplace and has a zero-tolerance drug
policy. Illegal possession or use of drugs of any kind, at any time, on or
off company premises within or outside of working hours may result in
immediate dismissal.
Smoking is not permitted on company property or at any company off-premises
events.
This offer is contingent on your executing the enclosed Proprietary
Information and Inventions Agreement and providing ADA with the legally
required proof of your identity and authorization to work in the United
States.
Please sign both copies of this letter, retain one copy for your files, and
return the second copy to us as soon as possible. Everyone is delighted to
have you join our team. I look forward to working with you, and to enjoying
the success our team will realize together.
Very truly yours,
/s/ Peter P. Savage
-----------------------------
Peter P. Savage
President and CEO
Please indicate your acceptance of this offer by signing below:
My first day of employment will be March 31, 1997.
Accepted /s/ Steven F. X. Murphy Date 3/17/97
--------------------------------- -------
Steven F. X. Murphy
<PAGE>
LEASE AGREEMENT
STATE OF TEXAS
COUNTY OF DALLAS
THIS LEASE AGREEMENT, made and entered into by and between the Landlord
and Tenant hereinafter named.
WITNESSETH:
1 . DEFINITIONS AND BASIC PROVISIONS. The following definitions and basic
provisions shall be used in conjunction with and limited by the reference
thereto in the provisions of this lease:
(a) "Landlord": Campbell Creek, Ltd.
(b) "Tenant": Applied Digital Access, Inc.
(c) "Building":
i) Name: Campbell Creek Business Park -Phase II. Building 2.
2350 Campbell Creek Blvd.
Address: Richardson, Texas 75082
ii) Agreed Rentable Area of the Building: Building 2 - 54,165 square feet.
(d) "Premises": That portion of the Building which is cross-hatched on Exhibit
"A" attached hereto and made a part hereof. The Premises consists of
approximately 14,750 square feet of rentable area (all rentable area
being determined by measuring from the outer surfaces of exterior wall
and from the centerline of demising wall). All measurements shall utilize
and conform with BOMA Standards and shall be subject to field measurements
upon completion of Tenant's
<PAGE>
Improvements (as hereinafter defined). In the event of an adjustment to the
square footage contained in the Premises necessitated by such field
measurement, Landlord shall adjust Tenant's Basic Rental and Tenant's Pro Rata
Share percentage (both as hereinafter defined) in direct proportion to such
change of the rentable area.
The Building, the land (the "Land") on which the Building is situated
(which land is particularly described on Exhibit A- I attached hereto), and all
improvements and appurtenances to the Building and the Land are referred to
collectively herein as the "Property".
(e) "Tenants's Pro Rata Share" percentage: 27.23% of Building 2 (the
rentable area of Premises divided by the rentable area of the
Building, expressed in a percentage).
(f) Base Expense Rate: $3.90 per square foot
(g) "Project": All buildings, structures and other improvements located on the
land which is described on Exhibit "B" attached hereto and made a part
hereof, together with such land.
(h) "Lease Term": A period of 84 months, which is anticipated to commence on
the earlier of January 1, 1998 or upon Substantial Completion (as defined in
Exhibit D attached hereto) and to end on December 31, 2004 ("EXPIRATION DATE"),
The date on which this Lease actually commences is herein called the
"Commencement Date".
(i) "Basic Rental":
<TABLE>
<CAPTION>
Rental Rate Per Square "Basic Monthly
Period Foot of Rentable Area Rental"
<S> <C> <C>
January 1, 1998 - March 31, 1998 $15.25 $10,166.67
April 1, 1998 - June 30, 1998 $15.25 $15,250.00
July 1, 1998 - December 31, 2004 $15.25 $18,744.79
</TABLE>
(j) "SECURITY Deposit": $18.744.79
(k) "Permitted Use": General Office/Technical Purposes and any other
lawful use incidental thereto.
(l) "Common Areas": All landscaped areas, parking areas, service roads,
loading facilities, sidewalks and other improvements and facilities in the
Project which are designated by Landlord from time to time for the common use
and enjoyment of more than
- -2
<PAGE>
one tenant in the Project.
(m) "Environmental Law": Any federal, state, or local law, statute,
ordinance, or regulation pertaining to health, industrial hygiene,
or the environmental conditions on, under, or about the Premises,
including without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ("CERCLA") as
amended, 42 U.S.C. Section 9601 et seq. ("RCRA"), the Texas Water
Code ("TWC"), the Texas Solid Waste Disposal Act, Texas Health &
Safety Code ("THSC") Section 361.001 et seq., and regulations, rules,
guidelines, or standards promulgated pursuant to such laws, as such
statutes, regulations, rules, guidelines, and standards as are
amended from time to time.
2. LEASE GRANT. Landlord, in consideration of the rent to be paid and the
other covenants and agreements to be performed by Tenant and upon the terms and
conditions hereinafter stated, does hereby lease, demise and let unto Tenant
the Premises commencing on the Commencement Date and ending on the last day of
the Lease Term, unless sooner terminated as herein provided. If this lease is
executed before the Premises are available and Ready For Occupancy (as
hereinafter defined) and Landlord cannot deliver possession on the anticipated
Commencement Date, then Landlord shall not be deemed to be in default
hereunder, and Tenant agrees to accept possession of the Premises at such time
as Landlord is able to tender the same and such date shall be the Commencement
Date and this lease shall continue for the entire Lease Term. Landlord hereby
waives payment of rent covering any period prior to the tendering of possession
of the Premises to Tenant hereunder, unless such delay is caused by Tenant or
anyone acting under or for Tenant and such abatement shall be Tenant's-sole
remedy by reason of the Premises not being Ready For Occupancy. Likewise,
should Tenant occupy the Premises prior to the anticipated commencement date
specified in Section I(h), the Commencement Date shall be altered to coincide
with said occupancy with the anticipated ending date set forth in Section I(h)
remaining unchanged. For the purposes hereof, the term "Ready For Occupancy"
shall mean the first to occur of the following: (a) the date Landlord
substantially completes the work required of it under terms of Exhibit "D"
attached hereto AND SECURES A CERTIFICATE OF INSURANCE OR FINAL INSPECTION TO
BE ISSUED BY THE CITY OF RICHARDSON; or (b) the date Landlord would have
substantially completed the work required of it under the terms of Exhibit "D"
but for delays caused by Tenant, or its agents, employees or contractors; or
(c) the date Tenant takes possession of the Premises. By occupying the
Premises ON THE COMMENCEMENT DATE, Tenant shall be deemed to have accepted the
same as suitable for the purposes herein intended and waives any defects in the
Premises (WITH THE EXCEPTION OF ANY LATENT STRUCTURAL DEFECTS OR ANY LATENT OR
PATENT DEFECTS IN THE IN THE WORK OF EXHIBIT "D") and all related improvements
and appurtenances in the Building and to have acknowledged that the same comply
fully with Landlord's covenants and obligations. After the commencement date of
this Lease, Tenant shall, upon request from Landlord, execute and deliver to
Landlord a Letter of Acceptance of the Premises, which letter shall also state
the Commencement Date and the Expiration.
- -3
<PAGE>
Date.
3. RENT. In consideration of this lease, Tenant promises and agrees to pay
Landlord the Basic Monthly Rental without demand, deduction or set off, for
each month of the entire Lease Term. One such monthly installment together with
the Security Deposit shall be payable by Tenant to Landlord contemporaneously
with the execution hereof, and a like monthly installment shall be due and
payable without demand on or before the first day of each calendar month during
the term hereof beginning with the first calendar month following the
Commencement Date. Rent for any fractional month at the beginning or end of the
Lease Term shall be prorated, with any DIFFERENCES BETWEEN THE PREPAID MONTHLY
INSTALLMENT AND THE PRORATED RENT TO BE CREDITED TO THE SECOND MONTHLY
INSTALLMENT. The Security Deposit shall be held by Landlord without liability
for interest and as security for the performance by Tenant of Tenant's
covenants and obligations under this lease, it being expressly understood that
such deposit shall not be considered an advance payment of rental or a measure
of Landlord's damages in case of default by Tenant. Upon the occurrence of any
event of default by Tenant, Landlord may, from time to time, without prejudice
to any other remedy, use such deposit to the extent necessary to make good any
arrearages of rent and any other damage, injury, expense or liability caused to
Landlord by such event of default. Following any such application of the
Security Deposit, Tenant shall pay to Landlord on demand the amount so applied
in order to restore the Security Deposit to its original amount. If Tenant is
not then in default hereunder, any remaining balance of such deposit shall be
returned by Landlord to Tenant within thirty (30) days of termination of this
lease. If Landlord transfers its interest in the Premises during the Lease
Term, Landlord may assign the Security Deposit to the transferee and thereafter
shall have no further liability for the return of such Security Deposit.
4. RENTAL ESCALATION.
(a) The Basic Rental includes a component equal to the "Base Expense Rate"
(as defined in subsection l(f) hereof). In the event that the Operating
Expenses (HEREINAFTER DEFINED) per rentable square foot for any calendar year
during the Lease Term, exceed the Base Expense Rate, then Tenant shall be
obligated to pay to Landlord Tenant's Pro Rata Share of the amount by which
such Operating Expenses exceed the Base Expense Rate. All amounts which Tenant
is obligated to pay to Landlord under the terms of this Lease which are not
Basic Rental are herein called "Additional Rent". Basic Rental, Additional Rent
and all other sums required to be paid to Landlord by Tenant under this Lease
shall constitute rent and are sometimes collectively referred to as "Rent".
(b)The term "Operating Expenses" shall mean all costs and expenses of
owning, operating and maintaining the Project including, but not limited to the
following: (i) ad
- -4
<PAGE>
valorem taxes assessed against the Project together with any special
assessments and other real estate costs in the nature of taxes, assessments or
governmental impositions of any type for which Landlord is responsible (in the
event there is a change in the general system of real estate taxation such that
any alternative taxes, of whatever nature, are imposed upon Landlord in lieu
of, in whole or in part, general ad valorem taxes on the Project, or the
revenue of the Project, then such alternative taxes shall be deemed "ad valorem
taxes" or "real estate costs"); (ii) expense of operation, maintenance and
repair of the Common Areas, including, but not limited to, landscape, landscape
management, sprinkler maintenance and associated supply costs, license, permits
and inspection fees, trash removal, parking lot restriping and repairs,
exterior electrical repairs, and pest control for the Common Areas, in a manner
deemed reasonable by Landlord and appropriate and for the best interest of the
tenants of the Project; (iii) REASONABLE actual expenses incurred for
employees, such as wages, fringe benefits, taxes, unemployment and disability
insurance, workmen's compensation insurance, social security benefits and any
REASONABLE other expenses incurred in connection with such employees (the term
"employees" includes employees such as property manager, superintendents,
engineers, electricians, clerks, mechanics, helpers, security officers,
porters, cleaners and window washers, as well as contract laborers performing
services for the Project and other persons, firms, or corporations providing
contract services for the benefit of the Project); (iv) full contract cost of
third-party contractors for all of the foregoing; (v) all utility services for
utilities consumed for the benefit of the Common Areas, (vi) reasonable
consulting, legal, accounting and management fees for managing the Project,
provided however management fees shall not exceed five percent (5%) of gross
rentals during the Term; (vii) actual costs of insurance, including fire and
extended coverage, loss of rental insurance and general liability insurance;
(viii) amortization of REASONABLE costs of capital alterations or improvements
which would generally be regarded as ownership, operating, maintenance and
management costs which would normally be amortized over a period not to exceed
five (5) years; (ix) the reasonable costs and expenses of a consultant, if any,
or of contesting validity or amount of such real estate taxes, and (x) costs
of any energy-saving or labor-saving device or other equipment installed in the
Project amortized over such a period as is reasonably determined by Landlord,
but only to the extent of Landlord's good faith estimate of the actual the
Operating Expense savings.
(c) Said Operating Expenses shall not include administrative salaries and
wages of persons not involved in the day-to-day operations of the Project,
state or federal income taxes (unless such taxes are in lieu of general
ad valorem taxes as hereinbefore provided), or periodic alterations or
improvements to the construction of the Project (except as specifically
provided for herein), and in no case shall Tenant be charged additional
rent for
- -5
<PAGE>
any Operating Expenses such as painting, repainting, decorating, redecorating,
special cleaning service or special security service to the extent any of the
foregoing are directly related to the sole advantage of any particular occupant
of the Project other than Tenant.
(d) In the event that during the Lease Term said Operating Expenses for
any calendar year exceed, per rentable square foot (determined by dividing the
total Operating Expenses for such calendar year by the total rental square
footage of the Project), the Base Expense Rate, Tenant shall, in addition to
the Basic Rental specified in this Lease, pay Tenant's Pro Rata Share of such
increases to Landlord as Additional Rent, in each calendar year or partial year
during the term of this Lease, payable in monthly installments as hereinafter
provided.
(i) On or before the first day of each calendar year during
the Lease term, Landlord shall give Tenant written notice of Tenant's
estimated Additional Rent for the upcoming calendar year and the amount of
the monthly installment due for each month during such year. Tenant shall pay
to Landlord on the first day of each month thereafter the amount of the
applicable monthly installment, without demand, offset or deduction,
provided, however, if the applicable installment covers a partial month, then
such installment shall be prorated on a daily basis. Within one hundred
twenty (120) days after the end of each calendar year or as soon thereafter
as is reasonably possible, Landlord shall prepare and deliver to Tenant a
statement showing Tenant's actual Additional Rent for the previous calendar
year. If Tenant's total monthly payments of Additional Rent for the
applicable year are less than Tenant's actual Additional Rent, then Tenant
shall pay to Landlord the amount of such underpayment. If Tenant's total
monthly payments of Additional Rent for the applicable year are more than
Tenant's actual Additional Rent, then Landlord shall credit against the next
Additional Rent payment or payments due from Tenant the amount of such
overpayment. Unless Tenant takes written exception to any item within thirty
(30) days after the furnishing of an annual statement, such statement shall
be considered as final and accepted by Tenant. Any amount due Landlord as
shown on any such statement shall be paid by Tenant within thirty (30) days
after it is furnished to Tenant.
(ii) If, during any calendar year during the Lease Term, the
Building is not at least 95% occupied, then the Operating Expenses incurred
for such calendar year shall, for the purpose of making the calculations to
be made pursuant to this Section 4, be adjusted to reflect the amount of
Operating Expenses which Landlord determines would have been incurred had the
Building been occupied to the extent of at least 95% of the rentable area of
the Building during the entirety of such calendar year.
- -6
<PAGE>
(iii) Landlord shall be permitted, at anytime during any
calendar year when it reasonably forecasts that Operating Expenses for such
calendar year will exceed the Base Expense Rate together with any monthly
escalation reserves then being paid, to notify Tenant of such forecast. In
such event the amount of the monthly escalation reserves for the period
following such notice shall be increased by the amount which Landlord
reasonably forecasts will be necessary to pay the Operating Expenses for such
calendar year.
Notwithstanding anything to the contrary contained herein, for the purpose of
determining Additional Rent, Operating Expenses (exclusive of the Non-Capped
Operating Expenses, as hereinafter defined) for any calendar year shall not be
increased over the amount of Operating Expenses (exclusive of Non-Capped
Operating Expenses) during the calendar year in which the term of this Lease
commences by more than eight percent (8%) per year on a cumulative basis,
compounded annually. It is understood and agreed that there shall be no cap on
Non-Capped Operating Expenses, which are hereby defined to mean all Utility
Expenses, Real Estate Taxes and Insurance Premiums.
(e) AT ANY TIME WITHIN SIXTY (60) DAYS OF TENANT'S RECEIPT OF ANY
STATEMENT FROM LANDLORD RELATING TO ADDITIONAL RENT, LANDLORD SHALL FURNISH
TENANT FOLLOWING TENANT'S WRITTEN REQUEST THEREFOR, BUT NO MORE THAN ONCE IN
ANY CALENDAR YEAR, INCLUDING INVOICES AND OTHER SOURCE DOCUMENTS RELATING TO
EXPENSES. SUCH AUDIT SHALL BE LIMITED TO THE ITEMS NECESSARY TO A
DETERMINATION OF THE APPLICABLE EXPENSES. IN ANY EVENT, IF IT IS DETERMINED
THAT TENANT WAS OVERCHARGED BY MORE THAN FOUR PERCENT (4%), SUCH OVERCHARGE
SHALL ENTITLE TENANT TO CREDIT AGAINST ITS NEXT PAYMENTS OF ADDITIONAL RENT
THE AMOUNT OF THE OVERCHARGE AND THE COSTS ASSOCIATED WITH THE AUDIT (AND, IF
SUCH CREDIT OCCURS FOLLOWING THE EXPIRATION OF THE TERM, LANDLORD SHALL
PROMPTLY PAY THE AMOUNT OF SUCH CREDIT TO TENANT). IF THE AUDIT DETERMINES
THAT THE TENANT WAS OVERCHARGED LESS THAN FOUR PERCENT (4%), SUCH OVERAGE
SHALL ENTITLE TENANT TO CREDIT AGAINST ITS NEXT PAYMENT OF ADDITIONAL RENT
THE AMOUNT OF THE OVERCHARGE AND A TENANT SHALL PAY FOR ALL COSTS ASSOCIATED
WITH THE AUDIT. IF THE AUDIT SHALL DETERMINE THAT TENANT WAS UNDERCHARGED FOR
THE OPERATING EXPENSES, TENANT SHALL PROMPTLY PAY THE AMOUNT OF SUCH
UNDERCHARGE TO LANDLORD AND TENANT SHALL PAY FOR ALL COSTS ASSOCIATED WITH
THE AUDIT.
5. SERVICES. Tenant shall pay for the actual costs of utilities
(electricity, telephone, gas, water and sewer) that it consumes within the
Premises ("Premises Utilities"). Tenant shall pay the charges for such Premises
Utilities directly to the utility company that provides such utility service to
the Premises. Landlord shall, at its sole cost and expense, connect the
Premises to the main off-premises electrical supply and install all necessary
meters.
Landlord shall furnish, or cause to be furnished, at Landlord's own cost and
expense (as part
- -7
<PAGE>
of the Operating Expenses) the following services, subject to all other
provisions of this Lease.
(a) All utilities (except Premises Utilities) including electricity,
water, gas (if any), except telephone, for the Building Common Areas;
(b) Air conditioning, both heating and cooling service (as required by the
seasons) in accordance with equipment specified in Tenant's
Construction Plans. Such service shall include operating maintenance
and expensable replacement costs where necessary;
(c) All exterior landscaping, landscaping maintenance and exterior
common area maintenance;
(d) Trash and waste removal from the Building and daily trash and waste
removal from the Premises (Monday through Friday);
(e) Exterior Building glass cleaning no less than twice per year;
(f) Maintenance and repairs to the Building fire and safety systems
pursuant to approved plans and specifications;
(g) Full daily janitorial service five (5) days per week in and about the
Premises and the Building;
(h) Pest and rodent control service on an as-needed basis.
(i) Daily security guard service in the form of a roving patrol in the
parking lot. Notwithstanding anything to the contrary, Tenant
expressly acknowledges and agrees that Landlord is not warranting
the efficiency of any such security personnel, service, procedures
or equipment. Landlord shall not be responsible or liable in any
manner for failure of any such security personnel, services,
procedures or equipment to prevent, control, or apprehend anyone
suspected of causing personal injury or damage in, or around, the
Building or the Project.
Failure to any extent to furnish or any stoppage or interruption of these
defined services resulting from any cause shall not render Landlord liable in
any respect for damages to any person, property or business, nor shall the same
be construed as an eviction of Tenant or work an abatement of Basic Rental or
Additional Rent, nor relieve Tenant from fulfillment of any covenant or
agreement contained herein and Tenant shall have no claim, offset or abatement
rights as a result of any of the foregoing. NOTWITHSTANDING ANYTHING TO
CONTRARY CONTAINED
- -8
<PAGE>
HEREIN, IN THE EVENT LANDLORD SHALL FAIL TO PROVIDE THE SERVICES PROVIDED FOR
IN THIS PARAGRAPH 5 FOR A PERIOD OF TEN (10) CONSECUTIVE DAYS AFTER TENANT'S
WRITTEN NOTICE TO LANDLORD, TENANT'S BASIC RENT SHALL BE ABATED THEREAFTER
UNTIL SUCH SERVICES ARE RESTORED.
6. LEASEHOLD IMPROVEMENTS. Landlord shall install and construct the Tenant
Improvements as defined in and in accordance with Exhibit D (hereinafter, the
"Work Letter"), attached hereto and made a part hereof. The condition of the
Premises prior to construction of Tenant Improvements shall be in "Shell
Condition". "Shell Condition" shall be defined as meaning no existing tenant
improvements, but shall include a Building shell that is constructed in
accordance with the Project Criteria and specifications attached hereto as
Rider 5 and in accordance with all applicable governmental laws, codes and
regulations, is clear of debris and has all main electrical and plumbing, fire
sprinkler and mechanical trunk lines to the Premises.
7. USE.
(a) Tenant shall use the Premises only for the Permitted Use. Tenant will
not occupy or use the Premises, or permit any portion of the Premises to be
occupied or used, for any business or purpose other than the Permitted Use or
for any use or purpose which is unlawful in part or in whole or deemed to be
disreputable in any manner, or which may be dangerous to life, limb or
property, or keep any substance or carry on or permit any operation which might
emit offensive odors from the Premises, or any use which is extrahazardous on
account of fire, nor permit anything to be done which will in any way increase
the rate of fire insurance on any building in the Project or their contents;
and in the event that, by reason of acts of Tenant, there shall be any increase
in rate of insurance on any building in the Project or their contents created
by Tenant's acts or conduct of business then such acts of Tenant shall be
deemed to be an event of default hereunder and Tenant hereby agrees to pay to
Landlord the amount of such increase on demand and acceptance of such payment
shall not constitute a waiver of any of Landlord's other rights provided
herein. Tenant will conduct its business and control its agents, employees and
invitees in such a manner as not to create any nuisance, nor interfere with,
annoy or disturb other tenants or Landlord in management of the Project. Tenant
will maintain the Premises in a clean, healthful and safe condition and will
comply with all laws, ordinances, order, rules and regulations (state, federal,
municipal and other agencies or bodies having any jurisdiction thereof) with
reference to use, condition or occupancy of the Premises, including without
limitation any Environmental Law. Tenant shall indemnify and hold Landlord
harmless from any and all costs, expenses (including reasonable attorney's
fees) claims and causes of action arising from Tenant's failure to comply with
this Section. Tenant will not, without the prior written consent of Landlord,
paint, install lighting or decoration, or install any signs, window or door
lettering or advertising media of any type or window awning on or about the
Premises or any part thereof. Should Landlord agree in writing to any of the
foregoing items in the preceding
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<PAGE>
sentence, Tenant will maintain such permitted item in good condition and repair
at all times. Outside storage, including but not limited to trucks or other
vehicles, is prohibited without Landlord's prior written consent.
(b) Tenant shall comply with provisions of Rider No. 4 attached hereto,
as it relates to Hazardous Substances and Materials.
8. REPAIRS AND MAINTENANCE.
(a) Landlord's Obligation: Landlord shall at its sole cost and expense (as
part of the Operating Expenses, except as specifically excluded above), and
throughout the Lease Term and any extensions thereof, provide maintenance and
repairs (including replacement parts and labor) to the Building and the
Premises, including (i) the ROOF (INCLUDING, BUT NOT LIMITED TO, ROOF MEMBRANE,
SKY-LIGHTS, SMOKE VENTS AND OTHER ROOF PENETRATIONS WHICH ARE A PART OF THE
ORIGINAL CONDITION OF THE BUILDING SET FORTH IN RIDER NO. 5), walls (including
glass curtain walls, windows, and exterior doors), foundation, and other
structural elements of the Building; (ii) heating, ventilating, air
conditioning, mechanical, electrical, plumbing, lighting, and other systems and
equipment; (iii) interior walls, ceilings and floors; and (iv) driveways,
sidewalks, curbs, signs (except Tenant's signs), landscaping, and other
exterior areas (including painting and striping of parking areas).
Notwithstanding any of the foregoing to the contrary, Landlord shall not be
required to repaint or replace the floor coverings and wall coverings in the
Premises during the term of the Lease.
(b) Tenant's Obligation: Tenant shall, at Tenant's sole cost and expense, (i)
keep the interior of the Premises (including, but not limited to, all fixtures,
walls, ceilings, floors, doors, windows [except replacement of exterior plate
glass unless the replacement is by reason of damage caused by Tenant or its
employees, contractors, invitees, agents or guests], appliances and equipment
which are a part of the Premises) in good repair and condition, (ii) repair or
replace any damage or injury done to the Building or any other part of the
Project caused by Tenant, Tenant's contractors agents, employees, licensees,
invitees or visitors or resulting from a breach of its obligations,(EXCEPT TO
THE EXTENT COVERED BY LANDLORD'S INSURANCE, IN WHICH CASE TENANT SHALL BE
RESPONSIBLE ONLY FOR THE DEDUCTIBLE OF SUCH INSURANCE COVERAGE) and (iii)
indemnify and hold Landlord harmless from any and all costs, expenses
(including reasonable attorneys' fees), claims and causes of action arising
from or incurred by and/or asserted in connection with such maintenance,
repairs, replacements, damage or injury or Tenant's breach of its obligations
under this Lease. All repairs and replacements performed by or on behalf of
Tenant shall be performed in a good and workmanlike manner and in accordance
with the standards applicable to alterations or improvements performed by
Tenant.
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(c) If Tenant should fail to perform any of its obligations WITHIN ANY
APPLICABLE CURE PERIOD hereunder with respect to repairs and maintenance, then
Landlord may, if it so elects, in addition to any other remedies provided
herein, effect such repairs and maintenance. Any sums expended by Landlord in
effecting such repairs and maintenance shall be deemed to be so much additional
rental owing by Tenant to Landlord and shall be due and payable, on demand,
together with interest thereon at the rate of eighteen percent (18%) per annum
from the date of each such expenditure by Landlord to the date of repayment by
Tenant.
9. ALTERATIONS AND IMPROVEMENTS. At the end or other termination of this
Lease, Tenant shall deliver the Premises to Landlord with all improvements
located thereon (except as otherwise herein provided) in good repair and
condition, reasonable wear and tear, casualty and condemnation excepted, and
shall deliver to Landlord all keys to the Premises. The cost and expense of any
repairs necessary to restore the condition of the Premises to said condition in
which they are to be delivered to Landlord shall be borne by Tenant. Tenant
will not make or allow to be made any alterations or physical additions in or
to the Premises without the prior written consent of Landlord, which consent
shall not be unreasonably withheld as to non-structural alterations PROVIDED
THAT NO CONSENT SHALL BE REQUIRED FOR NON-STRUCTURAL ALTERATIONS NOT EXCEEDING
$15,000.00 IN THE AGGREGATE, WHICH ARE OTHERWISE IN COMPLIANCE WITH THIS LEASE,
PROVIDED, HOWEVER, TENANT SHALL PROVIDE LANDLORD WITH AS-BUILT DRAWINGS AND A
COMPUTER DISKETTE (DXF FORMAT) WITHIN TEN (10) DAYS OF COMPLETION OF SUCH
ALTERATIONS. In such cases, Tenant agrees to cause such alterations to comply
with all applicable governmental laws, ordinances and regulations. Tenant shall
promptly pay for the costs of all work performed and shall indemnify Landlord
against liens, costs, damages or expenses incurred therewith including
reasonable attorney's fees incurred by Landlord if Landlord shall be joined in
any action or proceeding involving such work. Under no circumstances shall
Tenant commence such work until Landlord has been provided with evidence that
Tenant's contractor(s) is licensed and carries adequate public liability and
builders risk insurance and workman compensation as required by the State of
Texas and in amounts deemed satisfactory by Landlord. Upon completion of the
alterations, Tenant shall deliver to the Landlord "as-built" plans. At Tenant's
option, if Landlord performs such alterations, Tenant shall pay Landlord, as
Additional Rent, the cost thereof plus fifteen percent (15%) as reimbursement
for Landlord's overhead. All alterations, additions or improvements (whether
temporary or permanent in character) made in or upon the Premises, either by
Landlord or Tenant, shall be at Landlord's option, Landlord's property on
termination of this lease and shall remain on the Premises without compensation
to Tenant. All furniture, movable trade fixtures and equipment installed by
Tenant may be removed by Tenant at the termination of this lease if Tenant so
elects, and shall be so removed if required by Landlord, or if not so removed
shall, at the option of Landlord, become the property of Landlord. All such
installations, removals and restoration shall be accomplished in a good and
workmanlike manner so as not to damage the Premises or the primary structure or
structural qualities of any building improvements or the plumbing, electrical
lines or other utilities.
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<PAGE>
10. COMMON AREAS. The use and occupation by Tenant of the Premises in
accordance with the terms of this lease shall include a right to use the Common
Areas in common with other tenants of the Project; subject, however, to the
terms and conditions of this Lease and to the Rules and Regulations for the use
of the Premises and the Common Areas which are attached hereto as Exhibit "C"
and made a part hereof as the same may be reasonably amended by Landlord from
time to time, with which Tenant covenants and agrees to comply.
All Common Areas shall be subject, at all times, to the exclusive control
and management by Landlord, and Landlord shall have the right from time to time
to change the dimensions and location and to establish, modify and enforce
reasonable rules and regulations with respect to all Common Areas. Landlord
shall have the right to construct additional buildings or improvements,
construct additional stories on existing buildings and to maintain, and operate
lighting facilities on all said areas and improvements; to change the area,
level, location and arrangement of parking areas and other facilities and to
restrict parking by Tenant or tenants and their officers, agents, employees and
contractors to designated parking area. Landlord also reserves the right to
dedicate portions of the Common Areas for streets, parks, utilities or other
public areas, PROVIDED, HOWEVER, IN NO EVENT SHALL THE PARKING RATIO FOR TENANT
BE REDUCED BELOW A RATIO OF ONE SPACE PER 300 SQUARE FEET LEASED. If the amount
of the Common Areas is diminished, Landlord shall not be subject to any
liability nor shall Tenant be entitled to any compensation or abatement of
Basic Rental or Additional Rent, nor shall such diminution of Common Areas be
deemed an actual or constructive eviction.
11. ASSIGNMENT AND SUBLETTING. Tenant shall not have the right to assign
or in any manner transfer this Lease or to sublet the whole or any part of the
Premises nor to grant any license, concession or other right of occupancy of
any portion of the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Landlord shall have the
option, upon receipt from Tenant of a written request for Landlord's consent to
a subletting or assignment, to cancel this Lease as of the date which is sixty
(60) days following the receipt by Landlord of the request from Tenant to
sublet or assign. The option of Landlord to cancel this Lease, as provided for
below, shall be exercised, if at all, within sixty (60) days following
Landlord's receipt of such written notice, by delivering to Tenant written
notice of Landlord's intention to exercise the option to so cancel this Lease.
If Tenant desires at any time to enter into an assignment of this Lease or a
sublease of the Premises or any portion thereof, Tenant shall give written
notice to Landlord of its desire to do so, which notice shall contain (a) the
name of the proposed assignee or subtenant, (b) the nature of the proposed
assignee's or subtenant's business to be carried on in the Premises, (c) the
terms and provisions of the proposed assignment or sublease, and (d) resumes,
business plans, references, financial information, and other information as
Landlord may reasonably request concerning the proposed assignee or subtenant.
Notwithstanding any permitted assignment or subletting, Tenant shall at all
times remain directly, primarily and fully responsible and liable for the
payment of the rent herein specified and for compliance with all of its other
obligations under the
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<PAGE>
terms, provisions and covenants of this Lease. No assignee or sublessee of the
Premises or any portion thereof may assign or sublet the Premises or any
portion thereof WITHOUT THE PRIOR WRITTEN CONSENT OF THE LANDLORD, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED. Consent by Landlord to
one or more assignments or sublettings shall not operate as a waiver of
Landlord's rights as to any subsequent assignments or sublettings. Upon the
occurrence of an "event of default" as hereinafter defined, if the Premises or
any part thereof are then assigned or sublet Landlord, in addition to any other
remedies herein provided, or provided by law, may at its option collect
directly from such assignee or subtenant all rents becoming due to Tenant under
such assignment or sublease and apply such rent against any sums due to
Landlord from Tenant hereunder, and no such collection shall be construed to
constitute a novation or a release of Tenant from the further performance of
Tenant's obligations hereunder. In the event of the transfer and assignment by
Landlord of its interest in this Lease and the Project ( or the part thereof in
which the Premises are located) Landlord shall thereby be released from any
further obligations hereunder, and Tenant agrees to look solely to such
successor in interest of the Landlord for performance of such obligations.
Tenant shall not mortgage, pledge or otherwise encumber its interest in this
lease or in the Premises. NOTWITHSTANDING THE FOREGOING, TENANT SHALL HAVE THE
RIGHT TO SUBLET ANY PORTION OF THE PREMISES OR ASSIGN THE LEASE TO ANY PARENT,
SUBSIDIARY OR AFFILIATE OF TENANT WITHOUT LANDLORD APPROVAL, PROVIDED, HOWEVER,
IN ALL SUCH EVENTS, TENANT SHALL REMAIN LIABLE FOR THE LEASE.
12. LIABILITY.
(a) TENANT'S INDEMNITY. Tenant will indemnify and hold Landlord, Property
Manager and their respective partners, officers, directors, employees and
agents harmless from all claims, demands, actions, damages, loss, liabilities,
judgments, costs and expenses, including without limitation, attorney's fees
and court costs (each a "Claim" and collectively the "Claims") which (i) are
suffered by, recovered from or asserted against Landlord, (ii) are not paid by
insurance carried by Tenant or Landlord, and (iii) arise from or in connection
with (a) the use or occupancy of the Premises and/or the Common Areas, by
Tenant or its employees, guests, invitees, officers and agents or any accident,
injury or damage occurring in or at the Premises, or (b) any breach by Tenant
of any representation or covenant in this Lease; provided, however, such
indemnification of Landlord by Tenant shall not include any Claim waived by
Landlord under Paragraph 26 of this Lease, any Claim to the extent caused by
the negligence, gross negligence or willful misconduct of Landlord or any Claim
relating to hazardous or toxic materials except to the extent such Claim arises
out of a breach by Tenant.
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<PAGE>
(b) LANDLORD'S INDEMNI1Y. Landlord will indemnify and hold Tenant and its
officers, directors, employees and agents harmless from all Claims which are
suffered by, recovered from or asserted against Tenant and which are not paid
by proceeds of insurance carried by Landlord or Tenant and which arise from or
in connection with (i) any accident, injury or damage occurring in or on the
Common Areas caused by Landlord's actions, or arising from negligence or
willful misconduct of Landlord, its agents, employees, contractors, or (ii) any
breach by Landlord of any representation or covenant in this Lease, provided,
however, such indemnification of Tenant by Landlord shall not include any Claim
waived by Tenant under Paragraph 26 of this Lease, any Claim to the extent
caused by the negligence, gross negligence or willful misconduct of Tenant or
any Claim relating to hazardous or toxic materials except to the extent such
Claim arises out of a breach by Landlord.
Tenant shall procure and maintain throughout the term of this lease a policy or
policies of insurance, at its sole cost and expense, insuring both Landlord and
Tenant against all claims, demands or actions arising out of or in connection
with: (i) the Premises; (ii) the condition of the Premises; (iii) Tenant's
operations in and maintenance and use of the Premises; and (iv) Tenant's
liability assumed under this Lease, the limits of such policy or policies to be
in the amount of not less than $3,000,000.00 per occurrence in respect of
injury to persons (including death), and in the amount of not less than
$1,000,000.00 per occurrence in respect of property damage or destruction,
including loss of use thereof. All such policies shall be procured by Tenant
from responsible insurance companies. Certified copies of Certificates of
insurance of such policies, shall be delivered to Landlord prior to the
commencement date of this lease. Not less than thirty (30) days prior to the
expiration date of any such policies, certificates of insurance certified
copies of the renewals thereof (bearing notations evidencing the payment of
renewal premiums) shall be delivered to Landlord. Such policies shall further
provide that not less than thirty (30) days written notice shall be given to
Landlord before such policy may be canceled or changed to reduce insurance
provided thereby.
13. CASUALTY INSURANCE
(a) Landlord shall, at all times during the Lease Term, maintain a policy or
policies of insurance issued by and binding upon one or more solvent insurance
companies insuring the Project, against loss or damage by fire, explosion and
other casualties insurable pursuant to standard fire and extended coverage
insurance forms
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<PAGE>
then in common use in the State of Texas. Landlord shall not be required to
insure any furniture, fixtures, equipment, machinery, goods, or supplies or
other personal property which Tenant may have brought into or which might
otherwise be located in or about the Premises. Landlord shall not be required
to insure alterations or improvements made to the Premises the cost of which is
in excess of the credit given by Landlord pursuant to Section 6 of this lease
or any alterations or improvement made by Tenant after the commencement date.
(b) Any insurance provided for in subsection 13(a) above may be effected by
self insurance or by a policy of blanket insurance. Tenant shall have no rights
in any policy or policies maintained by Landlord.
14. MORTGAGES. Tenant accepts this Lease subject to any deeds of trust,
security interests or mortgages which might now or hereafter constitute a lien
upon the Premises and to zoning ordinances and other building and fire
ordinances and governmental regulations relating to the use of the Premises. If
any such mortgage or deed of trust is enforced by the holder thereof, Tenant
shall, upon written request, attorn to the holder of such mortgage or deed of
trust or purchaser at such foreclosure sale, or any other person succeeding to
the interest of Landlord as a result of such enforcement, as the case may be,
and execute instruments affirming such attornment PROVIDED SUCH SUCCESSOR IN
INTEREST TO LANDLORD ASSUMES ALL OBLIGATIONS OF LANDLORD THEREAFTER ARISING.
Tenant shall at any time hereafter, on demand, execute any instruments,
releases or other documents that may be required by any mortgagee for the
purpose of subjecting and subordinating this Lease to the lien of any such deed
of trust, security interest or mortgage; PROVIDED, HOWEVER, SUCH SUBORDINATION
AGREEMENTS SHALL EXPRESSLY PROVIDE THAT TENANT'S OCCUPANCY OF THE PREMISES
SHALL NOT BE DISTURBED SO LONG AS TENANT PERFORMS ALL OF ITS COVENANTS AND
OBLIGATIONS HEREUNDER. With respect to any deed of trust, security interest or
mortgage hereafter constituting a lien on the Premises Landlord, at its sole
option, shall have the right to waive the applicability of this Section 14 so
that this lease will not be subject and subordinate to any such deed of trust,
security interest or mortgage.
15. INSPECTION. Without being deemed guilty of an eviction of Tenant and
without abatement of Rent, Landlord and Landlord's agents and representatives
shall have the right WITH REASONABLE NOTICE to enter upon and inspect the
Premises at any reasonable time during business hours, for the purpose of (i)
ascertaining the condition of the Premises or in order to make such repairs as
may be permitted to be made by Landlord and (ii) during THE LAST SIX (6) MONTHS
showing the Premises to prospective lenders, purchasers or tenants. Tenant
hereby waives any claims for damages for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or Quite Enjoyment
of the Premises and any other loss occasioned thereby. During the last six (6)
months of the Lease Term Landlord shall have the right to erect on the grounds
of the
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<PAGE>
Building or the Premises a suitable sign indicating the Premises are available
for lease or for sale.
16. CONDEMNATION. If the whole or any substantial part of the Premises
should be taken for any public or quasi-public use under governmental law,
ordinance or regulation, or by right of eminent domain, or by private purchase
in lieu thereof and the taking would prevent or materially interfere with the
use of the Premises for the purposes contemplated by the Permitted Use, this
lease shall terminate and the Basic Rent and Additional Rent shall be abated
during the unexpired portion of this lease, effective when the physical taking
of said Premises shall occur.
If part of the Premises shall be taken for any public or quasi-public use
under any governmental law, ordinance or by right of eminent domain, or by
private purchase in lieu thereof, and this lease is not terminated as provided
in the subparagraph above, this lease shall not terminate but the rent payable
hereunder during the unexpired portion of this lease shall be reduced to such
extent as may be fair and reasonable under all of the circumstances.
In the event of any such taking or private purchase in lieu thereof,
Landlord shall receive the entire award (which shall include sales proceeds)
payable as a result of the condemnation, taking or sale thereof. Tenant shall,
however, have the right to recover from such authority through a separate award
which does not reduce Landlord's award, any compensation as may be awarded to
Tenant on account of moving and relocation expenses of Tenant's physical
property.
17. INSURANCE, FIRE OR OTHER CASUALTY. In the event that the Premises
should be damaged or destroyed by fire, tornado or other casualty to such an
extent that rebuilding or repairs cannot be completed ONE HUNDRED TWENTY (120)
days after the date on which such repairs commence, Landlord may at its option
terminate this lease, in which event the Basic Rental and Additional Rent shall
be abated during the unexpired portion of this lease effective with the date of
such damage. In the event the Premises should be damaged by fire, tornado or
other casualty covered by Landlord's insurance, but only to such extent that
rebuilding or repairs can be completed within ONE HUNDRED TWENTY (120) days
after the date of such damage, or if the damage should be more serious but
Landlord does not elect to terminate this lease, in either such event Landlord
shall within sixty (60) days after the date of such damage commence to rebuild
or repair the Premises and shall proceed with reasonable diligence to restore
the Premises to substantially the same condition in which they were immediately
prior to the happening of the casualty, except that Landlord shall not be
required to rebuild, repair or replace any part of the furniture, equipment,
fixtures and other improvements which may have been placed by Tenant or other
tenants within the Project or the Premises and Landlord shall not be obligated
to replace any improvements whose cost was in excess of the credit provided by
Landlord to Tenant under Section 6 of this lease. In the event that the
Premises are totally untenantable, Landlord shall abate the rent during the
time the Premises are unfit for occupancy. If the Premises are not totally
untenantable, Landlord shall allow Tenant a fair diminution of rent during the
time
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<PAGE>
the Premises are partially unfit for occupancy. With respect to the previous
two sentences, if the casualty was caused by Tenant, its agents, employees,
licensees or invitees, Basic Rental and Additional Rent shall be abated only to
the extent Landlord is compensated for such by loss of rents insurance, if any.
Notwithstanding the foregoing, (i) in the event any mortgagee under a deed of
trust, security agreement or mortgage on the Project should require that the
insurance proceeds be used to retire the mortgage debt or (ii) in the event
that the Project is damaged to such an extent that Landlord does not deem it
feasible to rebuild same (even though the Premises might not have been
substantially damaged) Landlord shall have no obligation to rebuild and this
Lease shall terminate upon notice to Tenant. Any insurance which may be carried
by Landlord or Tenant against loss or damage to the Project or to the Premises
shall be for the sole benefit of the party carrying such insurance and under
its sole control.
18. HOLDING OVER. Should Tenant, or any of its successors in interest, hold
over the Premises, or any part thereof, after the expiration of the term of
this lease, unless otherwise agreed in writing, such holding over shall
constitute and be construed as a tenant at sufferance tenancy at will only,
subject, however, to all of the terms, provisions, covenants and agreements on
the part of Tenant hereunder; such parties shall be subject to immediate
eviction and removal and Tenant or any such party shall pay Landlord as rent
for the period of such holdover an amount equal to the Basic Rental and
Additional Rent payable for the last month of the term of this lease plus FIFTY
PERCENT (50%) of such amount. Tenant shall also pay any damages sustained by
Landlord as a result of such holdover. The holding over by Tenant for any part
of a month shall entitle Landlord to collect the rent called for under this
Section 18 for the entirety of such month. The inclusion of this Section 18
shall not be construed as Landlord's consent for the Tenant to hold over.
19. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes
levied or assessed against personal property, furniture or fixtures placed by
Tenant in the Premises. If any such taxes for which Tenant is liable are levied
or assessed against Landlord or Landlord's property and if Landlord elects to
pay the same or if the assessed value of Landlord's property is increased by
inclusion of personal property, furniture or fixtures placed by Tenant in the
Premises, and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord upon demand that part of such taxes for which Tenant is
primarily liable hereunder.
20. EVENTS OF DEFAULT. The following events shall be deemed to be events
of default by Tenant under this Lease:
(a) Tenant shall fail to pay any of the Basic Rental or Additional Rent
hereby reserved and such failure shall continue for a period of ten (10) days
after WRITTEN NOTICE the date such payment was due, PROVIDED, HOWEVER, LANDLORD
SHALL NOT BE REQUIRED TO GIVE MORE THAT TWO (2) SUCH NOTICES PER YEAR.
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<PAGE>
(b) Tenant shall fail to comply with any term, provision or covenant of
this lease, other than the payment of rent, and shall not cure such failure
within THIRTY (30) days after written notice thereof to Tenant
(c)Tenant or any guarantor of Tenant's obligations shall become insolvent
or shall make an assignment for the benefit of creditors.
(d) Tenant or any guarantor shall file a petition under any section or
chapter of the National Bankruptcy Code, as amended, or under any similar law
or statute of the United States or any State thereof; or Tenant shall be
adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder
and such adjudication shall not be vacated or set aside within thirty (30)
days.
(e)receiver or trustee shall be appointed for all or substantially all of
the assets of Tenant and such receivership shall not be terminated or stayed
within thirty (30) days.
(f) Tenant shall desert or vacate any substantial portion of the Premises
WITHOUT PAYMENT OF RENT for a period of five (5) or more days without written
permission of Landlord.
With respect to the defaults in subsections (c) through (f) above,
Landlord shall not be obligated to give Tenant notices of default and Tenant
shall have no right to cure such defaults.
21. REMEDIES. Upon the occurrence of any event of default specified in
Section 20 hereof, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever:
(a) Terminate this lease in which event Tenant shall immediately surrender
the Premises to Landlord, and if Tenant fails to do so, Landlord may, without
prejudice to any other remedy which it may have for possession or arrearages in
rent, enter upon and take possession and expel or remove Tenant and any other
person who may be occupying said Premises or any part thereof, by force if
necessary, without being liable for prosecution or any claim of damages
thereof; and Tenant agrees to pay to Landlord on demand the amount of all loss
and damage which Landlord may suffer by reason of such termination, whether
through inability to relet the Premises on satisfactory terms or otherwise,
including (i) accrued Rent to the date of termination and Late Charges, plus
interest thereon from the date due through the date paid, the unamortized cost
of Tenant's improvements, broker's fees and commissions, attorney's fees,
moving allowances and any other costs Landlord incurred in making this Lease,
the cost of recovering the Premises and the costs of reletting the
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<PAGE>
Premises; (ii) the Present Value of the Rent that would have accrued under the
Lease for the balance of the term but for such termination, reduced by the fair
market rental value of the Premises for such balance of the lease term
discounted at the Present Value; (iii) plus any other ACTUAL AND REASONABLE
costs or amounts necessary to compensate Landlord for its damages.
(b) Enter upon and take possession of the Premises and expel or remove
Tenant and any other person who may be occupying the Premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, and if Landlord so elects, relet the Premises on
such terms as Landlord shall deem advisable and receive the rent thereof; and
Tenant agrees to pay to Landlord on demand any deficiency that may arise by
reason of such reletting for the remainder of the Lease Term.
(c) Enter upon the Premises by force if necessary, without being liable
for prosecution or any claim for damages therefor, and do whatever Tenant is
obligated to do under the terms of this lease; and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this lease, and Tenant further
agrees that Landlord shall not be liable for any damages resulting to the
Tenant from such action.
In the event Tenant fails to pay any Basic Rental or Additional Rent
hereunder as and when such is due, to help defray the additional cost to
Landlord for processing such late payments, Tenant shall pay to Landlord on
demand a late charge in an amount equal to percent ten percent (10%) of such
rent or additional rent, and the failure to pay such late charge, within ten
(10) days after demand therefore, shall be an event of default hereunder. The
provision for such late charge shall be in addition to all of Landlord's other
rights and remedies hereunder or at law and shall not be construed as
liquidated damages or as limiting Landlord's remedies in any manner.
No re-entry or taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this lease, unless a written
notice of such intention be given to Tenant. Notwithstanding any such reletting
or re-entry or taking possession, Landlord may at any time thereafter elect to
terminate this lease for a previous default. Pursuit of any of the foregoing
remedies shall not preclude pursuit of any of the other remedies herein
provided or any other remedies provided by law, nor shall pursuit of any remedy
herein provided constitute a forfeiture or waiver of any rent due to Landlord
hereunder or of any damages accruing to Landlord by reason of the violation of
any of the terms, provisions and covenants herein contained. Landlord's
acceptance of rent following an event of default hereunder shall not be
construed as Landlord's waiver of such event of default. No waiver by Landlord
of any violation or breach of any of the terms, provisions, and covenants
herein contained shall be deemed or construed to constitute a waiver of any
other violation or breach of any of the terms, provisions, and covenants herein
contained. Forbearance by
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<PAGE>
Landlord to enforce one or more of the remedies herein provided upon an event
of default shall not be deemed or construed to constitute a waiver of any other
violation or default. The loss or damage that Landlord may suffer by reason of
termination of this lease or the deficiency from any reletting as provided for
above shall include the expense of repossession and any repairs or remodeling
undertaken by landlord following possession. Should Landlord at any time
terminate this lease for any default, in addition to any other remedy Landlord
may have, Landlord may recover from Tenant all damages Landlord may incur by
reason of such default, including the cost of recovering the Premises and the
loss of rental for the remainder of the Lease Term.
In addition to the foregoing remedies, upon the occurrence of any event of
default Landlord is entitled and is hereby authorized, without any notice to
Tenant whatsoever, to enter upon the Premises by use of master key, a duplicate
key, or other peaceable means, and to change, alter, and/or modify the door
locks on all entry doors of the Premises, thereby permanently excluding Tenant,
and its officers, principals, agents, employees, representatives and invitees
therefrom. In the event that Landlord has either permanently repossessed the
Premises pursuant to the foregoing provisions of this Lease, or has terminated
that lease by reason of Tenant's default, Landlord shall not thereafter be
obligated to provide Tenant with a key to the Premises at any time, regardless
of any amounts subsequently paid by Tenant; provided, however, that in any such
instance, during Landlord's normal business hours and at the convenience of
Landlord, and upon receipt of written request from Tenant accompanied by such
Landlord will either (at Landlord's option) (i) escort Tenant or its authorized
personnel to the Premises to retrieve any personal belongings or other property
of Tenant not subject to the Landlord's Lien or security interest described
herein, or (ii) obtain a list from Tenant of such personal property as Tenant
intends to remove, whereupon Landlord shall remove such property and make it
available to Tenant at a time and place designated by Landlord. However, if
Landlord elects option (ii), Tenant shall pay, in cash in advance, all costs
and expenses estimated by Landlord to be incurred in removing such property and
making it available to Tenant and all moving and/or storage charges theretofore
incurred by Landlord with respect to such property. If Landlord elects to
exclude Tenant from the Premises without permanently repossessing or
terminating pursuant to the foregoing provisions of this Lease, then Landlord
shall not be obligated to provide Tenant a key to reenter the Premises until
such time as all delinquent rental and other amounts due under this Lease have
been paid in full and all other defaults, if any, have been completely cured to
Landlord's satisfaction (if such cure occurs prior to any actual permanent
repossession or termination), and Landlord has been given assurance reasonably
satisfactory to Landlord evidencing Tenant's ability to satisfy its remaining
obligations under this lease. This remedy of Landlord shall be in addition to,
and not in lieu of, any of its other remedies set forth in this Lease, or
otherwise available to Landlord at law or in equity. The foregoing provisions
shall override and control over any conflicting provisions of the Texas
Property Code as well as any successor statute governing the right of a
landlord to change the door locks of a commercial tenant.
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<PAGE>
22. SURRENDER OF PREMISES. No act or thing done by the Landlord or its
agents during the term hereby granted shall be deemed an acceptance of a
surrender of the Premises, and no agreement to accept a surrender of the
Premises shall be valid unless the same be made in writing and subscribed by
the Landlord.
23. ATTORNEYS' FEES. If on account of any breach or default by Tenant OR
LANDLORD in Tenant's OR LANDLORD'S OBLIGATIONS under this lease it should be
necessary or appropriate for Landlord to bring any action under this lease or
to enforce or defend any of Landlord's OR TENANT'S rights hereunder, then
LANDLORD OR TENANT agrees in each and any such case to pay to Landlord a
reasonable attorneys' fee.
24. LANDLORD'S LIEN: Section Deleted
- -21
<PAGE>
25. MECHANIC'S LIEN. Tenant shall have no authority, express or implied,
to create or place any lien or encumbrance of any kind or nature whatsoever
upon, or in any manner to bind, the interest of Landlord in the Premises or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs, and each such claim shall attach to, if at
all, only the leasehold interest granted to Tenant by this instrument. Tenant
covenants and agrees that it will pay or cause to be paid all sums legally due
and payable by it on account of any labor performed or materials furnished in
connection with any work performed on the Premises on which any lien is or can
be validly and legally asserted against its leasehold interest in the Premises
or the improvements thereon and that it will save and hold Landlord harmless
from any and all loss, cost or expense based on or arising out of asserted
claims or liens against the leasehold estate or against the right, title and
interest of the Landlord in the Premises or under the terms of this lease.
26. WAIVER OF SUBROGATION. Anything in this lease to the contrary
notwithstanding, the parties hereto waive any and all rights of recovery,
claim, action or cause of action, against each other, their agents, officers,
and employees, for any loss or damage that may occur to the Premises hereby
demised, or any improvements thereto, the Project or any improvements thereto,
by reason of fire, the elements, or any other cause which is insured against
pursuant to valid and collectible insurance policies (OR ANY INSURANCE PROVIDED
FOR IN SECTION 13), which are then in effect, regardless of cause or origin,
including negligence of the parties hereto, their agents, officers, and
employees.
27. SIGNS. Tenant shall have the right to install signs upon the Premises
in accordance with Rider No. 2 attached hereto.
28. NOTICES. Each provision of this Agreement, or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing or delivery of any notice, or with reference
to the making of any payment by Tenant to Landlord, shall be deemed to be
complied with when and if the following steps are taken:
(a) All rent and other payment required to be made by Tenant to Landlord
hereunder shall be payable to Landlord in Dallas County, Texas, at the address
hereinbelow set forth, or at such other address as Landlord may specify from
time to time by written notice delivered in accordance herewith.
(b) Any notice or document required to be delivered hereunder shall be
deemed to be delivered when actually received and whether or not received when
deposited in the United States mail, postage prepaid, certified or registered
mail (with return receipt
- -22
<PAGE>
requested) addressed to the parties hereto at the respective addresses set out
opposite their names below, or at such other address as they have theretofore
specified by written notice delivered in accordance herewith. Notice also may
be given by telex or facsimile, provided each such transmission is confirmed
(and such confirmation is supported by documented evidence) as received.
LANDLORD: CAMPBELL CREEK LTD.
4099 MCEWEN ROAD, SUITE 370
DALLAS, TEXAS 75244 ATTN: PROPERTY MANAGER
TENANT:
APPLIED DIGITAL ACCESS, INC..
9855 SCRANTON ROAD
SAN DIEGO. CALIFORNIA 92121
ATTN: PRESIDENT FAX-.619.623.2208
29. FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by Landlord or Tenant, Landlord or Tenant shall not be
liable or responsible for, and there shall be excluded from the computation for
any such period of time, any delays due to strikes, riots, acts of God,
shortages of labor or materials, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever which are beyond the
control of Landlord or Tenant, provided, however, in no event shall the
foregoing apply to the financial obligations of either Landlord or Tenant to
the other under this Lease.
30. SEVERABILITY. If any clause or provision of this lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this lease
shall not be affected thereby, and it is also the intention of the parties to
this lease that in lieu of each clause or provision of this lease that is
illegal, invalid, or unenforceable, there be added as a part of this lease a
clause or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
31. ENTIRE AGREEMENT; AMENDMENTS; BINDING EFFECT. This Lease contains the
entire agreement between the parties and may not be altered, changed or
amended, except by instrument in writing signed by both parties hereto. No
provision of this Lease shall be deemed to have been waived by Landlord unless
such waiver be in writing signed by Landlord and addressed to Tenant, nor shall
any custom or practice which may grow up between the parties in the
administration of the terms hereof be construed to waive or lessen the right of
Landlord to insist
- -23
<PAGE>
upon the performance by Tenant in strict accordance with the terms hereof. The
terms, provisions, covenants and conditions contained in this lease shall apply
to, inure to the benefit of, and be binding upon the parties hereto, and upon
their respective successors in interest and legal representatives, except as
otherwise herein expressly provided.
32. QUIET ENJOYMENT. Provided Tenant has performed all of the terms,
covenants, agreements and conditions of this lease, including the payment of
rent, to be performed by Tenant, Tenant shall have the quiet possession of
peaceably and quietly hold and enjoy the Premises for the term hereof, without
hindrance from Landlord, subject to the terms and conditions of this lease.
33. EXISTENCE OF BROKER. Tenant represents and warrants that it has not
contacted or dealt with any real estate broker or agent in connection with the
execution of this lease, except as listed below, and Tenant agrees to indemnify
and hold harmless Landlord against all liabilities and costs (including but not
limited to attorneys' fees) incurred by Landlord as a result of Tenant's breach
of the warranties and representations contained herein.
BROKER: CB CORNMERCIAL (SUCH BROKER IS REPRESENTED BY PAT O'KEEFE AND
ANTHONY BOLNER)
34. GENDER. Words of any gender used in this lease shall be held and
construed to include any other gender, and words in the singular number shall
be held to include the plural, unless the context otherwise requires.
35. JOINT AND SEVERAL LIABILITY. If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. If there
be a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be the joint and several obligations of Tenant and
such guarantor and Landlord need not first proceed against the Tenant hereunder
before proceeding against such guarantor, nor shall any such guarantor be
released from its guaranty for any reason whatsoever, including without
limitation, in case of any amendments hereto, waivers hereof or failure to give
such guarantor any notices hereunder.
36. ESTOPPEL CERTIFICATE. Tenant agrees promptly following any request by
Landlord to execute and deliver to Landlord within ten (10) days any documents,
evidencing the status of the Lease as may be required, either by a lender
("Lender") making a loan to Landlord to be secured by a deed of trust or
mortgage covering the Premises or the Project or a purchaser ("Purchaser") of
the Premises or the Project from Landlord (including an estoppel certificate
(i) certifying that this Lease is unmodified and in full force and effect, or,
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect and the date to which the
rent and other charges are paid in advance, if any, (ii) acknowledge that there
are
- -24
<PAGE>
not, to Tenant's knowledge, any uncured defaults on the part of the Landlord
hereunder, or so specifying such defaults, if any, as are claimed, and (iii)
such other matters as Landlord may reasonably request). If required by a Lender
or a Purchaser Tenant will deliver to Landlord current financial statements of
Tenant.
37. CAPTIONS. The captions contained in this lease are for convenience of
reference only, and in no way limit or enlarge the terms and conditions of this
lease.
38. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which may be erected on the Project or
lands adjacent to the Project shall in no way affect this Lease or impose any
liability on Landlord (even if Landlord is the adjacent land owner).
39. RELOCATION. - Section Deleted.
40. PARKING. The parking areas shall be designated for automobile parking
on a nonexclusive basis for all Property tenants (including Tenant) and their
respective employees, customers, invitees and visitors, provided, however,
Tenant shall be entitled to five (5) visitor spaces at a location mutally
acceptable to Landlord and Tenant. Parking and delivery areas for all vehicles
shall be in accordance with parking regulations established from time to time
by Landlord, with which Tenant agrees to conform. Tenant shall only permit
parking by its employees, customers and agents of automobiles in appropriate
designated parking areas. Tenant covenants that all items during the term of
the Lease, Tenant will not use in excess of one (1) parking space for each 250
rentable square feet in the Premises from Tenant's employees, invitees and
agents.
41. AUTHORITY OF TENANT. Tenant and each person signing this Lease on
behalf of Tenant represents to Landlord as follows: Tenant, if a corporation,
is duly incorporated and legally existing under the laws of the state of its
incorporation and is duly qualified to do business in the
- -25
<PAGE>
State of Texas. Tenant, if a partnership or joint venture, is duly organized
under the Texas Uniform Partnership Act. Tenant, if a limited partnership, is
duly organized under the applicable limited partnership act of the State of
Texas or, if organized under the laws of a state other than Texas, is qualified
under said Texas limited partnership act. Tenant has all requisite power and
all governmental certificates of authority, licenses, permits, qualifications
and other documentation to lease the Premises and to carry on its business as
now conducted and as contemplated to be conducted. Each person signing on
behalf of Tenant is authorized to do so. The foregoing representations in this
Paragraph 41 shall also apply to any corporation, partnership, joint venture or
limited partnership which is a general partner or joint venturer of Tenant.
Executed by Landlord this 1st day of October, 1997.
LANDLORD:
CAMPBELL CREEK, LTD.
By: /s/ James H. Kirchoff
Name: James H. Kirchhoff
Title: Vice President
TENANT:
Applied Digital Access, Inc.
By: /s/ James L. Keefe
Name: James L. Keefe
Title: Chief Financial Officer
<PAGE>
THIS FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is executed
effective as of the 22nd day of January, 1998, by and between CAMPBELL CREEK,
LTD., a Texas limited partnership ("Landlord"), and Applied Digital Access,
Inc.
WITNESSETH
WHEREAS, on October 1, 1997, Landlord and Tenant executed and entered into
that certain Lease Agreement (the "Lease") covering that certain premises
consisting of approximately 14,750 square feet of rentable area (the
"Premises") located at 2350 Campbell Creek Boulevard, Richardson, Texas, as
more particularly described in the Lease (except as otherwise expressly
defined herein, each capitalized term used herein shall have the meaning
ascribed to such term in the Lease); and
WHEREAS, Tenant desires that the Lease be modified and amended to reflect its
utilization of the allowance towards Excess Costs as set forth in Section 2.3
of Exhibit "D", Workletter.
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained and other good and valuable consideration, Landlord and Tenant do
hereby agree as follows:
1. Effective February 1, 1998, Paragraph 1(h), "Lease Term" of the Lease
shall be amended to the following:
A period of 84 months which shall commence on February 1, 1998 (the
"Commencement Date") and end on January 31, 2005 (the "Expiration Date").
The Commencement Date shall not be further adjusted upon Substantial
Completion (as defined in Exhibit D of the Lease).
2. Effective February 1, 1998, Paragraph 1(i), "Basic Rental", of the Lease
is hereby modified and amended to read in its entirety as follows:
<TABLE>
<CAPTION>
Annual Rate
Per Sq. Ft of
Rental Period Rentable Area "Basic Monthly Rental"
<S> <C> <C>
February 1, 1998 - April 30, 1998 $9.86 $12,125.61
May 1, 1998 - July 31, 1998 $14.00 $17,208.94
August 1, 1998 - January 31, 2005 $16.84 $20,703.73
</TABLE>
3. Exhibit "D", Workletter' Section 2.3, Construction Deposit, the second
paragraph shall be amended to provide for Landlord to pay up to eight dollars
($8.00) per rentable square foot of such Excess Costs.
4. Tenant desires to use all eight dollars ($8.00) pursuant to Section 2.3,
as amended herein, of the Lease. Paragraph 2 of this Amendment reflects
adjustment to the Basic Rental due to the amortization of $8.00 per rentable
square foot at an interest rate of the ten percent (10%) over the Lease Term
(as defined herein).
5. Any and all terms and provisions of the Lease are hereby amended and
modified wherever necessary, and even though not specifically addressed
herein, so as to conform to the amendments set forth in the preceding
paragraphs hereof.
6. Any and all of the terms and provisions of the Lease shall, except as
expressly amended and modified hereby, remain in full force and effect.
7. This Amendment may be executed in any number of counterparts, any one
of which shall constitute an original and all counterparts being but one
instrument.
<PAGE>
EXECUTED effective as 22nd day of January, 1998.
LANDLORD: CAMPBELL CREEK, LTD. a Texas Limited Partnership
By: Granite Properties, Inc.
By: /s/ James H. Kirchoff
------------------------------
Name: James H. Kirchoff
Title: Vice President
TENANT: APPLIED DIGITAL ACCESS, INC.
By: /s/ Wayne M. Lettiere
------------------------------
Name: Wayne M. Lettiere
Title: VP Operations
<PAGE>
SECOND AMENDMENT TO SUBLEASE
THIS SECOND AMENDMENT TO SUBLEASE ("Amendment") is made as of this 31st
day of December 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 executed by Sublessee on December 9, 1996
as amended by that certain First Amendment to Sublease date January 24, 1997
("Sublease"). For the purposes of this Amendment, the term "Sublease" shall
mean, collectively, the Sublease, the First Amendment to Sublease, and this
Second Amendment to Sublease, 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.
1. TERM. Paragraph 4(b) of the Sublease dated December 9, 1996, is revised
to add the following language:
"The Term of this Sublease shall be extended on a month to month basis,
that is, for no fixed term, commencing January 1, 1998; provided,
however, at any time on or after January 1, 1998, either Sublessor or
Sublessee must give ninety (90) days prior written notice to the other
of intent to terminate this Sublease ("Termination Notice"), and upon
expiration of said Termination Notice this Sublease shall terminate."
2. RENTAL. Commencing January 1, 1998, Sublessee shall pay to Sublessor
monthly rent as follows:
January 1, 1998 through August 31, 1998: $28,291.01 per month.
September 1, 1998 through August 31, 1999: $28,992.44 per month.
September 1, 1999 through August 31, 2000 $29,927.68 per month.
September 1, 2000 through August 31, 2001: $30,629.11 per month.
Sublessee acknowledges and agrees that (i) the monthly rental amounts
set forth above incorporate the Sublessee's pro rata share of the
estimated Tenant's Building Share of Building Expenses and of Tenant's
Project Share of Project Expenses as of the date of this Amendment, and
(ii) in the event that Landlord increases the estimated Tenant's
Building Share of Building Expenses and Tenant's Project Share of
Project Expenses, a proportionate increase in such monthly rental
amounts will be made.
3. OPERATING EXPENSE RECONCILIATION. For calendar year 1998, and for each
calendar year or portion thereof thereafter in which Sublessee occupies
the subleased Premises, Sublessee shall pay, as additional rent to
Sublessor, its pro rata share of annual Building Expenses and Project
Expenses (as defined in Paragraph 5 of the Master Lease) paid by
Sublessor to Lessor in excess of $3.72 per rentable square foot of
Sublessor's Premises (the "Baseline Amount"). In the event an
adjustment is made to the monthly rental amounts set forth in Section 2
as a result of an increase by the Landlord of the estimated Tenant's
Building Share of Building Expenses and Tenant's Project Share of
Project Expenses, a proportionate adjustment shall be made to the
Baseline Amount.
1
<PAGE>
Such payment shall be made within 30 days of the delivery by Sublessor to
Sublessee of Landlord's Expense Statement for the previous year's operating
expenses.
Sublessee's pro rata share shall be 37.49% (calculated by dividing the
rentable area of the subleased Premises, by the rentable area of
Sublessor's Premises or 23,381/62,368 = 37.49%). For calendar years in
which Sublessee occupies the subleased Premises for less than a full
calendar year, Sublessee's pro rata share shall be further prorated based
on a 365 day/year basis. This obligation shall survive termination of the
sublease.
4. HOLDING OVER. If Sublessee does not vacate the Property upon the
expiration of or earlier termination of the Sublease and Sublessor
thereafter accepts rent from Sublessee, Sublessee's occupancy of the
Property shall be a "month-to-month" tenancy, subject to all of the
terms of this Sublease applicable to a month-to-month tenancy.
5. EFFECT OF AMENDMENT: Ratification: Except to the extent that the
Sublease is modified by this Amendment, the terms and provisions of the
Sublease shall remain unmodified and in full force and effect. In the
event of conflict between the terms of the Sublease and the terms of
this Amendment, the terms of the Amendment shall prevail.
6. ATTORNEYS' FEES. The provisions of the Sublease respecting payment of
attorneys' fees shall also apply to this Amendment.
7. COUNTERPARTS. If this Amendment is executed in counterparts, each
counterpart shall be deemed an original.
8. AUTHORITY TO EXECUTE AMENDMENT. Each individual executing this
Amendment on behalf of a partnership or corporation represents that he
or she is duly authorized to execute and deliver this Amendment on
behalf of the partnership and/or corporation and agrees to deliver
evidence of his or her authority to Sublessor upon request by Sublessor.
9. GOVERNING LAW. This Amendment and any enforcement of the agreements and
modifications set forth above shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written.
SUBLESSOR SUBLESSEE
APPLIED DIGITAL ACCESS, ENOVA CORPORATION,
a Delaware corporation a California corporation
/s/ James Keefe /s/ Jerry Deems
- ------------------------------------ -------------------------------
James Keefe, Chief Financial Officer Jerry Deems, Vice President, CITO
Date Signed: 1/12/98 Date Signed: 1/6/98
------------------ ---------------
LESSOR'S CONSENT
The undersigned, Lessor under the Master Lease referenced in the preamble to
this Amendment, hereby consents to the subletting of the Premises described
herein on the terms and conditions
2
<PAGE>
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 premises under the
same terms and conditions set forth in this Sublease in the event of
Sublessor's default.
ACCEPTED AND AGREED TO:
- -----------------------
LESSOR
SORRENTO TECH ASSOCIATES,
a California limited partnership
BARNES CANYON RPF REALTY CORP.
a Connecticut corporation
General Partner
By: Date Signed:
------------------------------ ---------------------
Mark S. Knapp, Vice President
3
<PAGE>
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this 23rd day of December, 1997
between Applied Digital Access, Inc., a Delaware corporation ("Corporation"),
whose address is 9855 Scranton Road, San Diego, California 92121 and
__________________ ("Director"), whose address is __________________.
RECITALS:
A. WHEREAS, Director, a member of the Board of Directors of
Corporation, performs a valuable service in such capacity for Corporation; and
B. WHEREAS, the stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
agents and employees of Corporation to the maximum extent authorized by
Section 145 of the Delaware General Corporation Law, as amended (the "Law");
and
C. WHEREAS, the Bylaws and the Law, as amended and in effect from
time to time or any successor or other statutes of Delaware having similar
import and effect, currently purports to be the controlling law governing
Corporation with respect to certain aspects of corporate law, including
indemnification of directors and officers; and
D. WHEREAS, in accordance with the authorization provided by the Law,
Corporation may from time to time purchase and maintain a policy or policies
of Directors and Officers Liability Insurance ("D & O Insurance"), covering
certain liabilities which may be incurred by its directors and officers in
the performance of services as directors and officers of Corporation; and
E. WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent and overall desirability of protection afforded members of the Board
of Directors by such D & O Insurance, if any, and by statutory and bylaw
indemnification provisions; and
F. WHEREAS, in order to induce Director to continue to serve as a
member of the Board of Directors of Corporation, Corporation has determined
and agreed to enter into this contract with Director.
NOW, THEREFORE, in consideration of Director's continued service as a
director after the date hereof, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. The following terms used in this Agreement
shall have the meanings set forth below. Other terms are defined where
appropriate in this Agreement.
(a) "Disinterested Director" shall mean a director of Corporation
who is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Director.
<PAGE>
(b) "Expenses" shall include all direct and indirect costs
(including, without limitation, attorneys' fees, retainers, court costs,
transcripts, fees of experts, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery
service fees, all other disbursements or out-of-pocket expenses and
reasonable compensation for time spent by Director for which he or she is
otherwise not compensated by Corporation) actually and reasonably incurred in
connection with a Proceeding or establishing or enforcing a right to
indemnification under this Agreement, applicable law or otherwise; provided,
however, that "Expenses" shall not include any Liabilities.
(c) "Final Adverse Determination" shall mean that a determination
that Director is not entitled to indemnification shall have been made
pursuant to Section 5 hereof and either (i) a final adjudication in a
Delaware court or decision of an arbitrator pursuant to Section 13(a) hereof
shall have denied Director's right to indemnification hereunder, or (ii)
Director shall have failed to file a complaint in a Delaware court or seek an
arbitrator's award pursuant to Section 13(a) for a period of one hundred
twenty (120) days after the determination made pursuant to Section 5 hereof.
(d) "Independent Legal Counsel" shall mean a law firm or member of
a law firm selected by Corporation and approved by Director (which approval
shall not be unreasonably withheld) and that neither is presently nor in the
past five years has been retained to represent: (i) Corporation, in any
material matter, or (ii) any other party to the Proceeding giving rise to a
claim for indemnification hereunder. Notwithstanding the foregoing, the term
"Independent Legal Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either Corporation or Director in an
action to determine Director's right to indemnification under this Agreement.
(e) "Liabilities" shall mean liabilities of any type whatsoever
including, but not limited to, any judgments, fines, ERISA excise taxes and
penalties, penalties and amounts paid in settlement (including all interest
assessments and other charges paid or payable in connection with or in
respect of such judgments, fines, penalties or amounts paid in settlement) of
any proceeding.
(f) "Proceeding" shall mean any threatened, pending or completed
action, claim, suit, arbitration, alternative dispute resolution mechanism,
investigation, administrative hearing or any other proceeding whether civil,
criminal, administrative or investigative, including any appeal therefrom.
(g) "Change of Control" shall mean the occurrence of any of the
following events after the date of this Agreement:
(i) A change in the composition of the Board of Directors of
Corporation (the "Board"), as a result of which fewer than two-thirds (2/3)
of the incumbent directors are directors who either (1) had been directors of
Corporation twenty-four (24)
-2-
<PAGE>
months prior to such change or (2) were elected, or nominated for election,
to the Board with the affirmative votes of at least a majority of the
directors who had been directors of Corporation 24 months prior to such
change and who were still in office at the time of the election or
nomination; or
(ii) Any "person" (as such term is used in section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) through the
acquisition or aggregation of securities is or becomes the beneficial owner,
directly or indirectly, of securities of Corporation representing twenty
percent (20%) or more of the combined voting power of Corporation's then
outstanding securities ordinarily (and apart from rights accruing under
special circumstances) having the right to vote at elections of directors
(the "Capital Stock"), except that any change in ownership of Corporation's
securities by any person resulting solely from a reduction in the aggregate
number of outstanding shares of Capital Stock, and any decrease thereafter in
such person's ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's beneficial
ownership of any securities of Corporation.
2. INDEMNITY OF DIRECTOR. Corporation hereby agrees to hold harmless
and indemnify Director to the fullest extent authorized or permitted by the
provisions of the Law, as may be amended from time to time.
3. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
Section 4 hereof, Corporation hereby further agrees to hold harmless and
indemnify Director:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Director in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (including an action by or in the right of Corporation) to
which Director is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Director is, was or at any time
becomes a director, officer, employee or agent of Corporation, or is or was
serving or at any time serves at the request of Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Director
by Corporation under the non-exclusivity provisions of the Bylaws of
Corporation and the Law.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 3 hereof shall be paid by Corporation:
(a) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which the Director is
indemnified pursuant to Section 2 hereof or reimbursed pursuant to any D & O
Insurance purchased and maintained by Corporation;
(b) in respect of remuneration paid to Director if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
-3-
<PAGE>
(c) on account of any action, suit or proceeding in which judgment
is rendered against Director for an accounting of profits made from the
purchase or sale by Director of securities of Corporation pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto or similar provisions of any federal, state or local
statutory law;
(d) on account of Director's conduct which is finally adjudged to
have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct if such conduct has been established by a judgment or
other final adjudication adverse to Director (an "Adverse Judgment");
(e) provided there has been no Change of Control, on account of or
arising in response to any action, suit or proceeding (other than an action,
suit or proceeding referred to in Section 14(b) hereof) initiated by Director
or any of Director's affiliates against Corporation or any officer, director
or stockholder of Corporation unless such action, suit or proceeding was
authorized in the specific case by action of the Board of Directors of
Corporation;
(f) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful; or
(g) on account of any action, suit or proceeding to the extent
that Director is a plaintiff, a counter-complainant or a cross-complainant
therein (other than an action, suit or proceeding permitted by Section 4(e)
hereof).
5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) Whenever Director believes that he or she is entitled to
indemnification pursuant to this Agreement, Director shall submit a written
request for indemnification to Corporation. Any request for indemnification
shall include sufficient documentation or information reasonably available to
Director to support his or her claim for indemnification. Director shall
submit his or her claim for indemnification within a reasonable time not to
exceed five years after any judgment, order, settlement, dismissal,
arbitration award, conviction, acceptance of a plea of nolo contendere or its
equivalent, final termination or other disposition or partial disposition of
any Proceeding, whichever is the later date for which Director requests
indemnification. The President or the Secretary or other appropriate officer
shall, promptly upon receipt of Director's request for indemnification,
advise the Board of Directors in writing that Director has made such a
request. Determination of Director's entitlement to indemnification shall be
made not later than ninety (90) days after Corporation's receipt of his or
her written request for such indemnification.
(b) The Director shall be entitled to select the forum in which
Director's request for indemnification will be heard, which selection shall
be included in the written request for indemnification required in Section
5(a). This forum shall be any one of the following:
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(i) The stockholders of Corporation;
(ii) A quorum of the Board of Directors consisting of
Disinterested Directors;
(iii) Independent Legal Counsel, who shall make the
determination in a written opinion; or
(iv) A panel of three arbitrators, one selected by
Corporation, another by Director and the third by the first two arbitrators
selected. If for any reason three arbitrators are not selected within thirty
(30) days after the appointment of the first arbitrator, then selection of
additional arbitrators shall be made by the American Arbitration Association.
If any arbitrator resigns or is unable to serve in such capacity for any
reason, the American Arbitration Association shall select his or her
replacement. The arbitration shall be conducted pursuant to the commercial
arbitration rules of the American Arbitration Association now in effect.
If Director fails to make such designation, his or her claim
shall be determined by the forum selected by Corporation.
6. PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a
request for indemnification, Director shall be presumed to be entitled to
indemnification under this Agreement and Corporation shall have the burden of
proof to overcome that presumption in reaching any contrary determination.
The termination of any Proceeding by judgment, order, settlement, arbitration
award or conviction, or upon a plea of nolo contendere or its equivalent
shall not affect this presumption or, except as may be provided in Section 4
hereof, establish a presumption with regard to any factual matter relevant to
determining Director's rights to indemnification hereunder. If the person or
persons so empowered to make a determination pursuant to Section 5(b) hereof
shall have failed to make the requested determination within thirty (30) days
after any judgment, order, settlement, dismissal, arbitration award,
conviction, acceptance of a plea of nolo contendere or its equivalent, or
other disposition or partial disposition of any Proceeding or any other event
which could enable Corporation to determine Director's entitlement to
indemnification, the requisite determination that Director is entitled to
indemnification shall be deemed to have been made.
7. CONTRIBUTION. If the indemnification provided in Sections 2 and 3
is unavailable and may not be paid to Director for any reason other than
those set forth in Section 4, then in respect of any threatened, pending or
completed action, suit or proceeding in which Corporation is or is alleged to
be jointly liable with Director (or would be if joined in such action, suit
or proceeding), Corporation shall contribute to the amount of expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred and paid or payable by Director in such
proportion as is appropriate to reflect (i) the relative benefits received by
Corporation on the one hand and Director on the other hand from the
transaction from which such action, suit or proceeding arose, and (ii) the
relative fault of Corporation on the one hand and of Director on the other
hand in connection with the events which resulted in such expenses,
judgments, fines or settlement amounts, as well as any other relevant
equitable
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<PAGE>
considerations. The relative fault of Corporation on the one hand and of
Director on the other shall be determined by reference to, among other
things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such
expenses, judgments, fines or settlement amounts. Corporation agrees that it
would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation or any other method of allocation
which does not take account of the foregoing equitable considerations.
8. INSURANCE AND FUNDING. Corporation hereby represents and warrants
that it shall purchase and maintain insurance to protect itself and/or
Director against any Expenses and Liabilities in connection with any
Proceeding to the fullest extent permitted by the Law. In the event of a
Change of Control, Corporation shall establish a letter of credit, as
provided in Section 9, to ensure the payment of such amounts as may be
necessary to effect indemnification or advancement of Expenses as provided in
this Agreement.
9. LETTER OF CREDIT.
(a) In order to secure the obligations of Corporation to indemnify
and advance Expenses to Director pursuant to this Agreement, Corporation
shall obtain at the time of any Change of Control, upon request of any
director, an irrevocable standby letter of credit naming the directors of the
Corporation in office at the time of a Change of Control as joint
beneficiaries (the "Letter of Credit"). The Letter of Credit shall be in an
appropriate amount not less than two million dollars ($2,000,000), shall be
issued by a commercial bank headquartered in the United States having assets
in excess of $10 billion and capital according to its most recent published
reports equal to or greater than the then applicable minimum capital
standards promulgated by such bank's primary federal regulator and shall
contain terms and conditions reasonably acceptable to all directors. The
Letter of Credit shall provide that Director may from time to time draw
certain amounts thereunder, upon written certification by Director to the
issuer of the Letter of Credit that (i) Director has made written request
upon Corporation for an amount not less than the amount he or she is drawing
under the Letter of Credit and that Corporation has failed or refused to
provide him with such amount in full within thirty (30) days after receipt of
the request, and (ii) Director believes that he or she is entitled under the
terms of this Agreement to the amount which he or she is drawing upon under
the Letter of Credit. The issuance of the Letter of Credit shall not, in any
way, diminish Corporation's obligation to indemnify Director against Expenses
and Liabilities to the full extent required by this Agreement.
(b) Once Corporation has obtained the Letter of Credit,
Corporation shall maintain and renew the Letter of Credit or substitute
letter of credit meeting the criteria of Section 9(a) during the term of this
Agreement so that the Letter of Credit shall have an initial term of five
years, be renewed for successive five-year terms, and always have at least
one year of its term remaining.
10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Director is a
director, officer,
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employee or agent of Corporation (or is or was serving at the request of
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
and shall continue thereafter so long as Director shall be subject to any
possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact
that Director was serving Corporation or such other entity in any capacity
referred to herein.
11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by
Director of notice of the commencement of any action, suit or proceeding,
Director will, if a claim in respect thereof is to be made against
Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will not relieve it from
any liability which it may have to Director otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Director notifies Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its own
expense;
(b) Except as otherwise provided below, to the extent that it may
wish, Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Director. After notice from Corporation to
Director of its election to assume the defense thereof, Corporation will not
be liable to Director under this Agreement for any legal or other expenses
subsequently incurred by Director in connection with the defense thereof
other than reasonable costs of investigation or as otherwise provided below.
Director shall have the right to employ his or her own counsel in such
action, suit or proceeding but the fees and expenses of such counsel incurred
after notice from Corporation of its assumption of the defense thereof shall
be at the expense of Director unless (i) the employment of counsel by
Director has been authorized by Corporation, (ii) Director shall have
reasonably concluded that there may be a conflict of interest between
Corporation and Director in the conduct of the defense of such action or
(iii) Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
Director's separate counsel shall be at the expense of Corporation.
Corporation shall not be entitled to assume the defense of any action, suit
or proceeding brought by or on behalf of Corporation or as to which Director
shall have made the conclusion provided for in (ii) above; and
(c) Provided there has been no Change of Control, Corporation
shall not be liable to indemnify Director under this Agreement for any
amounts paid in settlement of any action or claim effected without its
written consent, which consent shall not be unreasonably withheld.
Corporation shall be permitted to settle any action except that it shall not
settle any action or claim in any manner which would impose any penalty,
out-of-pocket liability, or limitation on Director without Director's written
consent.
12. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Director employs his or her own counsel
pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance
to Director, prior to any final disposition of any threatened or pending
action, suit or proceeding, whether civil, criminal,
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administrative or investigative, any and all reasonable expenses (including
legal fees and expenses) incurred in investigating or defending any such
action, suit or proceeding within ten (10) days after receiving copies of
invoices presented to Director for such expenses.
(b) Director agrees that Director will reimburse Corporation for
all reasonable expenses paid by Corporation in defending any civil or
criminal action, suit or proceeding against Director in the event and only to
the extent it shall be ultimately determined by a final judicial decision
(from which there is no right of appeal) that Director is not entitled, under
the provisions of the Law, the Bylaws, this Agreement or otherwise, to be
indemnified by Corporation for such expenses.
13. REMEDIES OF DIRECTOR.
(a) In the event that (i) a determination pursuant to Section 5
hereof is made that Director is not entitled to indemnification, (ii)
advances of Expenses are not made pursuant to this Agreement, (iii) payment
has not been timely made following a determination of entitlement to
indemnification pursuant to this Agreement, or (iv) Director otherwise seeks
enforcement of this Agreement, Director shall be entitled to a final
adjudication in an appropriate court of his or her rights. Alternatively,
Director at his or her option may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the commercial arbitration rules
of the American Arbitration Association now in effect, whose decision is to
be made within ninety (90) days following the filing of the demand for
arbitration. The Corporation shall not oppose Director's right to seek any
such adjudication or arbitration award.
(b) In the event that a determination that Director is not
entitled to indemnification, in whole or in part, has been made pursuant to
Section 5 hereof, the decision in the judicial proceeding or arbitration
provided in paragraph (a) of this Section 13 shall be made de novo and
Director shall not be prejudiced by reason of a determination that he or she
is not entitled to indemnification.
(c) If a determination that Director is entitled to
indemnification has been made pursuant to Section 5 hereof or otherwise
pursuant to the terms of this Agreement, Corporation shall be bound by such
determination in the absence of (i) a misrepresentation of a material fact by
Director or (ii) a specific finding (which has become final) by an
appropriate court that all or any part of such indemnification is expressly
prohibited by law.
(d) In any court proceeding pursuant to this Section 13,
Corporation shall be precluded from asserting that the procedures and
presumptions of this Agreement are not valid, binding and enforceable. The
Corporation shall stipulate in any such court or before any such arbitrator
that Corporation is bound by all the provisions of this Agreement and is
precluded from making any assertion to the contrary.
(e) Expenses reasonably incurred by Director in connection with
his or her request for indemnification under this Agreement, meeting
enforcement of this Agreement or to recover damages for breach of this
Agreement shall be borne by Corporation.
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(f) Corporation and Director agree herein that a monetary remedy
for breach of this Agreement, at some later date, will be inadequate,
impracticable and difficult of proof, and further agree that such breach
would cause Director irreparable harm. Accordingly, Corporation and Director
agree that Director shall be entitled to temporary and permanent injunctive
relief to enforce this Agreement without the necessity of proving actual
damages or irreparable harm. The Corporation and Director further agree that
Director shall be entitled to such injunctive relief, including temporary
restraining orders, preliminary injunctions and permanent injunctions,
without the necessity of posting bond or other undertaking in connection
therewith. Any such requirement of bond or undertaking is hereby waived by
Corporation, and Corporation acknowledges that in the absence of such a
waiver, a bond or undertaking may be required by the court.
14. ENFORCEMENT.
(a) Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on Corporation hereby
in order to induce Director to continue as a director of Corporation, and
acknowledges that Director is relying upon this Agreement in continuing in
such capacity.
(b) In the event Director is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Corporation shall reimburse Director for all
Director's reasonable fees and expenses in bringing and pursuing such action.
15. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
or all of the provisions hereof shall be held to be invalid or unenforceable
to any extent for any reason, such invalidity or unenforceability shall not
affect the validity or enforceability of the other provisions hereof, or the
obligation of the Corporation to indemnify the Director to the full extent
provided by the Bylaws or the Law, and the affected provision shall be
construed and enforced so as to effectuate the parties' intent to the maximum
extent possible.
16. GOVERNING LAW. This Agreement shall be governed by and interpreted
and enforced in accordance with the internal laws of the State of Delaware.
17. CONSENT TO JURISDICTION. The Corporation and Director each
irrevocably consent to jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out
of or relates to this Agreement and agree that any action instituted under
this Agreement shall be brought only in the state courts of the State of
Delaware.
18. BINDING EFFECT. This Agreement shall be binding upon Director and
upon Corporation, its successors and assigns, and shall inure to the benefit
of Director, his or her heirs, executors, administrators, personal
representatives and assigns and to the benefit of Corporation, its successors
and assigns.
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19. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties hereto and there are no other agreements, contracts or
understandings between the parties hereto with respect to the subject matter
of this Agreement, except as specifically referred to herein. This Agreement
supersedes any and all agreements regarding indemnification heretofore
entered into by the parties.
20. AMENDMENT AND TERMINATION. No amendment, modification, waiver,
termination or cancellation of this Agreement shall be effective for any
purpose unless set forth in writing signed by both parties hereto.
21. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Director, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Director by
this Agreement shall not be exclusive of any other right which Director may
have or hereafter acquire under any statute, provision of Corporation's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.
23. SURVIVAL OF RIGHTS. The rights conferred on Director by this
Agreement shall continue after Director has ceased to be a director, officer,
employee or other agent of Corporation or such other entity.
24. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed to Director or to
Corporation, as the case may be, at the address shown on page 1 of this
Agreement, or to such other address as may have been furnished by either
party to the other, and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the
date on which it is so mailed.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
DIRECTOR: APPLIED DIGITAL ACCESS, INC.
By:
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(Signature)
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- ----------------------------- ---------------------------------------------
Print Name Print Name and Title
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INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this 23rd day of December, 1997
between Applied Digital Access, Inc., a Delaware corporation ("Corporation"),
whose address is 9855 Scranton Road, San Diego, California 92121 and
__________________ ("Officer"), whose address is __________________.
RECITALS:
A. WHEREAS, Officer, an officer (but not currently a member of the
Board of Directors) of Corporation, performs a valuable service in such
capacity for Corporation; and
B. WHEREAS, the stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
agents and employees of Corporation to the maximum extent authorized by
Section 145 of the Delaware General Corporation Law, as amended (the "Law");
and
C. WHEREAS, the Bylaws and the Law, as amended and in effect from
time to time or any successor or other statutes of Delaware having similar
import and effect, currently purports to be the controlling law governing
Corporation with respect to certain aspects of corporate law, including
indemnification of directors and officers; and
D. WHEREAS, in accordance with the authorization provided by the Law,
Corporation may from time to time purchase and maintain a policy or policies
of Directors and Officers Liability Insurance ("D & O Insurance"), covering
certain liabilities which may be incurred by its directors and officers in
the performance of services as directors and officers of Corporation; and
E. WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent and overall desirability of protection afforded officers by such D & O
Insurance, if any, and by statutory and bylaw indemnification provisions; and
F. WHEREAS, in order to induce Officer to continue to serve as an
officer of Corporation, Corporation has determined and agreed to enter into
this contract with Officer.
NOW, THEREFORE, in consideration of Officer's continued service as an
officer after the date hereof, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. The following terms used in this Agreement
shall have the meanings set forth below. Other terms are defined where
appropriate in this Agreement.
(a) "Disinterested Director" shall mean a director of Corporation
who is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Officer.
(b) "Expenses" shall include all direct and indirect costs
(including, without
<PAGE>
limitation, attorneys' fees, retainers, court costs, transcripts, fees of
experts, witness fees, travel expenses, duplicating costs, printing and
binding costs, telephone charges, postage, delivery service fees, all other
disbursements or out-of-pocket expenses and reasonable compensation for time
spent by Officer for which he or she is otherwise not compensated by
Corporation) actually and reasonably incurred in connection with a Proceeding
or establishing or enforcing a right to indemnification under this Agreement,
applicable law or otherwise; provided, however, that "Expenses" shall not
include any Liabilities.
(c) "Final Adverse Determination" shall mean that a determination
that Officer is not entitled to indemnification shall have been made pursuant
to Section 5 hereof and either (i) a final adjudication in a Delaware court
or decision of an arbitrator pursuant to Section 13(a) hereof shall have
denied Officer's right to indemnification hereunder, or (ii) Officer shall
have failed to file a complaint in a Delaware court or seek an arbitrator's
award pursuant to Section 13(a) for a period of one hundred twenty (120) days
after the determination made pursuant to Section 5 hereof.
(d) "Independent Legal Counsel" shall mean a law firm or member of
a law firm selected by Corporation and approved by Officer (which approval
shall not be unreasonably withheld) and that neither is presently nor in the
past five years has been retained to represent: (i) Corporation, in any
material matter, or (ii) any other party to the Proceeding giving rise to a
claim for indemnification hereunder. Notwithstanding the foregoing, the term
"Independent Legal Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either Corporation or Officer in an
action to determine Officer's right to indemnification under this Agreement.
(e) "Liabilities" shall mean liabilities of any type whatsoever
including, but not limited to, any judgments, fines, ERISA excise taxes and
penalties, and penalties and amounts paid in settlement (including all
interest assessments and other charges paid or payable in connection with or
in respect of such judgments, fines, penalties or amounts paid in settlement)
of any proceeding.
(f) "Proceeding" shall mean any threatened, pending or completed
action, claim, suit, arbitration, alternative dispute resolution mechanism,
investigation, administrative hearing or any other proceeding whether civil,
criminal, administrative or investigative, including any appeal therefrom.
(g) "Change of Control" shall mean the occurrence of any of the
following events after the date of this Agreement:
(i) A change in the composition of the Board of Directors of
Corporation (the "Board"), as a result of which fewer than two-thirds (2/3)
of the incumbent directors are directors who either (1) had been directors of
Corporation twenty-four (24) months prior to such change or (2) were elected,
or nominated for election, to the Board with the affirmative votes of at
least a majority of the directors who had been directors of Corporation 24
months prior to such change and who were still in office at the time of the
election or
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nomination; or
(ii) Any "person" (as such term is used in section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) through the
acquisition or aggregation of securities is or becomes the beneficial owner,
directly or indirectly, of securities of Corporation representing twenty
percent (20%) or more of the combined voting power of Corporation's then
outstanding securities ordinarily (and apart from rights accruing under
special circumstances) having the right to vote at elections of directors
(the "Capital Stock"), except that any change in ownership of Corporation's
securities by any person resulting solely from a reduction in the aggregate
number of outstanding shares of Capital Stock, and any decrease thereafter in
such person's ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's beneficial
ownership of any securities of Corporation.
2. INDEMNITY OF OFFICER. Corporation hereby agrees to hold harmless
and indemnify Officer to the fullest extent authorized or permitted by the
provisions of the Law, as may be amended from time to time.
3. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
Section 4 hereof, Corporation hereby further agrees to hold harmless and
indemnify Officer:
(a) against any and all legal expenses (including attorneys'
fees), witness fees, judgments, fines and amounts paid in settlement actually
and reasonably incurred by Officer in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including an action by or in the right of
Corporation) to which Officer is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Officer is, was or
at any time becomes a director, officer, employee or agent of Corporation, or
is or was serving or at any time serves at the request of Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Officer
by Corporation under the non-exclusivity provisions of the Bylaws of
Corporation and the Law.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 3 hereof shall be paid by Corporation:
(a) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which Officer is indemnified
pursuant to Section 2 hereof or reimbursed pursuant to any D & O Insurance
purchased and maintained by Corporation;
(b) in respect of remuneration paid to Officer if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any action, suit or proceeding in which judgment
is rendered against Officer for an accounting of profits made from the
purchase or sale by Officer of
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securities of Corporation pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions
of any federal, state or local statutory law;
(d) on account of Officer's conduct which is finally adjudged to
have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct if such conduct has been established by a judgment or
other final adjudication adverse to Officer (an "Adverse Judgment");
(e) provided there has been no Change of Control, on account of or
arising in response to any action, suit or proceeding (other than an action,
suit or proceeding referred to in Section 14(b) hereof) initiated by Officer
or any of Officer's affiliates against Corporation or any officer, director
or stockholder of Corporation unless such action, suit or proceeding was
authorized in the specific case by action of the Board of Directors of
Corporation;
(f) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful; or
(g) on account of any action, suit or proceeding to the extent
that Officer is a plaintiff, a counter-complainant or a cross-complainant
therein (other than an action, suit or proceeding permitted by Section 4(e)
hereof).
5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) Whenever Officer believes that he or she is entitled to
indemnification pursuant to this Agreement, Officer shall submit a written
request for indemnification to Corporation. Any request for indemnification
shall include sufficient documentation or information reasonably available to
Officer to support his or her claim for indemnification. Officer shall
submit his or her claim for indemnification within a reasonable time not to
exceed five years after any judgment, order, settlement, dismissal,
arbitration award, conviction, acceptance of a plea of nolo contendere or its
equivalent, final termination or other disposition or partial disposition of
any Proceeding, whichever is the later date for which Officer requests
indemnification. The President or the Secretary or other appropriate officer
shall, promptly upon receipt of Officer's request for indemnification, advise
the Board of Directors in writing that Officer has made such a request.
Determination of Officer's entitlement to indemnification shall be made not
later than ninety (90) days after Corporation's receipt of his or her written
request for such indemnification.
(b) The Officer shall be entitled to select the forum in which
Officer's request for indemnification will be heard, which selection shall be
included in the written request for indemnification required in Section 5(a).
This forum shall be any one of the following:
(i) The stockholders of Corporation;
(ii) A quorum of the Board of Directors consisting of
Disinterested
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Directors;
(iii) Independent Legal Counsel, who shall make the
determination in a written opinion; or
(iv) A panel of three arbitrators, one selected by
Corporation, another by Officer and the third by the first two arbitrators
selected. If for any reason three arbitrators are not selected within thirty
(30) days after the appointment of the first arbitrator, then selection of
additional arbitrators shall be made by the American Arbitration Association.
If any arbitrator resigns or is unable to serve in such capacity for any
reason, the American Arbitration Association shall select his or her
replacement. The arbitration shall be conducted pursuant to the commercial
arbitration rules of the American Arbitration Association now in effect.
If Officer fails to make such designation, his or her claim
shall be determined by the forum selected by Corporation.
6. PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a
request for indemnification, Officer shall be presumed to be entitled to
indemnification under this Agreement and Corporation shall have the burden of
proof to overcome that presumption in reaching any contrary determination.
The termination of any Proceeding by judgment, order, settlement, arbitration
award or conviction, or upon a plea of nolo contendere or its equivalent
shall not affect this presumption or, except as may be provided in Section 4
hereof, establish a presumption with regard to any factual matter relevant to
determining Officer's rights to indemnification hereunder. If the person or
persons so empowered to make a determination pursuant to Section 5(b) hereof
shall have failed to make the requested determination within thirty (30) days
after any judgment, order, settlement, dismissal, arbitration award,
conviction, acceptance of a plea of nolo contendere or its equivalent, or
other disposition or partial disposition of any Proceeding or any other event
which could enable Corporation to determine Officer's entitlement to
indemnification, the requisite determination that Officer is entitled to
indemnification shall be deemed to have been made.
7. CONTRIBUTION. If the indemnification provided in Sections 2 and 3
is unavailable and may not be paid to Officer for any reason other than those
set forth in Section 4, then in respect of any threatened, pending or
completed action, suit or proceeding in which Corporation is or is alleged to
be jointly liable with Officer (or would be if joined in such action, suit or
proceeding), Corporation shall contribute to the amount of expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred and paid or payable by Officer in such
proportion as is appropriate to reflect (i) the relative benefits received by
Corporation on the one hand and Officer on the other hand from the
transaction from which such action, suit or proceeding arose, and (ii) the
relative fault of Corporation on the one hand and of Officer on the other
hand in connection with the events which resulted in such expenses,
judgments, fines or settlement amounts, as well as any other relevant
equitable considerations. The relative fault of Corporation on the one hand
and of Officer on the other shall be determined by reference to, among other
things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such
expenses, judgments,
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<PAGE>
fines or settlement amounts. Corporation agrees that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.
8. INSURANCE AND FUNDING. Corporation hereby represents and warrants
that it shall purchase and maintain insurance to protect itself and/or
Officer against any Expenses and Liabilities in connection with any
Proceeding to the fullest extent permitted by the Law. In the event of a
Change of Control, Corporation shall establish a letter of credit, as
provided in Section 9, to ensure the payment of such amounts as may be
necessary to effect indemnification or advancement of Expenses as provided in
this Agreement.
9. LETTER OF CREDIT.
(a) In order to secure the obligations of Corporation to indemnify
and advance Expenses to Officer pursuant to this Agreement, Corporation shall
obtain at the time of any Change of Control, upon request of any officer, an
irrevocable standby letter of credit naming the officers of the Corporation
in office at the time of a Change of Control as joint beneficiaries (the
"Letter of Credit"). The Letter of Credit shall be in an appropriate amount
not less than one million dollars ($1,000,000), shall be issued by a
commercial bank headquartered in the United States having assets in excess of
$10 billion and capital according to its most recent published reports equal
to or greater than the then applicable minimum capital standards promulgated
by such bank's primary federal regulator and shall contain terms and
conditions reasonably acceptable to all directors. The Letter of Credit
shall provide that Officer may from time to time draw certain amounts
thereunder, upon written certification by Officer to the issuer of the Letter
of Credit that (i) Officer has made written request upon Corporation for an
amount not less than the amount he or she is drawing under the Letter of
Credit and that Corporation has failed or refused to provide him with such
amount in full within thirty (30) days after receipt of the request, and (ii)
Officer believes that he or she is entitled under the terms of this Agreement
to the amount which he or she is drawing upon under the Letter of Credit.
The issuance of the Letter of Credit shall not, in any way, diminish
Corporation's obligation to indemnify Officer against Expenses and
Liabilities to the full extent required by this Agreement.
(b) Once Corporation has obtained the Letter of Credit,
Corporation shall maintain and renew the Letter of Credit or substitute
letter of credit meeting the criteria of Section 9(a) during the term of this
Agreement so that the Letter of Credit shall have an initial term of five
years, be renewed for successive five-year terms, and always have at least
one year of its term remaining.
10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Officer is a
director, officer, employee or agent of Corporation (or is or was serving at
the request of Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise) and shall continue thereafter so long as Officer shall
be subject to any possible claim or threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative, by reason of
the fact that Officer was serving Corporation or such other entity in
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<PAGE>
any capacity referred to herein.
11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by
Officer of notice of the commencement of any action, suit or proceeding,
Officer will, if a claim in respect thereof is to be made against Corporation
under this Agreement, notify Corporation of the commencement thereof; but the
omission so to notify Corporation will not relieve it from any liability
which it may have to Officer otherwise than under this Agreement. With
respect to any such action, suit or proceeding as to which Officer notifies
Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its own
expense;
(b) Except as otherwise provided below, to the extent that it may
wish, Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Officer. After notice from Corporation to Officer
of its election to assume the defense thereof, Corporation will not be liable
to Officer under this Agreement for any legal or other expenses subsequently
incurred by Officer in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Officer
shall have the right to employ his or her own counsel in such action, suit or
proceeding but the fees and expenses of such counsel incurred after notice
from Corporation of its assumption of the defense thereof shall be at the
expense of Officer unless (i) the employment of counsel by Officer has been
authorized by Corporation, (ii) Officer shall have reasonably concluded that
there may be a conflict of interest between Corporation and Officer in the
conduct of the defense of such action or (iii) Corporation shall not in fact
have employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of Officer's separate counsel shall be at the
expense of Corporation. Corporation shall not be entitled to assume the
defense of any action, suit or proceeding brought by or on behalf of
Corporation or as to which Officer shall have made the conclusion provided
for in (ii) above; and
(c) Provided there has been no Change of Control, Corporation
shall not be liable to indemnify Officer under this Agreement for any amounts
paid in settlement of any action or claim effected without its written
consent, which consent shall not be unreasonably withheld. Corporation shall
be permitted to settle any action except that it shall not settle any action
or claim in any manner which would impose any penalty, out-of-pocket
liability, or limitation on Officer without Officer's written consent.
12. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Officer employs his or her own counsel
pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance
to Officer, prior to any final disposition of any threatened or pending
action, suit or proceeding, whether civil, criminal, administrative or
investigative, any and all reasonable expenses (including legal fees and
expenses) incurred in investigating or defending any such action, suit or
proceeding within ten (10) days after receiving copies of invoices presented
to Officer for such expenses.
(b) Officer agrees that Officer will reimburse Corporation for all
reasonable
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<PAGE>
expenses paid by Corporation in defending any civil or criminal action, suit
or proceeding against Officer in the event and only to the extent it shall be
ultimately determined by a final judicial decision (from which there is no
right of appeal) that Officer is not entitled, under the provisions of the
Law, the Bylaws, this Agreement or otherwise, to be indemnified by
Corporation for such expenses.
13. REMEDIES OF OFFICER.
(a) In the event that (i) a determination pursuant to Section 5
hereof is made that Officer is not entitled to indemnification, (ii) advances
of Expenses are not made pursuant to this Agreement, (iii) payment has not
been timely made following a determination of entitlement to indemnification
pursuant to this Agreement, or (iv) Officer otherwise seeks enforcement of
this Agreement, Officer shall be entitled to a final adjudication in an
appropriate court of his or her rights. Alternatively, Officer at his or her
option may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the commercial arbitration rules of the American
Arbitration Association now in effect, whose decision is to be made within
ninety (90) days following the filing of the demand for arbitration. The
Corporation shall not oppose Officer's right to seek any such adjudication or
arbitration award.
(b) In the event that a determination that Officer is not entitled
to indemnification, in whole or in part, has been made pursuant to Section 5
hereof, the decision in the judicial proceeding or arbitration provided in
paragraph (a) of this Section 13 shall be made de novo and Officer shall not
be prejudiced by reason of a determination that he or she is not entitled to
indemnification.
(c) If a determination that Officer is entitled to indemnification
has been made pursuant to Section 5 hereof or otherwise pursuant to the terms
of this Agreement, Corporation shall be bound by such determination in the
absence of (i) a misrepresentation of a material fact by Officer or (ii) a
specific finding (which has become final) by an appropriate court that all or
any part of such indemnification is expressly prohibited by law.
(d) In any court proceeding pursuant to this Section 13,
Corporation shall be precluded from asserting that the procedures and
presumptions of this Agreement are not valid, binding and enforceable. The
Corporation shall stipulate in any such court or before any such arbitrator
that Corporation is bound by all the provisions of this Agreement and is
precluded from making any assertion to the contrary.
(e) Expenses reasonably incurred by Officer in connection with his
or her request for indemnification under this Agreement, meeting enforcement
of this Agreement or to recover damages for breach of this Agreement shall be
borne by Corporation.
(f) Corporation and Officer agree herein that a monetary remedy
for breach of this Agreement, at some later date, will be inadequate,
impracticable and difficult of proof, and further agree that such breach
would cause Officer irreparable harm. Accordingly, Corporation and Officer
agree that Officer shall be entitled to temporary and permanent injunctive
relief to
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<PAGE>
enforce this Agreement without the necessity of proving actual damages or
irreparable harm. The Corporation and Officer further agree that Officer
shall be entitled to such injunctive relief, including temporary restraining
orders, preliminary injunctions and permanent injunctions, without the
necessity of posting bond or other undertaking in connection therewith. Any
such requirement of bond or undertaking is hereby waived by Corporation, and
Corporation acknowledges that in the absence of such a waiver, a bond or
undertaking may be required by the court.
14. ENFORCEMENT.
(a) Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on Corporation hereby
in order to induce Officer to continue as an officer of Corporation, and
acknowledges that Officer is relying upon this Agreement in continuing in
such capacity.
(b) In the event Officer is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Corporation shall reimburse Officer for all of
Officer's reasonable fees and expenses in bringing and pursuing such action.
15. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
or all of the provisions hereof shall be held to be invalid or unenforceable
to any extent for any reason, such invalidity or unenforceability shall not
affect the validity or enforceability of the other provisions hereof, or the
obligation of the Corporation to indemnify the Officer to the full extent
provided by the Bylaws or the Law, and the affected provision shall be
construed and enforced so as to effectuate the parties' intent to the maximum
extent possible.
16. GOVERNING LAW. This Agreement shall be governed by and interpreted
and enforced in accordance with the internal laws of the State of Delaware.
17. CONSENT TO JURISDICTION. The Corporation and Officer each
irrevocably consent to jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out
of or relates to this Agreement and agree that any action instituted under
this Agreement shall be brought only in the state courts of the State of
Delaware.
18. BINDING EFFECT. This Agreement shall be binding upon Officer and
upon Corporation, its successors and assigns, and shall inure to the benefit
of Officer, his or her heirs, executors, administrators, personal
representatives and assigns and to the benefit of Corporation, its successors
and assigns.
19. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties hereto and there are no other agreements, contracts or
understandings between the parties hereto with respect to the subject matter
of this Agreement, except as specifically referred to herein. This Agreement
supersedes any and all agreements regarding indemnification heretofore
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<PAGE>
entered into by the parties.
20. AMENDMENT AND TERMINATION. No amendment, modification, waiver,
termination or cancellation of this Agreement shall be effective for any
purpose unless set forth in writing signed by both parties hereto.
21. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Officer, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Officer by this
Agreement shall not be exclusive of any other right which Officer may have or
hereafter acquire under any statute, provision of Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
23. SURVIVAL OF RIGHTS. The rights conferred on Officer by this
Agreement shall continue after Officer has ceased to be a director, officer,
employee or other agent of Corporation or such other entity.
24. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed to Officer or to
Corporation, as the case may be, at the address shown on page 1 of this
Agreement, or to such other address as may have been furnished by either
party to the other, and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the
date on which it is so mailed.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
Officer: APPLIED DIGITAL ACCESS, INC.
By:
- ---------------------------- -------------------------------------------
(Signature)
- ---------------------------- -------------------------------------------
Print Name Print Name and Title
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<PAGE>
1994 Employee Stock Purchase Plan, as Amended
APPLIED DIGITAL ACCESS, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE
This Applied Digital Access, Inc. 1994 Employee Stock Purchase Plan
(the "Plan") is intended to provide Qualifying Employees with the opportunity
to acquire a proprietary interest in the Company by accumulating amounts for
the Employee's Account through payroll deductions and the periodic
application of such amounts to the purchase of shares of the Company's Common
Stock.
II. DEFINITIONS
For purposes of plan administration, the following terms shall have
the meanings indicated:
ACT shall mean the Securities Act of 1933 (as amended).
ACCOUNT means the amount held for the benefit of a Participant
hereunder which Account will be increased by any payroll deductions from the
Participant and will be decreased by amounts applied to the purchase of
shares or refunded to or for the benefit of the Participant hereunder.
BOARD means the Company's Board of Directors.
CODE means the Internal Revenue Code of 1986, as amended from time
to time.
COMMON STOCK means shares of the Company's Common Stock.
COMPANY means Applied Digital Access, Inc., a California
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Applied Digital Access, Inc. which adopts the Plan.
CORPORATE AFFILIATE means any company which is a parent or
subsidiary corporation of the Company (as determined in accordance with Code
Section 424), including any parent or subsidiary corporation which becomes
such after the Effective Date.
EFFECTIVE DATE means the first day of the term of this Plan as set
forth in Article XI.A, which term is scheduled to commence upon the effective
date of the S-8 Registration Statement covering the shares of Common Stock
issuable under the Plan. However, for any Corporate Affiliate which becomes
a Participating Company in the Plan after the first day of the initial option
period, a subsequent Effective Date shall be designated with respect to
participation by its Qualifying Employees.
ENTRY DATE means the date on which a Participant first joins the
option period in effect under the Plan.
PARTICIPANT means any Qualifying Employee of a Participating
Company who has enrolled and is actively participating in the Plan.
PARTICIPATING COMPANY means the Company and any Corporate Affiliate
designated from time to time by the Board.
<PAGE>
QUALIFYING EMPLOYEE means any person who is engaged, on a
regularly-scheduled basis of more than twenty (20) hours per week and more
than five (5) months per calendar year, in the rendition of personal services
to the Company, or any Participating Company in exchange for amounts which
constitute wages under Section 3121(a) of the Code, provided that no person
who owns (within the meaning of Code Section 424(d)) or holds outstanding
options or other rights to purchase stock possessing five percent (5%) or
more of the total combined voting power or value of all classes of stock of
the Company or any of its Corporate Affiliates shall be a Qualifying
Employees.
QUARTER means a calendar quarter and (except for the first Quarter
of the initial option period or as otherwise designated by the Plan
Administrator), each Quarter shall begin on the first business day of the
Quarter and shall end on the last business day of such Quarter. The first
Quarter of the initial option period under this Plan shall commence on the
Effective Date and shall end on June 30, 1994.
REGULAR COMPENSATION means the basic earnings paid to a Participant
by Participating Companies plus (i) any pre-tax contributions made by the
Participant to any Code Section 401(k) salary deferral plan or any Code
Section 125 cafeteria benefit program (now existing or hereafter
established), (ii) commissions, and (iii) bonuses payable pursuant to any
formal bonus plan which has been approved and adopted by the Board. Regular
Compensation shall not include (I) overtime payments, profit-sharing
distributions and other incentive-type payments or (II) contributions (other
than Code Section 401(k) or Code Section 125 contributions) made on the
Participant's behalf under any employee benefit or welfare plan (now existing
or hereafter established).
SERVICE means the period during which an individual remains a
Qualifying Employee and all periods of Service shall be measured from such
individual's most recent date of hire by the Company or such Corporate
Affiliate.
III. ADMINISTRATION
The Plan shall be administered by a committee comprised of two (2)
or more non-employee Board members appointed from time to time by the Board
(the "Plan Administrator"). The Plan Administrator shall have full authority
to administer the Plan, including authority to interpret and construe any
provision of the Plan. Decisions of the Plan Administrator shall be final
and binding on all parties who have an interest in the Plan.
IV. OPTION PERIODS
A. Shares of Common Stock shall be offered for purchase
under the Plan through a series of successive option periods during the term
of the Plan until the maximum number of shares of Common Stock available for
issuance under the Plan shall have been issued.
B. The initial option period will begin on the Effective
Date and will end on the last business day in December, 1995. Subsequent
option periods will coincide with calendar years.
C. Each Participant will have purchase rights as set forth
in Article VII for each option period, the purchase price for which shall be
collected through payroll deductions and which purchase rights shall be
exercised in successive installments each Quarter within the option period.
D. The acquisition of Common Stock through participation in
the Plan for any option period shall neither limit nor require the
acquisition of Common Stock by the Participant in any subsequent option
period.
<PAGE>
V. ELIGIBILITY AND PARTICIPATION
A. Each Qualifying Employee shall be eligible to participate
in an option period under the Plan in accordance with the following
provisions:
- All Qualifying Employees on the Effective Date may enter the
initial option period on the Effective Date by enrolling in accordance
with Section V.C below.
- A Qualifying Employee with at least three (3) months of
Service on the first day of any subsequent option period may enter that
option period on such first day by enrolling in accordance with Section
V.C below.
- A Qualifying Employee who was not previously eligible to
enter an option period may enter that option period on the first day
of the Quarter next following the date such Qualifying Employee has at
least three (3) months of Service by enrolling in accordance with
Section V.C below.
B. A Qualifying Employee who does not enroll for an option
period on the first date such Qualifying Employee is permitted to enroll
hereunder may not subsequently enroll in that option period.
C. To enroll in the Plan, a Qualifying Employee must
complete the enrollment forms prescribed by the Plan Administrator and file
such forms with the Plan Administrator (or its designate) on or before the
date such Qualifying Employee is first permitted to enter the Option Period.
D. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock under the Plan may be any
multiple of one percent (1%) of the Regular Compensation paid to the
Participant during each Quarter of the option period, up to a maximum of
fifteen percent (15%) of Regular Compensation. The deduction rate so
authorized shall continue in effect for the remainder of the option period,
except to the extent such rate is changed in accordance with the following
guidelines:
- The Participant may, at any time during a Quarter,
reduce the rate of payroll deduction. Such reduction shall become
effective as soon as possible after filing of the requisite reduction
form with the Plan Administrator (or its designate), but the
Participant may not effect more than one such reduction during the
same Quarter.
- The Participant may, prior to the commencement of any
new Quarter within the option period, increase or decrease the rate of
payroll deduction for the new Quarter by filing the appropriate form
with the Plan Administrator (or its designate). The new rate shall
become effective as of the first day of the next Quarter.
Payroll deductions will automatically cease upon the
termination of the Participant's purchase right in accordance with the
applicable provisions of Section VII below.
<PAGE>
VI. STOCK SUBJECT TO PLAN
A. The maximum number of shares of Common Stock which may be
issued under the Plan shall be 300,000 shares of Common Stock (subject to
adjustment under Section VI.B below).
B. In the event any change is made to the Company's
outstanding Common Stock by reason of any stock dividend, stock split,
combination of shares or other change affecting such outstanding Common Stock
as a class without receipt of consideration, then appropriate adjustments
shall be made by the Plan Administrator to (i) the class and maximum number
of shares issuable over the term of the Plan, (ii) the class and maximum
number of shares purchasable per Participant during any one option period and
(iii) the class and number of shares and the price per share in effect under
each purchase right at the time outstanding under the Plan. Such adjustments
shall be designed to preclude the dilution or enlargement of rights and
benefits under the Plan.
VII. PURCHASE RIGHTS
Each Participant in a particular option period shall have the right
to purchase shares of Common Stock in a series of successive quarterly
installments during such option period on the terms and conditions set forth
below (the "Purchase Rights"). Each Participant shall execute a purchase
agreement embodying such terms and conditions and such other provisions (not
inconsistent with the Plan) as the Plan Administrator may require.
PURCHASE PRICE. The Purchase Rights shall be exercised at the end
of each Quarter at a purchase price equal to eighty-five percent (85%) of the
LOWER of (i) the fair market value per share of the Common Stock on the
Participant's Entry Date or (ii) the fair market value per share of the
Common Stock on the last business day of the Quarter. However, for each
Participant whose Entry Date is other than the first day of the option
period, the amount determined under clause (i) shall not be less than the
fair market value of the Common Stock on the first day of such option period.
VALUATION. For purposes of determining the fair market value per
share of Common Stock on any relevant date, the following procedures shall be
in effect:
- If fair market value is to be determined on or after the
date the Common Stock is first registered under Section 12(g) of
the Securities Exchange Act of 1934, then the fair market value
shall be the closing selling price on that date, as officially
quoted on the NASDAQ National Market System, or if there is no
quoted selling price for such date, then the closing selling
price on the next preceding day for which there does exist such a
quotation.
- If fair market value is to be determined prior to such
Section 12(g) registration of the Common Stock, then the fair
market value of the Common Stock on such date shall be determined
by the Plan Administrator after taking into account such factors
as the Plan Administrator deems appropriate.
NUMBER OF PURCHASABLE SHARES. The number of shares purchasable by
a Participant each Quarter shall be the number of whole shares obtained by
dividing the amount in Participant's Account at the end of such Quarter by
the purchase price in effect for the Quarter.
Notwithstanding the above, no Participant shall have the right to
purchase shares of Common Stock to the extent that, immediately after the
grant, such Participant would own (within the meaning of Code Section 424(d))
or hold outstanding options or other rights to purchase, stock possessing
five
<PAGE>
percent (5%) or more of the total combined voting power or value of all
classes of stock of the Company or any of its Corporate Affiliates.
PAYMENT. Payment for the Common Stock purchased under the Plan
shall be effected by means of the Participant's authorized payroll
deductions. Such deductions shall begin on the first pay day coincident with
or immediately following the Participant's Entry Date into the option period
and shall (unless sooner terminated by the Participant) continue through the
pay day ending with or immediately prior to the last day of the option
period. The amounts so collected shall be credited to the Participant's
Account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such Account. The amounts collected from a
Participant may be commingled with the general assets of the Company and may
be used for general corporate purposes.
TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the last five
(5) business days of the Quarter, terminate his/her outstanding purchase
right under the Plan by filing the prescribed notification form with the
Plan Administrator (or its designate). No further payroll deductions
shall be collected from the Participant with respect to the terminated
purchase right, and any payroll deductions collected for the current
Quarter shall, at the Participant's election, be immediately refunded or
held for the purchase of shares on the end of the Quarter. If no such
election is made, then such funds shall be refunded as soon as possible
after the close of such Quarter.
(ii) After the termination of purchase rights for an option
period, the Participant may not subsequently rejoin that option period.
In order to resume participation in any subsequent option period, such
individual must re-enroll in the Plan for that option period.
(iii) If a Participant ceases to be a Qualifying Employee for
any reason whatsoever during an option period then all payroll
deductions shall terminate and all funds held in the Participant's
Account will be promptly paid to the Participant or the Participant's
legal representative. No further purchases of shares hereunder shall
occur after the Participant has ceased to be a Qualifying Employee.
(iv) A Participant may withdraw all or any portion of the
payroll deductions credited to his or her Plan account and not
previously applied toward the purchase of Common Stock by delivering to
the Company's designated office a written notice on a form provided by
the Company for such purpose. A Participant who withdraws the entire
remaining balance in his/her Plan Account pursuant to this paragraph
shall be deemed to have terminated his/her purchase right for the option
period. Amounts withdrawn shall be returned to the Participant as soon
as practicable after the withdrawal and may not be applied to the
purchase of shares in any offering period under the Plan. The Company
may from time to time establish or change limitations on the frequency
of withdrawals permitted under this paragraph, establish a minimum
dollar amount that must be retained in the Participant's Account, or
terminate the withdrawal right provided by this paragraph.
STOCK PURCHASE. Subject to the limitations set forth herein, funds
held in a Participant's Account at the end of a Quarter (and which are not
required to be refunded hereunder) shall be applied to the purchase of whole
shares of Common Stock for the Participant on the last business day of the
Quarter at the purchase price in effect for such Quarter. Any payroll
deductions not applied to such purchase because they are not sufficient to
purchase a whole share shall be held for the purchase of Common Stock in the
next
<PAGE>
Quarter. Any payroll deductions not applied to the purchase of Common Stock
for any other reason shall be promptly refunded to the Participant.
PRORATION OF PURCHASE RIGHTS. If the total number of shares of
Common Stock which would otherwise be purchased hereunder on any date exceed
the number of shares then available for issuance under the Plan, the Plan
Administrator shall make a pro-rata allocation of the available shares to
Participants on a uniform and nondiscriminatory basis.
RIGHTS AS SHAREHOLDER. A Participant shall have no shareholder
rights with respect to the shares subject to his/her outstanding purchase
right until the shares are actually purchased on the Participant's behalf in
accordance with the applicable provisions of the Plan. No adjustments shall
be made for dividends, distributions or other rights for which the record
date is prior to the date of such purchase.
A Participant shall be entitled to receive, as soon as practicable
after purchase hereunder, a stock certificate for the number of shares
purchased for the Participant. Such certificate may, upon the Participant's
request, be issued in the names of the Participant and his/her spouse as
community property or as joint tenants with right of survivorship.
ASSIGNABILITY. No purchase right granted under the Plan shall be
assignable or transferable by the Participant other than by will or by the
laws of descent and distribution following the Participant's death, and
during the Participant's lifetime the purchase right shall be exercisable
only by the Participant.
CHANGE IN OWNERSHIP. Should the Company or its shareholders enter
into an agreement to dispose of all or substantially all of the assets or
outstanding capital stock of the Company by means of:
(i) a sale, merger or other reorganization in which the
Company will not be the surviving corporation (other than a
reorganization effected primarily to change the State in which the
Company is incorporated), or
(ii) a reverse merger in which the Company is the surviving
corporation but in which more than 50% of the Company's outstanding
voting stock is transferred to holders different from those who held
the stock immediately prior to the reverse merger,
then all outstanding purchase rights under the Plan shall
automatically be exercised immediately prior to the consummation of such
sale, merger, reorganization or reverse merger by applying the amounts in
each Participant's Account to the purchase of whole shares of Common Stock at
eighty-five percent (85%) of the LOWER of (i) the fair market value of the
Common Stock on the Participant's Entry Date into the option period in which
such transaction occurs or (ii) the fair market value of the Common Stock
immediately prior to the consummation of such transaction. However, the
applicable share limitations of Articles VII and VIII shall continue to apply
to any such purchase, and the clause (i) amount above shall not, for any
Participant whose Entry Date for the option period is other than the start
date of such option period, be less than the fair market value of the Common
Stock on such start date.
The Company shall use its best efforts to provide at least ten
(10)-days advance written notice of the occurrence of any such sale, merger,
reorganization or reverse merger, and Participants shall, following the
receipt of such notice, have the right to terminate their outstanding
purchase rights in accordance with the applicable provisions of this Article
VII.
VIII. ACCRUAL LIMITATIONS
<PAGE>
A. No Participant shall be entitled to accrue rights to
acquire Common Stock pursuant to any purchase right outstanding under this
Plan if and to the extent such accrual, when aggregated with (I) rights to
purchase Common Stock accrued under any other purchase right outstanding
under this Plan and (II) similar rights accrued under other employee stock
purchase plans (within the meaning of Section 423 of the Code) of the Company
or its Corporate Affiliates, would otherwise permit such Participant to
purchase more than $25,000 worth of stock of the Company or any Corporate
Affiliate (determined on the basis of the fair market value of such stock on
the date or dates such rights are granted to the Participant) for each
calendar year such rights are at any time outstanding.
B. For purposes of applying such accrual limitations, the
right to acquire Common Stock pursuant to each purchase right outstanding
under the Plan shall accrue as follows:
(i) The right to acquire Common Stock under each such
purchase right shall accrue in a series of successive quarterly
installments as and when the purchase right first becomes exercisable
for each quarterly installment on the last business day of each
Quarter for which the right remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
$25,000 worth of Common Stock (determined on the basis of the fair
market value on the date or dates of grant) pursuant to one or more
purchase rights held by the Participant during such calendar year.
(iii) If by reason of such accrual limitations, any
purchase right of a Participant does not accrue for a particular
Quarter, then the payroll deductions which the Participant made during
that Quarter with respect to such purchase right shall be promptly
refunded.
C. In the event there is any conflict between the provisions
of this Article VIII and one or more provisions of the Plan or any instrument
issued thereunder, the provisions of this Article VIII shall be controlling.
IX. STATUS OF PLAN UNDER FEDERAL TAX LAWS
The Plan is designed to qualify as an employee stock purchase plan
under Code Section 423.
X. AMENDMENT AND TERMINATION
A. The Board may alter, amend, suspend or discontinue the
Plan following the close of any Quarter. However, the Board may not, without
the approval of the Company's shareholders:
(i) materially increase the number of shares issuable under
the Plan or the maximum number of shares which may be purchased per
Participant during any one option period under the Plan, except that the
Plan Administrator shall have the authority, exercisable without such
stockholder approval, to effect adjustments to the extent necessary to
reflect changes in the Company's capital structure pursuant to Section
VI.B;
(ii) alter the purchase price formula so as to reduce the
purchase price payable for the shares issuable under the Plan; or
<PAGE>
(iii) materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility to participate in the Plan.
B. The Company shall have the right, exercisable in the sole
discretion of the Plan Administrator, to terminate all outstanding purchase
rights under the Plan immediately following the close of any Quarter. Should
the Company elect to exercise such right, then the Plan shall terminate in
its entirety. No further purchase rights shall thereafter be granted or
exercised, and no further payroll deductions shall thereafter be collected,
under the Plan.
XI. GENERAL PROVISIONS
A. The term of this Plan shall commence on the effective
date of the S-8 Registration Statement covering the common stock issuable
under the Plan, PROVIDED that the term shall not commence, and no shares of
Common Stock shall be issued hereunder, until (i) the Plan shall have been
approved by the shareholders; (ii) the Company shall have complied with all
applicable requirements, all applicable listing requirements of any
securities exchange on which shares of the Common Stock are listed and all
other applicable requirements established by law or regulation and the Plan
Administrator shall have determined to commence granting Purchase Rights
hereunder. In the event shareholder approval is not obtained, or Company
compliance with the Act is not effected, within twelve (12) months after the
date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect.
B. The Plan shall terminate on December 31, 2003.
C. All costs and expenses incurred in the administration of
the Plan shall be paid by the Company.
D. Neither the action of the Company in establishing the
Plan, nor any action taken under the Plan by the Board or the Plan
Administrator, nor any provision of the Plan itself shall be construed so as
to grant any person the right to remain in the employ of the Company or any
Corporate Affiliate for any period, and such person's employment may be
terminated at any time, with or without cause.
<PAGE>
APPLIED DIGITAL ACCESS CONFIDENTIAL
MANAGEMENT TEAM INCENTIVE COMPENSATION PLAN
rev 3: February 13, 1997
PURPOSE: The Management Team Incentive Compensation Plan identifies a portion
of the total compensation of each participant as "at risk" compensation. Total
compensation includes both base salary and "at risk" compensation.
REVIEW AND APPROVAL: This plan has been approved by the CEO and the
Compensation Committee of the Board of Directors.
PHILOSOPHY: People in the company should be compensated in proportion to:
- their personal contribution and success,
- the contribution and success of their department,
- the contribution and success of their business unit, and
- the success of the entire company.
The amount of "at risk" compensation should be proportional to management level
in the company.
The proportion of the "at risk" compensation element that is dependent on
company performance should be proportional to management level in the company.
Measurements must be simple and quantitative against agreed upon objectives.
Company and business unit objectives are set at the beginning of the fiscal year
and remain unchanged for the entire year.
Department objectives should be reviewed quarterly and modified to reflect
changing business conditions.
PARTICIPANTS in the Plan are designated by the CEO and approved by the
Compensation Committee, and include the President/CEO, Officers, Business
Unit General Managers, Vice Presidents, Directors, Managers, and Supervisors.
People who become participants during the year shall have the amount they may
earn under the plan prorated according to their time in the plan.
AMOUNT OF COMPENSATION AT RISK: The percentage of base salary that comprises
"at risk" compensation is:
CEO 50%
CONFIDENTIAL MIC 1
<PAGE>
Officers - BUGM 40%
Officers - Dept Head 40%
VP (non officer) 35%
Directors 30%
Managers 25%
Supervisors 20%
Base salary is the participant's salary at the start of the fiscal year.
SETTING OBJECTIVES - Objectives fall into four categories: department, business
unit, company, and individual/discretionary. Objectives will be set at the
beginning of each fiscal year in discussions between the participant and manager
based on company objectives set in company planning sessions. Additional
objectives may be added during the year. All objectives will be approved by the
CEO and may be reviewed by the Compensation Committee.
Future department objectives and performance against previously set objectives
will be reviewed each quarter.
WEIGHTING OBJECTIVES - The weighting of each category of objective is:
<TABLE>
<CAPTION>
% of base % of incentive compensation based on:
at risk company business unit department individual
<S> <C> <C> <C> <C> <C>
CEO 50% 100% -- -- --
Officers - BUGM 40% 40% 30% -- 30%
Officers - Dept Head 40% 30% 20% 20% 30%
VP (non officer) 35% 30% 20% 20% 30%
Directors 30% 20% 30% 20% 30%
Managers 25% 20% 20% 30% 30%
Supervisors 20% 20% 20% 30% 30%
</TABLE>
Within categories, each objective shall be weighted to reflect importance to
company success. Quality shall be emphasized in weighting objectives.
EVALUATING PERFORMANCE AGAINST OBJECTIVES: Accomplishments against objectives
will be determined in a quarterly review. A quantitative determination of
accomplishment against each objective will be made and a percent score assigned
to each objective. Each score will be multiplied by its weighting factor. The
sum of the weighted scores in the 'company', 'business unit', and 'department'
categories multiplied by the participant's base salary shall determine the
amount earned in each category.
CONFIDENTIAL MIC 2
<PAGE>
The amount earned in the 'individual/discretionary' category shall be determined
by the individual's immediate supervisor as part of the individual's performance
appraisal.
The sum of the company, business unit, department, and individual/discretionary
categories shall be the total entitlement.
PAYMENTS: A determination of the amount of "at risk" compensation earned
will be made at the end of each quarter. These determinations will be
approved by the CEO and the Compensation Committee. A payment equal to 1/2
of the earned amount in the 'company', 'business unit', and 'department'
categories will be made to each participant after release of earnings for the
quarter. The remainder of the 'company', 'business unit', and 'department'
payments and all of the discretionary payment will be held until the close of
the year when yearly results are available. The amount payable at the end of
the year will be determined by total year results.
PARTICIPANTS MUST BE EMPLOYED BY THE COMPANY ON THE DAY OF ANY PAYMENT IN ORDER
TO BE ELIGIBLE FOR THAT PAYMENT.
COMPANY AND BUSINESS UNIT OBJECTIVES: Company and business unit objectives
shall be established each year. Additional objectives may be added during the
year. Company and business unit objectives shall not change during the year.
Quantitative objectives may include: Revenue, Bookings, Gross Margin,
Operating Income, and Earnings per Share (EPS).
Strategic objectives may include: Product introduction schedules, and account
capture.
DEPARTMENT OBJECTIVES: Department objectives shall be established each year,
and modified each quarter to reflect changed business conditions. Department
objectives shall include quality of the products (output) of each department.
In addition, the following objectives shall be included:
Engineering: Product development schedules
Quality of developed products
Operations: Gross Margin
Inventory turns
Product ship schedules
Product quality
Finance: Quality of financial reports/analyses
Control of assets
CONFIDENTIAL MIC 3
<PAGE>
Marketing: Bookings - established and new products
Product introduction schedules
Customer and product support
Sales: In accordance with the Sales Compensation Plan
FINANCIAL OBJECTIVES: Accomplishments against company and business unit
financial objectives may be determined by the company's unaudited financial
results as approved by the Board of Directors at its January meeting.
Adjustments, if any, may be made after completion of the annual audit.
Revenue and bookings elements will be scored linearly from zero at 80% of plan
to a maximum of 150 at 110% of plan. The operating income element will be
scored linearly from zero at 95% of plan OI percentage to 100 at 100% of plan OI
percentage, then linearly to a score of 150 at 105% of plan OI percentage.
Elements shall be evenly weighted in determining the company score.
STRATEGIC OBJECTIVES: Strategic objectives may be established that include
quantitative and qualitative measurements. The achievement criteria in each
case shall be established as quantitatively as possible.
SCORING OF ACHIEVEMENT AGAINST DEPARTMENT OBJECTIVES:
SCHEDULE OBJECTIVES: Achievement against schedule shall be measured according
to the following formula:
score = [ 1 - (2 x time late)/schedule time]
ex: if the task measured was 5 weeks late on a schedule that originally was 20
weeks long, the score would be:
score = [ 1 - ( 2 x 5 weeks)/20 weeks] = 50%
It is possible to score higher than 100% if the task is completed ahead of
schedule.
OTHER OBJECTIVES: Measurements of accomplishments against objectives will be
set by each department head with the approval of the CEO. These measures will
link measurable performance with a numeric score. Examples of these
measurements include:
Quality: percent of modules returned within 120 days
number of problems discovered after shipment or
installation
Response time: average time to respond to customer requests
CONFIDENTIAL MIC 4
<PAGE>
Delivery schedules: actual delivery time versus customer requested delivery
time.
Asset control: book to physical inventory variances, numbers of items in
error and dollars difference.
Other measures shall be developed as appropriate and as agreed to by the
business unit GM, department head and the CEO.
CONTINUOUS IMPROVEMENT: The objective for each measured element of
performance shall be raised from time to time to improve performance in each
area.
CONFIDENTIAL MIC 5
<PAGE>
Exhibit 23.1
Consent of independent accountants
We consent to the incorporation by reference in the Registation Statement of
Applied Digital Access, Inc. on Form S-8 of our report dated January 23, 1998
on our audits of the financial statements and financial statement schedule of
Applied Digital Access, Inc. as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995, which report is included in the
Annual Report on Form 10-K of Applied Digital Access, Inc. for the year ended
December 31, 1997.
COOPERS & LYBRAND L.L.P.
San Diego, California
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,400
<SECURITIES> 8,779
<RECEIVABLES> 13,031
<ALLOWANCES> (50)
<INVENTORY> 5,859
<CURRENT-ASSETS> 35,924
<PP&E> 12,719
<DEPRECIATION> (6,554)
<TOTAL-ASSETS> 46,283
<CURRENT-LIABILITIES> 9,136
<BONDS> 0
0
0
<COMMON> 51,610
<OTHER-SE> 2,576
<TOTAL-LIABILITY-AND-EQUITY> 46,283
<SALES> 34,050
<TOTAL-REVENUES> 34,050
<CGS> 15,116
<TOTAL-COSTS> 15,116
<OTHER-EXPENSES> 23,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,151)
<INCOME-TAX> 132
<INCOME-CONTINUING> (4,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,283)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
