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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___ to ___
Commission file number 0-24612
ADTRAN, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 63-0918200
(State of incorporation) (I.R.S. Employer
Identification Number)
901 EXPLORER BOULEVARD, HUNTSVILLE, ALABAMA 35806-2807
(Address of principal executive offices, including zip code)
(205) 971-8000
(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,
$.01 par value
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on January 31, 1997 was $776,223,057. There
were 38,920,914 shares of Common Stock outstanding as of January 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report for the fiscal year ended December 31, 1996
are incorporated herein by reference in Part II and portions of the Proxy
Statement for the Annual Meeting of Stockholders to be held on April 23, 1997
are incorporated herein by reference in Part III.
1
ADTRAN, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1996
Table of Contents
-----------------
Item Page
Number Number
- ------ ------
PART I
1. Business........................................................ 3
2. Properties...................................................... 18
3. Legal Proceedings............................................... 19
4. Submission of Matters to a Vote of Security Holders............. 19
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 22
6. Selected Financial Data......................................... 22
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 22
8. Financial Statements and Supplementary Data..................... 23
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 23
PART III
10. Directors and Executive Officers of the Registrant.............. 23
11. Executive Compensation.......................................... 24
12. Security Ownership of Certain Beneficial Owners and Management.. 24
13. Certain Relationships and Related Transactions.................. 24
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................. 24
SIGNATURES...................... 27
INDEX OF EXHIBITS................... E-1
2
PART I
ITEM 1. BUSINESS
- ----------------
OVERVIEW
ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets
and services a broad range of high speed digital transmission products utilized
by telephone companies ("Telcos") and corporate end-users to implement advanced
digital data services over existing telephone networks. The Company also
customizes many of its products for private label distribution and for original
equipment manufacturers ("OEMs") to incorporate into their own products. Most of
the Company's Telco and customer premises equipment ("CPE") products are
connected to the local loop ("Local Loop"). The Local Loop is the large existing
infrastructure of the telephone network connecting end-users to a Telco's
central office, the facility that provides the local switching and distribution
functions ("Central Office"). The balance of the Company's products are used in
the Telcos' Central Offices.
The Company's product lines, which are comprised of over 400 principal
products, are built around a core technology developed by the Company to address
the Local Loop and Central Office digital communications marketplace. These
products include a comprehensive line of transmission, repeater, extension and
termination products such as dataports, channel and data service units, and
digital repeaters and extenders. The Company also offers a broad line of T-1
multiplexers providing modular flexibility to the CPE marketplace. A separate T-
1 product line is sold to Telcos for use within their Central Offices. The
Company recently has addressed the wireless marketplace with the introduction of
a wireless spread spectrum microwave transceiver.
The Company's products address three market segments: (i) Telco products
for use in the Local Loop or in Central Offices; (ii) CPE products for end-
users; and (iii) OEM products. In 1996, sales of Telco, CPE and OEM products
accounted for 60.1%, 27.8% and 12.1%, respectively, of the Company's sales. The
Company's Telco products deliver cost-effective digital services such as 56/64
Kbit/sec Digital Data Service ("DDS"), 128 Kbit/sec Integrated Services Digital
Network ("ISDN") 64 Kbit/sec or 1.544 Mbit/sec Frame Relay service ("Frame
Relay") and 1.544 Mbit/sec T-1 (24 Channel) service. In addition, the Company's
High bit-rate Digital Subscriber Line ("HDSL") products permit T-1 transmission
on up to 12,000 feet of unconditioned copper wireline while reducing the need
for costly mid-span repeaters. The Company's CPE products provide end-users
access to Telco digital services and often include additional features for
specific end-user applications. The Company customizes many of its Telco and CPE
products and supplies them as OEM products to substantially all significant
manufacturers of T-1 multiplexers used in Telcos' Central Offices. The Company
has introduced and shipped a number of HDSL, ISDN and other products which
comply with international standards to increase its penetration of overseas
markets. See "Business -Products."
The rapidly expanding requirements for digital transmission in the Local
Loop are being driven by Internet access, small office/home office ("SOHO")
users, video delivery and on-line data services, among other applications, all
of which require and benefit from the speed, reliability and low cost of digital
transmission. While the Telcos have, to a large extent, replaced their wireline
data transmission network between Central Offices with fiber-optic and digital
microwave links which allow for high speed digital transmission, the Local Loop
remains predominantly characterized by low speed analog transmission over copper
wirelines. As a result, there has been considerable impetus for Telcos to
upgrade the Local Loop in the most cost effective manner available. Widespread
replacement of the copper wireline Local Loop remains prohibitively expensive,
so the Telcos have turned to manufacturers such as the Company for technologies
that expand Local Loop capabilities to handle
3
digital transmission without necessitating this costly replacement. Existing
digital delivery technologies, including Frame Relay, ISDN and HDSL, are all
experiencing rapid compound growth. Numerous higher speed digital technologies
are under development or in the trial stage, including Asymmetric Digital
Subscriber Line ("ADSL"), Switched Multi-megabit Data Services ("SMDS"),
Asynchronous Transfer Mode ("ATM"), wireless transmission, hybrid fiber coax and
cable modems.
The Company's core technologies expand the digital transmission
capabilities of the Local Loop by enabling increased transmission speed and/or
increased transmission distance. Ongoing research and product development
activities are designed to enhance the distances covered by existing services as
well as to develop new higher speed technologies. For example, during the first
quarter of 1996, the Company demonstrated to the Telcos its new "Total Reach"
delivery technology which increases the distance covered by ISDN services in the
Local Loop from 18,000 feet to 30,500 feet. The same technology is being
incorporated into 64Kbit/sec digital products for use in Frame Relay and DDS
services. In addition, the Company is engaged in research, performance
simulation, and design of higher speed digital technologies for the transport of
data. Current issues for future higher speed digital technologies, including
costs, power consumption and distances reachable, must be resolved for
widespread acceptance and deployment of these technologies.
In developing its product families, the Company has continuously
improved its design, purchasing and production processes to lower product costs
and has consistently offered improved products at lower prices to customers. As
a result, management believes that the Company is a leading provider of Local
Loop and Central Office digital transmission products to Telcos. See "Company
Strategy." The Company's customers include all seven Regional Bell Operating
Companies ("RBOCs"), GTE Corporation, the three largest interexchange carriers,
many of the 1,300 independent telephone companies as well as a number of
worldwide electronics, communications and industrial companies. See "Business-
Customers."
The Company was incorporated under the laws of Delaware in November 1985
and commenced operations in January 1986.
Recent Developments
In August 1994, the Company completed an initial public offering of
Common Stock which resulted in net proceeds to the Company of $37,867,963. The
Company's Common Stock now trades on the Nasdaq National Market under the symbol
"ADTN."
On June 29, 1995, the Company and certain stockholders of the Company
sold a total of 3,125,100 shares of Common Stock in a second public offering.
The Company received net proceeds of $15,705,362 from the sale of 500,000 shares
of Common Stock at the public offering price of $33 per share. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in the Company's 1996 Annual Report to
Shareholders.
The Company is continuing a project to expand its facilities in
Huntsville, Alabama in several phases over the next three years at a cost of
approximately $131,000,000 of which $36,255,906 had been incurred at December
31, 1996. The debt associated with $50,000,000 of this project has been approved
for participation in an incentive program offered by the Alabama State
Industrial Development Authority (the "Authority"). That program enables
participating companies such as the Company to generate Alabama corporate income
tax credits that can be used to reduce the amount of Alabama corporate income
taxes that would otherwise be paid. In January 1995, the Authority issued
$20,000,000 of its taxable revenue bonds (the "Original Bond"), pursuant to such
program and loaned
4
the proceeds from the sale of the bonds to the Company. The Original Bond was
purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the "Bank"), pursuant
to a financing agreement dated January 1, 1995, (the "Original Financing
Agreement") and bears interest, payable monthly, at the rate of 87.5 basis
points over the 30 day London inter-bank offered rate and mature on January 1,
2020. First Union National Bank of Tennessee, Nashville, Tennessee (the
"Bondholder") has agreed to purchase the Original Bond from AmSouth and to make
further advances to the Authority with the total amount not to exceed
$50,000,000. Upon approval by the Authority, an Amended and Restated Taxable
Revenue Bond (Adtran, Inc. Project) Series 1995, (the "Amended and Restated
Bond") will be issued and the Original Financing Agreement will be amended. The
Company anticipates that the Amended and Restated Bond and associated documents
will be completed during the second quarter of 1997. The Amended and Restated
Bond will bear interest, payable monthly, at the rate of 45 basis points over
the money market rate of the Bondholder and will mature on January 1, 2020. The
Company has agreed to make payments to the Authority in amounts necessary to pay
the principal of and interest on the Amended and Restated Bond. Construction on
the project began in March 1995 and certain phases were completed by December
31, 1996. There can be no assurance that the State of Alabama will continue to
make these corporate income tax credits available in the future, and the Company
therefore may not realize the full benefit of these incentives. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Company's 1996 Annual
Report to Shareholders.
Company Strategy
The Company's growth strategy includes the following elements:
Focus on Local Loop and Central Office Digital Transmission Products.
Upon commencing operations in 1986, the Company focused its product strategy
upon capturing a significant market share for sales of Local Loop and Central
Office digital transmission products to Telcos. This focus was the result of the
recognition by the Company's founders of the significant opportunity created by
the elimination of American Telephone & Telegraph Co.'s ("AT&T") monopoly
position in the manufacture of telecommunications equipment. Having achieved a
leading market share of Local Loop and Central Office digital transmission
products, the Company intends to consolidate its position through an integrated
program of new product development, customer service and product excellence.
Capitalize on Existing Leadership Position in the Telco Market. As a
leader in the Telco market it serves, the Company intends to apply its sales and
customer service resources to new market opportunities that arise as expanded
services are provided by the Telcos in response to increasing subscriber demand.
In this regard, the Company expects that its in-depth understanding of and
experience with Local Loop and Central Office technology will provide it a
competitive advantage. The Company is committed to replace most of its products
with succeeding generations of products with lower costs, additional product
features and improved serviceability.
Adapt Product Technology and Sales Force to CPE Market. Over the past
five years, the Company has adapted product technology developed for Telco
Central Offices for use in the Company's CPE product lines. As many of the
technologies that are critical to success in the CPE market are identical to
those already developed and refined for the Company's Telco products, the
Company has realized a competitive advantage through leveraging these product
development efforts and expertise in all of its markets. To sell its CPE
products to the large number of end-users which comprise the market, the Company
has built a dedicated sales force and an extensive nationwide network of
resellers over the past five years. The Company intends to develop new
distribution channels to address the worldwide market for its CPE products.
5
Expand Presence in OEM Market. Sales of private label and OEM versions
of the Company's standard products to manufacturers of Telco and CPE equipment
have contributed significantly to the Company's growth and profitability. As
standard products move to volume production, the Company will continue adapting
them to other manufacturers' equipment. Since OEM products bear the nameplate of
the manufacturer for whom they are produced, the manufacturers to whom OEM
products are sold insist upon the highest quality and reliability in such
products. Accordingly, management believes that the low cost, high quality and
reliability of the Company's product technology will be increasingly attractive
to manufacturers of a wide variety of Telco and CPE products that connect to the
Local Loop. During 1996, sales of the Company's more mature 64 Kbit/sec DDS
products met increasing cost competition and resulted in lower sales by its OEM
customers. To address this new competitive threat, the Company reached
agreements with its OEM customers allowing the Company to sell directly to
certain large accounts (primarily GTE Corporation) and thus avoid the higher
distribution costs associated with the OEM sales channel.
Expand into International Markets. While international sales are not
currently substantial, international customers have begun to order, and the
Company has shipped, international versions of the Company's Telco and CPE
products. The Company has formed, and will continue to pursue, international
distribution arrangements built upon core products and technology developed by
the Company in an effort to further its penetration into international markets.
The Company has also focused on developing E-1 technology, the predominant
standard for data transmission outside of North America. In the future, the
Company plans to add appropriate support capabilities and introduce new versions
of its products that incorporate E-1 technology and that otherwise comply with
relevant international standards. The Company's development process currently is
conducted in accordance with ISO 9001, the international standard for quality
management systems for design, manufacturing and service.
Invest in Engineering and Product Development. The Company expects to
continue its relatively high levels of investment in developing innovative new
products, and redesigning existing products, in order to reduce product costs
and production cycle times, and in so doing will continue its efforts to be a
low cost provider in the industry. New products are generally targeted at
opportunities that promise rapid growth as product costs are reduced and feature
sets are optimized. The Company will also continue to develop and expand its
broad product line serving each of the Telco, CPE and OEM markets. The Company
continuously monitors developing technologies and introduces products as defined
standards and markets emerge. This diversification in products and markets will
continue to be a key to the Company's business strategy.
Adapt to New Local Loop Media. New Local Loop connections continue to be
implemented primarily with copper wirelines, although the Company anticipates an
increased use of fiber-optic, coaxial and wireless communications in new
installations over the next decade and more. To the extent such alternative
connection methods become economically advantageous, and as such markets develop
and grow, the Company intends to extend its technical and marketing experience
to develop products meeting the demands of such markets.
Commit to Constant Improvements in Quality and Service. The Company
believes its success to date has been due in large measure to its commitment to
constantly improve product quality and customer service. This commitment has
been formally recognized in awards received from several of its largest
customers. In the future, product quality is expected to contribute
significantly to the Company's efforts to reduce production cycle times and
product costs.
6
Products
Core Product Technology. The Company's product lines, comprised of over
400 principal products, are built around core technologies developed by the
Company to address the Central Office and Local Loop digital communications
marketplaces. Central Office facilities, approximately 30,000 of which are
located throughout North America, provide subscribers with access to a discrete
portion of the network's bandwidth on a switched basis ("switched access") or on
an exclusive basis ("private line"). Typically, access is available in unit
multiples of 56 Kbit/sec (64 Kbit/sec in some locations) increments, although
Telco multiplexing equipment can efficiently aggregate these basic increments
into high speed channels up to T-1 rates (1.544 Mbit/sec), T-3 (45 Mbit/sec) or
faster rates. Individual channels can also be subdivided to speeds as low as 2.4
Kbit/sec.
Each individual Local Loop circuit is served by a circuit assembly
(consisting of a channel unit, U-Basic Rate Transmission Extender, or "U-BR1TE"
or other similar products manufactured by the Company) that plugs into a Central
Office channel bank or shelf. The speed and functionality of the circuit is
determined by the type of circuit assembly deployed by the Telco. For each such
circuit, Central Office facilities generally make available a corresponding
physical mounting position in a channel bank or shelf, and plug-in circuit
assemblies are installed in accordance with the service ordered by the
subscriber. Other special plug-in circuit assemblies, such as those manufactured
by the Company, are commonly employed to connect or bridge circuits within the
Central Office. Individual communication channels (multiplexer time slots) are
interconnected and switched as appropriate within the Central Office, and the
resultant communications payload is then directed toward the proper destination.
If the communications traffic needs to be delivered to another Central Office,
it is directed toward the inter-office network, usually through a long distance
carrier such as AT&T, MCI or Sprint. At the far-end connection, the process is
reversed. Voice is converted into digital form by circuit assemblies within the
RBOC's Central Office and treated like any other digital information until
delivered to the far-end serving Central Office where it is returned to analog
form in the Local Loop. However, when products such as those sold by the Company
are utilized, data communications traffic remains in digital form end to end.
In recent years, the need for higher volume data communications has led
to the development of "remote huts." Like the Central Office, remote huts
provide subscriber access through plug-in circuit assemblies such as those
manufactured by the Company, but they can take advantage of high capacity fiber-
optic links to bring service to the local area economically. Remote huts are
then connected by the Local Loop to end-users with products such as those sold
by the Company. The Company also manufactures optional mid-span repeaters that
extend the service range of the Local Loop, as well as optional termination
units that are deployed to monitor and maintain service to the subscriber.
At the customer's premises, terminating equipment receives the
transmitted signal from the Central Office and converts it to a form useful to
end-user products such as LAN interconnection gear, video conferencing
equipment, PBXs, personal computers and related equipment. In general, the Local
Loop and related CPE products support bi-directional communications traffic.
Today, the Company's product lines consist of three groups of inter-
related products, all evolving from the core product technology developed for
the Local Loop:
* Telco Central Office and Local Loop digital transmission products.
7
* CPE products.
* OEM products
Telco Central Office and Local Loop Digital Transmission Products.
Several hundred to several thousand circuit assemblies, such as those
manufactured by the Company, are required at each Central Office, since each
Local Loop generally requires a unit of this type to provide service to each
subscriber. In 1996, the Company delivered more than 735,680 units of this
product group, accounting for 60.1% of the Company's sales. Telco products
accounted for 58.1% and 52.5% of the Company's sales in 1995 and 1994,
respectively.
Typical of the different versions of Central Office channel assemblies
manufactured by the Company are the various OCU dataports and related products,
the fundamental building blocks for delivering DDS and Frame Relay services at
56/64 Kbit/sec rates to subscribers. The Company is also a leading industry
supplier of mid-span DDS repeaters. In response to the Telco's need for a method
to monitor transmission conditions and to detect problems for each individual
circuit, the Company pioneered development of the Digital Data Station
Termination ("DDST") product family. Both the OCU dataports and DDSTs are
produced in relatively high volumes directly related to the increased demand for
DDS and Frame Relay services.
The Company is one of the industry's primary suppliers of U-BR1TEs,
which are required to extend ISDN service from an ISDN capable switch at a hub
Central Office to a serving Central Office or to remote Channel Banks. The
Company also supplies a substantial portion of the industry's ISDN mid-span
repeaters. Other ISDN products include a BR1TE Bank to mount multiple U-BR1TES,
T-BR1TES, NT-1 interface units, and outside plant housings for the repeaters.
Late in 1993, the Company commenced deliveries of its HDSL product
family. The Company has chosen to develop its own custom integrated circuits so
HDSL product performance, availability and cost can be carefully managed.
Management believes that demand for this product family will increase steadily
as more affordable versions increasingly become available to the Telcos.
The list price for the Company's Telco product family generally ranges
from $100 to $1,000 per unit. The following table illustrates the breadth of the
Company's Telco products and their applications:
Representative Telco Products
Product Current
or Product Product
Family Description Application Generation
------ ----------- ----------- ----------
DDST Digital Data Station Terminates DDS (up 4th
Terminations to 64 Kbit/sec);
monitors and tests
DDS lines
DSO-DP Digital Signal Zero Interconnects 2 5th
Data Ports channels in the Telco
Central Office
HDSL High bit-rate Digital Delivers repeaterless 3rd
Subscriber Line
8
Units T-1 (1.544 Mbit/sec up
to 12,000 ft.
LR 56/72 DDS Loop Repeaters Extends DDS Circuit 4th
Range
OCU-DP Office Channel Units - Provides DDS (up to 8th
Data Ports 64 Kbit/sec)
U-BR1TE U-Basic Rate Extends ISDN (up to 3rd
Transmission Extenders 128 Kbit/sec) to Central
Offices/remote huts
without ISDN Switch
U-Repeater ISDN Loop Repeaters Extends ISDN Circuit 3rd
Range
CPE Products. The Company's CPE products have evolved from technology
developed for its Telco product line. As many of the technologies which are
critical to success in the CPE market are identical to those already developed
and refined for the Company's Telco products, the Company has realized a
competitive advantage through leveraging these product development efforts and
expertise in all of its markets. Since initial product deliveries in 1991, CPE
product sales have accounted for 20.3%, 28.3% and 27.8% of the Company's sales
in 1994, 1995 and 1996, respectively.
In most cases, a CPE product is purchased and installed by end-user
customers in conjunction with a Telco's digital data transmission service. For
example, a DSU is normally installed with each DDS loop. The Company's DSU
product line was completely upgraded and revamped in 1993 with five new models
that can terminate any standard DDS or Switched 56 digital service available in
North America. In 1994, the product line was expanded to include lower cost
versions as well as a family of shelf mount units. In 1995, products supporting
synchronous data compression and versions supporting the simple network
management protocol were added to the family. In 1996, the flagship products
were once again redesigned to become more modular and flexible. These design
changes have substantially reduced the associated manufacturing costs while
increasing the utility of the product to the marketplace. Customer acceptance of
this product family has significantly increased the Company's DSU market share,
and management believes that further gains are possible with the Company's
recent enhancements of this product line.
Over the past two years, Frame Relay Services have met with increasing
customer acceptance. As a result, the Company has recently readied for
introduction a family of Frame Relay Service units (FSU). These products are
built from the core technologies utilized in the existing DSU and TSU product
families.
The Company believes that its ISDN Service Unit (ISU) with sustained
data transmission rates up to 128 Kbit/sec was the first product of its type
when introduced in 1993. New versions of the product introduced by the Company
have followed, including a model that automatically senses and adapts to
virtually any far-end communications device, including modems, 2 wire or 4 wire
DSUs, or another ISDN terminal adapter. The ISU product family was later
extended to include the ISU 512, a device that allows multiple ISDN lines to be
combined for use by high speed video conferencing equipment. Recently, ADTRAN
has solved one of the biggest obstacles in successful installation of new ISDN
circuits with the introduction of its "Expert ISDN" technology. Expert ISDN
allows CPE devices to automatically determine key parameters, such as Telco
switch type and Service Profile Identifiers ("SPIDS"). Previously, these
parameters were passed manually from the Telco to the user, who
9
manually entered the information into the CPE device. ADTRAN's new ISDN terminal
adapters, the Express XR and XRT, utilize this technology. Additionally, these
products have been recognized by Computer Telephony Magazine as "Products of the
Year" and received the "97 Design and Engineering" award at the Winter Consumer
Electronics Show (CES).
Late in 1993, initial installations of the Company's T-1 Service Unit
("TSU") were successfully completed. Offering full or fractional T-1 access, the
product line is designed for sophisticated users needing higher speed
interconnection of LANs, remote offices, video delivery systems, graphic
workstations and related equipment. Common plug-in modules are available for
several of the Company's models, tailoring the units for multi-channel data
communications. TSU order rates have increased steadily since the 1993
introduction and now comprise a significant portion of CPE sales. The TSU
product line augments the Company's mature line of ACT Channel Banks that
accommodate most commercially available channel units, including those offered
by the Company's competitors.
The list price for the CPE product family generally ranges from $500 to
$2,000 per unit. The following table illustrates the breadth of the Company's
CPE products and their applications:
Representative CPE Products
Product Current
or Product Product
Family Description Application Generation
------ ----------- ----------- ----------
Act Channel Bank T-1 (1.544 Mbit/sec) Provides user access 3rd
Channel Banks; to each of 24 channels
compatible with D-4 in T-1 service
Channel Units
DSU Data Service Units/ Connects data terminal 4th
Channel Service Units equipment to DDS (up
to 64 Kbit/sec);
standard interface
for data processing
equipment
SMART 16 Shelf-Mount Systems Provides means for end- 2nd
users to plug in
multiple DSU, TSU and
ISU circuit assemblies
ISU ISDN Service Units Connects data terminal 3rd
equipment to ISDN (up to
128 Kbit/sec) network
TSU T-1 Data Service Units/ Connects data terminal 2nd
Channel Service Units equipment to T-1 (1.544
Mbit/sec) network
T1-CSU T-1 Channel Service Provides T-1 termination 2nd
Units
NT-1 Network Termination Provides ISDN termination 3rd
FSU Frame Relay Service Provides Frame Relay 1st
Unit circuit termination
10
OEM Products. The Company supplies OEM products to essentially all
significant manufacturers of T-1 multiplexers used in either Central Offices or
remote huts, and has become a major OEM supplier of dataports, U-BR1TEs and
other channel units for Central Office multiplexer systems sold to the Telcos.
In 1994, 1995 and 1996, OEM products accounted for 27.2%, 13.6% and 12.1%,
respectively, of the Company's sales. This decrease was attributable primarily
to reduced demand related to mature programs combined with the low volume
normally encountered on new programs. In addition, the Company converted
numerous products originally developed under OEM contract status to ADTRAN
standard product status. This conversion was accomplished with permission from
the OEM contract holders and was done to allow the Company to directly pursue
markets that will no longer support a two tier distribution structure. The
Company has shipped new OEM versions of its HDSL products which comply with
international standards. OEM versions of HDSL products that were sold
internationally amounted to 12.4% of total international sales.
Generally, the Company's OEM supply contracts call for customer funded
modification of standard products followed by joint testing and refinement of
resultant designs. Minimum production volumes are usually, but not always,
specified in such contracts. While the bulk of OEM sales has involved tailored
versions of dataports and related products, DSUs and other CPE products have
also become important sources of OEM sales. Such products are being supplied to
manufacturers of video delivery equipment, LAN interconnect equipment and
information services providers. OEM products are generally customized versions
of the Company's Telco and CPE products. The selling price for the OEM product
family generally ranges from $100 to $500 per unit.
International Markets
The Company serves its international markets through a combination of
direct sales and distribution agreements. The Company has formed, and will
continue to pursue, international distribution arrangements built upon core
products and technology developed by the Company in an effort to further its
penetration into international markets. In addition, the Company has focused on
developing E-1 technology which, though similar to T-1 technology, has a
transmission rate of 2.048 Mbit/sec and is the predominant standard for data
transmission outside of North America. The Company has tested, received orders
for and shipped HDSL products incorporating E-1 technology. The Company
anticipates that it will develop additional products incorporating E-1
technology. ISDN development work is underway to incorporate compatibility with
European ISDN standards and specific in-country network interface requirements.
Although the Company has not yet fully developed its potential in its
international markets and related sales have been modest (7.4% of total sales in
1996), the Company believes that international markets present a significant
opportunity for growth.
Research and Product Development
The markets for the Company's products are characterized by rapidly
changing technology, evolving industry standards and continuing improvements in
telecommunications service offerings of common carriers. If technologies or
standards applicable to the Company's products, or common carrier service
offerings based on the Company's products, become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be adversely
affected. Moreover, the introduction of products embodying new technology, the
emergence of new industry standards or changes in common carrier service
offerings could adversely affect the Company's ability to sell its products. For
instance, a large number of the Company's products have, to date, been designed
to apply primarily to the delivery of digital communications over copper
wireline in the Local Loop. While the Company has competed favorably by
developing a high performance line of products, it expects that the increasing
deployment of fiber-optic cable, coaxial cable and wireless transmission in
11
the Local Loop (each of which uses a significantly different process of
delivery) will require that it develop new products to meet the demands of these
markets when such markets are sufficiently established. The Company's sales and
profitability in the past have resulted to a significant extent from its ability
to anticipate changes in technology, industry standards and common carrier
service offerings, and to develop and introduce new and enhanced products. The
Company's continued ability to adapt will be a significant factor in maintaining
or improving its competitive position and its prospects for growth. Therefore,
the Company will continue to make significant investments in product
development, although there can be no assurance that the Company will have the
resources necessary to continue this strategy successfully or to otherwise
respond appropriately to changing technology, industry standards and common
carrier service offerings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1996 Annual
Report to Stockholders.
As of December 31, 1996, the Company's product development programs were
carried out by 194 engineers and engineering support personnel, comprising
approximately 21.7% of the Company's employees. To date, all product development
expenses have been charged to operations as incurred. From time to time,
development programs are conducted by other firms under contract with the
Company, and related costs are also charged to operations as incurred. During
1994, 1995 and 1996, product development expenditures totaled $13,774,038,
$19,131,457 and $24,647,425 respectively. Because the Company's product
development activities are an important part of its strategy and because of
rapidly changing technology and evolving industry standards, the Company expects
to spend more in product development activities in 1997 than it did in 1996.
The Company's product development personnel are organized into teams,
each of which is effectively dedicated to a specific product line or lines.
However, because the Company services each of the Telco, CPE and OEM markets,
and because all of the products in each of these markets share certain
similarities, the benefits of the Company's product development efforts
generally are not confined to a particular market, but can be leveraged to the
Company's advantage in all of its markets. As of December 31, 1996, product
development teams were assigned to the following product lines: Loop products,
Network products, HDSL products, DSU and Frame Relay products, T-1 multiplexer
products, ISDN Telco products, ISDN CPE products, strategic products and
extended range products. In addition, engineering services and advanced
technology groups provide support for all the product development teams. Each
product development team is generally responsible for sustaining technical
support of existing products, improving the cost or manufacturing of products,
conceiving new products in cooperation with other groups within the Company and
adapting standard products or technology under supply contracts to other firms.
In particular, each product development team is charged with implementing the
Company's engineering strategy of reducing product costs for each succeeding
generation of the Company's products in an effort to be a low cost, high quality
provider in the industry, without compromising functionality or serviceability.
This strategy has involved setting a price point for the next generation of any
given product with the aim of meeting that price point through innovative
engineering. The key to this strategy is choosing an initial architecture for
each product that enables engineering innovations to result in future cost
reductions. Successful execution of this strategy also requires that the Company
continue to attract and recruit outstanding engineers, and the continued success
of the Company's recruiting program at Southeastern universities is critical to
this effort.
The product development teams are supported by a research group that
provides guidance in applicable digital signal processing technologies, computer
simulation and modeling, CAD/CAM tool sets, custom semiconductor design and
technological forecasting. As product and market opportunities arise, the
organizational structure may be adjusted accordingly. The Company's development
process
12
is conducted in accordance with ISO 9001, which is the international standard
for quality management systems for design, manufacturing and service.
The Company believes that its success in the past has been dependent
upon the ability of its engineering team to establish and maintain a position of
product and technological leadership, and its success in the future will be
equally dependent upon the evolution of new forms of existing products and the
development of new products fulfilling the needs of current and future
customers. Therefore, the Company will continue to make significant investments
in product development.
Customers
The Company's customer base includes each of the seven RBOCs and most of
the major independent domestic Telcos. The major customers of the Company
include:
Alcatel Hong Kong Telecom
Alltel Corporation Nordata dba Datatech
Ameritech Corp. Northern Telcom Inc.
AT&T NYNEX Corp.
Bell Atlantic Network Services Pacific Bell
BellSouth Corp. R Tech.
Bloomberg L.P. Siemens Corp.
Charles Industries, Ltd. Southwestern Bell Corp.
Desert Palms International Co. Sprint Corp.
GTE Corp. US West, Inc.
Historically, a large percentage of the Company's sales have been to the
seven RBOCs (36.0% in 1996) and other Telcos (24.0% in 1996). GTE and Sprint
accounted for 16.3% and 10.2%, respectively, of the Company's total sales in
1996. No other customer accounted for 10% or more of the Company's sales in
1996.
A supplier such as the Company must first obtain product approvals from
an RBOC or other Telco to sell its products to such RBOC or Telco. The Company,
therefore, is involved in a constant process of submitting for approval
succeeding generations of products as well as products that deploy new
technology or respond to a new technology demand from an RBOC or other Telco.
While the Company has been successful in the past in obtaining such approvals,
there can be no assurance that such approvals or that ensuing sales of such
products will continue to occur. Further, any attempt by an RBOC or other Telco
to seek out additional or alternative suppliers or to undertake, as permitted
under applicable regulations, the production of such products internally could
have a material adverse effect on the Company's operating results. See
"Government Regulation."
Marketing, Sales and Distribution
As of December 31, 1996, the Company's marketing, sales and distribution
programs were conducted by 160 employees. The Company sells its Telco products
in the United States directly to the Telcos through a field sales organization
based in 19 locations in the United States and Canada, and it sells its Telco
products internationally under various distribution arrangements with a
geographically dispersed set of distributors. The Company sells its CPE
products, both domestically and internationally, through a network of resellers.
OEM products are sold directly to other firms, both domestically and
internationally, through various supply and product support arrangements. The
13
Company has formed, and will continue to pursue, international distribution
arrangements built upon core products and technology developed by the Company in
an effort to further its penetration into international markets. Although the
international market channel has not yet been fully developed and related
revenue has been modest, the Company believes that international markets present
a significant opportunity for growth, and the Company continues to focus effort
on positioning itself to take advantage of such opportunity.
Sales to Telcos involve protracted product qualification and
standardization processes that can extend for several months or years.
Subsequent orders, if any, are generally placed under single or multi-year
supply agreements that are generally not subject to minimum volume commitments.
Telcos generally prefer having two or more suppliers of most products, so
individual orders are generally subject to competition based on some combination
of price, delivery and other terms. OEM products are generally sold to other
manufacturers under contracts negotiated prior to commencement of required
engineering activities. CPE products are sold under both exclusive and non-
exclusive distribution agreements.
The Company's field sales organizations and distributors receive support
from headquarters-based marketing, sales and customer support groups. Under
certain circumstances, other headquarters personnel may become involved in sales
and other activities. The Company believes that its success in the past has been
dependent to a significant degree upon the ability of its sales and distribution
teams to compete effectively in a highly competitive environment that includes
firms with greater financial resources and more experience than the Company. The
Company's success in the future will depend in part upon its ability to attract
and retain qualified sales and marketing personnel who can compete and succeed
in this environment.
Customer Service and Support
The Company maintains 24-hour, 7 day a week telephone support for all of
its customers as customers often demand an immediate response to problems with
installed products or with plans for new installations. The Company provides on-
site support in those circumstances in which problems cannot otherwise be
resolved. It has generally been the Company's policy to follow through with
problem resolutions even after it is established that the Company's products are
not the source of the difficulty. The Company provides direct installation and
service of its products in North America utilizing its own resources or
resources available under a nationwide services contract with TSS (formerly
General Electric) for installation and service. International Business Machines
Corporation ("IBM") purchased General Electric's service division in 1995 and
General Electric assigned the Company's service contract to IBM under the terms
of their sale agreement. The Company has approved the assignment. The Company
also provides training to its customers (on both a paid and complimentary basis)
relative to installation, operation and maintenance of the Company's products.
Substantially all of the Company's products carry a full ten year
return-to-factory warranty. Warranty returns to date have been relatively
insignificant (1.1%). The Company believes that its low return rate is the
direct result of its commitment to a rigorous product quality program that has
garnered it special recognition by several key customers. The Company also
offers annual maintenance agreements to its customers which provide that, in
exchange for an annual fee, the Company will provide on-site service, within a
specified time, in response to any reported difficulties in the use or
performance of the Company's products.
14
Manufacturing
The principal steps in the manufacturing process are the purchase and
management of materials, assembly, testing, final inspection, packing and
shipping. The Company purchases parts and components for assembly of all its
products from a large number of suppliers through a worldwide sourcing program.
However, certain key components used in the Company's products are currently
available from only one source, and other key components are available from only
a limited number of sources. In the past, the Company has experienced delays in
the receipt of certain of its key components, which have resulted in delays in
related product deliveries. The Company attempts to manage such risks through
developing alternative sources, through engineering efforts designed to obviate
the necessity of certain components, and by maintaining quality relationships
and close personal contact with each of its suppliers. However, there can be no
assurance that delays in deliveries of key components (including particularly
integrated circuits as discussed in greater detail below) and consequent delays
in 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 reductions in product
shipments which, in turn, could have a material adverse effect on the Company's
customer relationships and operating results.
The Company relies on subcontractors in the United States, Mexico and
Taiwan for assembly of printed circuit board assemblies, subassemblies, chassis,
enclosures and equipment shelves. The Company subcontracts the assembly of a
significant portion of its lower priced products to a company in Mexico. Such
assembly typically can be done by subcontractors at a lower cost than if the
Company assembled such items internally, which furthers the Company's goal of
being a low cost, high quality provider in the industry. Subcontract assembly
operations do, however, contribute significantly to production cycle times, but
the Company believes it can respond more rapidly to uncertainties in incoming
order rates by selecting assembly subcontractors having significant reserve
capacity. This reliance on third-party subcontractors for the assembly of its
products involves several risks, including the unavailability of or
interruptions in access to certain process technologies and reduced control over
product quality, delivery schedules, manufacturing yields and costs. These risks
may be exacerbated by economic or political uncertainties or by natural
disasters in foreign countries in which the Company's subcontractors may be
located. The Company currently does not undertake any foreign exchange risks as
it conducts all transactions with foreign vendors or customers in U.S. dollars.
The Company is heavily dependent on five subcontractors. In 1996, one of
these subcontractors, Comptronix Corporation filed for protection under Chapter
11 bankruptcy laws and its assets were subsequently acquired by Sanmina
Corporation. To date, the Company believes that it has successfully managed the
risks of such dependence on these subcontractors through a variety of efforts,
which include seeking and developing alternative subcontractors while
maintaining existing relationships. However, there can be no assurance that
delays in product deliveries may not occur in the future because of shortages
resulting from this limited number of subcontractors or from the financial or
other difficulties of such parties (including Sanmina). The inability to develop
alternative subcontractors 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.
While the Company believes that alternative sources of supply or alternative
subcontractors could be developed if necessary, material delays or interruption
of supply might, nevertheless, arise as a consequence of required retraining and
other activities related to establishing and developing a new supply or
subcontractor relationship and such material delays may have a material adverse
effect on the Company's business and operating results.
15
Basically, final testing and shipment of products to customers occurs in
the Company's Huntsville, Alabama facilities. The Company's facilities are
certified pursuant to ISO 9001 and certain other telephone company standards,
including those relating to emission of electromagnetic energy and safety
specifications.
Backlog and Inventory
A substantial portion of the Company's shipments in any fiscal period
relate to orders received in that period and firm purchase orders released in
that fiscal period by customers under agreements containing non-binding purchase
commitments. Further, a significant percentage of orders require delivery within
48 hours. These factors result in very little order backlog. The Company
believes that because a substantial portion of customer orders are filled within
the fiscal quarter of receipt, the Company's backlog is not a meaningful
indicator of actual sales for any succeeding period. To meet this demand, the
Company maintains a substantial finished goods inventory. The Company's
inventory represented an acceptable range of 29% to 41% of working capital
during 1996. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" in the Company's
1996 Annual Report of Shareholders.
The Company's practice of maintaining sufficient inventory levels to
assure prompt delivery of the Company's products increases the amount of
inventory which may become obsolete. The provision for inventory losses as a
percentage of sales was 1.5% in 1996. The obsolescence of such inventory may
have an adverse effect on the Company's business and operating results.
Competition
The markets for the Company's products are intensely competitive. With
the development of the worldwide communications market and the growing demand
for related equipment, additional manufacturers have entered the markets in
recent years to offer products in competition with the Company. Additionally,
certain companies have, in recent years, developed the ability to deliver fiber-
optic cable, coaxial cable and wireless transmission to certain office centers
and other end-users. Competition would further increase if new companies enter
the market or existing competitors expand their product lines. For instance,
legislation has been enacted that lifts the restrictions which previously
prevented the RBOCs from manufacturing telecommunications equipment. The RBOCs,
which in the aggregate are the Company's largest customers, may increasingly
become competitors of the Company in the markets served by the Company. See
"Government Regulation" below.
The Company competes for customers on the basis of performance in
relation to price, product features, adherence to standards, quality,
reliability, development capabilities, availability and support. Some of the
Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing, and personnel resources than the
Company.
With respect to Telco sales, product quality and availability and an
established reputation for customer service are important competitive factors
that can affect the Company's ability to have its products accepted and approved
by the individual Telcos. The Company's Telco competitors include large
established firms such as ADC Telecommunications, Inc., Lucent Technologies,
Inc., PairGain Technologies, Inc., Pulse Communications, Inc. (a subsidiary of
Hubbell Incorporated), Tellabs, Inc. and Teltrend, Inc., as well as smaller,
specialized firms such as Conklin Instrument Corporation and Integrated Network
Corporation.
16
With the introduction of its CPE product lines, the Company entered a
market segment with entrenched competitors. Among the significant competitors
for standard rate DSU market share are Motorola, Inc., Paradyne Corporation and
Racal-Datacom, Incorporated. Market segment leaders for TSU products include ADC
KENTROX, a subsidiary of ADC Telecommunications, Inc., Paradyne Corp., Digital
Link Corporation and Verilink Corporation. The Company's T-1 multiplexer product
line's key competitors include Newbridge Networks Corporation, Pulse
Communications, Inc. and TELCO Systems, Inc. The Company generally competes with
the same firms in sales of its OEM products as it does in sales of Telco and CPE
products. An increase in competition could reduce the Company's gross profit
margins, may require increased spending by the Company on product development
and sales and marketing, and may otherwise adversely affect the Company's
business.
Government Regulation
The telecommunications industry is subject to regulation in the United
States and other countries. Federal and state regulatory agencies, including the
Federal Communications Commission (the "FCC") and the various state public
utility commissions and public service commissions, regulate most of the
Company's domestic Telco customers. While such regulation does not typically
affect the Company directly, the effects of such regulation on the Company's
customers may, in turn, adversely impact the Company's business and operating
results. For instance, the sale of the Company's products may be affected by the
imposition upon certain of the Company's customers of common carrier tariffs and
the taxation of telecommunications services. In addition, regulatory policies
affecting the availability of common carrier services (such as high speed
digital transmission lines) and other terms on which common carriers conduct
their business may impede the Company's penetration of certain markets. These
policies are under continuous review and are subject to change. Governmental
authorities also have promulgated regulations which, among other things, set
installation and equipment standards for private telecommunications systems and
require that all newly installed hardware be registered and meet certain
governmental standards.
Other governmental authorities, such as federal and state courts and the
United States Department of Justice, have been in the past, and will likely
continue in the future to be, a major force in shaping the manner in which the
telecommunications business is conducted and telecommunication services are
provided. For instance, the United States telecommunications industry was also
significantly impacted by the landmark Modification of Final Judgment (the
"MFJ"), which governed the structure of the 1984 divestiture by AT&T of its
local operating telephone company subsidiaries (the Divestiture"). The
Divestiture increased competition in the U.S. telecommunications industry by (i)
eliminating the monopoly power which AT&T had enjoyed for years in most U.S.
local and long distance telephone service and equipment markets, and (ii)
prohibiting the RBOCs which emerged from the Divestiture from engaging in
certain lines of business, including the provision of long distance services and
the manufacture of telecommunications equipment. The terms of the Divestiture
provide, however, for the removal of the line of business prohibitions if the
rationale therefor becomes outmoded by technical developments or changes in
competitive conditions.
The Telecommunications Act of 1996 covers a broad range of topics that
will dramatically affect the telecommunications industry. RBOCs now will be
allowed to manufacture equipment three years after they are eligible to enter
the long distance business. The RBOCs, which are among the Company's largest
customers, may increasingly become competitors of the Company in the markets it
serves. The Telecommunications Act of 1996 also provides for RBOCs to enter long
distance markets under certain conditions and long distance carriers may now
provide local service.
17
The Company's business and operating results may also be adversely
affected by the imposition of certain tariffs, duties and other import
restrictions on components which the Company obtains from non-domestic
suppliers, or by the imposition of export restrictions on products which the
Company sells internationally.
Proprietary Rights
The name "ADTRAN" and the Company's corporate logo are registered
trademarks of the Company. A number of the Company's product identifiers and
names are also registered. The Company also claims rights to a number of
unregistered trademarks. The Company has obtained patents on thirteen inventions
relating to its products and has several patent applications pending. The
Company will seek additional patents from time to time related to its research
and development activities. The Company protects its trademarks, patents,
inventions, trade secrets, and other proprietary rights by contract, trademark,
copyright and patent registration, and internal security. Management believes,
however, that the Company's competitive success will not depend on the ownership
of intellectual property rights, but primarily on the innovative skills,
technical competence and marketing abilities of the Company's personnel. The
telecommunications industry, nevertheless, is characterized by the existence of
an ever increasing number of patents and frequent litigation based on
allegations of patent infringement. From time to time, third parties may assert
exclusive patent, copyright and other intellectual property rights to
technologies that are important to the Company. While there are no outstanding
infringement lawsuits pending by or against the Company, there can be no
assurance that third parties will not assert litigation claims against the
Company in the future, that assertions by such parties will not result in costly
litigation, or that the Company would prevail in any such litigation or be able
to license any valid and infringed patents from third parties on commercially
reasonable terms. Any infringement claim or other litigation against or by the
Company could have a material adverse effect on the Company's business and
operating results.
Employees
As of December 31, 1996, the Company had 894 full-time employees in the
United States and two in Canada. Of the Company's total employees, 212 were in
sales, marketing, distribution and service, 194 were in research and
development, 379 were in manufacturing, and 111 were in administration. None of
the Company's employees is represented by a collective bargaining agreement nor
has the Company ever experienced any work stoppage. Management believes the
Company's relationship with its employees is good.
ITEM 2. PROPERTIES
- -------------------
The Company's headquarters and principal administrative, engineering and
manufacturing facilities are located in an office building containing 440,000
square feet located on approximately 22 acres of land in Huntsville, Alabama.
The Company also temporarily leases 65,480 additional square feet to accommodate
manufacturing and engineering activities. Plans are being made to expand its
facilities in Huntsville by approximately 600,000 square feet (to accommodate a
projected total of 3,000 employees) over the next three years at a cost of up to
$131,000,000 of which $36,255,906 had been incurred at December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Companay's 1996 Annual
Report to Stockholders and Note 6 of Notes to Financial Statements.
18
The Company also maintains 19 sales and service facilities, 17 located
within the United States and two in Canada, in the following locations:
Huntsville, AL, Irvine, CA, San Francisco, CA, Denver, CO, Hartford, CT,
Atlanta, GA, Chicago, IL, Bativia, IL, Darien, IL, Orland Park, IL, Leakwood,
KS, Trenton, NJ, New York, NY, Cleveland, OH, Philadelphia, PA, Irving, TX,
Washington, DC and Ontario and Quebec, Canada. In addition to the leases in
Huntsville, AL, the facilities in Leakwood, KS, Irvine, CA, Denver, CO, Atlanta,
GA, Irving, TX and Philadelphia, PA are leased under leases which expire at
various times between 1995 and 2000. See Note 9 of Notes to Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company has been involved from time to time in litigation in the
normal course of its business. The Company is not aware of any pending or
threatened litigation matters which could have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matter was submitted by the Company to vote of security holders
during the fiscal quarter ended December 31, 1996.
Item 4(A). Executive Officers of the Registrant
Set forth below, in accordance with General Instruction G(3) of Form 10-
K and Instruction 3 of Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company. Unless otherwise indicated, the
information set forth is as of March 14, 1997.
MARK C. SMITH - AGE 56
Mr. Smith is one of the co-founders of the Company.
1995 to present Chairman of the Board and Chief Executive Officer
1986 - 1995 Chairman of the Board, Chief Executive Officer
and President
LONNIE S. McMILLIAN - AGE 68
Mr. McMillian is one of the co-founders of the Company.
1996 to present Senior Vice President, Secretary and Director
1986 - 1996 Vice President - Engineering, Secretary,
Treasurer and Director
HOWARD A. THRAILKILL - AGE 58
1995 to present President, Chief Operating Officer and Director
October 1995 Executive Vice President, Chief Operating Officer
and Director
1992 - 1995 Executive Vice President, Chief Operating Officer
1988 - 1991 President and Chief Operating Officer of
Floating Point Systems, Inc.
JOHN R. COOPER - AGE 49
1996 to present Vice President - Finance and Chief Financial
Officer
1995 - 1996 President, Sauty Group
1991 - 1995 Partner, Coopers & Lybrand L.L.P.
DANNY J. WINDHAM - AGE 37
1995 to present Vice President - CPE Marketing
1994 - 1995 Director of Marketing
1989 - 1994 Manager of Product Management
Mr. Windham, a co-founder of Processing Telecom Technologies (PTT),
a subsidiary of ADTRAN, joined the Company in October 1989, and assumed
responsibility for marketing activities for ADTRAN and PTT.
THOMAS R. STANTON - AGE 32
1995 to present Vice President - Telco Marketing
1994 - 1995 Sr. Director, Marketing, E.F. Johnson Company
1993-1994 Director, Marketing, E.F. Johnson Company
1990-1992 Director, Systems Programs, E.F. Johnson Company
IRWIN O. GOLDSTEIN - AGE 63
1996 to present Vice President - Admimistration
1989 - 1996 Vice President - Finance and Administration and
Chief Financial Officer
19
PETER O. BRACKETT - AGE 55
1996 to present Vice President - Techmology
1992 - 1996 Research Manager, Advanced Data Networking,
Bellsouth
1986 - 1992 Division Vice President, Product Line,
Racal-Datacom
M. MELVIN BRUCE - AGE 56
1996 to present Vice President - Engineering
1989 - 1996 Vice President, Research and Design, TCI,
ROBERT A. FREDRICKSON
1996 to present Vice President - Telco Sales
1996 Vice President, Broadband Business Development,
DSC Communications Corp.
1991 - 1996 Senior Director, Access Products, DSC
Communications Corp.
STEVEN L. HARVEY - AGE 36
1996 to present Vice President - CPE Sales
1995 - 1996 Executive Vice President, Data Processing
Sciences
1991 - 1995 Vice President, Data Processing Sciences
JUDE T. PANETTA - AGE 37
1994 to present Vice President - Manufacturing
1989 - 1994 Director of Manufacturing, Exide Electronics
GREGORY A. PETERS - AGE 36
1996 to present Vice President - International Sales
1993 - 1996 Executive Vice President and Chief Operating
Officer, Connell Communications
1991 - 1992 Managing Director, Action Consulting
International
There are no family relationships among the directors or executive
officers.
All officers are elected annually by and serve at the pleasure of the
Board of Directors of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- ------------------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
Information relating to the market for holders of and dividends on the
Company's Common Stock is set forth under the caption "Market for the
Registrant's Common Stock and Related Stockholder Matters" on page 17 of the
Company's 1996 Annual Report to Stockholders. Such information is incorporated
herein by reference. Portions of the 1996 Annual Report to Stockholders are
filed as Exhibit 13 to this report.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Selected financial data for the Company for each year of the five-year
period ended December 31, 1996 are set forth under the caption "Selected
Financial Data" on page 18 of the Company's 1996 Annual Report to Stockholders
referred to in Item 5 above. Such five-year selected financial data are
incorporated herein by reference.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
A discussion of the Company's results of operations and financial
condition is set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 19 through 24 of the
Company's 1996 Annual Report to Stockholders referred to in Item 5 above. Such
discussion is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following financial statements of the Company, which are set forth
on pages 25 through 39 of the Company's 1996 Annual Report to Stockholders
referred to in Item 5 above, are incorporated herein by reference:
Balance Sheets as of December 31, 1995 and 1996.
Statements of Income for the years ended December 31, 1994, 1995 and
1996.
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996.
Statement of Cash Flows for the years ended December 31, 1994, 1995 and
1996.
Notes to Financial Statements.
Independent Auditor's Report.
The Supplementary financial information required by Item 302 of
Regulation S-K is set forth in Note 13 of Notes to Financial Statements in the
Company's 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- --------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
- ------------------------
None
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information relating to nominees for director of the Company is set
forth under the caption "Election of Directors-Information Regarding Nominees
for Director" in the Proxy Statement for the Annual Meeting of Stockholders to
be held on April 23, 1997. Such information is incorporated herein by reference.
The definitive Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the Company's fiscal year end. Information
relating to the executive officers of the Company, pursuant to Instruction 3 of
Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, is set
forth at Part I, Item 4(A) of this report under the caption "Executive Officers
of the Registrant." Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information relating to executive compensation is set forth under the
caption "Executive Compensation" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information relating to ownership of Common Stock of the Company by
certain persons is set forth under the caption "Share Ownership of Principal
Stockholders and Management" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information relating to existing or proposed relationships or
transactions between the Company and any affiliate of the Company is set forth
under the caption "Compensation Committee Interlocks and Insider Participation"
in the Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) Documents Filed as Part of This Report.
1. Financial Statements
The consolidated financial statements of the Company and the
related report of Independent Auditors thereon which are
required to be filed as part of this report are included in
the Company's 1996 Annual Report and are incorporated by
reference in Item 8 hereof.
2. Financial Statement Schedules
Schedule II
3. Exhibits
The following exhibits are filed with or incorporated by
reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any
exhibit upon request to Irwin O. Goldstein, Vice President -
Administration, ADTRAN, Inc., P.O. Box 140000, 901 Explorer
Boulevard, Huntsville, Alabama 35814-4000. There is a charge
of $.50 perpage to cover expenses for copying and mailing.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No. 33-81062
(the "Form S-1 Registration Statement")).
3.2 Bylaws, as amended (Exhibit 3.2 to the Form S-1 Registration
Statement).
10.1 Documents relative to the $50,000,000 Taxable Revenue Bond,
Series 1995
(ADTRAN, Inc.Project) issued by the State Industrial
Development Authority, consisting of the following
(Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (the "1994 Form 10-
K")):
(a) Financing Agreement dated January 1, 1995, among the
State Industrial Development Authority, a public
corporation organized under the laws of the State of
Alabama (the "Issuer"), the Company and AmSouth Bank of
23
Alabama, a state banking corporation under the laws of
the State of Alabama;
(b) Loan Agreement dated January 1, 1995 (the "Loan
Agreement"), between the Issuer and the Company;
(c) Resolution of the Issuer authorizing the issuance of the
$50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN,
Inc. Project);
(d) Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc.
Project);
(e) Resolution of the Company authorizing the Financing
Agreement, the Loan Agreement and the Note;
(f) Specimen Note from the Company to AmSouth Bank of
Alabama, dated January 13, 1995;
(g) Pledge Agreement dated January 13, 1995 between AmSouth
Bank of Alabama and the Company;
*(h) Eighth Amended and Restated Closing Agreement between the
Company and AmSouth Bank of Alabama dated March 24, 1997
and effective January 13, 1995; and
(i) Preliminary Agreement dated November 16, 1994 between the
Issuer and the Company.
*10.2 Master Note for Business and Commercial Loans, dated June 1,
1996 and in the original principal amount of $10,000,000 by
and between the Company and AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among
the Company and the stockholders of the Company prior to the
Company's initial public offering of Common Stock (Exhibit
10.5 to the 1994 Form 10-K).
10.4 Management Contracts and Compensation Plans:
(a) 1996 Employees Stock Incentive Plan (Exhibit 10.4 to 1995
Form 10-K).
(b) 1995 Directors Stock Incentive Plan (Exhibit 10.4 to 1995
Form 10-K).
*11 Statement regarding Computation of Per Share Earnings.
*13 1996 Annual Report to Security Holders on Form 10-K.
*23 Consent of Coopers & Lybrand L.L.P.
*24 Powers of Attorney
*27 Article 5 Financial Data Schedule
- ---------------
*Filed herewith
24
(b) Reports on Form 8-K. The following Current Reports on Form 8-K
were filed by the Company during the year ended December 31,
1996:
Financial
Date of Report Form 8-K Item No. Description Statements
-------------- ----------------- ----------- ----------
Filed
-----
9/11/96 7(c) Press release dated August 12, 1996 None
announcing the appointment of John R.
Cooper as Vice President and Chief
Financial Officer of Adtran, Inc.
Press release dated August 29, None
1996 announcing the appointment
of Dr. Melvin Bruce as Vice
President of Engineering of
Adtran, Inc.
Press release dated September 9, 1996 None
announcing the appointment of Dr. Peter
O. Brackett as Vice President of
Technology of Adtran, Inc.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
___________
*Filed herewith
25
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 on March 26, 1997.
ADTRAN, Inc.
(Registrant)
By: /s/ John R. Cooper
------------------------------------
John R. Cooper
Vice President - Finance and Chief
Financial Officer
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 and in the capacities indicated on March 26, 1997
Signature Title
--------- -----
/s/ Mark C. Smith Chairman of the Board, Chief
- ------------------------- Executive Officer and Director
Mark C. Smith
Howard A. Thrailkill* President, Chief Operating Officer
- ------------------------- and Director
Howard A. Thrailkill
Lonnie S. McMillian* Sr. Vice President, Secretary,
- ------------------------- and Director
Lonnie S. McMillian
O. Gene Gabbard* Director
- -------------------------
O. Gene Gabbard
William L. Marks* Director
- -------------------------
William L. Marks
Roy J. Nichols* Director
- -------------------------
Roy J. Nichols
James L. North* Director
- -------------------------
James L. North
/s/ John R. Cooper Vice President-Finance and
- ------------------------- Chief Financial Officer
John R. Cooper
*By: /s/Mark C. Smith
---------------------
Mark C. Smith
as Attorney-in-Fact
26
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the financial statement of ADTRAN, Inc. has been incorporated by
reference in this Form 10-K from the 1996 Annual Report to Shareholders of
ADTRAN, Inc. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed in the index
in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Birmingham, Alabama
January 14, 1997
SCHEDULE II
ADTRAN, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts $544,526 $430,789 $102,591 $ 872,724
Inventory Reserve $660,151 $222,881 $ 883,032
Warranty Liability $523,027 $503,129 $1,026,156
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts $450,000 $178,952 $ 84,426 $ 544,526
Inventory Reserve $497,825 $162,326 $ 660,151
Warranty Liability $280,806 $242,221 $ 523,027
YEAR ENDED DECEMBER 31, 1994
Allowance for Doubtful Accounts $150,000 $300,000 $ 450,000
Inventory Reserve $ 90,000 $407,825 $ 497,825
Warranty Liability $ 24,519 $256,287 $ 280,806
ADTRAN, INC.
INDEX OF EXHIBITS
The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration
statement or report is identified in parentheses.
Exhibit Page
Number Description Number
- ------ ----------- ------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to the Company's Registration
Statement on Form S-1, No. 33-81062 (the "Form S-1 Registration Statement")).
3.2 Bylaws, as amended (Exhibit 3.2 to the Form S-1 Registration Statement).
10.1 Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995
(ADTRAN, Inc. Project) issued by the State Industrial Development Authority,
consisting of the following (Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")):
(a) Financing Agreement dated January 1, 1995, among the State
Industrial Development Authority, a public corporation organized
under the laws of the State of Alabama (the "Issuer"), the Company
and AmSouth Bank of Alabama, a state banking corporation under the
laws of the State of Alabama;
(b) Loan Agreement dated January 1, 1995 (the "Loan Agreement"),
between the Issuer and the Company;
(c) Resolution of the Issuer authorizing the issuance of the $50,000,000
Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project);
(d) Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project);
(e) Resolution of the Company authorizing the Financing Agreement, the
Loan Agreement and the Note;
(f) Specimen Note from the Company to AmSouth Bank of Alabama,
dated January 13, 1995;
(g) Pledge Agreement dated January 13, 1995 between Amsouth Bank of
Alabama and the Company;
E-1
*(h) Eighth Amended and Restated Closing Agreement between the Company
and AmSouth Bank of Alabama dated March 24, 1997 and effective
January 13, 1995; and
(i) Preliminary Agreement dated November 16, 1994 between the Issuer
and the Company.
*10.2 Master Note for Business and Commercial Loans, dated June 1, 1996 and in
the original principal amount of $10,000,000 by and between the Company and
AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among the Company
and the stockholders of the Company prior to the Company's initial public
offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K).
10.4 Management Contracts and Compensation Plans:
(a) 1996 Employees Incentive Plan (Exhibit 10.4 to 1995 Form 10-K).
(b) 1995 Directors Stock Incentive Plan (Exhibit 10.4 to 1995 Form 10-K).
*11 Statement regarding Computation of Per Share Earnings.
*13 1996 Annual Report to Security Holders on Form 10-K.
*23 Consent of Coopers & Lybrand L.L.P.
*24 Powers of Attorney.
*27 Financial Data Schedule.
__________
*Filed herewith
E-2