| ADTRAN INC ITEM 1A RISK FACTORS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN ADTRAN and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and our other filings with the SEC and in our reports to our stockholders |
| Generally, the words, “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could” and similar expressions identify forward-looking statements |
| We caution you that any forward-looking statements made by or on our behalf are subject to uncertainties and other factors that could cause these statements to be wrong |
| Some of these uncertainties and other factors are listed below |
| Though we have attempted to list comprehensively these important factors, we caution investors that other factors may prove to be important in the future in affecting our operating results |
| New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or combination of factors may have on our business |
| You are further cautioned not to place undue reliance on those forward-looking statements because they speak only of our views as of the date the statements were made |
| We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise |
| 11 ______________________________________________________________________ [54]Table of Contents [55]Index to Financial Statements The following are some of the risks that could affect our financial performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements: We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in telecommunications technology |
| The markets for our products are characterized by rapidly changing technology, evolving industry standards, and continuing improvements in the telecommunications service offerings of common service providers |
| If technologies or standards applicable to our products, or common service provider offerings based on our products, become obsolete or fail to gain widespread commercial acceptance, our existing products or products under development may become obsolete or unmarketable |
| Moreover, the introduction of products embodying new technologies, the emergence of new industry standards, or changes in common service provider offerings could adversely affect our ability to sell our products |
| For instance, we offer a large number of products that apply primarily to the delivery of high-speed digital communications over the local loop over copper wire |
| We compete favorably with our competitors by developing a high-performance line of these products |
| Recently, we have begun marketing products that apply to fiber optic transport in the local loop |
| We expect, however, that use of coaxial cable and mobile wireless access in place of local loop access will increase |
| Also, non-traditional providers, such as cable television companies, are increasing their presence in the local loop |
| To meet the requirements of these new delivery systems and to maintain our market position, we may have to develop new products or modify existing products |
| Our sales and profitability in the past have, to a significant extent, resulted from our ability to anticipate changes in technology, industry standards and common service provider offerings, and to develop and introduce new and enhanced products |
| Our continued ability to adapt will be a significant factor in maintaining or improving our competitive position and our prospects for growth |
| We cannot assure you that we will be able to respond effectively to changes in technology, industry standards, common service provider offerings or new product announcements by our competitors |
| We also cannot assure you that we will be able to successfully develop and market new products or product enhancements, or that these products or enhancements will achieve market acceptance |
| Any failure by us to continue to anticipate or respond in a cost-effective and timely manner to changes in technology, industry standards, common service provider offerings, or new product announcements by our competitors, or any significant delays in product development or introduction, could have a material adverse effect on our future profitability and our ability to market our products on a timely and competitive basis |
| We do not engage in long-term research and development processes, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts |
| Our research and development efforts are focused primarily on the refinement and redefinition of transmission technologies, which are currently accepted and commonly practiced |
| Most of our research and development efforts result in improved applications of technologies for which demand already exists or is latent |
| We do not, for the most part, engage in long-term speculative research projects, which represent a vast departure from the current business practices of our key customers |
| This includes pioneering new services and participating in advance field trials or demonstration projects for new technologies |
| Our strategy, while producing a more predictable revenue stream, could result in lost opportunity should a new technology achieve rapid and widespread customer acceptance |
| We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income |
| Historically, a large percentage of our sales have been made to ILECs and major independent telecommunications companies |
| As long as the ILECs and other service providers represent such a substantial percentage of our total sales, our future success will significantly depend upon certain factors which are not within our control, including: • the timing and size of future purchase orders, if any, from these customers; • the product requirements of these customers; • the financial and operational success of these customers; • the impact of legislative and regulatory changes on these customers; • the success of these customers’ services deployed using our products; and • the impact of work stoppages at these customers |
| 12 ______________________________________________________________________ [56]Table of Contents [57]Index to Financial Statements Sales to our large customers have, in the past, fluctuated and may fluctuate significantly from quarter to quarter and year to year |
| The loss of, or a significant reduction or delay in, sales to any such customer or the occurrence of sales fluctuations could have a material adverse effect on our business and results of operations |
| Further, any attempt by an ILEC or other service provider to seek out additional or alternative suppliers or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material adverse effect on our operating results |
| Our dependence on subcontractors located in Asia may result in reduced control over product quality, delayed delivery of products, increased materials cost from excess/obsolete material and/or increased manufacturing costs, each of which could negatively affect customer relations and operating results |
| We rely on subcontractors in Asia for the assembly of printed circuit board assemblies, subassemblies, chassis, enclosures and equipment shelves, and, more recently, to purchase the raw materials used in such assemblies |
| We are heavily dependent on two subcontractors |
| This reliance involves several risks, including the unavailability of, or interruptions in, access to certain process technologies and reduced control over product quality, delivery schedules, transportation interruptions, manufacturing yields, and costs |
| These risks may be exacerbated by economic or political uncertainties or by natural disasters in the foreign countries in which our subcontractors are located |
| To date, we believe that we have successfully managed the risks of our dependence on these subcontractors through a variety of efforts, which include seeking and developing alternative subcontractors while maintaining existing relationships; however, we cannot assure you that delays in product deliveries will not occur in the future because of shortages resulting from this limited number of subcontractors or from the financial or other difficulties of these parties |
| Our inability to develop alternative subcontractors if and as required in the future, or the need to undertake required retraining and other activities related to establishing and developing a new subcontractor relationship, could result in delays or reductions in product shipments which, in turn, could have a negative effect on our customer relationships and operating results |
| We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share |
| The markets for our products are intensely competitive |
| Additional manufacturers have entered the markets in recent years to offer products in competition with us |
| Additionally, certain companies have, in recent years, developed the ability to deliver coaxial cable and cellular transmission, especially in high-density metropolitan areas |
| Competition would further increase if new companies enter the market or existing competitors expand their product lines |
| Some of these potential competitors may have greater financial, technological, manufacturing, sales and marketing, and personnel resources than we have |
| As a result, these competitors may be able to respond more rapidly or effectively to new or emerging technologies and changes in customer requirements, withstand significant price decreases, or devote greater resources to the development, promotion, and sale of their products than we can |
| In addition, our present and future competitors may be able to enter our existing or future markets with products or technologies comparable or superior to those that we offer |
| An increase in competition could cause us to reduce prices, decrease our market share, require increased spending by us on product development and sales and marketing, or cause delays or cancellations in customer orders, any one of which could reduce our gross profit margins and adversely affect our business and results of operations |
| Our estimates regarding future warranty obligations may change due to product failure rates, shipment volumes, field service obligations and other rework costs incurred in correcting product failures |
| If our estimates change, the liability for warranty returns may be increased or decreased, impacting future cost of goods sold |
| Our products are highly complex, and there is no assurance that our extensive product development, manufacturing and integration testing will be adequate to detect all defects, errors, failures and quality issues |
| Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results and financial position |
| The development and production of new products with high complexity often involves problems with software, components and manufacturing methods |
| If significant warranty obligations arise due to reliability or quality issues arising from defects in software, faulty components, or manufacturing methods, our operating results and financial position could be negatively impacted by: • cost associated with fixing software or hardware defects; • high service and warranty expenses; • high inventory obsolescence expense; • delays in collecting accounts receivable; • payment of liquidated damages for performance failures; and • declining sales to existing customers |
| 13 ______________________________________________________________________ [58]Table of Contents [59]Index to Financial Statements The lengthy approval process required by ILECs and other service providers could result in fluctuations in our revenues |
| In the industry in which we compete, a supplier must first obtain product approval from an ILEC or other service provider to sell its products to them |
| This process can last from six to 18 months depending on the technology, the service provider, and the demand for the product from the service provider’s subscribers |
| Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well as products that deploy new technology or respond to new technology demands from an ILEC or other service provider |
| We have been successful in the past in obtaining these approvals |
| However, we cannot be certain that we will obtain these approvals in the future or that sales of these products will continue to occur |
| Furthermore, the delay in sales until the completion of the approval process, the length of which is difficult to predict, could result in fluctuations of revenue and uneven operating results from quarter to quarter or year to year |
| Our dependence on a limited number of suppliers may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results |
| Certain raw materials and key components used in our products are currently available from only one source, and others are available from only a limited number of sources |
| The availability of these raw materials and supplies is subject to market forces beyond our control |
| From time to time, there may not be sufficient quantities of raw materials and supplies in the marketplace to meet customer demand |
| Many companies utilize the same raw materials and supplies as we do in the production of their products |
| Companies with more resources than our own may have a competitive advantage in obtaining raw materials and supplies due to greater buying power |
| These factors can result in reduced supply, higher prices of raw materials, and delays in the receipt of certain of our key components, which in turn may generate increased costs, lower margins, and delays in product delivery, with a corresponding adverse effect on sales, customer relationships, and revenue |
| Furthermore, due to general economic conditions in the US and globally, our suppliers may experience financial difficulties, which could result in increased delays, additional costs, or loss of a supplier |
| We attempt to manage these risks through developing alternative sources, through engineering efforts designed to obviate the necessity of certain components, and by building long-term relationships and close personal contact with each of our suppliers |
| However, we cannot assure you that delays in or failures of deliveries of key components, either to us or to our contract manufacturers, and consequent delays in product deliveries, will not occur in the future |
| Increased sales volume in international markets could result in increased costs or loss of revenue due to factors inherent in these markets |
| We are in the process of expanding into international markets, which represented 11dtta3prca of our net sales for 2005, and we anticipate increased sales from these markets |
| We currently maintain regional sales offices in each of the following cities: Melbourne and Sydney, Australia; Montreal, Quebec, Canada; Prague, Czech Republic; Hong Kong, Beijing, and Guangzhou, China; Bad Homburg, Germany; and Uxbridge, United Kingdom |
| A number of factors inherent to these markets expose us to significantly more risk than domestic business, including: • local economic and market conditions; • exposure to unknown customs and practices; • potential political unrest; • foreign exchange exposure; • unexpected changes in or impositions of legislative or regulatory requirements; • less regulation of patents or other safeguards of intellectual property; and • difficulties in collecting receivables and inability to rely on local government aid to enforce standard business practices |
| 14 ______________________________________________________________________ [60]Table of Contents [61]Index to Financial Statements Our success depends on our ability to reduce the selling prices of succeeding generations of our products |
| Our strategy is to attempt to increase unit sales volumes and market share each year by introducing succeeding generations of products having lower selling prices and increased functionality as compared to prior generations of products |
| To maintain or increase our revenues and margins while continuing this strategy, we must continue, in some combination, to increase sales volumes of existing products, introduce and sell new products, or reduce our per unit costs at rates sufficient to compensate for the reduced revenue effect of continuing reductions in the average sales prices of our products |
| We cannot assure you that we will be able to maintain or increase revenues or margins by increasing unit sales volumes of our products, introducing and selling new products, or reducing our per unit costs |
| Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality, and commercial value of our products |
| Our future success depends in part upon our proprietary technology |
| Although we attempt to protect our proprietary technology by contract, trademark, copyright and patent registration, and internal security, these protections may not be adequate |
| Furthermore, our competitors can develop similar technology independently without violating our proprietary rights |
| From time to time we receive and may continue to receive notices from third parties, including some of our competitors, claiming that we are infringing upon third-party patents or other proprietary rights |
| We cannot predict whether we will prevail in any litigation over third-party claims, or whether we will be able to license any valid and infringed patents on commercially reasonable terms |
| Any of these claims, whether with or without merit, could result in costly litigation; divert our management’s time, attention, and resources; delay our product shipments; or require us to enter into royalty or licensing agreements |
| A third party may not be willing to enter into a royalty or licensing agreement on acceptable terms, if at all |
| If a claim of product infringement against us is successful and we fail to obtain a license or develop or license non-infringing technology, our business, financial condition, and operating results could be affected adversely |
| Consolidation and deterioration in the competitive service provider market could result in a significant decrease in our revenue |
| We sell a moderate volume of products to competitive service providers, relative newcomers to the telecom industry, who compete with the established ILECs |
| The competitive service provider market is overbuilt, and is experiencing a process of consolidation and closure |
| Many of our competitive service provider customers do not have a strong financial position and have limited ability to access the public financial markets for additional funding for growth and operations |
| If one or more of these competitive service providers fail, we could face a loss in revenue and an increased bad debt expense, due to their inability to pay outstanding invoices, as well as the corresponding decrease in customer base and future revenue |
| Furthermore, significant portions of our sales to competitive service providers are made through independent distributors |
| The failure of one or more competitive service providers could also negatively effect the financial position of a distributor to the point that the distributor could also experience business failure and/or default on payments to us |
| Our success depends on attracting and retaining key personnel |
| Our business has grown significantly since its inception |
| Our success is dependent in large part on the continued employment of our executive officers, including Thomas R Stanton, our Chief Executive Officer, Danny Windham, our President, Chief Operating Officer, and Secretary, and other key management personnel |
| The unplanned departure of one or more of these individuals could adversely affect our business |
| In addition, for ADTRAN to continue as a successful entity we must also be able to attract and retain key engineers and technicians whose expertise helps us maintain competitive advantages |
| We do not have employment contracts or non-compete agreements with any of our employees |
| We believe that our future success will depend, in large part, upon our ability to continue to attract, retain, train, and motivate highly-skilled employees who are in great demand |
| Properly managing our continued growth, avoiding the problems often resulting from such growth and expansion, and continuing to operate in the manner which has proven successful to us to date will be critical to the future success of our business |
| The price of our common stock has been volatile and may continue to fluctuate significantly |
| Our common stock is traded on the NASDAQ National Market under the symbol ADTN Since our initial public offering in August 1994, there has been, and may continue to be, significant volatility in the market for our common stock, based on a variety of factors, some of which are beyond our control, including the following: • actual or anticipated fluctuations in our quarterly or annual operating results; • the gain or loss of significant contracts by us or our competitors; 15 ______________________________________________________________________ [62]Table of Contents [63]Index to Financial Statements • the entry of new competitors (potentially including the ILECs) into our markets; • changes in management or additions or departures of key personnel; • announcements of technological innovations, new products, changes in product pricing, acquisitions, strategic partnerships, joint ventures, or capital commitments by us or our competitors; • changes in financial estimates or investment recommendations by securities analysts or our failure to perform in line with analysts’ expectations; • legislative or regulatory changes; and • other events and circumstances beyond our control |
| In addition, the stock market has recently experienced significant price and volume fluctuations, which have particularly affected the share price of many high technology companies like ADTRAN These fluctuations may be unrelated to the operating performance of these companies |