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, 1997
[ ] 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
dentification Number)
901 Explorer Boulevard, Huntsville, Alabama 35806-2807
(Address of principal executive offices, including zip code)
(256) 963-8000
(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 March 12, 1998 was $568,848,69. There
were 39,402,679 shares of Common Stock outstanding as of March 12, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 27, 1998 are incorporated herein by reference in Part III.
<PAGE>
ADTRAN, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1997
Table of Contents
Item Page
Number Number
PART I
1. Business 3
2. Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 16
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 18
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
PART III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and
Management 39
13. Certain Relationships and Related Transactions 39
PART IV
14. Exhibits,Financial Statement, financial Statement Schedules,
and Reports on Form 8-K 39
SIGNATURES 42
INDEX OF EXHIBITS 45
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets and
services a broad range of high-speed digital transmission products utilized by
telephone companies ("Telcos") and corporate end-users to implement advanced
digital data services over existing telephone networks. 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 500 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 has addressed the wireless marketplace with the introduction of a
wireless spread spectrum microwave transceiver.
The Company's products address two market segments: (i) Telco products for
use in the Local Loop or in Central Offices and (ii) CPE products for end-users.
In 1997, sales of Telco and CPE products accounted for 64.8% and 35.2%
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 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 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
The Company is continuing a project to expand its facilities in Huntsville,
Alabama in phases over the next four years at a cost expected to exceed
$150,000,000 of which, almost $50,000,000 had been incurred at December 31,
1997. Fifty million of this project was approved for participation in an
incentive program offered by the Alabama State Industrial Development Authority
(the "Authority"). That incentive 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
payable. 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. The Authority
has issued $50,000,000 of its taxable revenue bonds pursuant to such program and
loaned the proceeds from the sale of the bonds to the Company. The Company will
make payments to the Authority in amounts necessary to pay the principal of and
interest on the Authority's Taxable Revenue Bond, Series 1995 (ADTRAN, Inc.
Project), as amended, currently outstanding in the aggregate principal amount of
$50,000,000. Said bond matures on January 1, 2020, and bears interest at the
rate of 45 basis points over the money market rate of First Union National Bank.
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 six
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 re-sellers over the past six
years. The Company intends to develop new distribution channels to address the
worldwide market for its CPE products.
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 and CPE 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.
Products
Core Product Technology. The Company's product lines, comprised of over 500
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 two 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.
* CPE 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
1997, the Company delivered more than 749,856 units of this product group,
accounting for 76.7% of the Company's total units shipped. Telco products
accounted for 64.8% and 68.7% of the Company's sales in 1997 and 1996
respectively. Sales of Telco products to original equipment manufacturers
("OEMs") are included in these percentages. The Company had in prior years
reported Telco product sales to OEM customers in an OEM product section of Form
10-K, and were not part of the Telco product percentages. The Company now
categorizes certain OEM sales as Telco product sales, as the OEM supply
contracts are customer funded modifications of Telco products.
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 the industry's primary supplier 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, Total Reach 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 4th
Terminations (up 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 5th
Subscriber Line 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 8th
Data Ports (up to 64 Kbit/sec)
U-BR1TE U-Basic Rate Transmission Extends ISDN (up to 3rd
Extenders 128 Kbit/sec) to Central
Offices/remote huts
without ISDN Switch
U-Repeater ISDN Loop Repeaters Extends ISDN Circuit 3rd
Range
Total Reach ISDN Extended Range ISDN Delivers ISDN servies 2nd
(up to 128 Kbit/sec) up
to 30,000 feet over a
single copper pair
Tracer Wireless T1 Transmission Delivers two T1's over 1st
wireless digital spread
spectrum microwave radio
Total Reach DDS Extended Range DDS Delivers DDS services 1st
(up to 64 Kbit/sec) up
to 40,000 feet over a
single copper pair
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 35.2% and 31.3% of the Company's sales in 1997
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. In 1997, the Company introduced its "IQ
Series" of DSU's/CSU's with control and monitor features for frame relay
circuits. 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 three years, Frame Relay Services have met with increasing
customer acceptance. As a result, the Company has introducted 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 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
Company's technical expertise was recognized in July of 1997, as ADTRAN's TSU
120 TSU/CSU received a Users Choice Award from Communications News Magazine in
the T1/T3 networking category.
Late in 1997, the Company intoduced its new ATLAS 800 Integrated Access System.
The ADTRAN Total Access System, ATLAS, is a modular, highly scaleable platform
that provides robust solutions addressing the wide area communication needs of
medium to large corporations as well as network access providers. ATLAS is a
powerful host-site access platform that provides customers with a total
integrated end-to-end solution.
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 2nd
end-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 Connects data terminal 2nd
Units/Channel Service equipment to T-1
Units (1.544 Mbit/sec)
network
T1-CSU T-1 Channel Service Provides T-1 3rd
Units termination
NT-1 Network Termination Provides ISDN 3rd
termination
FSU Frame Relay Service Provides Frame Relay 1st
Unit circuit termination
ATLAS Integrated Access Consolidates voice, 1st
System data and video into a
single, scaleable
platform
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 (8.7% of total sales in 1997), 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 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 1997 Annual
Report to Stockholders.
As of December 31, 1997, the Company's product development programs were carried
out by 252 engineers and engineering support personnel, comprising approximately
25% 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 1997, 1996 and 1995, product
development expenditures totaled $30,055,091, $24,647,425, and $19,131,457,
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 1998 than it did in 1997.
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 and CPE markets, and because all
of the products in each of the 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, 1997, 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 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:
Alltel Corporation Hong Kong Telecom
Ameritech Corp. NYNEX Corp.
Azteca Telecommunications Pacific Bell
Bell Atlantic Network Services Solunet, Inc.
BellSouth Corp. Siemens Corp.
Bloomberg L.P. Southwestern Bell Corp.
Cincinnati Bell Sprint Corp
Cisco Systems, Inc. Tech Data, Inc.
Eltrax US West, Inc.
GTE Corp.
Historically, a large percentage of the Company's sales have been to the seven
RBOCs (31.7% in 1997) and other Telcos (33.0% in 1997). GTE and Sprint accounted
for 19.5% and 10.0%, respectively, of the Company's total sales in 1997. No
other customer accounted for 10% or more of the Company's sales in 1997.
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, 1997, the Company's marketing, sales and distribution
programs were conducted by 166 employees. The Company sells its Telco products
in the United States directly to the Telcos through a field sales organization
based in 39 locations (some of these work out of their homes) in the United
States, Canada, and it sells its Telco products internationally through a Hong
Kong sales office and various distribution arrangements with a geographically
dispersed set of distributors. The Company sells its CPE products, both
domestically and internationally, through a network of re-sellers. 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. 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. 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(less than 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.
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. 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. 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.
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 26% to 43% of working capital
during 1997.
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 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.
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. 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.
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, 1997, the Company had 1008 full-time employees in the United
States, two in Canada and one in Hong Kong. Of the Company's total employees,
255 were in sales, marketing, distribution and service, 252 were in research and
development, 376 were in manufacturing, and 128 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 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 four years at a cost expected
to exceed $150,000,000 of which almost $50,000,000 had been incurred at December
31, 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" in the Company's 1997
Annual Report to Stockholders and Note 6 of Notes to Financial Statements.
The Company also maintains 39 sales and service facilities, 36 located
within the United States, two in Canada and one in Hong Kong, 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, Altamonte Springs, FL, Herndon, VA and
Philadelphia, PA are leased under leases which expire at various times between
1998 and 20010. 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, 1997.
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 December 31, 1997
Mark C. Smith - Age 57
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 69
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 59
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
John R. Cooper - Age 50
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 38
1995 to present Vice President - CPE Marketing
1994 - 1995 Director of Marketing
1989 - 1994 Manager of Product Management
Thomas R. Stanton - Age 33
1995 to present Vice President - Telco Marketing
1994 - 1995 Sr. Director, Marketing, E.F. Johnson Company
1993-1994 Director, Marketing, E.F. Johnson Company
Peter O. Brackett - Age 56
1996 to present Vice President - Technology
1992 - 1996 Research Manager, Advanced Data Networking, Bellsouth
M. Melvin Bruce - Age 57
1996 to present Vice President - Engineering
1989 - 1996 Vice President, Research and Design, TCI
Robert A. Fredrickson - Age 47
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 37
1996 to present Vice President - CPE Sales
1995 - 1996 Executive Vice President, Data Processing Sciences
1991 - 1995 Vice President, Data Processing Sciences
Charles A. O'Donnell - 43
1996 to present Vice President - Quality
1993 - 1996 Quality & Technical Resources Manager,
Exide Electronics Corp.
Jude T. Panetta - Age 38
1994 to present Vice President - Manufacturing
1989 - 1994 Director of Manufacturing, Exide Electronics
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
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 March 12, 1998, the Company
had approximately 625 shareholders of record and approximately 14,200 beneficial
owners of shares held in street name.. The following table shows the high and
low closing sale prices per share of Common Stock as reported by Nasdaq for the
periods indicated:
1997 Quarters High Low
First $53-1/4 $22-1/2
Second $35-5/8 $20-7/8
Third $44 $23
Fourth $45-1/2 $26
1996 Quarters High Low
First $54-3/4 $26-1/2
Second $73-1/2 $45
Third $75-1/4 $47-1/2
Fourth $52-1/4 $33-1/2
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.
ITEM 6. SELECTED FINANCIAL DATA
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, 1997 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 is qualified in its 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, 1997 and 1996 and for each of the years in the three year period ended
December 31, 1997, and the report of Coopers & Lybrand L.L.P. thereon, are
included elsewhere in Item 8 of this report.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Sales:
Telco (1) $171,838 $171,902 $121,311 $87,888 $58,994
CPE (1) 93,497 78,219 60,167 35,552 13,417
Total sales 265,335 250,121 181,478 123,440 72,411
Cost of sales 130,254 129,953 93,007 63,187 36,769
Gross profit 135,081 120,168 88,471 60,253 35,642
Selling, general and
administrative expense 44,973 34,308 27,260 17,347 11,898
Research and development
expenses 30,055 24,647 19,131 13,774 10,033
Operating income 60,053 61,213 42,080 29,132 13,711
Interest income 4,175 2,542 3,205 440 7
Interest expense (1,839) (895) (1,105) (448) (424)
Other income (expense) 438 642 111 (25) (13)
Income before income
taxes (2) 62,827 63,502 44,291 29,099 13,281
Provision for income
taxes (2) 22,618 23,682 14,833 6,288 0
Net income (2) 40,209 39,820 29,458 22,811 13,281
Pro forma provision for
income taxes (2) 0 0 0 4,202 4,825
Pro forma net income (2) 40,209 39,820 29,458 18,609 8,456
Pro forma net income per share
assuming dilution(2)(3)(4) 1.02 1.01 .75 .51 .25
Earnings per common share
- basic(2)(3) 1.03 1.03 .80 .56 .27
Weighted average shares
outstanding assuming
dilution(3) (4) 39,565 39,549 39,249 36,199 34,098
S corporation distributions(2) $5,483 $5,494
At December 31,
1997 1996 1995 1994 1993
(in thousands)
Balance Sheet Data:
Working capital $149,184 $140,510 $122,466 $66,368 $19,795
Total assets 282,401 210,207 165,767 94,347 46,304
Total debt 50,000 20,000 20,000 0 10,100
Stockholders' equity 212,037 172,879 130,743 85,233 29,757
</TABLE>
(1) Represents sales of the Company's Telco 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 o 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 net income per share as if the Company had been
subject 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.
(4) Assumes exercise of dilutive stock options calculated under the
treasury stock method. See Notes 1, 10, and 13 of Notes to Financial Statements.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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),and 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 14 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")
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 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.
When used in this 1997 Annual Report, the words "believe," "anticipate,"
"think," "intend," "will be," and similar expressions identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Readers are also urged
to carefully review and consider the various disclosures made by the Company
which attempt to adivse interestedd parties of the factors which affect the
Company's business, including the disclosures made in other periodic reports
on Forms 10-K, 10-Q and 8-K, when appropriate, filed with the Securities and
Exchange Commission.
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 1997 1996 1995
Sales:
Telco 64.8% 68.7% 66.8%
CPE 35.2 31.3 33.2
Total sales 100.0 100.0 100.0
Cost of sales 49.1 51.9 51.3
Gross profit 50.9 48.1 48.7
Selling, general and
administrative expenses 17.0 13.7 15.0
Research and development expenses 11.3 9.9 10.5
Operating income 22.6 24.5 23.2
Interest income 1.6 1.0 1.8
Interest expense (0.7) (0.4) (0.6)
Other income (expense) 0.2 0.3 0.0
Income before provision for
income taxes 23.7 25.4 24.4
Provision for income taxes 8.5 9.5 8.2
Net income 15.2% 15.9% 16.2%
1997 Compared to 1996
Sales
The Company's sales increased 6.1% from $250,120,836 in 1996 to $265,334,768 in
1997. The increased sales resulted from increased sales volume to existing
customers and from increased market penetration. Sales to Telcos remained
basically unchanged from $171,901,851 in 1996 to $171,837,883 in 1997. Telco
sales as a percentage of total sales decreased from 68.7% in 1996 to 64.8% in
1997. Sales of CPE products increased 19.5% from $78,218,985 in 1996 to
$93,496,885 in 1997. The increase in sales of CPE products is attributable to
increased demand for T1 Service Unit (TSU) products and Integrated Services
Digital Network (ISDN) products. Cost of Sales Cost of sales increased only
slightly, 0.2% from $129,953,371 in 1996 to $130,253,531 in 1997, primarily as a
result of the increase in sales. As a percentage of sales, cost of sales
decreased from 51.9% in 1996 to 49.1% in 1997. This decrease was primarily
attributable to manufacturing efficiencies and product design enhancements. 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 31.1% from $34,308,436 in
1996 to $44,973,175 in 1997 due to additional sales and support expenditures
necessary as a result of the Company's expanded sales base and increased dollar
amounts of these expenses associated with the ongoing introduction and marketing
of enhanced products, increased distribution activities associated with the CPE
market, and general expansion into international markets. As a percentage of
sales, selling, general and administrative expenses increased from 13.7% in 1996
to 17.0% in 1997.
Research and Development Expenses
Research and development expenses increased 21.9% from $24,647,425 in 1996 to
$30,055,091 in 1997. This increase was due to increased engineering costs
associated with new product introductions and feature enhancement activities. As
a percentage of sales, research and development expenses increased from 9.9% in
1996 to 11.3% in 1997. 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 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 increased 105.5% from $894,657 in 1996 to $1,838,814 in 1997.
This increase was due to interest cost incurred as a part of the cost of
acquiring certain assets. The Company currently pays interest on $50,000,000 of
revenue bond proceeds of which $20,000,000 was loaned to the Company in January
1995, and $30,000,000 was loaned to the Company in April 1997. The proceeds were
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 1.0% from $39,819,904 in
1996 to $40,209,272 in 1997. As a percentage of sales, net income decreased from
15.9% in 1996 to 15.2% in 1997.
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 from increased sales volume to existing
customers and from increased market penetration. Sales to Telcos increased 41.7%
from $121,311,131 in 1995 to $171,901,851 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. Telco sales as a
percentage of total sales increased from 66.8% in 1995 to 68.7% in 1996
primarily as a result of increased sales volume of ISDN and HDSL products during
the 1996 period. Sales of CPE products increased 30.0% from $60,166,935 in 1995
to $78,218,985 in 1996. The increase in sales of CPE products is attributable to
increased demand for Digital Data Service (DDS) products, T1 Service Unit (TSU)
products, and Integrated Services Digital Network (ISDN) 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.
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.
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.
Liquidity and Capital Resources
The Company is continuing a project to expand its facilities in Huntsville,
Alabama in phases over the next four years at a cost expected to exceed
$150,000,000, of which almost $50,000,000 had been incurred at December 31,
1997. Fifty million of this project has been approved for participation in an
incentive program offered by the Alabama State Industrial Development Authority
(the "Authority"). That incentive 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
payable. 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. The Authority
has issued $50,000,000 of its taxable revenue bonds pursuant to such program and
loaned the proceeds from the sale of the bonds to the Company. The Company will
make payments to the Authority in amounts necessary to pay the principal of and
interest on the Authority's Taxable Revenue Bond, Series 1995 (ADTRAN, Inc.
Project), as amended, currently outstanding in the aggregate principal amount of
$50,000,000. Said bond matures on January 1, 2020, and bears interest at the
rate of 45 basis points over the money market rate of First Union National Bank.
The Company's working capital position improved from $140,509,802 as of
December 31, 1996 to $149,183,578 as of December 31, 1997. 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 3.5% for the twelve months ended December 31,
1997 due to overall efficiencies in manufacturing operations.
On March 31, 1997, the Board of Directors authorized the Company to re-purchase
up to 1,000,000 shares of the Company's outstanding common stock. As of December
31, 1997, the Company had re-purchased 100,000 shares of its common stock at a
total cost of $2,200,000.
Capital expenditures totaling $29,661,438 in 1996 and $18,220,850 in 1997 were
used to expand the Company's headquarters and to purchase equipment.
At December 31, 1997, the Company's cash on hand of $45,340,961, short-term
investments of $37,833,240 and $10,000,000 available under a bank line of credit
placed the Company's potential cash availability at $93,174,201. 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 on May 1, 1998. 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.
Year 2000 Compliance
The Company is in the process of reviewing current software and hardware to
assess the impact of the year 2000 issue. Initially, the Company has determined
that most of the Company's current business process software and hardware are
year 2000 compliant. The Company is in the process of implementing new business
process software which has been determined to be year 2000 compliant as well.
This implementation should be completed in 1998. The Company expects to complete
its year 2000 analysis by the end of 1998 and does not believe that costs
associated with bringing the Company's computer systems into full compliance
with year 2000 will result in material costs to the Company. The Company's
products are year 2000 compliant as well and therefore, the Company does not
believe that they have any material exposure to contingencies related to the
year 2000 issue for products it has sold. The Company is also in the preliminary
stages of assessing the impact of the year 2000 issue on its major vendors and
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own year 2000 issues. Based on
information presently available, the Company does not anticipate any material
impact on its financial condition or results of operations from the effect of
the year 2000 issue on the Company's internal systems or those of its major
suppliers and customers. However, there can be no guarantee that the systems of
other companies on which the Company's system rely will be timely converted, or
that a failure to convert by another company would not have a material adverse
impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are contained in this report.
Page
Report of Independent Certified Public Accountants 25
Financial Statements for Years Ended December 31, 1997,
1996 and 1995
Balance Sheets 26
Statements of Income 27
Statements of Changes in Stockholders' Equity 28
Statements of Cash Flows 29
Report of Independent Certified Public Accountants on
Supplementary Information 42
Schedule II - Valuation and Qualifying Accounts 43
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, 1997 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, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ADTRAN, Inc. as of December 31,
1997, and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
January 13, 1998
<PAGE>
BALANCE SHEET
December 31, 1997 and 1996
1997 1996
ASSETS
Current Assets:
Cash and cash equivalents $45,340,961 $44,839,131
Short-term investments 37,833,240 32,555,930
Accounts receivable, marked to market, less
allowance for doubtful accounts of $893,389 and
$872,724 in 1997 and 1996, respectively 40,906,887 33,825,560
Other receivables 343,463 362,578
Inventory 39,369,103 40,792,646
Prepaid expenses 1,148,288 2,261,338
Deferred income taxes 2,458,136 1,598,750
Total current assets 67,400,078 156,235,933
Property, plant and equipment, net 64,801,132 53,971,213
Other assets 200,000 0
Long-term investments 50,000,000 0
Total assets $282,401,210 $210,207,146
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,121,270 $9,350,266
Accrued salaries 1,927,364 2,454,194
Accrued income taxes 4,579,345 1,803,706
Accrued taxes other than income taxes 180,611 338,997
Accrued interest payable 0 59,594
Warranty liability 1,435,259 1,026,156
Compensated absences 972,651 693,218
Total current liabilities 18,216,500 15,726,131
Bonds payable 50,000,000 20,000,000
Deferred income taxes 2,147,635 1,602,116
Total liabilities 70,364,135 37,328,247
Stockholders' equity:
Commonstock, par value $.01 per share;
200,000,000 shares authorized; 39,381,264
shares issued in 1997 and 38,769,514 in 1996 393,813 387,695
Additional paid-in capital 90,582,615 90,172,863
Retained earnings 123,260,647 82,318,341
Less 100,000 shares treasury stock, at cost (2,200,000) 0
Total stockholders' equity 212,037,075 172,878,899
Total liabilities and stockholders'equity $282,401,210 $210,207,146
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Sales $265,334,768 $250,120,836 $181,478,065
Cost of sales 130,253,531 129,953,371 93,006,672
Gross profit 135,081,237 120,167,465 88,471,393
Selling, general and
administrative expenses 44,973,175 34,308,436 27,259,610
Research and development expenses 30,055,091 24,647,425 19,131,457
Income from operations 60,052,971 61,211,604 42,080,326
Other income (expenses):
Interest income 4,175,032 2,542,417 3,204,902
Interest expense (1,838,814) (894,657) (1,105,156)
Other 437,639 642,432 111,219
2,773,857 2,290,192 2,210,965
Income before income taxes 62,826,828 63,501,796 44,291,291
Provision for income taxes 22,617,556 23,681,892 14,833,564
Net income $40,209,272 $39,819,904 $29,457,727
Weighted average shares
outstanding assuming
dilution (1) 39,565,497 39,548,654 39,249,101
Earnings per common share
assuming dilution (1) $1.02 $1.01 $0.75
Earnings per common share - basic $1.03 $1.03 $0.80
The accompanying notes are an integral part of these financial statements.
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
Number Par Value Additional Retained Treasury Total
of shares ($.01 Per Paid-In Earnings Stock Stockholders'
Share) Capital Equity
<S> <C> <C> <C> <C> <C> <C>
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 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 non-qualified
stock options 1,533,926 1,533,926
Net income 39,819,904 39,819,904
Balance,
December 31, 1996 38,769,514 $387,695 $90,172,863 $82,318,341 $0 $172,878,899
Stock options exercised
through issuance of
common stock:
Various prices per
share 611,750 6,118 409,752 415,870
Purchase of treasury
stock:
100,000 shares (2,200,000) (2,200,000)
Income tax benefit from
exercise of non-qualified
stock options 733,034 733,034
Net Income 40,209,272 40,209,272
Balance,
December 31, 1997 39,381,264 $393,813 $90,582,615 $123,260,647($2,200,000) $212,037,075
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENTS OF CASH FLOW
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $40,209,272 $39,819,904 $29,457,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,342,518 4,890,303 3,052,798
Provision for warranty claims 1,435,259 2,110,614 776,908
Loss on sale of property, plant, and equipment (9,884) 40,572 8,842
Loss on sale of short-term investments
classified as available-for-sale (6,063) 405,789 169,766
Deferred income taxes (313,867) 104,561 (31,910)
Change in operating assets:
Accounts receivable (7,081,327) (4,590,757) (11,212,334)
Inventory 1,423,543 4,204,549 (17,472,844)
Other current assets 932,165 (1,083,019) (270,724)
Change in operating liabilities:
Accounts payable( (228,996) (390,321) 3,245,924
Other liabilities 1,284,106 (50,491) 1,584,749
Net cash provided by operating activities 44,986,726 45,461,704 9,308,902
Cash flows from investing activities:
Expenditures for property, plant and equipment (18,220,850) (29,661,438) (12,790,517)
Proceeds from the disposition of property, plant,
and equipment 58,297 4,602 14,250
Purchase of restricted investments (50,000,000)
Purchase of short-term investments classified
as available-for-sale (5,271,247) (8,309,030) (16,322,455)
Net cash used in investing activities (73,433,800) (37,965,866) (29,098,722)
Cash flows from financing activities:
Redemption of bonds payable (20,000,000)
Proceeds from bond issuance 50,000,000 20,000,000
Proceeds from public offering,
net of expenditures 15,705,362
Proceeds from issuance of common stock 415,870 781,758 346,889
Income tax benefit from exercise of non-qualified
stock options 733,034 1,533,926
Purchase of treasury stock (2,200,000)
Net cash provided by financing activities 28,948,904 2,315,684 36,052,251
Net increase in cash and cash equivalents 501,830 9,811,522 16,262,431
Cash and cash equivalents, beginning of year 44,839,131 35,027,609 18,765,178
Cash and cash equivalents,end of year $45,340,961 $44,839,131 $35,027,609
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
capitalized interest of $204,153, $393,096
and $235,928 in 1997, 1996 and 1995, respectively $ 1,844,741 $ 909,368 $1,030,851
Cash paid during the year for income taxes $20,042,644 $22,151,925 $13,033,140
The accompanying notes are an integral part of these financial statements.
</TABLE>
<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 re-price
frequently.
Short-term investments represent re-marketed preferred stocks and municipal
bonds classified as available-for- sale securities. Re-marketed 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 1997, 1996, and 1995.
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:
The Company utilizes the asset and liability method of accounting for income
taxes which 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.
Earnings Per Share:
Earnings per common share and earnings per common share assuming dilution are
computed in compliance with SFAS No. 128, which the Company adopted December 31,
1997. This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. The statement requires a
computation for earnings per common share and earnings per common share assuming
dilution (see Note 13).
Reclassifications:
Certain reclassifications have been made to the 1995 and 1996 financial
statements and related footnotes to conform with the 1997 presentation. These
reclassifications had no impact on retained earnings or net income.
Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which requires the reporting and display of comprehensive income and its
components in an entity's financial statements, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be required. The Company is required to adopt these
standards in 1998. The Company does not expect the impact of these
pronouncements to be material.
2. Investments
At December 31, 1997 and 1996, the Company held the following securities as
available-for-sale or held-to- maturity recorded at amortized cost which
approximates fair value:
1997
Short-term investments, available-for-sale:
Municipal Bonds $10,333,240
Re-marketed preferred stocks:
GE Capital preferred asset corporation A series A 5,000,000
Muniyield Fund Auction market preferred series A 5,000,000
VKM Investment Grade Municipal Trust preferred 5,000,000
Nuveen Premium Income Fund preferred series M 2,500,000
Duff & Phelps RP series C 5,000,000
Van Kampen Merritt Municipal Income 5,000,000
Total short-term investments 1997 $37,833,240
1996
Short-term investments, available-for-sale:
Municipal Bonds $10,055,930
Re-marketed 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 Income Fund preferred series A 2,500,000
Total short-term investments in 1996 $32,555,930
Cash equivalents, held-to-maturity:
Triple A One Plus, zero coupon bonds,
matured January 10, 1997 $ 4,992,889
Receivables Capital, zero coupon bonds,
matured January 10, 1997 4,992,889
Barton Corporation, zero coupon bonds,
matured January 15, 1997 4,989,248
Three Rivers Funding, zero coupon bonds,
matured January 16, 1997 4,988,533
Total cash equivalents in 1996 $19,963,559
3. Inventory
At December 31, 1997 and 1996 inventory consisted of the following:
1997 1996
Raw materials $24,199,720 $24,454,251
Work in process 2,565,179 2,963,220
Finished goods 12,604,204 13,375,175
$39,369,103 $40,792,646
4. Property, Plant, and Equipment
Property, plant, and equipment comprised the following at December 31, 1997
and 1996:
1997 1996
Land $ 4,263,104 $ 4,263,104
Building 28,673,642 26,230,470
Construction in progress 3,081,702 2,021,525
Land improvements 7,963,770 7,177,261
Office machinery and equipment 17,184,334 8,338,789
Engineering machinery and equipment 24,534,852 19,577,071
85,701,404 67,608,220
Less accumulated depreciation (20,900,272) (13,637,007)
$64,801,132 $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, 1997 and 1996, the Company had no borrowings against this line. The
line of credit expires on May 1, 1998.
6. Alabama State Industrial Development Authority Financing
In conjunction with 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 $20,000,000 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"). First Union National Bank of
Tennessee, Nashville, Tennessee (the "Bondholder") purchased the original bond
from the Bank and made further advances to the Authority in the total amount of
$50,000,000. An Amended and Restated Taxable Revenue Bond (ADTRAN, Inc. Project)
Series 1995 was issued and the original financing agreement was amended. The
Amended and Restated Bond bears 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, 1997.
7. Income Taxes
A summary of the components of the provision (benefit) for income taxes as of
December 31 is as follows:
1997 1996 1995
Current:
Federal $21,251,520 $21,329,522 $13,896,982
State 1,679,903 2,247,809 968,492
Total Current 22,931,423 23,577,331 14,865,474
Deferred tax provision
(benefit) (313,867) 104,561 (31,910)
Total historical provision
for income taxes 22,617,556 $23,681,892 $14,833,564
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate due to the following:
1997 1996 1995
Tax provision computed at the
federal statutory rate
(35% in 1997, 1996
and 1995) $21,989,390 $22,225,629 $15,501,952
State income tax provision,
net of federal benefit 1,091,936 1,461,076 629,520
Federal research credits (1,248,925) (151,500) (815,408)
Permanent differences
and other 785,155 146,687 (482,500)
$22,617,566 $23,681,892 $14,833,564
Temporary differences which create deferred tax assets and liabilities at
December 31, 1997 and 1996 are detailed below.
1997 1996
Current Non-current Current Non-current
Property, plant and
equipment ($2,147,635) ($1,602,116)
Accounts receivable $ 381,022 $ 341,584
Inventory 1,130,083 584,204
Accruals 947,031 672,962
Deferred tax asset
(liability) $2,458,136 ($2,147,635) $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, gives retroactive effect to this stock split.
9. Operating Leases
The Company leases office space and equipment under operating leases. As of
December 31, 1997, future minimum rental payments under the non-cancellable
operating leases are approximately as follows:
1998 $ 529,000
1999 329,000
2000 125,000
2001 45,000
$1,028,000
Rental expense was approximately $657,000, $851,000, $447,000 in 1997, 1996
and 1995, respectively.
10. Employee Incentive Stock Option Plan and Director's 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 2,488,100
shares of common stock have been reserved as of December 31, 1997 for issuance
to certain employees and officers through incentive stock options and
non-qualified stock options. 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, 1997 range from 1998 to
2007.
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, 1997, 36,000 options have been granted
under the plan. Expiration dates of options outstanding under the Director's
Stock Option Plan at December 31, 1997 range from 2005 to 2007.
Pertinent information regarding the Plans is as follows:
<TABLE>
Weighted
Number Range of Average
of Exercise Exercise Vesting
Options Prices Price Provisions
<CAPTION>
<S> <C> <C> <C> <C>
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
Options granted 697,750 $22.00 - $42.38 $25.62 various
Options granted 3,000 $42.72 - $42.72 $42.72 various
Options granted 21,700 $25.37 - $45.78 $32.26 various
Options cancelled (38,300) $22.00 - $65.75 $50.89 various
Options exercised (611,750) $.11 - $31.75 $.68 various
Options outstanding, December 31, 1997 1,276,456 $.17 - $65.75 $32.24 various
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/97 Life Price 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$0.17-$2.50 135,831 2.80 $1.64 135,831 $1.64
$3.00-$22.50 54,225 5.91 $5.46 52,925 $5.06
$25.38-$25.38 676,450 9.54 $25.38 0 $0.00
$27.50-$42.38 109,050 7.98 $36.10 69,850 $35.76
$42.72-$42.72 3,000 9.11 $42.72 0 $0.00
$46.25-$46.25 3,500 8.03 $46.25 3,100 $46.25
$56.25-$56.25 5,000 8.54 $56.25 5,000 $56.25
$59.50-$59.50 3,500 8.56 $59.50 700 $59.50
$63.75-$63.75 22,500 8.65 $63.75 4,500 $63.75
$65.75-$65.75 263,400 8.53 $65.75 53,000 $65.75
1,276,456 324,906
</TABLE>
The options above were issued at exercise prices which approximate fair market
value at the date of grant. At December 31, 1997, 1,513,250 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:
1997 1996 1995
Net income - as reported $40,209,272 $39,819,904 $29,457,727
Net income - pro forma $37,634,225 $38,018,766 $28,852,035
Earnings per share - as reported
assuming dilution $1.02 $1.01 $0.75
Earnings per share - pro forma
assuming dilution $.96 $.96 $0.73
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Dividend yield 0% 0% 0%
Expected life (years) 5 5 5
Expected volatility (range) 47.07% - 49.19% 48.59% - 49.25% 49.40% - %2.37%
Risk-free interest rate (range) 6.01% - 6.69% 5.86% - 7.12% 6.23% - 8.29%
</TABLE>
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 of 1986, as amended. 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 $717,196, $547,072, $415,791 in
1997, 1996 and 1995, respectively.
12. Major Customers
Sales of the Company's transmission and test equipment to the Regional Bell
Operating Companies (RBOCs) amounted to approximately 33%, 36% and 40% of total
sales during the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997, 1996 and 1995 respectively, 26%, 23% and 36% of the accounts
receivable balance consisted of amounts due from RBOCs.
13. Earnings Per Share
A summary of the calculation of basic and diluted earnings per share for the
years ended December 31, 1997, 1996 and 1995 is as follows:
For the Year Ended 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common
stockholders $40,209,272 39,201,871 $1.03
Effect of Dilutive Securities
Stock Options 0 363,626
Diluted EPS
Income available to common
stockholders + assumed
conversions $40,209,272 39,565,497 $1.02
For the Year Ended 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common
stockholders $39,819,904 38,603,289 $1.03
Effect of Dilutive Securities
Stock Options 0 945,365
Diluted EPS
Income available to common
stockholders + assumed
conversions $39,819,904 39,548,654 $1.01
For the Year Ended 1995
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common
stockholders $29,457,727 36,984,156 $0.80
Effect of Dilutive Securities
Stock Options 0 2,264,945
Diluted EPS
Income available to common
stockholders + assumed
conversions $29,457,727 39,249,101 $0.75
The following options were outstanding during the respective year granted, but
were not included in the computation of that year's diluted EPS because the
options' exercise price was greater than the average market price of the common
shares in the respective year. All options were still outstanding at year end
1997 except for 23,100 options granted in 1996 with an exercise price of $65.75
which were cancelled during 1997 and 2,500 options granted in 1995 with an
exercise price of $46.25 which were cancelled during 1997.
<TABLE>
<CAPTION>
1997 1996 1995
Options Exercise Expiration Options Exercise Expiration Options Exercise Expiration
Granted Price Granted Price Granted Price
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000 $37.63 2007 5,000 $56.25 2005-2006 6,000 $46.25 2005
7,700 $37.88 1999-2007 3,500 $59.50 2005-2006
6,000 $42.38 2007 22,500 $63.75 2005-2006
3,000 $42.72 2007 286,500 $65.75 2005-2006
</TABLE>
14. 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 per share amounts)
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Net sales $61,231 $59,125 $70,579 $74,400
Gross profit 31,791 28,632 36,092 38,566
Income from
operations 14,258 10,291 16,778 18,726
Net income 9,522 6,980 11,141 12,566
Earnings per common
share assuming
dilution 0.24 0.18 0.28 0.32
Earnings per common
share-basic 0.25 0.18 0.28 0.32
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
Net sales $54,544 $63,305 $62,635 $69,637
Gross profit 25,734 29,960 29,419 35,054
Income from
operations 12,975 15,802 14,963 17,472
Net Income 8,623 10,340 9,406 11,451
Earnings per common
share assuming
dilution 0.22 0.26 0.24 0.29
Earnings per common
share - basic 0.22 0.27 0.24 0.30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No independent certified public accountant of the Company has resigned,
indicated any intent to resign or been dismissed as the independent certified
public accountant of the Company during the two fiscal years ended December 31,
1997 or subsequent thereto.
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 27, 1998. 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) or 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.
<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 financial statements of the Company and the related
report of independent auditors thereon are set forth
under Part II, Item 8 of this report.
Balance Sheets as of December 31, 1997 and 1996
Statements of Income for the years ended December 31,
1997, 1996 and 1995
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation of Qualifying Accounts
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: ADTRAN, Inc., Attn: Investor Relations,
P. O. Box 140000, 901 Explorer Boulevard, Huntsville,
Alabama 35814 There is a charge of $.50 per page 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
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).
*23 Consent of Coopers & Lybrand L.L.P.
*24 Powers of Attorney
*27 Financial Data Schedule for current period and restated
Financial Data Schedules for other periods.
(b) Reports on Form 8-K.
None
-----------
*Filed herewith
<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 30, 1998.
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 30, 1998.
Signature Title
/s/ Mark C. Smith Chairman of the Board, Chief
Mark C. Smith Executive Officer and Director
Howard A. Thrailkill* President, Chief Operating Officer
Howard A. Thrailkill and Director
Lonnie S. McMillian* Sr. Vice President, Secretary,
Lonnie S. McMillian and Director
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
John R. Cooper Chief Financial Officer
*By: /s/Mark C. Smith
Mark C. Smith
as Attorney-in-Fact
<PAGE>
ADTRAN, INC.
INDEX OF EXHIBITS
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 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).
*23 Consent of Coopers & Lybrand L.L.P.
*24 Powers of Attorney
*27 Financial Data Schedule for current period and restated Financial Data
Schedules for other periods.
*Filed herewith
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
ADTRAN, Inc.
Our report on the financial statements of ADTRAN, Inc.has been included on page
25 of this Form 10-K. In connection with our audits of such financial
statements we have also audited the related financial statement schedule
included on page 44 of this Form 10-K.
In our opinion, the financial statement schedules 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 13, 1998
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance
Beginning of at end of
Period Additions Deductions Period
Year ended December 31, 1997
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 872,724 $ 254,366 $233,701 $ 893,389
Inventory Reserve $ 883,032 $1,366,031 $2,249,063
Warranty Liability $1,026,156 $ 409,103 $1,435,259
Year ended December 31, 1996
Allowance for Doubtful Accounts $ 544,526 $ 430,789 $102,591 $ 872,724
Inventory Reserve $ 660,151 $ 222,881 $ 883,032
Warranty Liability $ 523,027 $ 503,129 $1,026,156
Year ended December 31, 1995
Allowance for Doubtful Accounts $ 450,000 $ 178,952 $ 84,426 $ 544,526
Inventory Reserve $ 497,825 $ 162,326 $ 660,151
Warranty Liability $ 280,806 $ 242,221 $ 523,027
</TABLE>
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 13, 1998, on our audits of
the financial statements and financial statement schedule of ADTRAN, Inc. as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, which reports are incorporated by reference in this annual report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
March 30, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 14th day of January, 1998.
/s/ Lonnie S. McMillian
Lonnies S. McMillian
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 26th day of January, 1998.
/s/ Roy J. Nichols
Roy J.Nichols
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 21th day of January, 1998.
/s/ William L. Marks
William L. Marks
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 23th day of January, 1998.
/s/ Mark C. Smith
Mark C. Smith
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 22th day of January, 1998.
/s/ Howard A. Thrailkill
Howard A. Thrailkill
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 21th day of January, 1998.
/s/ John R. Cooper
John R. Cooper
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 21th day of January, 1998.
/s/ O. Gene Gabbard
O. Gene Gabbard
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith, Howard A. Thrailkill 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, 1997, 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, 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 21th day of January, 1998.
/s/ James L. North
James L. North
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed statement of income for the year ended December 31, 1997 and the
condensed balance sheet as of December 31, 1997 and is qualifed in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000926282
<NAME> ADTRAN, Inc.
<MULTIPLIER> 1
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
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<SECURITIES> 37,833,240
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<BONDS> 50,000,000
0
0
<COMMON> 393,813
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<TOTAL-LIABILITY-AND-EQUITY> 282,401,210
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<CGS> 130,253,531
<TOTAL-COSTS> 130,253,531
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<INTEREST-EXPENSE> 1,838,814
<INCOME-PRETAX> 62,826,828
<INCOME-TAX> 22,617,556
<INCOME-CONTINUING> 40,209,272
<DISCONTINUED> 0
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<EPS-DILUTED> 1.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE
This schedule contains summary financinal information extracted from the
condensed statement of income for the year ended December 31, 1996 and the
condensed balance sheet as of December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000926282
<NAME> ADTRAN, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<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> 210,107,146
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE
This schedule contains summary financinal information extracted from the
condensed statement of income for the year ended December 31, 1995 and the
condensed balance sheet as of December 31, 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000926282
<NAME> ADTRAN, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 35,027,609
<SECURITIES> 24,652,689
<RECEIVABLES> 30,092,106
<ALLOWANCES> 544,526
<INVENTORY> 44,997,195
<CURRENT-ASSETS> 136,522,054
<PP&E> 29,245,252
<DEPRECIATION> 0
<TOTAL-ASSETS> 165,767,306
<CURRENT-LIABILITIES> 14,056,329
<BONDS> 20,000,000
0
0
<COMMON> 374,623
<OTHER-SE> 130,368,688
<TOTAL-LIABILITY-AND-EQUITY> 165,767,306
<SALES> 181,478,065
<TOTAL-REVENUES> 181,478,065
<CGS> 93,006,672
<TOTAL-COSTS> 93,006,672
<OTHER-EXPENSES> 27,259,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,105,156
<INCOME-PRETAX> 44,291,291
<INCOME-TAX> 14,833,564
<INCOME-CONTINUING> 29,457,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,457,727
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
