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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.
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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
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PART I
ITEM 1. BUSINESS
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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
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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
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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.
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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.
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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.
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* 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
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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
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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
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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.
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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
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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.
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<PAGE>
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
<PAGE>
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
<PAGE>
(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:
<TABLE>
<CAPTION>
Financial
Date of Report Form 8-K Item No. Description Statements
-------------- ----------------- ----------- ----------
Filed
-----
<S> <C> <C> <C>
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.
</TABLE>
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
___________
*Filed herewith
25
<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 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
<PAGE>
[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
<PAGE>
SCHEDULE II
ADTRAN, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
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;
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*(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.
</TABLE>
__________
*Filed herewith
E-2
<PAGE>
EIGHTH AMENDED AND RESTATED CLOSING AGREEMENT
---------------------------------------------
This Agreement is made as of January 13, 1995 by ADTRAN, INC. ("ADTRAN")
and AMSOUTH BANK OF ALABAMA ("AmSouth") in connection with the execution and
delivery of that certain Financing Agreement dated January 1, 1995, (the
"Financing Agreement") between the State Industrial Development Authority (the
"Authority"), ADTRAN and AmSouth, as Bondholder. Capitalized terms not
otherwise defined in this Agreement shall have the meaning assigned in the
Financing Agreement.
RECITALS
On January 13, 1995 ADTRAN and AmSouth entered into a Closing Agreement in
connection with the execution and delivery of the Financing Agreement and the
consummation of the transactions contemplated therein. On February 13, 1995,
May 15, 1995, August 11, 1995, December 9, 1995, March 8, 1996, November 12,
1996 and February 4, 1997, the parties amended the period of time for
satisfaction of the conditions of the Closing Agreement and entered into the
First Amended and Restated Closing Agreement, the Second Amended and Restated
Closing Agreement, the Third Amended and Restated Closing Agreement, the Fourth
Amended and Restated Closing Agreement, the Fifth Amended and Restated Closing
Agreement, the Sixth Amended and Restated Closing Agreement, and the Seventh
Amended and Restated Closing Agreement, respectively, for such purpose. The
parties wish to further amend the period of time for satisfaction of the
conditions of the Closing Agreement and have now entered into this Eighth
Amended and Restated Closing Agreement for such purpose. Accordingly, the
Closing Agreement is hereby amended and restated as follows:
1. ADTRAN has requested that AmSouth purchase the Bond on this date and
make an initial Advance of $20,000,000 without selling a 100% participation
interest to Madison County Investment Company, Inc. ("Madison"), as contemplated
by the Financing Agreement and that certain Participation Agreement dated
January 1, 1995, (the "Participation Agreement") to be executed by AmSouth and
Madison. A copy of the Participation Agreement is attached as Exhibit A.
2. AmSouth shall purchase and hold the Bond for 868 days (that is, until
May 30, 1997) without selling such a participation interest to Madison,
provided, however, that:
(a) no additional Advances shall be made during such 868-day period,
(b) the proceeds of such Advance shall be pledge to AmSouth as
security for payment of the Bond pursuant to a pledge agreement (the
"Pledge Agreement") to be executed by ADTRAN in favor of AmSouth.
<PAGE>
(c) Madison must enter into the Participation Agreement within such
868-day period;
(d) ADTRAN must execute and deliver the letter agreement attached
as Exhibit B simultaneously with the delivery of the Participation
Agreement by Madison: and
(e) all other conditions of the Financing Agreement to the initial
Advance must be satisfied within such 868-day period.
3. If all the conditions of paragraph 2 are not satisfied within 868
days, then
(a) ADTRAN shall purchase the Bond from AmSouth upon 30 days' written
demand therefor by AmSouth for an amount equal to the principal amount of
the Bond plus accrued interest to the purchase date; and
(b) AmSouth shall have no further obligation to make Advances under
the Financing Agreement, and ADTRAN shall execute (and shall cause the
Authority to execute) an amendment to the Financing Agreement confirming
such agreement.
4. If ADTRAN fails to purchase the Bond from AmSouth as provided in
paragraph 3 above, then AmSouth may in its discretion, notify the Authority and
ADTRAN that a default exists under this Agreement, and such notice shall also
constitute an Event of Default under the Financing Agreement and the Loan
Agreement, and AmSouth may pursue all remedies available to it under the
Financing Documents and the Pledge Agreement or under applicable law.
5. ADTRAN has applied to AmSouth for credit approval for a loan or loans
in an amount not to exceed $20,000,000, which may be in the form of Advances
pursuant to the Financing Agreement or a loan pursuant to a separate agreement.
AmSouth has given preliminary approval to such application, subject to
documentation acceptable to AmSouth in its sole discretion. If such loan is
funded prior to the date that ADTRAN is required to purchase the Bond pursuant
to this Agreement and if the parties agree that the proceeds of such loan will
be in the form of Advances pursuant to the Financing Agreement, then ADTRAN
shall not be required to purchase the Bond and Madison shall not be required to
enter into the Participation Agreement, but AmSouth shall not be required to
make any further Advances under the Financing Agreement.
<PAGE>
IN WITNESS WHEREOF, ADTRAN and AmSouth have caused this Agreement to be
executed by their duly authorized officers as of March 24, 1997, although this
Agreement is effective as of January 13, 1995 (the date of original execution).
ADTRAN, INC.
By: /s/ Mark C. Smith
--------------------------
Mark C. Smith
Its: Chairman
AMSOUTH BANK OF ALABAMA
By: /s/ Randall E. Phillips
-----------------------------
Randall E. Phillips
Its: Vice President
<PAGE>
[AMSOUTH BANK OF ALABAMA LOGO APPEARS HERE]
MASTER NOTE FOR BUSINESS AND COMMERCIAL LOANS
$10,000,000.00 Huntsville, Alabama
___________________ ___________________
June 1, 1996
___________________
FOR VALUE RECEIVED, the undersigned (hereinafter called, whether one or
more the "Borrower"), jointly and severally (if more than one) promises to pay
to the order of AmSouth Bank of Alabama, its successors and assigns (hereinafter
sometimes called the "Bank" and sometimes, together with any other holder of
this note, called "Holder"), at any office of Holder or at such other place as
Holder may from time to time designate, the sum of TEN MILLION AND 00/1000******
_____________________________
********************************************************************************
________________________________________________________________________________
($10,000,000.00**********), or so much thereof as the Bank has advanced to the
Borrower hereunder (the "Loan"), plus interest from the date hereof until
maturity (whether by acceleration or otherwise) on the outstanding unpaid
principal balance of the Loan, at the rate of [check (1), (2) or (3)]:
[ ] (1)__________% per annum
[ ] (2)__________% per annum in excess of the prime rate of the Bank in
effect from time to time as designated by the Bank (the "Prime
Rate"), with changes in the interest rate on this note caused by
changes in the Prime Rate to take effect on the date the Prime
Rate changes without notice to the Borrower or any other action
by Holder:
[X] (3)30 day LIBOR RATE + 87.5 basis points as listed in the
Wall Street Journal
Interest will be computed on the basis of the actual number of days
elapsed over (check one) [X] an assumed 360-day year, [ ] a 365-(or 366-, if
leap year) day year.
If none of the foregoing provisions for a rate of interest is checked,
the rate of interest payable on the Loan until maturity (whether by acceleration
or otherwise) shall be the Prime Rate of the Bank in effect from time to time,
or such lesser rate as shall be the maximum permitted by law, computed on the
basis of the actual number of days elapsed over an assumed 360-day year.
Notwithstanding anything to the contrary contained in this note, the
amount paid or agreed to be paid as interest on the principal amount of the Loan
shall never exceed the highest lawful rate allowed under applicable law. If at
any time, interest is due to be paid in an amount that exceeds the highest
lawful rate, then the obligation to pay interest hereunder shall be reduced to
the highest lawful rate. If at any time, interest is paid in an amount that is
greater then the highest lawful rate, then the amount that exceeds the highest
lawful rate shall be deemed to have been a prepayment of principal of the Loan
and applied to principal in the manner hereinafter provided, or if the excessive
amount of interest exceeds the unpaid principal balance, the excess shall be
refunded to the Borrower.
The Borrower hereby agrees to repay principal and interest as follows:
The Borrower will pay the principal amount of the Loan (check one and
complete if applicable):
[ ] on demand, [X] 365 days after date, or
[ ] ___________________________________________________________________
___________________________________________________________________
and will pay the interest on the Loan (check one and complete if
applicable):
[ ] at maturity, [X] in monthly installments on the 1st day of each
month, and at maturity
[ ] In quarterly installments on the _____ day of each _________________
______________________, and ________________________________________
and at maturity or
[ ] ____________________________________________________________________
____________________________________________________________________
For purposes of sending periodic billing statements in advance of each
interest payment date, at the Holder's option, the Prime Rate in effect 15 days
prior to each interest payment date shall be deemed to be the Prime Rate that
continues in effect until the date prior to such interest payment date for
purposes of computing the amount of interest payable on such interest payment
date. If the Prime Rate changes during such 15-day period, the difference
between the amount of interest that in fact accrues during such period and the
amount of interest actually paid will be added to or subtracted from, as the
case may be, the interest otherwise payable in preparing the periodic billing
statement for the next succeeding interest payment date. In determining the
amount of interest payable at the final maturity or upon full prepayment of this
Master Note, all changes in the Prime Rate occurring on or prior to the day
before the final maturity date or the date of such full prepayment shall be
taken into account.
If none of the foregoing provisions for the repayment of principal
and/or interest is checked, the principal, if not checked, and interest, if not
checked, due hereunder shall be payable on demand of Holder.
If permitted under applicable law, the Borrower agrees to pay to Holder,
on demand, a late charge. This late charge will be 5% of any installment that is
not paid within 12 days after it is due and will be 5% of the interest portion
of the payment due upon the final maturity date of this note if that payment is
not paid within 12 days after it is due. This late charge will never be less
than $10 nor more than $250 on each payment. This provision shall not be deemed
to excuse a late payment or be deemed a waiver of any other right Holder may
have, including, without limitation, the right to declare the entire unpaid
principal and interest immediately due and payable.
All payments coming due on this Master Note shall be made in cash or
immediately available funds at the Holder's office at which the payment is made.
At its option, the Holder may elect to give the Borrower credit for any payment
made by check or other instrument in accordance with the Holder's availability
schedule in effect from time to time for such items and instruments, which the
Holder will make available to the Borrower on request. Each payment on the
indebtedness evidenced hereby will first reduce charges owed by the Borrower
that are neither principal nor interest. The remainder of each payment will be
applied first to accrued but unpaid interest and then to unpaid principal. Any
partial prepayments of principal will be applied to installments due in the
inverse order of their maturity and no such partial prepayment of principal will
have the effect of postponing, satisfying, reducing, or otherwise affecting any
scheduled installment before the principal of and interest on the Loan is, and
all other charges due hereunder are, paid in full.
This note is a master note, and it is contemplated that the proceeds of
the Loan evidenced hereby will be advanced from time to time to the Borrower by
Holder in installments as requested by the Borrower and agreed to by Holder. It
is further contemplated that any amounts advanced under this note may be prepaid
from time to time by the Borrower and subsequently re-advanced by Holder, so
long as the principal amount outstanding does not exceed the face amount of this
note. By reason of prepayments hereon there may be times when no indebtedness is
owing hereunder, and notwithstanding any such occurrence, this note shall remain
valid and shall be in full force and effect as to each subsequent principal
advance made hereunder. The Holder shall maintain a record (by computer or
otherwise) of all principal advances and repayments under this Master Note and
that record shall be presumed to be correct in the absence of clear and
convincing evidence to the contrary.
Unless the Holder has otherwise agreed in writing, the Holder is not
obligated to make any advances or re-advances hereunder, and all advances and
re-advances shall be made at the option of Holder. This note shall be valid and
enforceable as to the aggregate amount advanced at any time hereunder, whether
or not the full face amount hereof is advanced.
If the Loan is payable on demand, this paragraph is inoperative and is
not applicable otherwise, this paragraph is operative and applies to the Loan in
accordance with its terms. In the event of default in the payment of any one or
more installments of principal or interest which may become due hereunder, when
and as the same fall due, or in the payment of all of principal and interest due
hereunder at maturity, or the failure of any maker, endorser, surety or
guarantor hereof (hereinafter called the "Obligors") to pay when due or perform
any of the Obligations (meaning thereby this note and any and all renewals and
extensions thereof and all other liabilities and indebtedness of the Borrower to
Holder, now existing or hereafter incurred or arising, direct or indirect, and
however incurred) or any part thereof or the failure of any Obligor to pay when
due any other liability to Holder, in the event a default occurs under the terms
of any loan agreement or other instrument (other than this note), document or
paper evidencing, securing, guaranteeing, or executed in connection with all or
any part of the Obligations (hereinafter, together with this note, collectively
called the "Loan Documents"), or in the event Holder shall in good faith deem
itself insecure for any reason, or on the happening of any one or more of said
events. Holder shall have the right at its election and without notice to any
Obligor to declare the Obligations immediately due and payable with interest to
date. No delay in making such election shall be construed to waive the right to
make such election. Holder may note the fact of acceleration hereon without
stating the ground therefor, and whether or not noted hereon such election to
accelerate shall be effective.
In the event of death of, insolvency of, general assignment by, judgment
against, filing of petition in bankruptcy by or against, filing a petition for
the reorganization of, filing of application in any court for receiver for or
issuance of a writ of garnishment or attachment in a suit or action against any
Obligor or against any of the assets of any Obligor, or on the happening of any
one or more of said events, the Obligations shall, without notice to or demand
upon any Obligor, immediately become due and payable with interest to date
unless Holder shall on notice of such event elect to waive such acceleration by
written notation hereon.
Each of the Obligors hereby severally (a) waives as to this debt or any
renewal or extension thereof all rights of exemption under the Constitution or
laws of Alabama or any other state as to personal property; (b) waives demand
(unless this notes is payable on demand), presentment, protest, notice of
protest, notice of dishonor, suit against any party and all other requirements
necessary to hold any Obligor liable; (c) agrees that time of payment may be
extended one or more times for any period of time (whether such period is
shorter or longer than the initial term of this note) or renewal notes taken or
other indulgence granted without notice of or consent to such action and without
release of liability as to any Obligor; (d) as to all or any part of the
Obligations, consents to Holder's releasing, agreeing not to sue, suspending the
right to enforce this instrument against or otherwise discharging or
compromising any Obligation of any Obligor or other person against whom any
Obligor has to the knowledge of Holder a right of recourse, all without notice
to or further reservations of rights against any Obligor, and all without in any
way affecting or releasing the liability of any Obligor; (e) consents to
Holder's releasing, exchanging or otherwise dealing in any manner with all or
any portion of any collateral, lien, or right of set-off which may now or
hereafter secure this note, all without notice to or further reservations of
rights against any Obligor, and all without in any way affecting or releasing
the liability of any Obligor, even though such release, exchange or other
dealing may in any manner and to any extent impair any such collateral, lien or
right to set-off; (f) agrees to pay all costs of collecting or securing or
attempting to collect or secure this note or defending any unsuccessful claim
asserted against the Holder in connection with this note, including reasonable
attorneys' fees; and (g) warrants that this Loan is for business, commercial or
agricultural purposes.
In addition to all liens upon, and rights of set-off against, any
monies, securities, or other property of any of the Obligors given to Holder by
law, Holder shall have a lien upon and a right of set-off against all monies,
securities and other property of any of the Obligors now or hereafter in the
possession of, or on deposit with, Holder, whether held in a general or special
account or deposit, for safekeeping, or otherwise; and every such lien and right
of set-off may be exercised without demand upon or notice to any Obligor, and
the Bank shall have no liability with respect to any of Obligor's checks or
other items which may be returned or other funds transfers which may not be made
due to insufficient funds thereafter.
The Borrower understands that the Bank may from time to time enter into
a participation agreement or agreements with one or more participants pursuant
to which such participant or participants shall be given participation in the
Loan and that such participants may from time to time similarly grant to other
participants sub-participations to the Loan. The Borrower agrees that any
participant may exercise any and all rights of banker's lien or set-off, whether
arising by operation of law or given to Holder by the provisions of this note,
with respect to the Borrower as fully as if such participant had made the Loan
directly to the Borrower. For the purposes of this Paragraph only, the Borrower
shall be deemed to be directly obligated to each participant or subparticipant
in the amount of its participating interest in the principal of, and interest
on, the Loan.
Neither any failure nor any delay on the part of Holder in exercising
any right, power or privilege under this note shall operate as a waiver thereof,
nor shall a single or partial exercise thereof preclude any other or further
exercise or the exercise of any other right, power or privilege. No
modification, amendment or waiver of any provisions of this note shall be
effective unless in writing and signed by a duly authorized officer of Holder,
and then the same shall be effective only in the specific instance and for the
purpose for which given. No notice to or demand on any Obligor in any case shall
entitle any Obligor to any other or further notice or demand in the same,
similar or other circumstances.
Any provision of this note which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
The provisions of this note shall inure to the benefit of the Holder,
its successors and assigns and shall be binding upon the heirs, successors and
assigns of each Obligor, except that no Obligor may assign or transfer his, her
or its obligation hereunder without the written consent of Holder.
All rights, powers and remedies of Holder under this note and now or
hereafter existing at law, in equity or otherwise shall be cumulative and may be
exercised successively or concurrently.
The Loan Documents contain the entire understanding and agreement
between the Borrower and the Holder with respect to the Loan and supersede any
and all prior agreements, understandings, promises, and statements with respect
to the Loan. This Master Note may not be modified, amended, or supplemented in
any manner except by a written agreement executed by both the Borrower and the
Holder.
This note shall be construed in accordance with and governed by the
laws of the State of Alabama.
This agreement is executed under seal by the Borrower or each of them.
CAUTION--IT IS IMPORTANT THAT YOU THOROUGHLY READ
THIS CONTRACT BEFORE YOU SIGN IT
NO. 0000387224-0000212522 XEP01 Adtran, Inc. [SEAL]
________________________________ ____________________________
Due May 31, 1997 By:/s/ MARK C. SMITH [SEAL]
________________________________ ____________________________
901 Explorer Blvd. Mark C. Smith
Huntsville, Alabama 35806 [SEAL]
____________________________
[SEAL]
____________________________
<PAGE>
EXHIBIT 11
ADTRAN, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding 33,213,678 36,984,156 38,603,289
Net weighted average common stock options
outstanding under the treasury stock method 2,918,262 2,305,351 962,801
----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 36,131,940 39,289,507 39,566,090
=========== =========== ===========
Net income (pro forma) $18,608,605 $29,457,727 $39,819,904
=========== =========== ===========
Net income per common and common
equivalent share (pro forma) $ 0.52 $ 0.75 $ 1.01
=========== =========== ===========
</TABLE>
<PAGE>
NET INCOME* NET SALES STOCKHOLDERS' EQUITY
(in $ Millions) (in $ Millions) (in $ Millions)
* Pro forma for
years prior to 1995
1991 -- $ 6.5m 1991 -- $ 42.6 1991 -- $ 16.7m
1992 -- $ 8.7m 1992 -- $ 57.0 1992 -- $ 22.0m
1993 -- $ 8.5m 1993 -- $ 72.4 1993 -- $ 29.8m
1994 -- $18.6m 1994 -- $123.4 1994 -- $ 85.2m
1995 -- $29.5m 1995 -- $181.5 1995 -- $130.7m
1996 -- $39.8m 1996 -- $250.1 1996 -- $172.9m
ONE
<PAGE>
Report to
Stockholders
ADTRAN achieved record sales and earnings for 1996. The Company's sales
increased 38 percent to $250,120,836, while earnings increased from $.75 per
share to $1.01 per share. Revenue growth across our major product lines of
DDS/Frame Relay Access, ISDN, and HDSL/T1 was 11 percent, 41 percent, and 72
percent, respectively. Revenue growth across our major markets of Telco,
Customer Premises Equipment (CPE), Original Equipment Manufacturing (OEM), and
International was 43 percent, 37 percent, 22 percent, and 70 percent,
respectively.
The Company's investment in engineering and technology resulted in 125 new
products being released during the year.
In the Telco market, revenue in all product lines grew and benefited from new
product introductions. DDS/Frame Relay Access product introductions included a
new generation of Channel Units approved by our OEM customer base for direct
sales to our Telco customers. New and expanded local loop performance monitoring
and enhanced deployment platforms continued to differentiate ADTRAN 64 kilobit
products from those of our competitors.
We further enhanced our dominant position during 1996 in the supply of ISDN
extension products to the Telco marketplace. A new platform, the BR1/10, allows
deployment of 20 ISDN lines in only 2-3/4 inches of chassis height. New
generations of reduced cost, improved performance U-BR1TES and Repeaters allowed
us to retain our leadership position in this fast growing market.
During the year, we introduced a new technological concept called "Total
Reach." Currently, a major and almost prohibitive cost results when ISDN is
installed at distances over 15,000-18,000 feet. Our "Total Reach" technology
allows for economical ISDN installation for distances of up to 30,000 feet,
without the use of repeaters. Field trials have been successfully installed and
production initiated.
The use of HDSL in the installation of T1 service expanded during the year at
a much faster rate than anticipated. A new line of low voltage (-135 volt) HDSL
products was introduced, allowing for both a remote unit and a mid-span repeater
to be line powered. Major engineering and technology investments were initiated,
with the goal of driving HDSL market share to levels consistent with those of
our DDS & ISDN Telco products.
In the Customer Premises Equipment market, new product introductions fueled
growth across all product areas. DDS/Frame Relay Access products were enhanced
with the addition of SNMP performance monitoring and expanded by the addition of
a new Frame Relay Access Device (FRAD) product line being readied for
introduction early in the first quarter. Installation of ISDN Terminal Adapters
(modems) was greatly simplified with the introduction of the Express XR and XRT
ISDN terminal adapters. ADTRAN's new Expert ISDN technology solved the major
problems associated with setting up and optioning ISDN devices. Expert ISDN
removes human error by automatically programming the ISDN modem with the
necessary phone company information, including switch type and service profile
TWO
<PAGE>
identifiers. The T1 market for our products exceeded expectations as new and
expanded products were introduced. The TSU line of multiplexers continued to
gain market share because of the introduction of new modules that support
numerous new applications. The inclusion of SNMP throughout the T1 line will
serve to further expand the market for these products in the coming year.
Both our OEM and International markets experienced growth as each of the new
Telco and CPE products became available to those customers.
The breadth and depth of the Company's management staff were significantly
increased during the year. Bob Fredrickson joined the Company as Vice President
Telco Sales, and Tom Stanton was promoted to Vice President Telco Marketing.
These two seasoned professionals will now lead our sales and marketing expansion
in our largest market area of Telco customers. Steve Harvey joined the Company
as Vice President of CPE Sales. He joined Danny Windham, our Vice President of
CPE Marketing, and this team has the goal of growing CPE revenue to that of our
established Telco levels. Also added to the management staff in 1996 was Greg
Peters, Vice President-International, who will lead in expanding our
international presence. Melvin Bruce joined the Company as Vice President of
Engineering, and Peter Bracket joined the Company as Vice President of
Technology. Both of these seasoned executives bring years of experience to these
roles and will enhance our expansion in these core areas. John Cooper joined the
Company as Vice President Finance and Chief Financial Officer, while Irwin
Goldstein retains the position of Vice President of Administration. Charles
O'Donnell joined the Company as Vice President Quality and Customer Services and
is charged with enhancing this area, viewed by many as best in class.
During the year, both John Jurenko, our founding Vice President of Sales and
Marketing, and Jerry Moore, our Vice President of Technology, reached
retirement. Both of these executives will remain as consultants and continue
providing access to their expertise. Lonnie McMillian, a founder, original Board
Member, and Vice President of Engineering, will now head our Center of New
Technology and Innovation. Mr. McMillian, with one of the most creative minds of
any of our employees, is now hard at work defining and initiating new product
market segments for our future.
The Company's efforts and achievements during the year have been extensive
and will provide an even stronger base for future growth. All of us at ADTRAN
are excited by the growth of our industry and the leadership role we play in our
respective markets.
/s/Mark C. Smith /s/Howard A. Thrailkill
Mark C. Smith Howard A. Thrailkill
Chairman and CEO President and COO
THREE
<PAGE>
PHOTO OF CONNECTING WALKWAY BETWEEN NORTH
TOWER AND SOUTH TOWER
CORPORATE PROFILE
ADTRAN, Inc. designs, develops, and manufactures ADvanced TRANsmission
products for high-speed digital communications. Incorporated in 1985, ADTRAN
began operations in 1986, following AT&T's divestiture of the Regional Bell
Operating Companies (RBOCs) with restrictions that effectively barred their
manufacturing of equipment. These events created an opportunity for companies
such as ADTRAN to supply network equipment to the seven RBOCs as well as more
than 1,300 independent telephone companies in the United States. At the same
time, sophisticated users were demanding the flexibility, reliability, and
economy afforded by emerging digital transmission technology. ADTRAN's founders
recognized the importance of the transition from analog to digital loop
technology using the existing copper wire network.
Today, ADTRAN supplies equipment for both ends of the local loop, that
portion of the network which connects homes and businesses to telephone company
network equipment, typically housed in a facility referred to as a Central
Office. The majority of this local loop infrastructure consists of twisted pair
copper wire. Today, more than 700 million such copper wire local loops are
installed worldwide, with 160 million in place in the United States. Industry
projections call for the installation of new copper local loops to outpace that
of any other transmission medium for several years to come.
Telephone companies' (Telcos) huge investment in copper wire infrastructure
mandates adapting existing local loops to meet growing data communication needs.
THROUGH THE APPLICATION OF INNOVATIVE ENGINEERING AND TECHNOLOGY, ADTRAN HAS
PROSPERED AS A LEADING SUPPLIER OF TELCO PRODUCTS WHICH TRANSFORM COPPER WIRE
LOCAL LOOPS INTO HIGH-SPEED DIGITAL NETWORKS.
Having firmly established a leading position with our Telco products, we
subsequently adapted that technology for use by end-users and earned a growing
share of the
FOUR
<PAGE>
Customer Premises Equipment (CPE) market. Both our Telco and CPE product lines
have produced rapid, profitable growth, resulting in our being selected as a
Nasdaq 100 Index stock by the Nasdaq Stock Market in 1996.
With over a million ADTRAN-based local loops operating worldwide, we have
become a leading supplier of Digital Data Service (DDS), Integrated Services
Digital Network (ISDN), and T1/High-bit-rate Digital Subscriber Line (HDSL)
digital loop products. These products are sold to all the RBOCs, most of the
domestic independent Telcos, a large number of corporate end-users, and a
growing number of international customers. In addition, we provide
custom-designed products for many well-known original equipment manufacturers
(OEMs).
ADTRAN is headquartered in Huntsville, Alabama, with sales offices
strategically located throughout the United States. We also sell our products
through a network of more than two hundred domestic and international value
added resellers and distributors, and we are aggressively augmenting those
world-wide resources.
BUSINESS PHILOSOPHY
Supporting customers beyond their expectations is the primary philosophy
guiding business decisions at ADTRAN. Our success has been built upon a
commitment to total customer satisfaction, which requires continually developing
and improving products to meet changing needs while maintaining the highest
level of quality and customer support.
AN ISO 9001 COMPANY, ADTRAN EMPLOYS CONSISTENT QUALITY PROCESSES FROM INITIAL
PRODUCT DESIGN AND DEVELOPMENT TO THE COMPREHENSIVE TESTING OF EVERY UNIT
DELIVERED. ADTRAN QUALITY ACHIEVEMENTS HAVE BEEN RECOGNIZED ON MANY OCCASIONS,
INCLUDING BY BEING SELECTED AS A PACIFIC BELL QUALITY PARTNER EACH YEAR SINCE
1991.
Our product programs follow a process that has proven consistently successful
and placed ADTRAN in a leading position in the industry. First, we seek early
identification of appropriate local loop market segments offering the potential
for future high unit volume demand. Once established in a market, we drive for
market share by constantly reducing costs and leveraging the benefits associated
with manufacturing economies of scale. Finally, we strive to develop a full
complement of products, consolidating and protecting our position in the
selected market segment.
ADTRAN maintains a strong commitment to developing products that extend the
performance of the existing copper network to its full potential. Most recently,
ADTRAN has participated in the early stages of development of Digital Subscriber
Line (DSL) products that have quickly established an important presence in the
market. This promising technology allows the current Telco infrastructure to
support demand for innovative new services such as remote access to corporate
networks, distance learning, and high speed Internet access.
ADTRAN implements extensive Product Qualification procedures, which ensure
consistent performance over specified temperature, humidity, line length, and
supply voltage conditions.
PHOTO OF PRODUCT QUALIFICATION
LAB TEMPERATURE AND SUPPLY
VOLTAGE TESTING EQUIPMENT.
FIVE
<PAGE>
PHOTO OF SEVERAL TYPES OF END-USER
DIGITAL COMMUNICATIONS EQUIPMENT
DESIGNED AND MANUFACTURED BY ADTRAN.
ADTRAN provides for a broad range of products for telcos and end-users of telco
services, including DDS/Frame Relay, ISDN, T1/HDSL, and other emerging
technologies.
SIX
<PAGE>
MARKETS SERVED
ADTRAN products are targeted at two primary markets: Network equipment for
Telcos and network access equipment for end-users of Telco services. ADTRAN is a
major supplier to these two markets in the United States and is making advances
in the international market, enhancing our position as a worldwide leader in the
telecommunications industry.
Both Telcos and their end-user customers utilize our products to deploy
DDS/Frame Relay, ISDN, and T1/HDSL service. Today, ADTRAN offers more than 200
principal products supporting these services, differentiated by the transmission
rate or capacity they provide, as well as features such as dedicated (leased) or
switched (dial-up) access. End-users consider these factors, along with cost,
when selecting the digital service that best fits their needs.
DDS is a widely deployed leased line (dedicated) digital service, that has
provided reliable wide area network (WAN) connections in corporate networks for
many years. DDS circuits, supporting data transmission rates from 2.4 to 64
kbps, are used most often by corporate customers who transfer information among
multiple locations for several hours a day. For example, DDS service is
frequently used to link ATM machines to banks. Frame Relay, a new technology
deployed over an existing DDS or T1 network, is a digital packet service,
providing the benefits of DDS but at a substantially lower cost. For digital
circuits that require DDS data rates on a less frequent basis, a switched
version of DDS service is often used.
ISDN is a switched access digital service; i.e., a user can dial other
locations as required and hang up when the connection is no longer needed. ISDN
subscribers can use Basic Rate ISDN circuits to carry two voice conversations at
once, voice and data signals simultaneously, or data-only signals at rates up to
128,000 bits per second. This service is beneficial to customers who need to
transfer large files periodically. ISDN is also becoming a preferred solution
for remote access, Internet access, and telecommuting.
T1 is a leased line digital service transporting up to 24 individual voice or
data channels. Operating at rates up to 1.544 Mbps, it is used to transmit large
volumes of data or voice traffic that modern corporate networks demand. In
recent years, HDSL technology, developed by ADTRAN and others, has made it
possible to deliver T1 service much more quickly and economically.
In 1996, as in the past, Telco products provided the largest contribution to
ADTRAN revenue, comprising 60 percent of total revenue. CPE and OEM product
revenue made up 28 percent and 12 percent, respectively. Telco revenue grew 43
percent, while CPE revenue expanded by more than 35 percent. International sales
have become increasingly important and now contribute more than 7 percent of
total sales.
SEVEN
<PAGE>
PHOTO OF ADTRAN PRODUCT
INTEROPERABILITY LAB WITH
ADTRAN EMPLOYEE SITTING
AT TERMINAL.
<PAGE>
TELCO OVERVIEW
ADTRAN supplies a full range of local loop and network equipment to Telcos,
enabling economic, efficient deployment of digital services. We supply the
circuit assemblies used by Telcos to provide digital services to their
customers, the repeaters that allow increased deployment range, and the network
termination devices that allow circuits to be tested up to the customer's
facility.
Our Telco product revenue increased 43 percent, from $105 million in 1995 to
more than $150 million in 1996. The Telco business base continues to grow
steadily, fueled by the recent 1996 Telecommunications Act mandating
deregulation of local exchange carriers. The Act allows new market entrants into
the service provider business, significantly increasing the market for ADTRAN
Telco products. Today our markets include all the RBOCs, major and smaller
independent telephone companies as well as a growing number of the international
service providers.
TO ADDRESS THESE MARKETS, WE CONSISTENTLY INTRODUCE NEW TECHNOLOGIES THAT
INCREASE EFFICIENCY AND REDUCE COSTS, WHILE STEADFASTLY MAINTAINING A COMMITMENT
TO QUALITY AND PERFORMANCE. FOR EXAMPLE, OUR INNOVATIVE TOTAL REACH PRODUCTS,
BASED ON REPEATERLESS TECHNOLOGY, ARE REVOLUTIONIZING DIGITAL DATA SERVICE
DEPLOYMENT BY ENABLING TELCOS TO DRAMATICALLY CUT DEPLOYMENT COSTS, INSTALLATION
TIMES, AND MAINTENANCE REQUIREMENTS.
DDS
In the 1980s, ADTRAN DDS products established our reputation as a leader in
digital transmission. Newer digital transmission services have since emerged,
yet DDS continues to hold a strong position because of its large installed base,
simplicity, and availability. In addition, new cost-effective service offerings
such as Frame Relay are being deployed over existing digital networks. With
market research predicting a compound annual growth rate for Frame Relay
exceeding 30 percent through the year 2000, demand for DDS should continue to
grow.
A noteworthy recent accomplishment within our DDS product line has been the
addition of performance monitoring capability, which allows more efficient
deployment and maintenance of the DDS circuits.
ISDN
The attractive pricing and widespread availability of ISDN, along with its
ability to enhance major new applications such as Internet, work-at-home, and
remote office/WAN connection, are increasing demand for the service.
FOUR-TO-EIGHT TIMES FASTER THAN ANALOG MODEMS USED FOR INTERNET ACCESS TODAY,
ISDN PROVIDES TRANSMISSION OF BOTH VOICE AND DATA SIMULTANEOUSLY OVER A SINGLE
LINE.
THE ISDN OPPORTUNITY
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
100,000 150,000 200,000 300,000 350,000 450,000 700,000 1.25m 1.75m 2.4m 3.15m 3.85m
</TABLE>
Domestic BRI Circuits (000)
Source: Dataquest (February 1997)
NINE
<PAGE>
ADTRAN's Total Reach range extension products allow Telco service providers to
deploy ISDN and DDS services to remote locations without the use of costly
repeaters.
[PHOTO OF TOTAL REACH(TM) ENCLOSURE AND HOUSING]
In 1996, we enhanced our ISDN product offerings by adding Performance
Monitoring and introducing our new BR1/10 digital loop carrier (DLC) and Total
Reach Range Extension Products. The BR1/10 is the most compact unit available
today, yet provides the most economical method of delivering Basic Rate ISDN
services over a T1 carrier system.
OUR TOTAL REACH TECHNOLOGY REVOLUTIONIZED ISDN BY EXTENDING THE BASIC RATE
ISDN SERVICE DEPLOYMENT RANGE FAR BEYOND LIMITATIONS OF THE PAST, WITHOUT THE
NEED FOR REPEATERS AND ENVIRONMENTAL ENCLOSURES.
Because of the reduction of equipment, installation, and maintenance costs,
our Total Reach family of products significantly lowers the cost of ISDN
deployment to remote locations, typically comprising 20% or more of total ISDN
customers.
T1/HDSL
In the past, Telcos have delivered T1 using a series of repeaters to extend
the service. Now, HDSL products from ADTRAN allow Telcos to deploy T1 circuits
without using repeaters, allowing for quicker, easier, more economical
installation. In addition, T1/HDSL accommodates newer network services such as
Frame Relay, Fractional T1, and Primary Rate ISDN service in order to meet
specific customer needs.
For services beyond normal range, we provide the HDSL Range.
THE HDSL OPPORTUNITY
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1990 91 92 93 94 95 96 97 98
---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fractional T1 N/A N/A 220k 300k 450k 550k 800k 1.05m
HDSL T1 100k 150k 200k 300k 375k 550k 675k 750k
Fiber T1 100k 150k 175k 250k 300k 350k 370k 375k
Repeater T1 80k 100k 125k 200k 210k 208k 125k 110k
</TABLE>
New Domestic T1/E1 Circuits (000)
Sources: TRA & Forward Concepts, IDC, Frost & Sullivan, & Company Estimates
TEN
<PAGE>
[PHOTO OF ADTRAN ACT 2300 CHASSIE AND OCU DP MODULES]
The Act 2300 provides advanced provisioning and monitoring capabilities to new
and existing special services networks.
Extender as an outside plant, range extension solution that doubles the range
of deployment. These HDSL products carry on our commitment to improve
performance, reduce cost, and serve the needs of our customers.
NETWORK PRODUCTS
ADTRAN markets a full range of intelligent channel bank products for special
applications that meet service providers' needs for greater network management
and control. Based on industry-standard technology, the products accept
dataports from a variety of vendors. ADTRAN dataports add advanced capabilities
such as performance monitoring, local and remote provisioning, and redundancy.
A promising 1996 product addition, the ACT 2300 channel bank, is the
centerpiece of the ADTRAN intelligent channel bank family. The ACT 2300, along
with the ADTRAN Site Manager (network management platform), intelligent channel
units, and bank upgrade products, represent a system that allows Telcos to add
intelligence into their special services networks for future growth, while
protecting their investments in existing technologies.
WIRELESS
The ADTRAN TRACER is the first of a new product family designed to meet the
wireless infrastructure needs of end-users, Telcos, and cellular/PCS service
providers. It allows cellular service providers and local Telcos to expand their
coverage areas with cost effective wireless links. The TRACER can also be used
for the point-to-point, high speed connections demanded by voice, video, and
data transfer applications in campus environments.
OUR COMMITMENT
The ADTRAN Telco products team moved decisively in 1996 to focus on new
market opportunities. As 1997 begins, we pledge to remain a leader in local loop
products and technology and to maintain our commitment to value and service for
our customers.
ELEVEN
<PAGE>
Adtran Express XRT unit being used in a work-at-home environment.
CPE OVERVIEW
ADTRAN supplies the Customer Premises Equipment (CPE) market with a complete
line of high-performance equipment for corporate end-users of digital services.
Much of the equipment developed for this market utilizes technology from the
Telco products ADTRAN develops. As a result, our CPE products hold a competitive
advantage over other companies, since building equipment for both ends of the
telecommunication network allows an increased degree of interoperability, higher
unit volumes, and lower cost.
CPE MARKET GROWTH IS DRIVEN BY SEVERAL FORCES; PRIMARY AMONG THESE IS GROWTH
OF THE INTERNET. TODAY, AN ESTIMATED 25 MILLION PEOPLE HAVE INTERNET
CONNECTIONS; BY THE YEAR 2000 THAT NUMBER IS PROJECTED TO HAVE INCREASED TO 160
MILLION, ALL REQUIRING SOME TYPE OF INTERNET ACCESS.
Another CPE market driver is the increasing demand for remote access
to corporate networks by employees working from home, whether full time
TWELVE
<PAGE>
telecommuting or traditional employees working during off hours. A third
driver is enterprise connectivity, the need for businesses to connect multiple
sites such as branch offices. Finally, electronic commerce, which is soon to
become an important way of conducting business, requires Internet connection.
ADTRAN HAS DEVELOPED A COMPLETE LINE OF CPE PRODUCTS, DESIGNED TO OFFER
CONNECTIVITY OPTIONS THAT ADDRESS A CUSTOMER'S SPEED, AVAILABILITY, AND COST
CRITERIA IN THE AREAS OF DDS/FRAME RELAY, ISDN, AND T1/HDSL.
Like all ADTRAN products, our high-performance CPE equipment is reliable and
user-friendly.
THE DDS/FRAME RELAY MARKET
ADTRAN's CPE market offerings began with a line of data service units (DSUs)
first introduced in 1991. Now comprised of over 100 individual products, the DSU
family has become one of the most comprehensive lines of DSUs available today.
New DSU products in 1996 included a broad fourth generation family of DSUs
with embedded Simple Network Management Protocol (SNMP). ADTRAN has also
introduced a line of Frame Relay products for 1997. Frame Relay is a digital
packet service which provides a permanent virtual connection to the network and
is deployed over an infrastructure similar to current DDS and T1 connections.
Frame Relay provides all the benefits of DDS at a lower cost than multiple
dedicated circuits allow. Popular in the IBM networking world and particularly
in branch offices, applications and equipment for Frame Relay service are
similar to those for DDS, making it easier for users to migrate to this service.
Service providers have elected to promote Frame Relay by reducing its price
relative to standard DDS.
THE DDS/FRAME RELAY OPPORTUNITY
94 95 96 97 98 99
----- ----- ----- ----- ----- ------
FRADS............... $400k $525k $750k $950k $1.1m $1.45m
MULTI RATE DSUs..... $325k $325k $375k $450k $550k $600k
Source: International Data Corporation
[PHOTO APPEARS HERE]
ADTRAN's FSU series of FRADs provide customers with a cost-effective means of
transporting multiprotocol data and voice over frame relay networks. Through a
series of ESP option cards, units can be configured to support a combination of
data, voice, and dial backup applications.
THIRTEEN
<PAGE>
ISDN MARKET
ISDN service has continued to grow as demand for high-speed connection for
homes and remote offices increases. ISDN provides data transfer rates four to
eight times faster than the analog modems widely used for Internet access today.
ADTRAN products support basic rate ISDN, providing low-cost solutions for
telecommuting, connecting the small office/home office (SOHO), accessing the
Internet, and other applications.
IN 1996, ADTRAN MADE GREAT STRIDES IN MAKING ISDN PRACTICAL FOR THE
NON-TECHNICAL CUSTOMER. WE INTRODUCED EXPERT ISDN, AN ADTRAN PATENT-PENDING
TECHNOLOGY WHICH SIMPLIFIES SERVICE INSTALLATION, TRANSLATING A DIFFICULT AND
FRUSTRATING TASK INTO AN EASY AND CONVENIENT ONE.
Two of seven new products added to our ISDN product family in 1996, the
Express XR and the Express XRT, won an Innovations '97 Design and Engineering
award at the International Winter Consumer Electronics Show (CES). The Express
XR and XRT are ISDN modems equipped with Expert ISDN. The Express XRT was also
named a 1996 Computer Telephony Product of the Year.
New additions to the family also included the ISU 512 S/T; the Express XL and
Express XLT, a family of ISDN router products; and the third generation of the
NT1 ACE. The ISDN CPE market now has a total of nearly 50 product offerings that
contributed to a 41 percent increase in ISDN revenue in 1996.
[PHOTO OF ADTRAN FRAME RELAY PRODUCTS RECENTLY ANNOUNCED.]
The Adtran ISU 512 is one of the most popular inverse multiplexers for Basic
Rate ISDN, providing connections of up to 512 kilobits per second. Its ease of
use, features, and price make it attractive for many applications including
corporate videoconferencing, medical imaging and remote broadcasting.
FOURTEEN
<PAGE>
[PHOTO OF ADTRAN T1 END-USER EQUIPMENT]
ADTRAN offers an extensive line of T1 CSUs, T1 DSU/CSUs and T1 multiplexers for
a variety of end-user applications. Providing support for T1 network
termination, frame relay circuit termination, LAN to LAN connectivity, and
voice/data multiplexing, the ADTRAN T1 CPE product family delivers value and
flexibility.
T1/FT1
ADTRAN entered the T1 CPE market in 1994 with a small family of T1 Service
Unit (TSU) products. Now our TSU family has expanded to include more than 50
products. The TSU products and available plug-in modules are designed to support
various data and voice applications including LAN connectivity, digital and
analog voice, and videoconferencing. Our application- specific plug-in modules
can be combined in various ways to meet specific customer needs, making the
T1/FT1 product line flexible and practical. ADTRAN's T1 CPE product line
experienced an impressive overall 68 percent revenue increase over 1995.
THE FUTURE OF THE ADTRAN CPE MARKET
The CPE market faces a bright future as growing numbers of faster, more
reliable networks are built. At ADTRAN, we are developing products that address
the emerging T3 market, a service which is 28 times faster than a T1 line. In
certain cases, customers requiring multiple T1s find it less expensive to
purchase a T3 line. We are also developing host-site products for use at
corporate networking centers to provide more efficient networking options.
Currently, our products focus primarily on remote site needs. Development of
host site products will allow us to sell a complete solution to the customer by
providing the central connection point for all remote site products. As we
expand into new markets, we will continue our commitment to fully support the
markets addressed by our existing products.
THE T1 CPE OPPORTUNITY
[LINE GRAPH APPEARS HERE]
94 95 96 97 98 99
----- ----- ----- ----- ----- -----
T1/FT1 DSUs $225m $300m $375m $425m $500m $550m
T1/FTI CSUs $ 75m 90m $105m $125m $140m $150m
[PLOT POINTS TO COME]
FIFTEEN
<PAGE>
INTERNATIONAL MARKET OVERVIEW
In 1996, we strengthened our position in the international marketplace. Our
revenue increased 70 percent, growing from less than $11 million in 1995 to over
$18 million. International revenue now represents 7 percent of total sales.
We expanded our revenue base in the Asia-Pacific region, Latin America, and
Europe by focusing on international network requirements, responding to specific
customer needs, and diversifying our product families. In countries where
telecom authorities faced national deregulation, the market opened up to
competing service providers, resulting in increased demand for ADTRAN's HDSL
products. In 1996, ISDN product sales also grew steadily because of accelerated
demands for home office and Internet access and corporate requirements for
increased bandwidth. Building on our HDSL and ISDN success, ADTRAN expanded
product offerings and received certification and approval on multiple products.
TO STRENGTHEN OUR POSITION IN THE INTERNATIONAL MARKETPLACE, WE ARE DESIGNING
NEW PRODUCTS WITH INTERNATIONAL SPECIFICATIONS AND STANDARDS IN MIND AND
ADAPTING EXISTING PRODUCTS TO MEET THESE REQUIREMENTS.
We are currently adding resources to address promising international markets
and expanding existing distribution alliances to service them. We are also
forging important new relationships to meet market and product requirements
unique to international customers.
[PHOTO OF BIG BEN IN LONDON]
Big Ben, Parliament and River Thames, London
SIXTEEN
<PAGE>
Market for the Registrant's Common Stock and
Related Stockholder Matters
The Company's Common Stock has been traded on the Nasdaq National Market
(Nasdaq) under the symbol "ADTN" since the Company's initial public offering
of Common Stock in August 1994. Prior to the initial public offering, there
was no established trading market for the Company's Common Stock. As of
January 31, 1997, the Company had 561 shareholders of record and
approximately 10,500 beneficial owners of shares held in street name. The
following table shows the high and low closing sale prices per share for the
Common Stock as reported by Nasdaq for the periods indicated:
Fiscal 1995 High Low
First Quarter $30-3/8 $20
Second Quarter $37-3/4 $26-7/8
Third Quarter $38-1/4 $30
Fourth Quarter $55-1/2 $33-1/4
Fiscal 1996 High Low
First Quarter $54-3/4 $26-1/2
Second Quarter $73-1/2 $45
Third Quarter $75-1/4 $47-1/2
Fourth Quarter $52-1/4 $33-1/2
The prices per share for the common stock give retroactive effect to the 2-
for-1 stock split effective May 12, 1995.
The Company has operated with a policy of retaining earnings, presently
intends to retain all future earnings for use in the development of its
business and does not anticipate paying any cash dividends in the foreseeable
future.
The following selected financial data concerning the Company for and as of
the end of each of the years in the five year period ended December 31, 1996
are derived from the financial statements of the Company, which financial
statements have been audited by Coopers & Lybrand L.L.P., independent
accountants. The selected financial data are qualified in their entirety by
the more detailed information and financial statements, including the notes
thereto, included elsewhere in this report. The financial statements of the
Company as of December 31, 1995 and 1996 and for each of the years in the
three year period ended December 31, 1996, and the report of Coopers &
Lybrand L.L.P. thereon, are included elsewhere in this report.
17
<PAGE>
Selected Financial Data
Year Ended December 31,
(in thousands, except
per share data) 1992 1993 1994 1995 1996
Income Statement Data:
Sales:
Telco(1) $36,849 $42,795 $64,830 $105,400 $150,310
OEM(1) 16,428 19,841 33,568 24,739 30,288
CPE(1) 3,765 9,775 25,042 51,339 69,523
- ----------------------------------------------------------------------
Total sales 57,042 72,411 123,440 181,478 250,121
Cost of sales 27,694 36,769 63,187 93,007 129,953
- ----------------------------------------------------------------------
Gross profit 29,348 35,642 60,253 88,471 120,168
Selling, general and
administrative
expenses 8,472 11,898 17,347 27,260 34,308
Research and development
expenses 7,188 10,033 13,774 19,131 24,647
- ----------------------------------------------------------------------
Operating income 13,688 13,711 29,132 42,080 61,213
Interest income 25 7 440 3,205 2,542
Interest expense (82) (424) (448) (1,105) (895)
Other income (expense) 102 (13) (25) 111 642
- ----------------------------------------------------------------------
Income before income
taxes(2) 13,733 13,281 29,099 44,291 63,502
Provision for income
taxes(2) 0 0 6,288 14,833 23,682
- ----------------------------------------------------------------------
Historical net income(2) 13,733 13,281 22,811 29,458 39,820
Pro forma provision for
income taxes(2) 5,041 4,825 4,202
- ----------------------------------------------------------------------
Pro forma net income(2) 8,692 8,456 18,609 29,458 39,820
- ----------------------------------------------------------------------
Pro forma net income per
share(2)(3) .25 .25 .52 .75 1.01
- ----------------------------------------------------------------------
Weighted average shares
outstanding(3) 34,124 34,061 36,132 39,290 39,566
- ----------------------------------------------------------------------
S corporation
distributions(2) $ 8,063 $ 5,494 $ 5,483
- ----------------------------------------------------------------------
At December 31,
(in thousands except
per share data) 1992 1993 1994 1995 1996
Balance Sheet Data:
Working capital $13,315 $19,795 $66,368 122,466 $140,510
Total assets 31,947 46,304 94,347 165,767 210,207
Total debt 6,500 10,100 0 20,000 20,000
Stockholders' equity 21,974 29,757 85,233 130,743 172,879
(1) Represents sales of the Company's Telco, OEM and CPE products. These amounts
are not derived from the Company's audited financial statements.
(2) Effective July 1, 1994, the Company converted from an S corporation to a C
corporation for income tax purposes. As an S corporation, the Company was
not subject to income taxes but paid quarterly cash distributions to fund
the income tax liabilities passed through to the stockholders. The Company
also paid a cash distribution of $3,121,816 to its stockholders in December
1992 in an amount approximately equal to their original investment in the
Company's Common Stock. As a C corporation, the Company is subject to income
taxes at corporate tax rates. The pro forma income statement data herein
presents the provision for income taxes, net income and netincome per share
as if the Company had been subjec t to corporate income taxes for all
periods presented.
(3) Reflects a 3-for-2 split of the Company's Common Stock which was effected on
August 1, 1994, and a 2 for-1 split of the Common Stock which was effected
on May 12, 1995. Also assumes exercise of dilutive stock options calculated
under the treasury stock method. See Notes 1 and 10 of Notes to Financial
Statements.
18
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company designs, develops, manufactures, markets and services a broad
range of high speed digital transmission products utilized by Telcos and
corporate end-users to implement advanced digital data services over existing
telephone networks. The Company currently sells its products to Telcos
(including all of the RBOCs), OEMs and, since 1991, private end-users in the CPE
market.
The Company's sales have increased in each year due primarily to increases in
the number of units sold to both new and existing customers. These annual sales
increases reflect the Company's strategy of increasing unit volume and market
share through the introduction of succeeding generations of products having
lower selling prices and increased functionality as compared both to the prior
generation of a product and to the products of competitors. An important part of
the Company's strategy is to engineer the reduction of the product cost of each
succeeding product generation and then to lower the product's price based on the
cost savings achieved. As a part of this strategy, the Company seeks in most
instances to be a low cost, high quality provider of products in its markets.
The Company's success to date is attributable in large measure to its ability to
initially design its products with a view to their subsequent re-design,
allowing efficient enhancements of the product in each succeeding product
generation. This strategy has enabled the Company to sell succeeding generations
of products to existing customers as well as to increase its market share by
selling these enhanced products to new customers.
While the Company has experienced increased sales in each year, the Company's
operating results have fluctuated on a quarterly basis in the past, and
operating results may vary significantly in future periods due to a number of
factors. The Company operates with very little order backlog. A substantial
majority of its sales in each quarter results from orders booked in that quarter
and firm purchase orders released in that quarter by customers under agreements
containing nonbinding purchase commitments. Furthermore, most Telcos typically
require prompt delivery of products; this results in a limited backlog of orders
for these products and requires the Company to maintain sufficient inventory
levels to satisfy anticipated customer demand. If near term demand for the
Company's products declines or if significant potential sales in any quarter do
not occur as anticipated, the Company's financial results will be adversely
affected. The Company currently does not undertake any foreign exchange risks,
as all transactions with foreign vendors or customers are conducted in currency
of the United States. Operating expenses are relatively fixed in the short term;
therefore, a shortfall in quarterly revenues could impact the Company's
financial results significantly in a given quarter. Further, maintaining
sufficient inventory levels to assure prompt delivery of the Company's products
increases the amount of inventory which may become obsolete and increases the
risk that the obsolescence of such inventory may have an adverse effect on the
Company's business and operating results. The Company's operating results may
also fluctuate as a result of a number of other factors, including increased
competition, customer order patterns, changes in product mix, product warranty
returns and announcements of new products by the Company or its competitors.
Accordingly, the Company's historical financial performance is not necessarily a
meaningful indicator of future results, and, in general, management expects that
the Company's financial results may vary from period to period. See Note 13 of
Notes to Financial Statements.
On August 16, 1994, the Company completed an initial public offering of Common
Stock, receiving net proceeds (after deduction of underwriting discounts and
other offering expenses) of $37,867,963 from the sale of 2,300,000 shares of
Common Stock (on a pre-split basis). The Company used the offering proceeds to
repay the full amount of principal and interest owed on certain revenue bonds
issued to construct and equip the Company's headquarters and manufacturing
facility in Huntsville, Alabama and to repay all amounts outstanding under its
bank line of credit and for general working capital purposes. On June 29, 1995,
the Company and certain stockholders of the Company (the "Selling Stockholders")
19
<PAGE>
sold a total of 3,125,100 shares of Common Stock to the public. Of the 3,125,100
shares offered, 500,000 shares were offered by the Company and 2,625,100 shares
were offered by the Selling Stockholders. The Company received net proceeds
(after deduction of underwriting discounts and other offering expenses) of
$15,705,362 from the sale of 500,000 shares of Common Stock at the public
offering price of $33 per share. The Company did not receive any of the proceeds
from the sale of shares by the Selling Stockholders. The Company has used and
expects to continue to use the proceeds of the public offerings for working
capital and other general corporate purposes, including product development
activities to enhance its existing products and develop new products and
expansion of sales and marketing activities.
The Company operated as an S corporation for tax purposes through June 30,
1994. Effective July 1, 1994, the Company converted from an S corporation to a C
corporation and became subject to corporate income taxes. The Company intends to
retain all earnings for use in the development of its business and does not
anticipate paying any cash dividends in the foreseeable future.
Results of Operations
The following table presents selected financial information derived from the
Company's statements of income expressed as a percentage of sales for the years
indicated.
Years Ended December 31
Percentage of Sales 1994 1995 1996
Sales:
Telco 52.5% 58.1% 60.1%
CPE 20.3 28.3 27.8
OEM 27.2 13.6 12.1
- -----------------------------------------------------------------------
Total sales 100.0 100.0 100.0
Cost of sales 51.2 51.3 51.9
-----------------------------------------------------------------------
Gross profit 48.8 48.7 48.1
Selling, general and
administrative expenses 14.0 15.0 13.7
Research and development
expenses 11.2 10.5 9.9
- -----------------------------------------------------------------------
Operating income 23.6 23.2 24.5
Interest income 0.4 1.8 1.0
Interest expense (0.4) (0.6) (0.4)
Other income (expense) 0.0 0.0 0.3
- -----------------------------------------------------------------------
Income before provision
for income taxes 23.6 24.4 25.4
Provision for income taxes
(pro forma prior to
July 1, 1994) (1) 8.5 8.2 9.5
- -----------------------------------------------------------------------
Net income (pro forma prior
to July 1, 1994)(1) 15.1% 16.2% 15.9%
(1)Prior to July 1, 1994, the Company was an S corporation for income tax
purposes and passed its taxattributes through to its stockholders. Effective
July 1, 1994, the Company converted from an S corporation to a C corporation
and therefore became subject to corporate income taxes for the third and
fourth quarters of 1994. The indicated amounts in the table reflect, for
periods prior to July 1, 1994, the unaudited pro forma effects of income
taxes on the Company's operations as if the Company had been subject to
corporateincome taxes prior to July 1, 1994.
20
<PAGE>
1996 Compared to 1995
Sales
The Company's sales increased 37.8% from $181,478,065 in 1995 to $250,120,836
in 1996. The increased sales resulted primarily from increased sales volume to
existing customers and from increased market penetration. Sales to Telcos
increased 42.6% from $105,399,953 in 1995 to $150,310,111 in 1996 due primarily
to increased sales of Integrated Services Digital Network (ISDN) products and
increased sales of High bit-rate Digital Subscriber Line (HDSL) products. Unit
sales volume for Telco products increased by 52.7% from 1995 to 1996. Telco
sales as a percentage of total sales increased from 58.1% in 1995 to 60.1% in
1996 primarily as a result of increased sales volume of ISDN and HDSL products
during the 1996 period. Sales of CPE products increased 35.4% from $51,338,868
in 1995 to $69,523,067 in 1996. The increase in sales of CPE products is
attributable to increased demand for ISDN products and T1 Service Unit (TSU)
products. OEM sales increased 22.4% from $24,739,244 in 1995 to $30,287,658 in
1996. This increase was due to new contracts for customer funded modifications
of standard DDS, ISDN and HDSL designs. OEM products are generally customized
versions of the Company's Telco and CPE products. The financial effect of the
increase in overall unit volume was offset somewhat by lower unit selling prices
for many of the Company's products.
Cost of Sales
Cost of sales increased 39.7% from $93,006,672 in 1995 to $129,953,371 in
1996, primarily as a result of the increase in sales. As a percentage of sales,
cost of sales increased from 51.3% in 1995 to 51.9% in 1996. An important part
of the Company's strategy is to reduce the product cost of each succeeding
product generation and then to lower the product's price based on the cost
savings achieved. This sometimes results in variations in the Company's gross
profit margin due to timing differences between the lowering of product selling
prices and the full recognition of cost reductions. In view of the rapid pace of
new product introductions by the Company, this strategy may result in variations
in gross profit margins that, for any particular financial period, can be
difficult to predict.
Provision for Losses On Inventory
A provision for losses on inventory of $3,862,396 in 1996 was comprised
primarily of assorted assembled products and assorted raw material. The
provision for inventory losses as a percentage of sales decreased from 1.6% in
1995 to 1.5% in 1996. The Company decreased its inventory levels in 1996 due to
overall manufacturing efficiencies associated with production of the Company's
products. The reduction in inventory was accomplished without any interruption
in prompt delivery of the Company's products to its customers. Obsolescence of
assembled products generally was caused by technological changes driven by an
effort to provide total customer satisfaction.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 25.9% from $27,259,610
in 1995 to $34,308,436 in 1996 due to additional sales and support expenditures
necessary as a result of the Company's expanded sales base. However, the larger
sales base caused selling, general and administrative expenses as a percentage
of sales to decrease from 15.0% in 1995 to 13.7% in 1996.
Research and Development Expenses
Research and development expenses increased 28.8% from $19,131,457 in 1995 to
$24,647,425 in 1996. This increase was due to increased engineering costs
associated with new product introductions and product cost and feature
enhancement activities. As a percentage of sales, however, research and
development expenses declined from 10.5% in 1995 to 9.9% in 1996. The Company
continually evaluates new product opportunities and engages in intensive
research and product development efforts. To date, the Company has expensed all
product research and development costs as incurred. Additionally, the Company
also frequently invests heavily in up-front market development efforts prior to
21
<PAGE>
the actual commencement of sales of a major new product. As a result, the
Company may incur significant research and development expenses and selling,
general and administrative expenses prior to the receipt of revenues from a
major new product group. The Company is presently incurring both research and
development expenses and selling, general and administrative expenses in
connection with its new products and its expansion into international markets.
Interest Expense
Interest expense decreased 19.0% from $1,105,156 in 1995 to $894,657 in 1996.
This decrease was due to capitalization of the interest cost as a part of the
cost of acquiring certain assets. The Company currently pays interest on
$20,000,000 of revenue bond proceeds loaned to the Company in January 1995,
which proceeds are being used to expand the Company's facilities in Huntsville,
Alabama. See "Liquidity and Capital Resources."
Net Income
As a result of the above factors, net income increased 35.2% from $29,457,727
in 1995 to $39,819,904 in 1996. As a percentage of sales, net income decreased
from 16.2% in 1995 to 15.9% in 1996.
1995 Compared to 1994
Sales
The Company's sales increased 47.0% from $123,440,202 in 1994 to $181,478,065
in 1995. The increased sales resulted primarily from increased sales volume to
existing customers and from increased market penetration. Sales to Telcos
increased 62.6% from $64,829,910 in 1994 to $105,399,953 in 1995, due primarily
to increased sales of ISDN products and increased sales of HDSL products. Unit
sales volume for Telco products increased by 44.3% from 1994 to 1995. Telco
sales as a percentage of total sales increased from 52.5% in 1994 to 58.1% in
1995, primarily as a result of increased sales volume of ISDN and HDSL products
during the 1995 period. Sales of CPE products increased 105.0% from $25,042,299
in 1994 to $51,338,868 in 1995. The increase in sales of CPE products was
attributed to increased demand for DDS, ISDN and TSU products. OEM sales
decreased 26.3% from $33,567,993 in 1994 to $24,739,244 in 1995. 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 ADTRAN to pursue
markets directly that will no longer support a two tier distribution structure.
The financial effect of the increase in overall unit volume was offset somewhat
by lower unit selling prices for many of the Company's products.
Cost of Sales
Cost of sales increased 47.2% from $63,187,366 in 1994 to $93,006,672 in 1995,
primarily as a result of the increase in sales. As a percentage of sales, cost
of sales increased only slightly from 51.2% in 1994 to 51.3% in 1995 as the
Company continued to maintain manufacturing efficiencies associated with higher
unit volume sales.
Provision for Losses On Inventory
A provision for losses on inventory of $2,887,877 in 1995 was comprised
primarily of assorted assembled products and assorted raw material. The
provision for inventory losses as a percentage of sales remained the same at
1.6% in 1994 and 1995. The Company increased its inventory levels in 1995 to
assure prompt delivery of the Company's products, which in turn increased the
amount of inventory which could become obsolete.
22
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 57.1% from $17,346,759
in 1994 to $27,259,610 in 1995 due to additional sales and support expenditures
necessary as a result of the Company's expanded sales base. Selling, general and
administrative expenses as a percentage of sales increased from 14.0% in 1994 to
15.0% in 1995. The increase resulted primarily from increased dollar amounts of
these expenses associated with the ongoing introduction of HDSL products,
increased distribution activities associated with the CPE market, and general
expansion into international markets.
Research and Development Expenses
Research and development expenses increased 38.9% from $13,774,038 in 1994 to
$19,131,457 in 1995. This increase was due to increased engineering costs
associated with new product introductions and product cost and feature
enhancement activities. As a percentage of sales, however, research and
development expenses declined from 11.2% in 1994 to 10.5% in 1995 due to the
increased sales in 1995. The Company continually evaluates new product
opportunities and engages in intensive research and product development efforts.
Interest Expense
Interest expense increased 146.9% from $447,547 in 1994 to $1,105,156 in 1995.
This increase was the result of interest paid on $20,000,000 of revenue bond
proceeds loaned to the Company in January 1995, which proceeds are being used to
finance the expansion of the Company's facilities in Huntsville, Alabama. See
"Liquidity and Capital Resources."
Provision for Income Taxes
The Company operated through June 30, 1994 as an S corporation under
Subchapter S of the Internal Revenue Code and comparable state tax laws. The
Company therefore was not subject to corporate income taxes, and its tax
liabilities instead were passed through to its stockholders for all periods
through June 30, 1994. Effective July 1, 1994, the Company converted from an S
corporation to a C corporation for income tax purposes and therefore became
subject to corporate income taxes for the third and fourth quarters of 1994. The
Company's statements of income set forth elsewhere in this report include, for
periods prior to July 1, 1994, a presentation of the pro forma effects of income
taxes on the Company's operations as if the Company had been subject to
corporate income taxes prior to July 1, 1994.
Net Income
As a result of the above factors, net income increased 58.3% from $18,608,605
in 1994 to $29,457,727 in 1995. As a percentage of sales, net income increased
from 15.1% in 1994 to 16.2% in 1995.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's only long-term debt outstanding as of December 31, 1996
consisted of a loan in the amount of $20,000,000 related to the expansion of the
Company's facilities in Huntsville, Alabama. The Company is continuing a project
to expand its facilities in Huntsville in several phases over the next three
years at a cost of approximately $131,000,000, of which $36,255,906 has been
incurred at December 31, 1996. The debt associated with fifty million dollars of
the 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 pursuant to such
program and loaned the proceeds from the sale of the bonds to the Company. The
bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama
(the "Bank") and bear interest, payable monthly, at the rate of 87.5 basis
23
<PAGE>
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 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.
The Company's working capital position improved from $122,465,725 as of
December 31, 1995 to $140,509,802 in 1996. This improvement in the Company's
working capital position was due primarily to increased earnings. The Company
has used, and expects to continue to use, the remaining proceeds of its earlier
public offerings for working capital and other general corporate purposes,
including (i) product development activities to enhance its existing products
and develop new products and (ii) expansion of sales and marketing activities.
Inventory decreased 9.3% for the twelve months ended December 31, 1996 due to
overall efficiencies in manufacturing operations.
Capital expenditures totaling $12,790,517 in 1995 and $29,661,438 in 1996 were
used to expand the Company's headquarters and to purchase equipment.
At December 31, 1996, the Company's cash on hand of $44,839,131, short-term
investments of $32,555,930 and $10,000,000 available under a bank line of credit
placed the Company's potential cash availability at $87,395,061. The Company's
$10,000,000 bank line of credit bears interest at the rate of 87.5 basis points
over the 30 day London inter-bank offered rate and expires in May 1997. The
Company anticipates renewing the $10,000,000 bank line of credit upon its
expiration.
The Company intends to finance its operations in the future with cash flow
from operations, the remaining net proceeds of its earlier public offerings,
amounts available under the bank line of credit, borrowed revenue bond proceeds
and possible additional public financings. These available sources of funds are
expected to be adequate to meet the Company's operating and capital needs for
the foreseeable future.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
ADTRAN, Inc.
We have audited the accompanying balance sheets of ADTRAN, Inc. as of December
31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ADTRAN, Inc. as of December 31,
1995, and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Cooper & Lybrand L.L.P.
- ---------------------------
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
January 14, 1997
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements and related notes of ADTRAN, Inc. were
prepared by management, which has the primary responsibility for the integrity
of the financial information therein. The statements were prepared in conformity
with generally accepted accounting principles appropriate in the circumstances
and include amounts which are necessarily based on management's judgment.
Financial information presented elsewhere in this report is consistent with that
in the financial statements.
Management maintains a comprehensive system of internal accounting controls
and relies on the system to discharge its responsibility for the integrity of
the financial statements. This system provides reasonable assurance that
corporate assets are safeguarded, and that transactions are recorded in such a
manner as to permit the preparation of reliable financial information.
Reasonable assurance recognizes that the cost of a system of internal accounting
controls should not exceed the related benefits. This system of internal
accounting controls is augmented by written policies and procedures and the
careful selection and training of qualified personnel. As of December 31, 1996,
management was aware of no material weaknesses in the ADTRAN system of internal
accounting controls.
The financial statements have been audited by the Company's independent
certified public accountants, whose opinion is expressed above. Their audit was
conducted in accordance with generally accepted auditing standards, and as such,
they obtained an understanding of the Company's systems of internal accounting
controls and conducted such tests and related procedures as they deemed
necessary to arrive at an opinion on the fairness of presentation of the
financial statements.
/s/ Mark C. Smith /s/ John R. Cooper
- ---------------------- -----------------------
Mark C. Smith John R. Cooper
Chairman and CEO Vice President and CFO
26
<PAGE>
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,027,609 $ 44,839,131
Short-term investments 24,652,689 32,555,930
Accounts receivable, less allowance for doubtful accounts of
$544,526 and $872,724 in 1995 and 1996, respectively 29,234,803 33,825,560
Other receivables 857,303 362,578
Inventory 44,997,195 40,792,646
Prepaid expenses 683,594 2,261,338
Deferred income taxes 1,068,861 1,598,750
- ------------------------------------------------------------------------------------------------------
Total current assets 136,522,054 156,235,933
Property, plant, and equipment, net 29,245,252 53,971,213
- ------------------------------------------------------------------------------------------------------
Total assets $165,767,306 $210,207,146
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,740,587 $ 9,350,266
Accrued salaries 1,332,141 2,454,194
Accrued income taxes 1,310,841 1,803,706
Accrued taxes other than income taxes 586,150 338,997
Accrued interest payable 74,305 59,594
Warranty liability 523,027 1,026,156
Compensated absences 489,278 693,218
- ------------------------------------------------------------------------------------------------------
Total current liabilities 14,056,329 15,726,131
Bonds payable 20,000,000 20,000,000
Deferred income taxes 967,666 1,602,116
- ------------------------------------------------------------------------------------------------------
Total liabilities 35,023,995 37,328,247
- ------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $.01 per share; 60,000,000 shares
authorized; 37,462,275 shares issued and outstanding
in 1995; 38,769,514 in 1996 374,623 387,695
Additional paid-in capital 89,404,177 90,172,863
Retained earnings 40,964,511 82,318,341
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 130,743,311 172,878,899
Total liabilities and stockholders' equity $165,767,306 $210,207,146
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Statements of Income
for the years ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Sales $123,440,202 $181,478,065 $250,120,836
Cost of sales 63,187,366 93,006,672 129,953,371
- ------------------------------------------------------------------------------------------------------
Gross profit 60,252,836 88,471,393 120,167,465
Selling, general, and administrative expenses 17,346,759 27,259,610 34,308,436
Research and development expenses 13,774,038 19,131,457 24,647,425
- -----------------------------------------------------------------------------------------------------
Income from operations 29,132,039 42,080,326 61,211,604
Other income (expenses):
Interest income 440,151 3,204,902 2,542,417
Interest expense (447,547) (1,105,156) (894,657)
Other (25,144) 111,219 642,432
- -----------------------------------------------------------------------------------------------------
(32,540) 2,210,965 2,290,192
- -----------------------------------------------------------------------------------------------------
Income before income taxes 29,099,499 44,291,291 63,501,796
Provision for income taxes 6,288,675 14,833,564 23,681,892
- -----------------------------------------------------------------------------------------------------
Net income (historical) 22,810,824 29,457,727 39,819,904
- -----------------------------------------------------------------------------------------------------
Pro forma provision for income taxes 4,202,219
- -----------------------------------------------------------------------------------------------------
Net income (pro forma in 1994) $ 18,608,605 $ 29,457,727 $39,819,904
- -----------------------------------------------------------------------------------------------------
Net income per common and common equivalent
share (pro forma in 1994) $0.52 $0.75 $1.01
- -----------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares oustanding 36,131,940 39,289,507 39,566,090
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
Common Stock
Price Par Value Additional Total
Number Of Per ($.01 Per Paid-In Retained Treasury Stockholders'
Shares Share Share) Capital Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 15,663,690 $156,637 $ 2,919,559 $27,091,267 $(410,000) $ 29,757,463
Purchase of treasury stock:
750 shares $6.67 (5,000) (5,000)
Stock options exercised
through issuance of
treasury stock:
60,000 shares $0.11 (393,332) 400,000 6,668
2,250 shares $3.00 (8,250) 15,000 6,750
Stock options exercised
through issuance of
common stock:
Various prices per
share 109,908 1,099 125,270 126,369
Transfer in connection
with conversion from
an S corporation to
a C Corporation
(see Note 7) 33,057,603 (33,057,603)
Issuance of common stock
through initial public
offering, net of
offering costs 2,300,000 $16.46 23,000 37,844,963 37,867,963
Income tax benefit from
exercise of
nonqualified stock
options 145,763 145,763
Distribution to
stockholders (5,483,467) (5,483,467)
Net income 22,810,824 22,810,824
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 18,073,598 180,736 73,545,813 11,506,784 0 85,233,333
Stock options exercised
through issuance of
common stock:
Various prices per
share 460,619 4,606 342,283 346,889
Issuance of common
stock in June 1995
through a public
offering of shares,
net of offering costs 500,000 $31.41 5,000 15,700,362 15,705,362
Issuance of shares to
effect stock split.
(see Note 8) 18,428,058 184,281 (184,281)
Net income 29,457,727 29,457,727
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 37,462,275 374,623 89,404,177 40,964,511 0 130,743,311
Stock options exercised
through issuance of
common stock:
Various prices per
share 1,307,239 13,072 768,686 781,758
Income tax benefit from
exercise of nonqualified
stock options 1,533,926 1,533,926
Net income 38,819,904 39,819,904
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 38,769,514 $387,695 $90,172,863 $82,318,341 $ 0 $172,878,899
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral pert of these financial statements.
29
<PAGE>
Statements of Cash Flows
for the years ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,810,824 $ 29,457,727 $ 39,819,904
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,252,549 3,052,798 4,890,303
Provision for losses on accounts receivable 300,000 172,621 430,637
Provision for losses on inventory 2,013,201 2,887,877 3,862,396
Provision for warranty claims 639,081 776,908 2,110,614
Loss on sale of property, plant, and equipment 82,644 8,842 40,572
Loss on sale of short-term investments classified
as available-for-sale 169,766 405,789
Change in operating assets:
Accounts receivable (5,852,356) (11,384,955) (5,021,394)
Inventory (13,939,944) (20,360,721) 342,153
Other current assets (1,149,441) (302,634) (978,458)
Change in operating liabilities:
Accounts payable 1,292,104 3,245,924 (390,321)
Other liabilities 71,177 1,584,749 (50,491)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,519,839 9,308,902 45,461,704
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Expenditures for property, plant, and equipment (4,051,716) (12,790,517) (29,661,438)
Proceeds from the disposition of
property, plant, and equipment 70,233 14,250 4,602
Purchase of short-term investments
classified as available-for-sale (8,500,000) (16,322,455) (8,309,030)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,481,483) (29,098,722) (37,965,866)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in borrowings under line of credit (1,100,000)
Proceeds from capital lease obligation 1,000,000
Payment of capital lease obligation (10,000,000)
Proceeds from bond issuance 20,000,000
Proceeds from public offering, net of expenditures 37,867,963 15,705,362
Proceeds from issuance of common stock 139,787 346,889 781,758
Income tax benefit from exercise of
nonqualified stock options 145,763 1,533,926
Purchase of treasury stock (5,000)
Distribution to stockholders (5,483,467)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,565,046 36,052,251 2,315,684
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18,603,402 16,262,431 9,811,522
Cash and cash equivalents, beginning of year 161,776 18,765,178 35,027,609
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 18,765,178 $ 35,027,609 $ 44,839,131
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
capitalized interest of $235,928 in 1995
and $393,096 in 1996 $ 479,415 $ 1,030,851 $ 909,368
Cash paid during the year for income taxes $ 6,824,070 $ 13,033,140 $ 22,151,925
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
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 to incorporate into their own products. Most of the
Company's Telco and customer premises equipment products are connected to the
local loop, which is the large existing infrastructure of the telephone network,
predominantly consisting of copper wireline, which connects end-users to a
Telco's central office. The central office is the Telco facility that provides
local switching and distribution functions. The balance of the Company's
products are used in the Telcos' central offices.
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits, money market accounts,
and short-term investments classified as held-to-maturity (see Note 2) with
original maturities of three months or less.
Financial Instruments
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amount reported for the bonds payable approximates fair value
because the underlying instruments are at variable rates that reprice
frequently.
Short-term investments represent remarketed preferred stocks and municipal
bonds classified as available-for-sale securities under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, (SFAS 115), which the Company adopted
effective January 1, 1994. SFAS 115 requires that these investments be
classified as either held-to-maturity, trading, or available-for-sale
securities. Remarketed Preferred Stocks are designed to be marketed as money
market instruments. These instruments' interest rates reset on a short-term
basis to maintain the price of the instruments at par. These instruments may be
redeemed on the date the interest rate resets. The fair value of short-term
investments is estimated based on quoted market prices (see Note 2). Realized
gains or losses are computed under the specific identification method.
Inventory
Inventory is carried at the lower of cost or market, with cost being
determined using the first-in, first-out method.
Property, Plant, and Equipment
Property, plant, and equipment, which is stated at cost, is depreciated using
methods which approximate straight-line depreciation over the estimated useful
lives of the assets. Expenditures for repairs and maintenance are charged to
expense as incurred; betterments which materially prolong the lives of the
assets are capitalized. The cost of assets retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts and the gain
or loss on such disposition is included in income.
Long-Lived Assets
The Company recognizes impairment losses on long lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying values. There were no such losses recognized during 1994, 1995, and
1996.
31
<PAGE>
Research and Development Costs
Research and development costs are expensed as incurred.
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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Income Taxes
Effective July 1, 1994, concurrent with the Company's conversion from an S
corporation to a C corporation for income tax purposes (see Note 7), the Company
adopted the asset and liability method of accounting for income taxes. This
method requires the establishment of deferred tax liabilities and assets, as
measured by enacted tax rates, for all temporary differences caused when the tax
bases of assets and liabilities differ from those reported in the financial
statements. The adoption of the asset and liability method did not have a
material impact on the financial statements.
Net Income Per Share
Net income per common and common equivalent share (pro forma) is based on the
weighted average number of shares of common stock outstanding during each period
and the assumed exercise of dilutive stock options (less the number of treasury
shares assumed to be purchased from the proceeds using the market price of the
Company's common stock).
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements and related footnotes to conform with the 1996 presentation. These
reclassifications had no impact on retained earnings or net income.
32
<PAGE>
2. Investments
At December 31, 1995 and 1996, the Company held the following securities as
available-for-sale or held-to-maturity recorded at amortized cost which
approximates fair value:
1995
Short term investments, available-for-sale:
Municipal Bonds $24,652,689
- ----------------------------------------------------------------
Cash equivalents, held-to-maturity:
General Motors Acceptance, zero coupon bonds
mature January 17, 1996 $ 4,986,731
Ford Motor Credit, zero coupon bonds,
mature January 17, 1996 4,986,731
Chevron Oil Company, zero coupon bonds,
mature January 18, 1996 4,986,000
General Electric Credit, zero coupon bonds,
mature January 18, 1996 4,986,000
$19,945,462
- ----------------------------------------------------------------
1996
Short-term investments, available-for-sale:
Municipal Bonds $10,055,930
Remarketed preferred stocks:
GE Capital preferred asset
corporation A series A 5,000,000
Merrill Lynch preferred series G 5,000,000
Muniyield Fund Auction preferred series A 5,000,000
VKM Investment Grade Municipal Trust
preferred 5,000,000
Nuveen Premium preferred series A 2,500,000
- ----------------------------------------------------------------
$32,555,930
================================================================
Cash equivalents, held-to-maturity:
Triple A One Plus, zero coupon bonds
mature January 10, 1997 $ 4,992,889
Receivables Capital, zero coupon bonds,
mature January 10, 1997 4,992,889
Barton Corporation, zero coupon bonds,
mature January 15, 1997 4,989,248
Three Rivers Funding, zero coupon bonds,
mature January 16, 1997 4,988,533
$19,963,559
================================================================
3. Inventory
At December 31, 1995 and 1996, inventory consisted of the following:
1995 1996
Raw materials $27,390,750 $24,454,251
Work in process 4,428,437 2,963,220
Finished goods 13,178,008 13,375,175
- ----------------------------------------------------------------
$44,997,195 $40,792,646
================================================================
33
<PAGE>
4. Property, Plant, and Equipment
Property, plant, and equipment comprised the following at December 31, 1995
and 1996:
1995 1996
Land $ 2,149,469 $ 4,263,104
Building 12,642,588 26,230,470
Construction in progress 3,511,987 2,021,525
Land improvements 2,995,292 7,177,261
Office machinery and
equipment 4,594,880 8,338,789
Engineering machinery
and equipment 12,228,540 19,577,071
- ----------------------------------------------------------------
38,122,756 67,608,220
Less accumulated
depreciation (8,877,504) (13,637,007)
- ----------------------------------------------------------------
$29,245,252 $ 53,971,213
================================================================
5. Line of Credit
The Company has a $10,000,000 line of credit at a bank, which bears interest
at the rate of 87.5 basis points over the 30 day London inter-bank offered rate.
At December 31, 1996, the Company had no borrowings against this line. The line
of credit expires on May 1, 1997.
6. Alabama State Industrial Development Authority Financing
In contemplation of an expansion of its Huntsville, Alabama facility, the
Company was approved for participation in an incentive program offered by the
State of Alabama Industrial Development Authority (the "Authority"). Pursuant to
such program, on January 13, 1995, the Authority issued $20 million of its
taxable revenue bonds pursuant to such program and loaned the proceeds from the
sale of the bonds to the Company. The bonds were originally purchased by AmSouth
Bank of Alabama, Birmingham, Alabama (the "Bank"), and bear 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 the Bank 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
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.
34
<PAGE>
7. Income Taxes
Effective July 1, 1994, the Company converted from an S corporation to a C
corporation for income tax purposes and therefore is subject to corporate income
taxes. The 1994 statement of income includes a presentation of the pro forma
effects of income taxes on the Company's operations as if the Company had been
subject to corporate income taxes prior to July 1, 1994. As of July 1, 1994,
deferred income tax assets and liabilities were recorded to reflect differences
between the bases of the Company's assets and liabilities for financial
reporting and income tax purposes.
The 1994 financial statements reflect the transfer of the Company's retained
earnings as an S corporation to additional paid-in-capital in connection with
the July 1, 1994 conversion to a C corporation. This transfer reflects the
assumption of a constructive distribution to the prior S corporation
stockholders followed by an assumed contribution to the paid-in capital of the
Company.
A summary of the components of the historical and pro forma tax provisions
as of December 31 is as follows:
1994 1995 1996
Historical:
Current:
Federal $5,626,413 $13,896,982 $21,329,522
State 621,542 968,492 2,247,809
- -----------------------------------------------------------------------
Total Current 6,247,955 14,865,474 23,577,331
Deferred 40,720 (31,910) 104,561
- -----------------------------------------------------------------------
Historical provision
for income taxes for
period after June 30,
1994 6,288,675 14,833,564 23,681,892
Pro forma provision for
income taxes for period
prior to July 1, 1994 4,202,219
- -----------------------------------------------------------------------
Total provision
for income taxes $10,490,894 $14,833,564 $23,681,892
=======================================================================
The provision for income taxes differs from the amounts computed by applying
the federal statutory rate due to the following:
1994 1995 1996
Tax provision computed
at the federal statutory
rate (34% in 1994, 35%
in 1995 and 1996) $ 9,893,830 $15,501,952 $22,225,629
State income tax provision,
net of federal benefit 758,212 629,520 1,461,076
Federal research credits (329,774) (815,408) (151,500)
Permanent differences and
other 168,626 (482,500) 146,687
- -------------------------------------------------------------------------
$10,490,894 $14,833,564 $23,681,892
=========================================================================
35
<PAGE>
Temporary differences which create deferred tax assets and liabilities at
December 31, 1995 and 1996 are detailed below.
1995 1996
Current Noncurrent Current Noncurrent
Property, plant
and equipment ($967,666) ($1,602,116)
Accounts receivable $201,257 $341,584
Inventory 493,456 584,204
Accruals 374,148 672,962
- ------------------------------------------------------------------------------
Deferred tax asset
(liability) $1,068,861 ($967,666) $1,598,750 ($1,602,116)
==============================================================================
No valuation allowance is deemed necessary by management as the realization of
recorded deferred tax assets is considered more likely than not.
8. Stock Split
On April 20, 1995, the stockholders approved the board of directors'
recommendation to increase authorized common stock from 30 million shares to 60
million shares, par value $.01.
Following approval by the board of directors, the Company declared a 2 for 1
stock split, payable on May 12, 1995, to stockholders of record on April 27,
1995. All common stock information included in the financial statements, except
in the statements of changes in stockholders' equity, give retroactive effect to
this stock split.
9. Operating Leases
The company leases office space and equipment under operating leases. As of
December 31, 1996, minimum rental payments under the noncancelable operating
leases are approximately as follows:
1997 $540,000
1998 387,000
1999 271,000
2000 92,500
- -----------------------------------------------------------------------
$1,290,500
=======================================================================
Rental expense was approximately $464,000, $447,000 and $851,000 in 1994,
1995 and 1996, respectively.
10. EMPLOYEE INCENTIVE STOCK OPTION PLAN and DIRECTOR'S STOCK OPTION PLAN
1996 Employees Incentive Stock Option Plan
The Board of Directors of the Company adopted the 1996 Employees Incentive
Stock Option Plan (the "1996 Plan") effective February 14, 1996, under which
488,100 shares of common stock have been reserved as of December 31, 1996 for
issuance to certain employees and officers through incentive stock options and
nonqualified stock options. At December 31, 1996, there were no shares of common
stock issued under the 1996 Plan as initial vesting will not occur until 1997.
In addition, the Company currently has options outstanding under its 1986
Employee Incentive Stock Option Plan (the "1986 Plan"), which plan expired on
February 14, 1996. Options granted under the 1996 Plan or the 1986 Plan become
exercisable after one year of continued employment after the date of grant or
pursuant to a five year vesting schedule beginning on the first anniversary of
the grant date. Expiration dates of options outstanding under the 1996 Plan and
the 1986 Plan at December 31, 1996 range from 1997 to 2007.
36
<PAGE>
Director's Stock Option Plan
The Board of Directors of the Company adopted a Director's Stock Option Plan
effective October 31, 1995 under which 70,000 shares of common stock have been
reserved. The Plan is a formula plan to provide options to non-employee
directors of the Company. At December 31, 1996, 28,000 options have been granted
under the plan. Expiration dates of options outstanding under the Director's
Stock Option Plan at December 31, 1996 range from 2005 to 2006.
Pertinent information regarding the Plans is as follows:
<TABLE>
<CAPTION> Weighted
Range of Average
Number Exercise Exercise Vesting
of Options Prices Price Provisions
<S> <C> <C> <C> <C>
Options outstanding,
December 31, 1993 3,218,640 $ .06 - $3.34 $0.43 100% / year
Options granted 28,250 $3.33 -$12.53 $5.91 100% / year
Options exercised (344,316) $ .06 - $1.67 $0.41 100% / year
- -------------------------------------------------------------------------------------
Options outstanding
December 31, 1994 2,902,574 $.06 - $12.53 $0.49 100% / year
Options granted 84,350 $22.50 - $46.25 $34.86 100% / year
Options cancelled (1,450) $31.75 $31.75 100% / year
Options exercised (815,079) $.06 - $3.33 $0.43 100% / year
- --------------------------------------------------------------------------------------
Options outstanding,
December 31, 1995 2,170,395 $.06 - $46.25 $1.83 100% / year
Options granted 342,000 $39.75 - $65.75 $63.99 20% / year
Options granted 7,950 $30.50 - $65.75 $44.43 100% / year
Options cancelled (9,050) $3.33 - $65.75 $61.78 various
Options exercised (1,307,239) $.06 - $31.75 $0.60 100% / year
- --------------------------------------------------------------------------------------
Options outstanding,
December 31, 1996 1,204,056 $.11 - $65.75 $20.38 various
======================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/96 Life Price 12/31/96 Price
<S> <C> <C> <C> <C> <C>
$0.11 - $0.11 251,800 0.45 $0.11 251,800 $0.11
$0.17 - $0.17 176,000 1.89 $0.17 176,000 $0.17
$0.50 - $0.50 127,415 2.20 $0.50 127,415 $0.50
$0.75 - $2.50 170,666 4.08 $1.85 170,666 $1.85
$3.00 - $3.33 59,525 6.84 $3.31 59,525 $3,31
$12.53 - $12.53 8,000 7.66 $12.53 8,000 $12.53
$22.50 - $46.25 93,150 8.89 $36.44 68,200 $35.60
$56.25 - $56.25 5,000 9.54 $56.25 0 $0.00
$59.50 - $59.50 3,500 9.56 $59.50 0 $0.00
$63.75 - $63.75 22,500 9.65 $63.75 0 $0.00
$65.75 - $65.75 286,500 9.53 $65.75 0 $0.00
- --------------------------------------------------------------------------------------
1,204,056 861,606
======================================================================================
</TABLE>
37
<PAGE>
The options above were issued at exercise prices which approximate fair market
value at the date of grant. At December 31, 1996, 200,600 shares are available
for grant under the plans.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock plans. Accordingly, no compensation cost has been recognized
related to stock options. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed in SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
1995 1996
Net income - as reported $29,457,727 $39,819,904
Net income - pro forma $28,852,035 $38,018,766
Earnings per share -
as reported $.75 $1.01
Earnings per share -
pro forma $.73 $.96
The pro forma amounts reflected above are not representative of the effects on
reported net income in future years because, in general, the options granted
typically do not vest for several years and additional awards are made each
year. The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1995 1996
Dividend yield 0% 0%
Expected life (years) 5 5
Expected volatility (range) 49.40% - 52.37% 48.59% - 49.25%
Risk-free interest rate
(range) 6.23% - 8.29% 5.86% - 7.12%
11. Employee Benefit Plan
In March 1990, the Company adopted an incentive savings plan (the Savings
Plan) for all of its employees. The Savings Plan provides certain employment
benefits to all eligible employees and qualifies as a deferred arrangement under
Section 401(k) of the Internal Revenue Code. The Company matches one-third of a
participant's contribution, limited to 5% of a participant's income. An
employee's interest in the Company's contributions becomes 100% vested at the
date participation in the Savings Plan commenced. Charges to operations for the
plan amounted to $260,392, $415,791, and $547,072 in 1994, 1995, and 1996,
respectively.
12. Major Customers
Sales of the Company's transmission and test equipment to the Regional Bell
Operating Companies (RBOCs) amounted to approximately 38%, 40% and 36% of total
sales during the years ended December 31, 1994, 1995 and 1996, respectively. At
December 31, 1994, 1995 and 1996, respectively, 27%, 36%, and 23% of the
accounts receivable balance consisted of amounts due from RBOCs.
38
<PAGE>
13. Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. This information has been prepared by
the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
data.
Three Months Ended
(In thousands, except for share amounts)
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
Net sales $38,097 $45,462 $48,002 $49,917
Gross profit 18,672 21,723 23,446 24,630
Income from
operations 9,091 10,423 11,250 11,317
Net income 6,075 7,048 7,770 8,566
Net income per
common and common
equivalent share 0.15 0.18 0.20 0.22
Three Months Ended
(In thousands, except for share amounts)
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
Net sales $54,544 $63,305 $62,635 $69,637
Gross profit 25,735 29,960 29,419 35,054
Income from
operations 12,976 15,802 14,963 17,472
Net Income 8,623 10,340 9,406 11,451
Net income per
common and common
equivalent share 0.22 0.26 0.24 0.29
39
<PAGE>
Directors and Executive Officers
Mark C. Smith
Chairman of the Board and Chief Executive Officer of the Company
Lonnie S. McMillian
Senior Vice President - Engineering, Secretary and Director of the Company
Howard A. Thrailkill
President, Director of the Company, and Chief Operating Officer of the Company.
O. Gene Gabbard
Director of the Company; Director of Dynatech Corporation, telecommunications
equipment manufacturer; InterCel, Inc., a provider of wireless communications
services; and Mindspring Enterprises, Inc., a provider of Internet access
services.
William L. Marks
Director of the Company; Chairman of the Board and Chief Executive Officer
of Whitney Holding Corp., the holding company for Whitney National Bank
of New Orleans.
Roy J. Nichols
Director of the Company; Vice Chairman of the Board and Chief Technical Officer
of Nichols Research Corporation (a defense and information systems company),
Huntsville, Alabama
James L. North
Director of the Company and Counsel to the Company since it commenced operations
in 1986. Attorney with James L. North and Associates, Birmingham, Alabama.
John R. Cooper
Vice President - Finance and Chief Financial Officer of the Company.
Danny J. Windham
Vice President - CPE Marketing
Thomas R. Stanton
Vice President - Telco Marketing
Irwin O. Goldstein
Vice President - Administration
Peter O. Brackett
Vice President - Technology
M. Melvin Bruce
Vice President - Engineering
Robert A. Fredrickson
Vice President - Telco Sales
Steven L. Harvey
Vice President - CPE Sales
Jude T. Panetta
Vice President - Manufacturing
Gregory A. Peters
Vice President - International Sales
Corporate Address
901 Explorer Boulevard
P.O. Box 140000
Huntsville, Alabama 35814-4000
Registrar and Transfer Agent
First Union National Bank of
North Carolina
Charlotte, North Carolina
Independent Auditors
Coopers & Lybrand L.L.P.
Birmingham, Alabama
General Counsel
James L. North, Attorney at Law
Birmingham, Alabama
Special Counsel
Long, Aldridge & Norman
Atlanta, Georgia
Form 10-K
The Company's 1996 Annual Report on Form 10-K (without exhibits) as filed with
the Securities and Exchange Commissions is available to stockholders without
charge upon written request to:
Investor Relations
ADTRAN, Inc.
901 Explorer Blvd.
Huntsville, Alabama 35806
Price Range of Common Stock
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ADTN" since the Company's initial public offering of
Common Stock in August 1994. Prior to the initial public offering, there
was no established trading market for the Company's Common Stock. As of
January 31, 1997, the Company had 561 shareholders of record and approximately
10,500 beneficial owners of shares held in street name.
<TABLE>
<CAPTION>
<S> <C> <C>
FISCAL 1996 HIGH LOW
First Quarter $54-3/4 $26-1/2
Second Quarter $73-1/2 $45
Third Quarter $75-1/4 $47-1/2
Fourth Quarter $52-1/4 $33-1/2
</TABLE>
Annual Meeting
The 1997 Annual Meeting of Shareholders will be held at the Company
Headquarters, 901 Explorer Blvd., Huntsville, Alabama, on Wednesday, April 23,
1997 at 10:00 a.m. local time.
Web Address
http://www.adtran.com
40
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
ADTRAN, Inc. on Form S-8 of our reports dated January 14, 1997, on our audits of
the financial statements of ADTRAN, Inc. as of December 31, 1996 and 1995, and
for the years ended December 31, 1996, 1995, and 1994, which reports are
incorporated by reference in this annual report on Form 10-K.
/s/COOPERS & LYBRAND L.L.P.
Birmingham, Alabama --------------------------
March 24, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 11th day of March, 1997.
/s/ MARK C. SMITH
------------------------
MARK C. SMITH
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 11th day of March, 1997.
/s/Lonnie S.McMillian
---------------------
Lonnie S. McMillian
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 12th day of March, 1997.
/s/Howard A. Thrailkill
-----------------------
Howard A. Thrailkill
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 6th day of March, 1997.
/s/John R. Cooper
-----------------
John R. Cooper
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 6th day of March, 1997.
/s/Roy J. Nichols
----------------
Roy J. Nichols
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 21st day of February, 1997.
/s/William L.Marks
------------------
William L. Marks
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 21st day of February, 1997.
/s/ O.Gene Gabbard
------------------
O. Gene Gabbard
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Lonnie S. McMillian and John R. Cooper, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the
fiscal year ended December 31, 1996, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 21st day of February, 1997.
/s/James L. North
-----------------
James L. North
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 44,839,131
<SECURITIES> 32,555,930
<RECEIVABLES> 34,698,284
<ALLOWANCES> (872,724)
<INVENTORY> 40,792,646
<CURRENT-ASSETS> 156,235,933
<PP&E> 67,608,220
<DEPRECIATION> (13,637,007)
<TOTAL-ASSETS> 210,207,146
<CURRENT-LIABILITIES> 15,726,131
<BONDS> 20,000,000
0
0
<COMMON> 387,695
<OTHER-SE> 172,491,204
<TOTAL-LIABILITY-AND-EQUITY> 210,207,146
<SALES> 250,120,836
<TOTAL-REVENUES> 250,120,836
<CGS> 129,953,371
<TOTAL-COSTS> 129,953,371
<OTHER-EXPENSES> 34,308,436
<LOSS-PROVISION> 430,637
<INTEREST-EXPENSE> (894,657)
<INCOME-PRETAX> 63,501,796
<INCOME-TAX> 23,681,892
<INCOME-CONTINUING> 39,819,904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,819,904
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
</TABLE>
