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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___ to ___
Commission file number 0-24612
ADTRAN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 63-0918200
(State of Incorporation) (I.R.S. Employer
Identification Number)
901 Explorer Boulevard, Huntsville, Alabama 35806-2807
(Address of principal executive offices, including zip code)
(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 1, 2000 was $1,558,585,524 based on a
closing market price of $73.375 as quoted on the Nasdaq National Market. There
were 39,445,813 shares of common stock outstanding as of March 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 21, 2000 are incorporated herein by reference in Part III.
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ADTRAN, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1999
Table of Contents
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Item Page
Number Number
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PART I
1. Business................................................................................ 3
2. Properties.............................................................................. 11
3. Legal Proceedings....................................................................... 11
4. Submission of Matters to a Vote of Security Holders..................................... 12
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters............... 14
6. Selected Financial Data................................................................. 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 16
7a. Quantitative and Qualitative disclosures About Market Risk.............................. 20
8. Financial Statements and Supplementary Data............................................. 21
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 34
PART III
10. Directors and Executive Officers of the Registrant...................................... 34
11. Executive Compensation.................................................................. 35
12. Security Ownership of Certain Beneficial Owners and Management.......................... 35
13. Certain Relationships and Related Transactions.......................................... 35
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules, and Reports on Form 8-K.. 35
SIGNATURES..................................................................................... 38
INDEX OF EXHIBITS.............................................................................. 40
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PART I
ITEM 1. BUSINESS
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Overview
ADTRAN, Inc. is a leading designer, developer, and manufacturer of digital
transmission products, particularly digital subscriber line (DSL) products,
providing high speed communications. Our products are utilized by
carriers in their networks (served by our Carrier Networks Division or CN) and
corporate end-users (served by our Enterprise Networks Division or EN) to
implement high speed communications over existing telephone networks. Our
customers include all Regional Bell Operating Companies ("RBOC's"), GTE
Corporation, the three largest interexchange carriers (collectively, the
telecommunications service providers, or "Telcos"), the independent telephone
companies, competitive local exchange carriers ("CLECs"), as well as a number of
worldwide electronics, communications and industrial companies. See "Business-
Customers". We market our products and services globally through our direct
sales force, resellers and distributors. We believe that we offer our customers
high quality, reliable, low cost products that utilize leading technology.
We have over 500 products built around our core technologies, developed by us to
address the digital communications marketplace of 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"). Our technologies
support over two million Local Loops worldwide. Our products include a
comprehensive line of transmission, repeater, extension and termination
products. We also offer a broad line of multiplexers providing modular
flexibility to the Telco and CLEC marketplaces. We sell a broad range of product
to corporate end-users for applications which interface with digital
transmissions up to 45 megabits per second (including all DSL technologies) in
the wide area network. We have also introduced a wireless spread spectrum
microwave transceiver to the wireless marketplace.
ADTRAN's products address two market segments: (i) CN products for use in the
Local Loop or in a Central Office, and (ii) EN products for end-users. In 1999,
sales of CN and EN products accounted for 62.9% and 37.1%, respectively, of
ADTRAN's sales. Our CN 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 to 1.544 Mbit/sec Frame Relay service
("Frame Relay") and 1.544 Mbit/sec T1 (24 Channel) service. In addition, our
High bit-rate Digital Subscriber Line ("HDSL") products permit T1 transmission
over up to 12,000 feet of unconditioned copper wireline while reducing the need
for costly mid-span repeaters. ADTRAN's EN products provide end-users access to
Telco's digital services and often include additional features for specific end-
user applications. We have introduced and shipped a number of HDSL, ISDN and
other products which comply with international standards to increase our
penetration of overseas markets. See "International Markets."
The rapidly expanding requirements for digital transmission in the Local Loop
are being driven by Internet access, small office/home office 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 ADTRAN 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 DSL, are all experiencing rapid compound growth.
Numerous higher speed digital technologies are under development, including many
versions of DSL technology, Asynchronous Transfer Mode ("ATM"), wireless
transmission, hybrid fiber coax, cable modems and other technologies.
ADTRAN'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, we demonstrated to the Telcos our 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 has been incorporated into
64Kbit/sec digital products for use in Frame Relay and DDS services. In
addition, we are 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 our product families, we have continuously improved our design,
purchasing and production processes to lower product costs and has
consistently offered improved products at lower prices to customers. As a
result, we believe that we are a leading provider of Local Loop and Central
Office digital transmission products to Telcos. See "Our Strategy."
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ADTRAN was incorporated under the laws of Delaware in November 1985 and
commenced operations in January 1986.
Our Strategy
Our objective is to enhance our position as a leading provider of digital
transmission products for the Local Loop. To achieve this objective, we have
adopted the following strategies:
Expand Product Offerings. We are expanding our products in order to offer
our customers a migration path from the traditional circuit switched Local Loop
to the next generation packet switched Local Loop. We are also expanding our
product line to offer products focused specifically on the CLEC market, as these
competitive carriers aim to provide high speed digital transmission services to
their customers. In addition, we are integrating multiple products to create the
complete digital loop solution systems that many Telcos, CLECs and Enterprise
end-users now desire.
. We have developed, and are continuing to develop, lines of products that are
aimed at aiding Telcos in transforming the Local Loop from a primarily
analog, circuit switched architecture to a digital, packet switched
architecture. These products are designed to carry both types of traffic so
that Telcos can buy them today to handle their circuit switched traffic,
then, in the future, simply reconfigure them to handle packet switched
traffic, instead of having to buy completely new equipment. These new
products will also allow our customers to deploy new services to their
customers, such as voice over DSL, many of which had not been available in
the past, or had been prohibitively expensive or complex to deploy.
. We are also continuing to develop new products for the CLEC market. We
believe that CLECs move more quickly in evaluating and purchasing new
products and require different specifications in their products than the
traditional Telcos. By recognizing these product differences and developing
products aimed specifically at the CLEC market, we seek to become as a
leading provider of digital transmission equipment for the developing CLEC
market.
. We are also beginning to bundle and integrate multiple products to create
complete systems and solutions that many Telcos, CLECs and corporate end-
users desire as they begin to implement digital and packet switched Local
Loop equipment. By selling entire systems, we believe we are better able to
serve our customers needs, while at the same time making ourselves a more
critical vendor to those customers.
Adapt Product Technologies to Address Growing Markets. We have a proven
ability to adapt product technologies from one market to another. For example,
we adapted our product technology developed for the Central Offices for use in
our corporate end-user product lines. We are currently leveraging this
capability in order to address the needs of the CLEC marketplace. We have also
recently introduced a suite of HDSL-based products aimed at the CLEC market. In
addition, in order to promote our technology, we have established a new sales
force dedicated to the development of the CLEC market. Through the development
of new products, the adaptation of existing product lines and the creation of a
dedicated CLEC sales force, we aim to become a leading provider of digital
transmission equipment to the emerging CLEC marketplace.
Capitalize on Existing Leadership Position in Telco Market. We will continue
to maintain our position as a leading provider of products and services to the
Telco markets. We have a dedicated engineering organization that focuses on
applying our current technologies to new applications. We will continue to
invest in developing innovative new products, and redesigning existing products
in order to reduce costs and cycle times. By focusing on these efforts, we
believe we will continue to be a low cost provider to the industry. We believe
that maintaining our leadership in technology for high-speed digital
transmission over copper wire is critical to our ability to build and maintain
strong relationships with RBOCs, CLECs and enterprise end-users, and to achieve
leadership in new markets.
Expand Sales Channels to Drive Market Penetration. We are working to
increase customer adoption of our products by expanding our sales operations and
distribution channels. We are working to expand our sales channel both through
the internal creation of new sales divisions (such as our recently created CLEC
sales force), and through the addition of international sales partners, who will
sell our products to customers around the world. We believe these additions to
and expansion of our sales channels will help us drive increased market
penetration in our existing markets, as well as help us to develop new markets.
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Products
ADTRAN is concentrating significant resources on the development of products to
support the migration from Time Division Multiplexing, or TDM, to packet
technologies such as Asynchronous Transfer Mode, ATM, or Frame Relay. Packet
technologies reduce costs by consolidating multiple users onto shared circuits,
eliminating the idle bandwidth associated with dedicated circuits. This concept
is especially important where carriers are offering converged voice and data
services over DSL to small- and medium-sized business customers. We offer a
complete line of enterprise and carrier-class Frame Relay products and are
building ATM technology into our newest integrated access systems.
Our product lines, comprised of over 500 products, are built around core
technologies that we developed to address the Central Office and Local Loop
digital communications marketplaces. Our product lines consist of two groups of
inter-related products: (1) Carrier Network, or CN, products and (2) Enterprise
Network, or EN, products.
CN Products. DSL continues to be the core technology of our CN division. We are
the industry's leading HDSL products supplier, with equipment in use by a
majority of incumbent local exchange carriers ("ILECS") and numerous other
service providers. We are also a leader in the development of the next
generation of HDSL products, HDSL2 products. While legacy T1 technology
transports voice and data over four wires at distances up to 6,000 feet, adding
HDSL technology doubles that distance to 12,000 feet. HDSL2 provides even
greater benefits to carriers by enabling them to achieve the 12,000-foot span
using only two wires instead of the four required by HDSL. Our first HDSL2
circuit went live in August 1999.
Using Total Access, ADTRAN's integrated multiservice access platform, carriers
can deliver a wide variety of services based on customers' specific requirements
using a single, easy-to-manage platform, while reducing equipment and manpower
costs. Total Access 3000, introduced in late 1998, integrates all of our
leading loop technologies into a single intelligent, broadband platform. An
integrated access device ("IAD"), such as Total Access 3000, can consolidate
voice, data and video-conferencing applications onto a single, high-speed
circuit before transporting it across a corporate or carrier network. Our Total
Access line of products now includes the Total Access 750, introduced in 1999,
and the Total Access 850 and 1500 lines, which we introduced in early 2000.
Each of the Total Access IADs will offer carriers a seamless migration path from
TDM to ATM technology.
The CLEC market became a central focus for us during 1999. CLECs differ from
ILECs in that they are typically building their transmission networks from the
ground up. Consequently, it is quicker and easier for them to deploy the latest
technologies. We are aggressively addressing this emerging market by
introducing new CLEC-focused products, enlisting industry-leading distributors
as resellers, and staffing engineering, sales and support departments. A number
of our new product introductions during 1999 were specifically targeted for the
CLEC market, including the Total Access 750, MX2800 and HDSL2 solutions.
The Total Reach family of products uses one of our technological breakthroughs
to extend digital services over one twisted pair of copper wires. Total Reach
addresses some of the major challenges associated with 64 kilobits per second
Frame Relay service deployment such as multiple copper pair availability,
extensive engineering for repeaters and apparatus cases required for lengthy
installs, bridged tap determination and removal efforts, and power requirements.
We are the industry's primary supplier of U-BR1TEs, which are required to extend
Integrated Services Digital Network ("ISDN") service from an ISDN capable switch
at a hub Central Office to a serving Central Office. We also supply a
substantial portion of the industry's ISDN mid-span repeaters and interface
units. In addition, we have introduced a wireless spread spectrum microwave
transceiver to the wireless marketplace.
EN Products. Our EN products have evolved from technologies developed for our
CN product lines. As many of the technologies which are critical to success in
the EN market are identical to those already
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developed and refined for our CN products, we have realized a competitive
advantage through leveraging these product development efforts and expertise in
all of our EN markets.
Late in 1997, we introduced our ATLAS 800 system, the flagship product of our EN
product line. The ATLAS family currently includes the 800, 800PLUS, and, most
recently, the 550. These products allow an organization to implement cost-
effective wide-area networks to support voice, data and video communications and
high-speed Internet access. The ATLAS 800 IAD essentially functions as a
bandwidth manager, ISDN access switch, remote access concentrator, digital
cross-connect system, router, dial backup solution and Frame Relay switch, all
in one. The ATLAS 550, a lower-cost, lower-capacity version of the ATLAS 800,
is a mid-sized platform for migrating TDM-based networks to packet technologies
such as voice over IP and ATM.
In 1998, we entered the T3 market. While T3 technology (the equivalent of 28
T1s worth of bandwidth) has been used by carriers for several years, only
recently, with the increased demand for Internet usage and telecommuting, have
many corporate enterprises seen the need to exceed T1 capacity. While a single
T3 line delivers 28 T1 lines worth of bandwidth, it only takes six to eight T1
lines, depending on local phone tariffs, to cost-justify the move to a T3 line.
In 1998, we entered the enterprise T3 market with the introduction of the T3SU
300. To complement an already robust T3 product line, during 1999 we introduced
the MX2800, a T1/T3 multiplexer with exceptional features for preventing circuit
downtime. Our T3 products now also include the T3SU 300 DSU/CSU (data service
unit / channel service unit, which serve as an interface between carrier and
end-user equipment, an ATLAS 800 functioning as a T3 integrated access device or
3/1/0 digital cross connect system. This product area has also produced the EN
division's first fiber optic product, the NTU45. This device transports roughly
45 Mbps of user data over a single-mode fiber optic cable for distances of about
20 miles. With the continued acceleration of both user bandwidth needs and
fiber optic deployment, this product area will provide a strong basis for future
product development.
We continue to provide a strong, broad offering of products in the enterprise
DSU/CSU marketplace. In 1997, we introduced our "IQ Series" of DSUs and CSUs,
which allows network operators and service providers to monitor/ensure the
quality of service delivered on Frame Relay circuits. These design changes
substantially reduced the manufacturing cost while increasing the utility of the
product to the marketplace.
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International Markets
ADTRAN serves its international markets through a combination of direct sales
and distribution arrangements. We have formed, and will continue to pursue,
international distribution arrangements built upon core products and
technologies developed by us in an effort to further our penetration into
international markets. In addition, we have focused on developing E1 technology
which, though similar to T1 technology, has a transmission rate of 2.048
Mbit/sec and is the predominant standard for data transmission outside of North
America. We have tested, received orders for and shipped HDSL products
incorporating E1 technology. We anticipate that we will develop additional
products incorporating E1 technology. ISDN development work is underway to
incorporate compatibility with European ISDN standards and specific in-country
network interface requirements. Although ADTRAN has not yet fully developed its
potential in its international markets and related sales have been modest (2.6%
of total sales in 1999), we believe that international markets present a
significant opportunity for growth.
Research and Product Development
The markets for our 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
our products, or common carrier service offerings based on our products, become
obsolete or fail to gain widespread commercial acceptance, ADTRAN'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 ADTRAN's ability to sell its products.
For instance, a large number of our products have, to date, been designed to
apply primarily to the delivery of digital communications over copper wireline
in the Local Loop. While ADTRAN has competed favorably by developing a high
performance line of products, we expect 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 we
develop new products to meet the demands of these markets when such markets are
sufficiently established. Our sales and profitability in the past have resulted
to a significant extent from our ability to
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anticipate changes in technology, industry standards and common carrier service
offerings, and to develop and introduce new and enhanced products. Our continued
ability to adapt will be a significant factor in maintaining or improving our
competitive position and our prospects for growth. Therefore, ADTRAN will
continue to make significant investments in product development, although there
can be no assurance that we 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".
As of December 31, 1999, ADTRAN's product development programs were carried out
by over 300 engineers and engineering support personnel, comprising
approximately 25% of ADTRAN'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 us, and
related costs are also charged to operations as incurred. During 1999, 1998 and
1997, product development expenditures totaled $42,017,779, $37,221,780, and
$30,055,091 respectively. Because our product development activities are an
important part of our strategy and because of rapidly changing technology and
evolving industry standards, we expect to spend more in product development
activities in 2000 than we did in 1999.
ADTRAN's product development personnel are organized into teams, each of which
is effectively dedicated to a specific product line or lines. However, because
we service each of the CN and EN markets, and because all of the products in
each of the markets share certain similarities, the benefits of ADTRAN's product
development efforts generally are not confined to a particular market, but can
be leveraged to our advantage in all of our markets. As of December 31, 1999,
product development teams were assigned to the following product lines: Loop
products, Network products, HDSL products, DSU and Frame Relay products, T1
multiplexer products, ISDN Telco products, ISDN EN 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 ADTRAN and
adapting standard products or technology under supply contracts to other firms.
In particular, each product development team is charged with implementing
ADTRAN's engineering strategy of reducing product costs for each succeeding
generation of our 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 we continue to attract
and recruit outstanding engineers, and the continued success of ADTRAN'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, our
organizational structure may be adjusted accordingly. ADTRAN's development
process is conducted in accordance with ISO 9001 and TL 9000, which are the
international standards for quality management systems for design, manufacturing
and service.
We believe that our success in the past has been dependent upon the ability of
our engineering team to establish and maintain a position of product and
technological leadership, and our 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, we will continue to make significant investments in
product development.
Customers
Our customer base includes each of the four RBOCs and most of the major
independent domestic Telcos. The major customers of ADTRAN include:
Alltel Corporation Hong Kong Telecom
Azteca Telecommunications Ingram Micro
Bell Atlantic Network Services SBC Communications, Inc.
BellSouth Corporation Sprint Corporation
Bloomberg L.P. Tech Data Corporation
Cisco Systems, Inc. U.S. West, Inc.
Eltrax
GTE Corporation
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Historically, a large percentage of our sales have been made to the four RBOC's
and GTE Corporation (55% in 1999). Bell Atlantic Network Services, GTE
Corporation, SBC Communications, Inc. and Sprint Corporation each accounted for
at least 10% of our total sales in 1999 and collectively. No other customer
accounted for 10% or more of our sales in 1999.
A supplier must first obtain product approvals from an RBOC or other Telco to
sell its products to them. We, therefore, are involved in a constant process of
submitting for approval succeeding generations of products as well as products
that deploy new technology or respond to a new technology demand from an RBOC or
other Telco. We have been successful in the past in obtaining such approvals.
However, we can not be certain that we will obtain such approvals in the future
or that 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 our operating
results.
Marketing, Sales and Distribution
As of December 31, 1999, ADTRAN's marketing and sales programs were conducted
by over 200 employees. ADTRAN sells its CN products in the United States and
Canada directly to the Telcos through a field sales organization based in 48
locations (some of these locations are home offices) in the United States.
ADTRAN sells its CN products internationally through field sales offices and
various distribution arrangements with a geographically dispersed set of
distributors. ADTRAN sells its EN products, both domestically and
internationally, through a network of resellers. We have formed, and will
continue to pursue, international distribution arrangements built upon core
products and technologies developed by ADTRAN us in an effort to further our
penetration into international markets. Although the international market
channel has not yet been fully developed and related revenue has been modest,
ADTRAN believes that international markets present a significant opportunity for
growth, and ADTRAN 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 typically 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. EN products are sold under both exclusive and non-exclusive
distribution arrangements.
ADTRAN'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. We believe that our success in the past has been dependent to
a significant degree upon the ability of our sales and distribution teams to
compete effectively in a highly competitive environment that includes firms with
greater financial resources and more experience than us. Our success in the
future will depend in part upon our ability to attract and retain qualified
sales and marketing personnel who can compete and succeed in this environment.
Customer Service and Support
ADTRAN 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. We provide on-site
support in those circumstances in which problems cannot otherwise be resolved.
Our policy has generally been to follow through with problem resolutions even
after it is established that our products are not the source of the difficulty.
We provide direct installation and service of our products in North America
utilizing our own resources or resources available under nationwide services
contracts with IBM Corporation and Data General Corporation for installation
and service.
Substantially all of our products carry a full ten year return-to-factory
warranty. Warranty returns to date have been relatively insignificant (less than
1%). We believe that our low return rate is a direct result of our commitment to
a rigorous product quality program that has garnered us special recognition by
several key customers.
Manufacturing
The principal steps in the manufacturing process are the purchase and management
of materials, assembly, testing, final inspection, packing and shipping. We
purchase parts and components for assembly of our products from a large number
of suppliers through a worldwide sourcing program. However, certain key
components used in our products are currently available from only one source,
and other key components are available from only a limited number of sources. In
the past, we have experienced delays in the receipt of certain of our key
components, which have resulted in delays in related product deliveries. We
attempt to manage such risks through
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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 our suppliers. However, we can make 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 our customer
relationships and operating results.
We rely on subcontractors in the United States, Mexico and Taiwan for assembly
of printed circuit board assemblies, sub-assemblies, chassis, enclosures and
equipment shelves. We subcontract the assembly of a significant portion of our
lower priced products to companies in Mexico. Such assembly typically can be
done by subcontractors at a lower cost than if we assembled such items
internally, which furthers our goal of being a low cost, high quality provider
in the industry. Subcontract assembly operations do, however, contribute
significantly to production cycle times, but we believe we 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 our 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
our subcontractors may be located. We currently do not undertake any foreign
exchange risks as we conduct all transactions with foreign vendors or customers
in U.S. dollars.
We are heavily dependent on six subcontractors. To date, we believe that we have
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 our customer relationships and operating results.
While we believe 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 our business and operating results.
Final testing and shipment of products to customers occurs in our Huntsville,
Alabama facilities. Our facilities are certified pursuant to ISO 9001, TL 9000
and certain other telephone company standards, including those relating to
emission of electromagnetic energy and safety specifications.
Backlog and Inventory
A substantial portion of ADTRAN'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. We believe that
because a substantial portion of customer orders are filled within the fiscal
quarter of receipt, our backlog is not a meaningful indicator of actual sales
for any succeeding period. To meet this demand, ADTRAN maintains a substantial
finished goods inventory.
Our practice of maintaining sufficient inventory levels to assure prompt
delivery of our products increases the amount of inventory which may become
obsolete. The obsolescence of such inventory may have an adverse effect on
ADTRAN's business and operating results.
Competition
The markets for ADTRAN'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 ADTRAN. 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 that previously
prevented the RBOCs from manufacturing telecommunications equipment. The RBOCs,
which in the aggregate are our largest customers, may increasingly become our
competitors in the markets that we share.
With respect to CN sales, product quality and availability and an established
reputation for customer service are important competitive factors that can
affect our ability to have our products accepted and approved by the individual
Telcos. Our CN market competitors include large established firms such as ADC
Telecommunications, Inc., Lucent Technologies, Inc., PairGain Technologies,
Inc., Tellabs, Inc. and Teltrend, Inc., as well as smaller, specialized firms.
10
<PAGE>
In the EN market, among the significant competitors for standard rate DSU
market share are Paradyne Corporation and Racal-Datacom, Incorporated. Market
segment leaders for TSU products include ADC KENTROX, a subsidiary of ADC
Telecommunications, Inc., Paradyne Corp., Quick Eagle Corporation, and Visual
Networks, Inc. Our multiplexer product line's key competitors include Newbridge
Networks Corporation, Carrier Access Corporation, and Premisys Communications,
Inc. An increase in competition could reduce our gross profit margins, may
require increased spending by us on product development and sales and marketing,
and may otherwise adversely affect our business.
Proprietary Rights
The name "ADTRAN" and our corporate logo are registered trademarks of ADTRAN. A
number of our product identifiers and names are also registered. We also claim
rights to a number of unregistered trademarks. We have obtained patents on 13
inventions relating to our products and have several patent applications
pending. We will seek additional patents from time to time related to our
research and development activities. We protect our trademarks, patents,
inventions, trade secrets, and other proprietary rights by contract, trademark,
copyright and patent registration, and internal security. Management believes,
however, that our competitive success will not depend on the ownership of
intellectual property rights, but primarily on the innovative skills, technical
competence and marketing abilities of our 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 us. While there are no outstanding infringement lawsuits pending by
or against ADTRAN, it is possible that third parties may assert litigation
claims against us in the future, that assertions by such parties may result in
costly litigation, or that we may not 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 us
could have a material adverse effect on our business and operating results.
Employees
As of December 31, 1999 ADTRAN had 1,279 full-time employees in the United
States, three in Canada and three in Hong Kong. Of ADTRAN's total employees, 351
were in sales, marketing, and service, 322 were in research and development, 470
were in manufacturing, and 136 were in administration. None of ADTRAN's
employees are represented by a collective bargaining agreement nor has ADTRAN
ever experienced any work stoppage. We believe that our relationship with our
employees is good.
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
ADTRAN'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. We
also lease 65,480 additional square feet to accommodate manufacturing and
engineering activities. Construction is under way to expand our facilities in
Huntsville by approximately 600,000 square feet (to accommodate a projected
total of 3,000 employees). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and Note 6 of Notes to Financial Statements.
We also maintain 48 sales and service facilities, 45 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, Leawood, 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 Leawood, KS, Irvine, CA, Denver, CO, Atlanta,
GA, Irving, TX, Altamonte Springs, FL, Herndon, VA, Crystal Lake, IL, Bainbridge
Island, WA, and Philadelphia, PA are leased under leases which expire at various
times between 2000 and 2005. See Note 8 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
ADTRAN has been involved from time to time in litigation in the normal course of
its business. We are not aware of any pending or threatened litigation matters
that could have a material adverse effect on us.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matter was submitted by ADTRAN to vote of security holders during the fiscal
quarter ended December 31, 1999.
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 ADTRAN. Unless otherwise indicated, the information
set forth is as of December 31, 1999.
Mark C. Smith - Age 59 - Mr. Smith is one of the co-founders of ADTRAN.
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 71 - Mr. McMillian is one of the co-founders of
ADTRAN.
1996 to present Senior Vice President-Engineering, Secretary and
Director
1986 - 1996 Vice President - Engineering, Secretary, Treasurer and
Director
Howard A. Thrailkill - Age 61
1995 to present President, Chief Operating Officer and Director
November 1995 Executive Vice President, Chief Operating Officer and
Director
1992 - 1995 Executive Vice President, Chief Operating Officer
John R. Cooper - Age 52
1996 to present Vice President - Finance and Chief Financial Officer
1995 - 1996 President, Sauty Group, Inc.
1991 - 1995 Partner, Coopers & Lybrand L.L.P.
Danny J. Windham - Age 40
1999 to present Vice President and General Manager-EN
1995 - 1999 Vice President-EN Marketing
1994 - 1995 Director of Marketing
1989 - 1994 Manager of Product Management
Thomas R. Stanton - Age 35
1999 to present Vice President and General Manager-CN
1995 - 1999 Vice President-CN Marketing
1995 VP-Marketing & Engineering, Transcrypt International,
Inc.
1994 - 1995 Sr. Director, Marketing, E.F. Johnson Company
12
<PAGE>
1993 - 1994 Director, Marketing, E.F. Johnson Company
M. Melvin Bruce - Age 59
1996 to present Vice President - CN Engineering
1989 - 1996 Vice President, Research and Design, Tel Control Inc.
James D. Butler - Age 41
1999 to present Vice President - EN Sales
1997 - 1999 Director, EN Sales
1995 - 1997 Area Vice President, Motorola Inc. Information Systems
Group
Robert A. Fredrickson - Age 49
1996 to present Vice President - CN Sales
1996 Vice President, Broadband Business Development, DSC
Communications Corp.
1991 - 1996 Senior Director, Access Products, DSC Communications
Corp.
Steven L. Harvey - Age 39
1999 to present Vice President - Competitive Service Provider
Sales
1996 - 1999 Vice President - EN Sales
1995 - 1996 Executive Vice President, Data Processing Sciences
Corporation
1991 - 1995 Vice President, Data Processing Sciences
Corporation
Charles A. O'Donnell - Age 45
1996 to present Vice President - Quality
1993 - 1996 Quality and Technical Resources Manager, Exide
Electronics Corporation
Jude T. Panetta - Age 40
1994 to present Vice President - Operations
1989 - 1994 Director of Manufacturing, Exide Electronics
Corporation
Everette R. Ramage - Age 52
1999 to present Vice President - EN Engineering
1993 - 1999 Engineering Manager, EN DDS Group
Kevin W. Schneider - Age 36
1999 to present Vice President - Technology
1996 - 1999 Chief Scientist, Technology
1992 - 1996 Staff Scientist
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 ADTRAN.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
ADTRAN's common stock has been traded on the Nasdaq National Market (Nasdaq)
under the symbol "ADTN" since our initial public offering of common stock in
August 1994. Prior to the initial public offering, there was no established
trading market for ADTRAN's common stock. As of January 31, 2000, we had 470
shareholders of record and approximately 9,800 beneficial owners of shares held
in street name. The following table shows the high and low sale prices per share
for the common stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
1999 Quarters High Low
<S> <C> <C>
First $25-1/2 $15-3/4
Second $36-7/8 $16
Third $42-11/16 $33-3/8
Fourth $55-1/2 $33-3/8
1998 Quarters High Low
First $34-3/4 $24
Second $29-3/4 $19-5/8
Third $29-1/8 $20-3/8
Fourth $28-7/8 $15-5/8
</TABLE>
ADTRAN has operated with a policy of retaining earnings, and 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.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected financial data concerning ADTRAN for and as of the end of
each of the years in the five year period ended December 31, 1999, are derived
from the financial statements of ADTRAN, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected financial data
are qualified in their entirety by the more detailed information and financial
statements, including the notes thereto. The financial statements of ADTRAN as
of December 31, 1999 and 1998 and for each of the years in the three year period
ended December 31, 1999, and the report of PricewaterhouseCoopers LLP thereon,
are included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
(in thousands, except per share data)
Sales
<S> <C> <C> <C> <C> <C>
CN (Carrier Networks Division) $230,967 $167,500 $171,838 $171,902 $121,311
EN (Enterprise Networks Division) 136,241 119,059 93,497 78,219 60,167
- ----------------------------------------------------------------------------------------------------------
Total Sales 367,208 286,559 265,335 250,121 181,478
Cost of Sales 178,630 130,010 130,254 129,953 93,007
- ----------------------------------------------------------------------------------------------------------
Gross profit 188,578 156,549 135,081 120,168 88,471
Selling, general and administrative expenses 71,735 62,061 44,973 34,308 27,260
Research and development expenses 42,018 37,222 30,055 24,648 19,131
- ----------------------------------------------------------------------------------------------------------
Operating income 74,825 57,266 60,053 61,212 42,080
Interest income 5,350 5,824 4,175 2,543 3,205
Interest expense (2,312) (2,287) (1,839) (895) (1,105)
Other income (expense) (673) (188) 438 642 111
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 77,190 60,615 62,827 63,502 44,291
Provision for income taxes 26,244 20,306 22,618 23,682 14,833
- ----------------------------------------------------------------------------------------------------------
Net income 50,946 40,309 40,209 39,820 29,458
Earnings per common share - assuming dilution(1) 1.31 1.03 1.02 1.01 .75
Earnings per common share - basic 1.33 1.03 1.03 1.03 .80
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - assuming
dilution (1) 38,831 39,164 39,565 39,549 39,249
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Balance Sheet Data
Working Capital $180,829 $150,535 $149,184 $140,510 $122,466
Total assets 556,296 301,711 282,401 210,207 165,767
Total debt 50,000 50,000 50,000 20,000 20,000
Stockholders' equity 400,052 231,389 212,037 172,879 130,743
</TABLE>
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method. See Note 1, 9 and 13 of Notes to Financial Statements.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overview
ADTRAN designs, develops, manufactures, markets and services a broad range of
high-speed digital transmission products utilized by providers of
telecommunications services and corporate end-users to implement advanced
digital data services over existing telephone networks. We currently sell our
products to a large number of carriers (including all of the RBOCs) and private
end-users in the EN market.
We have increased our sales in each year primarily by increasing the number of
units sold to both new and existing customers. These annual sales increases
reflect our 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 our 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, we seek in most instances to be a low-
cost, high-quality provider of products in our markets. Our success to-date is
attributable in large measure to our ability to initially design our products
with a view to their subsequent re-design, allowing efficient enhancements of
the product in each succeeding product generation. This strategy has enabled us
to sell succeeding generations of products to existing customers as well as to
increase our market share by selling these enhanced products to new customers.
While we have experienced increased sales in each year, our 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. A majority of our
customers typically require prompt delivery of products within a short period of
time after placing their orders. Consequently, we operate with very little
order backlog and must maintain sufficient inventory levels to satisfy
anticipated customer demand. A substantial majority of our sales in each quarter
result from orders booked in that quarter and firm purchase orders released in
that quarter by customers under agreements containing nonbinding purchase
commitments. If near term demand for our products declines or if significant
potential sales in any quarter do not occur as anticipated, our financial
results will be adversely affected. Operating expenses are relatively fixed in
the short term; therefore, a shortfall in quarterly revenues could impact our
financial results significantly in a given quarter. Further, maintaining
sufficient inventory levels to assure prompt delivery of our 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 our business
and operating results. Our 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 us or our competitors. Accordingly, our historical financial
performance is not necessarily a meaningful indicator of future results, and, in
general, we expect that our financial results may vary from period to period.
See Note 14 of Notes to Financial Statements.
16
<PAGE>
Results of Operations
The following table presents selected financial information derived from
ADTRAN's statements of income expressed as a percentage of sales for the years
indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
Percentage of Sales 1999 1998 1997
<S> <C> <C> <C>
Sales:
CN 62.9% 58.5% 64.8%
EN 37.1 41.5 35.2
- ------------------------------------------------ ----- ----- -----
Total sales 100.0 100.0 100.0
Cost of sales 48.7 45.4 49.1
- ------------------------------------------------ ----- ----- -----
Gross profit 51.3 54.6 50.9
Selling, general and administrative expenses 19.5 21.7 17.0
Research and development expenses 11.4 13.0 11.3
- ------------------------------------------------ ----- ----- -----
Operating income 20.4 19.9 22.6
Interest income 1.5 2.0 1.6
Interest expense (0.6) (0.8) (0.8)
Other income (expense) (0.2) 0.1 0.2
- ------------------------------------------------ ----- ----- -----
Income before provision for income taxes 21.0 21.2 23.7
Provision for income taxes 7.1 7.1 8.5
- ------------------------------------------------ ----- ----- -----
Net income 13.9% 14.1% 15.2%
</TABLE>
1999 Compared to 1998
Sales
ADTRAN's sales increased 28.0% from $286,559,000 in 1998 to $367,207,000 in
1999. The increased sales resulted from increased sales volume to existing
customers and from increased market penetration. Sales for the CN increased
37.9% from $167,500,000 in 1998 to $230,967,000 in 1999. CN sales as a
percentage of total sales increased from 58.5% in 1998 to 62.9% in 1999. Sales
of EN products increased 14.4% from $119,059,000 in 1998 to $136,241,000 in
1999. As a percentage of total sales, EN sales decreased from 41.5% in 1998 to
37.1% in 1999. The primary factors leading to the increase in sales in 1999 were
(1) additional market penetration for ADTRAN's HDSL products, (2) continuing
growth in demand for T1 products, (3) continuing growth in sales of the Atlas
Integrated Access Device, and (4) the introduction of the Total Access(TM)
product line (primarily directed to the CLEC market)
Cost of Sales
Cost of sales increased from $130,010,000 in 1998 to $178,630,000 in 1999. As a
percentage of sales, cost of sales increased only from 45.4% in 1998 to 48.7% in
1999. This increase was due primarily to a rise in material cost as a percentage
of sales. CN cost of sales increased from $75,926,000 in 1998 to $122,157,000
in 1999. CN cost of sales as a percentage of CN sales increased from 45.3% in
1998 to 52.9% in 1999. This increase resulted from an increase in the importance
of sales of HDSL products which, for a portion of 1999, were at a lower margin
due to a delay in the transition from one generation of HDSL products to the
succeeding generation. EN cost of sales increased from $54,084,000 in 1998 to
$56,472,000 in 1999. As a percentage of EN sales, EN cost of sales decreased
from 45.4% in 1998 to 41.6% in 1999. An important part of our 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 strategy sometimes
results in variations in our 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 ADTRAN,
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 15.6% from $62,061,000 in
1998 to $71,735,000 in 1999. Beginning in the first quarter of 1997, ADTRAN
embarked on a program of expanding infrastructure in both sales and support
personnel for our expanded customer base and for increased initiatives in the EN
and international markets, as well as for the introduction and marketing of more
technically enhanced products. This expansion program continued through-out
1997 and through the third quarter of 1998, at which point we determined that we
had developed the sales and support capacity necessary to service our expanded
revenue base. As a result, selling, general and administrative expense increased
as a percentage of sales in 1998 compared to 1997 and decreased as a percentage
of sales in
17
<PAGE>
1999 compared to 1998. As a percentage of sales, selling, general and
administrative expenses decreased from 21.7% in 1998 to 19.5% in 1999 because of
operating efficiencies due to the larger sales base.
Research and Development Expenses
Research and development expenses increased 12.9% from $37,222,000 in 1998 to
$42,018,000in 1999. 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 decreased from 13.0%
in 1998 to 11.4% in 1999. ADTRAN continually evaluates new product
opportunities and engages in intensive research and product development efforts.
To date, we have expensed all product research and development costs as
incurred. Additionally, ADTRAN frequently invests heavily in up-front market
development efforts prior to the actual commencement of sales of a major new
product. As a result, we 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. ADTRAN, Inc. 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 1.1% from $2,287,000 in 1998 to 2,312,000 in 1999.
ADTRAN currently pays interest on a $50,000,000 revenue bond, the proceeds of
which were used to expand our facilities in Huntsville, AL.
Net Income
As a result of the above factors, net income increased by 26.4% from $40,310,000
in 1998 to $50,946,000 in 1999. As a percentage of sales, net income decreased
from 14.1% in 1998 to 13.9% in 1999.
1998 Compared to 1997
Sales
ADTRAN's sales increased 8% from $265,335,000 in 1997 to $286,559,000 in 1998.
The increased sales resulted from increased sales volume to existing customers
and from increased market penetration. CN sales decreased from $171,838,000 in
1997 to $167,500,000 in 1998 primarily because of a decline in international
revenue. CN sales as a percentage of total sales decreased from 64.8% in 1997 to
58.5% in 1998. Sales of EN products increased 27.3% from $93,497,000 in 1997 to
$119,059,000 in 1998. As a percentage of total sales, EN sales increased from
35.2% in 1997 to 41.5% in 1998. The increase in sales of EN products is
attributable to increased demand for T1 Service Unit (TSU) products and Digital
Data Service (DDS) products.
Cost of Sales
Cost of sales decreased from $130,254,000 in 1997 to $130,010,000 in 1998. As a
percentage of sales, cost of sales decreased from 49.1% in 1997 to 45.4% in
1998. This decrease was due primarily to reductions in component cost and
product design enhancements. CN cost of sales decreased from $87,270,000 in 1997
to $75,926,000 in 1998. CN cost of sales as a percentage of CN sales decreased
from 50.8% in 1997 to 45.3% in 1998. EN cost of sales increased from $42,984,000
in 1997 to $54,084,000 in 1998. As a percentage of EN sales, EN cost of sales
decreased from 46.0% in 1997 to 45.4% in 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 38.0% from $44,973,000 in
1997 to $62,061,000 in 1998. Beginning in the first quarter of 1997, ADTRAN
embarked on a program of expanding infrastructure in both sales and support
personnel for its expanded customer base and for increased initiatives in the EN
and international markets, as well as for the introduction and marketing of more
technically enhanced products. This expansion program continued through-out
1997 and through the third quarter of 1998, at which point we determined that we
had developed the sales and support capacity necessary to service our expanded
revenue base. As a result, sales, general, and administrative expenses increased
as a percentage of sales in 1998 compared to 1997 and decreased a percentage
of sales in 1999 compared to 1998. As a percentage of sales, selling, general
and administrative expenses increased from 17.0% in 1997 to 21.7% in 1998.
18
<PAGE>
Research and Development Expenses
Research and development expenses increased 23.8% from $30,055,000 in 1997 to
$37,222,000 in 1998. 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 11.3% in
1997 to 13.0% in 1998.
Interest Expense
Interest expense increased 24.4% from $1,839,000 in 1997 to $2,287,000 in 1998.
ADTRAN currently pays interest on $50,000,000 of revenue bond proceeds of which
$20,000,000 was loaned to ADTRAN in January 1995, and $30,000,000 was loaned to
ADTRAN in April 1997. The proceeds were used to expand our facilities in
Huntsville, Alabama. The increase in interest expense in 1998 was due primarily
to a full year's interest being incurred in 1998 on the additional $30,000,000
borrowed in April 1997 versus only a partial year in 1997.
Net Income
As a result of the above factors, net income increased slightly from $40,209,000
in 1997 to $40,310,000 in 1998. As a percentage of sales, net income decreased
from 15.2% in 1997 to 14.1% in 1998.
Liquidity and Capital Resources
We are committed to spend approximately an additional $15,000,000 completing the
construction of Phase IV of our corporate headquarters in Huntsville, Alabama
with an expected completion date of June 30, 2000. Over the next several years,
we expect to spend approximately an additional $25,000,000 to equip Phase IV.
Fifty million dollars 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 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 we therefore may not
realize the full benefit of these incentives. Through December 31, 1999, the
Authority had issued a taxable revenue bond in the principal amount of
$50,000,000 pursuant to the incentive program and loaned the proceeds from the
sale of the bond to us. We are required to make payments to the Authority in
amounts necessary to pay the principal of and interest on the Authority's
Taxable Revenue Bond, Series 1995, as amended, currently outstanding in the
aggregate principal amount of $50,000,000. The 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 of Tennessee.
Our working capital position improved from $150,535,000 as of December 31, 1998
to $180,829,000 as of December 31, 1999. This improvement was due primarily to
earnings and the receipt of cash generated form operations. We have used, and
expect to continue to use, the cash generated from operations for working
capital and other general corporate purposes, including (i) product development
activities to enhance our existing products and develop new products and (ii)
expansion of sales and marketing activities. Inventory decreased 10.8% for the
fiscal year ended December 31, 1999 as compared to fiscal year ended December
31, 1998.
On March 31, 1997, the Board of Directors authorized us to re-purchase up to
1,000,000 shares of our outstanding common stock. In October 1998, the Board
approved the re-purchase of an additional 2,000,000 shares. As of December 31,
1999, we had re-purchased 1,120,136 shares of our common stock at a total cost
of $23,537,000.
We used capital expenditures totaling $36,237,000, $23,096,000 and $18,221,000
in 1999, 1998 and 1997, respectively, to expand our headquarters and to purchase
equipment.
At December 31, 1999, our cash on hand of $37,501,000, short-term investments
of $41,081,000 and $10,000,000 available under a bank line of credit placed our
potential cash availability at $88,581,000. Our $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 March 29, 2000. We anticipate renewing the
$10,000,000 bank line of credit upon its expiration. We intend to finance our
operations in the future with cash flow from operations and amounts available
under the bank line of credit. We expect these available sources of funds to be
adequate to meet our operating and capital needs for the foreseeable future.
19
<PAGE>
ITEM 7A. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
ADTRAN has not conducted transactions, established commitments or entered into
relationships requiring disclosures beyond those provided elsewhere in this Form
10-k.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The following financial statements are contained in this report.
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 21
Financial Statements for Years Ended December 31, 1999, 1998 and 1997
Balance Sheets 22
Statements of Income 23
Statements of Changes in Stockholders' Equity 24
Statements of Cash Flows 25
Schedule II - Valuation and Qualifying Accounts 39
</TABLE>
20
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Stockholders of ADTRAN, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14 (a)(1) on page 35 present fairly, in all material respects, the
financial position of ADTRAN, Inc. at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14(a)(2)
on page 35 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Birmingham, Alabama
January 12, 2000
21
<PAGE>
Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 37,500,674 $ 10,009,320
Short-term investments 41,080,776 40,795,068
Accounts receivable, less allowance for doubtful accounts of
$1,018,400 and $958,805 in 1999 and 1998, respectively 60,036,876 46,588,319
Other receivables 4,458,525 697,074
Inventory 58,568,773 65,700,576
Prepaid expenses 1,410,286 1,354,366
Deferred income taxes 4,069,937 2,416,685
- -------------------------------------------------------------------------------------------------------------------
Total current assets 207,125,847 167,561,408
Property, plant and equipment, net 104,587,755 78,894,317
Other assets 220,000 220,000
Long-term investments 244,362,579 50,035,000
- -------------------------------------------------------------------------------------------------------------------
Total assets $556,296,181 $301,710,725
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,773,848 $ 10,980,097
Accrued salaries 3,240,692 1,828,462
Accrued income taxes 6,096,459 1,060,795
Accrued taxes other than income taxes 728,077 252,548
Warranty liability 1,519,945 1,519,945
Compensated absences 1,619,534 1,384,802
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 25,978,555 17,026,649
Bonds payable 50,000,000 50,000,000
Deferred income taxes 80,265,155 3,295,140
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 156,243,710 70,321,789
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $.01 per share; 200,000,000
shares authorized; 39,466,644 shares issued in 1999
and 39,423,479 in 1998 394,466 394,235
Additional paid-in capital 90,832,913 90,640,451
Accumulated other comprehensive income 116,000,000
Retained earnings 214,834,541 163,570,297
- ------------------------------------------------------------------------------------------------------------------
422,061,920 254,604,983
Less treasury stock at cost: 1,047,225 and 1,100,081
shares in 1999 and 1998, respectively (22,009,449) (23,216,047)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 400,052,471 231,388,936
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $556,296,181 $301,710,725
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
22
<PAGE>
Statements of Income
- --------------------------------------------------------------------------------
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Sales $367,207,437 $286,558,950 $265,334,768
Cost of sales 178,629,643 130,009,879 130,253,531
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 188,577,794 156,549,071 135,081,237
Selling, general and administrative expenses 71,734,959 62,060,907 44,973,175
Research and development expenses 42,017,779 37,221,780 30,055,091
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 74,825,056 57,266,384 60,052,971
Other income (expenses):
Interest income 5,349,762 5,824,223 4,175,032
Interest expense (2,311,667) (2,286,821) (1,838,814)
Other (672,920) (188,530) 437,639
- -----------------------------------------------------------------------------------------------------------------------
2,365,175 3,348,872 2,773,857
Income before income taxes 77,190,231 60,615,256 62,826,828
Provision for income taxes 26,244,679 20,305,606 22,617,556
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 50,945,554 $ 40,309,650 $ 40,209,272
Weighted average shares outstanding assuming dilution (1) 38,831,091 39,163,763 39,565,497
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share - assuming dilution (1) $1.31 $1.03 $1.02
Earnings per common share - basic $1.33 $1.03 $1.03
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
23
<PAGE>
Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
for the years ended December 31, 1999, 1998 and 1997
Common Stock
<TABLE>
<CAPTION>
Number Par Value Additional Retained Treasury Stock Unrealized Gain Total
of shares ($.01 Per Paid-In Earnings on Marketable Stockholders'
Share) Capital Equity Equity
Securities
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 38,769,514 $387,695 $90,172,863 $ 82,318,341 $ 0 $ 0 $172,878,899
Net income 40,209,272 40,209,272
Stock options exercised
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
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 39,381,264 393,813 90,582,615 123,260,647 (2,200,000) 212,037,075
Net Income 40,309,650 40,309,650
Stock options exercised
Various prices per share 42,215 422 57,836 58,258
Purchase of treasury stock:
1,000,081 shares (21,016,047) (21,016,047)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 39,423,479 394,235 90,640,451 163,570,297 (23,216,047) 231,388,936
Net Income 50,945,554 50,945,554
Unrealized gain on marketable
securities (net of deferred
tax of 76,000,000) 116,000,000 116,000,000
Stock options exercised
Various prices per share 23,165 231 192,462 1,532,589 1,725,282
Purchase of treasury stock:
20,055 shares (325,991) (325,991)
Income tax benefit from
exercise of non-qualified
stock options 318,690 318,690
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 39,446,614 $394,466 $90,832,913 $214,834,541 ($22,009,449) $116,000,000 $400,052,471
</TABLE>
During 1999 ADTRAN issued 72,911 shares of Treasury Stock to accommodate
employee stock option exercise.
Comprehensive income of $ 166,945,554 consists of 116,000,000 unrealized gain on
marketable securities (net of deferred tax) and net income of $50,945,554.
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statements of Cash Flows
- --------------------------------------------------------------------------------
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 50,945,554 $ 40,309,650 $ 40,209,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,546,594 9,002,669 7,342,518
Provision for warranty claims 1,506,432 1,435,259
(Gain) loss on sale of property, plant, and equipment (5,050) (9,884)
(Gain) loss on sale of short-term investments
classified as available-for-sale 417,749 24,367 (6,063)
Deferred income taxes (683,237) 1,188,956 (313,867)
Change in operating assets:
Accounts receivable (13,448,557) (5,681,432) (7,081,327)
Inventory 7,131,803 (26,331,473) 1,423,543
Other assets (3,820,781) (579,689) 932,165
Change in operating liabilities:
Accounts payable 1,793,751 1,858,827 (228,996)
Other liabilities 7,158,155 (4,555,110) 1,284,106
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 60,035,981 16,743,197 44,986,726
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (36,236,622) (23,095,854) (18,220,850)
Proceeds from the disposition of property, plant,
and equipment 5,050 58,297
Sale\Purchase of restricted investments 2,672,421 (5,035,000) (50,000,000)
Purchase of short-term investments classified as
available-for-sale (703,457) (2,986,195) (5,271,247)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,262,608) (31,117,049) (73,433,800)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Redemption of bonds payable (20,000,000)
Proceeds from bond issuance 50,000,000
Proceeds from issuance of common stock 1,725,282 58,258 415,870
Income tax benefit from exercise of non-qualified
stock options 318,690 733,034
Purchase of treasury stock (325,991) (21,016,047) (2,200,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,717,981 (20,957,789) 28,948,904
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash 27,491,354 (35,331,641) 501,830
equivalents
Cash and cash equivalents, beginning of year 10,009,320 45,340,961 44,839,131
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 37,500,674 $ 10,009,320 $ 45,340,961
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
Capitalized interest of $0, $35,172, and
$204,153 in 1999, 1998 and 1997, respectively $ 2,311,667 $ 2,276,495 $ 1,844,741
Cash paid during the year for income taxes $ 22,094,478 $ 23,964,517 $ 20,042,644
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
ADTRAN, Inc. designs, develops, manufactures, markets, and services a broad
range of high-speed digital transmission products utilized by providers of
telecommunications services (serviced by ADTRAN's Carrier Networks Division or
CN) and corporate end-users (serviced by ADTRAN's Enterprise Networks Division
or EN) to implement advanced digital data services over existing telephone
networks. We also customize many of our products for private label distribution
and for original equipment manufacturers to incorporate into their own products.
Most of our CN and EN products are connected to the local loop, which is the
largest existing infrastructure of the telephone network, predominantly
consisting of copper wireline, which connects end-users to a Central Office, the
facility that provides local switching and distribution functions. The balance
of our products are used in the CN 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
due to 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.
Investments represent re-marketed preferred stocks, municipal bonds, and
marketable equity securities. Re-marketed preferred stocks are designed to be
marketed as money market instruments. These instruments' dividend 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.
Long-term investments represent restricted money market funds (see Note 6),
marketable equity securities, and other equity investments (see Note 2). The
fair value of the restricted money market funds approximate fair value due to a
variable interest rate. The marketable equity securities are reported at market
value as determined by the most recently traded price of the securities at the
balance sheet date although the securities may not be readily marketable due to
the size of the available market. Unrealized gains and losses, net of tax, are
reported as a separate component of stockholder's equity. Realized gains and
losses are computed under the specific identification method and are included in
current income.
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. ADTRAN depreciates its building and land improvements from
five to thirty-nine years, office machinery and equipment from three to seven
years and its engineering machinery and equipment from three to seven years.
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:
We recognize 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 1999, 1998, and 1997.
Research and Development Costs:
Research and development costs are expensed as incurred.
26
<PAGE>
Comprehensive Income:
Comprehensive Income consists of net income and unrealized gains and losses on
marketable securities, net of deferred taxes, and is presented in the Statements
of Changes in Stockholder's Equity. The adoption of Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, in 1998 had
no impact on total stockholders' equity.
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:
ADTRAN 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
based on the weighted average number of common and, when dilutive, common
equivalent shares outstanding during the year (see Note 13).
Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities on the balance sheet. Changes in such fair value are
required to be recognized immediately in net income (loss) to the extent the
derivatives are not effective as hedges. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000 and is effective for interim periods in the
initial year of adoption. ADTRAN does not currently hold any derivative
financial instruments.
Note 2 - Investments
At December 31, 1999 and 1998, we held the following securities as available-
for-sale or held-to-maturity recorded at amortized cost which approximates fair
value, except certain long-term investments in market equity securities which
are recorded at fair market value:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------------------------------------------
Short-term investments, available-for-sale:
<S> <C>
Municipal bonds: $ 35,342,510
Other:
Commercial paper, US Government securities and
preferred stock 5,738,266
-----------------------------------------------------------------------------------------------------------
Total short-term investments 1999 $ 41,080,776
Long-term investments:
Restricted Money market funds (see Note 6) $ 50,000,000
Investment in Marketable Equity Securities 117,828,577
Other equity investments 534,002
-----------------------------------------------------------------------------------------------------------
Total long-term investments 1999 $168,362,579
Gross unrealized gains on investment in marketable equity securities were $192,000,000 in 1999.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
1998
<S> <C>
Short-term investments, available-for-sale:
Municipal Bonds $ 34,553,013
Re-marketed preferred stocks:
GE Capital preferred asset corporation A series A 5,000,000
Other
Commercial paper, US Government securities and preferred stock 1,242,055
- -----------------------------------------------------------------------------------------------------------
Total short-term investments 1998 $ 40,795,068
Long-term investments:
Restricted Money market funds (see Note 6) $ 50,000,000
Other equity investments 5,035,000
- -----------------------------------------------------------------------------------------------------------
Total long-term investments 1998 $ 55,035,000
</TABLE>
Note 3 - Inventory
At December 31, 1999 and 1998 inventory consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------
<S> <C> <C>
Raw materials $30,143,435 $39,787,631
Work in process 15,763,155 7,935,771
Finished goods 12,662,183 17,977,174
- ---------------------------------------------------------------------------------------------------------------
$58,568,773 $65,700,576
</TABLE>
Note 4 - Property, Plant, and Equipment
Property, plant, and equipment was comprised of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Land $ 4,263,104 $ 4,263,104
Building 26,389,365 28,684,088
Construction in progress 44,248,566 12,119,342
Land improvements 9,499,352 9,499,352
Office machinery and equipment 24,590,473 22,683,087
Engineering machinery and equipment 36,013,355 31,548,285
- ----------------------------------------------------------------------------------------------------------------------
145,004,215 108,797,258
Less accumulated depreciation (40,416,460) (29,902,941)
- ----------------------------------------------------------------------------------------------------------------------
$104,587,755 $ 78,894,317
</TABLE>
Note 5 - Line of Credit
ADTRAN 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, 1999 and 1998, ADTRAN had no borrowings outstanding under this
line. The line of credit expires on March 29, 2000.
28
<PAGE>
Note 6 - Alabama State Industrial Development Authority Financing
In conjunction with an expansion of our Huntsville, Alabama facility, ADTRAN 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 us. 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 bringing the total
amount outstanding to $50,000,000. An Amended and Restated Taxable Revenue Bond
("Amended and Restated Bond"), 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. ADTRAN is required to make payments to the
Authority in amounts necessary to pay the principal of and interest on the
Amended and Restated Bond. Included in long-term investments is $50,000,000,
which is restricted for payment of principal of this bond. Construction on the
project began in March 1995 and certain phases were completed by December 31,
1999.
Note 7 - Income Taxes
A summary of the components of the provision (benefit) for income taxes as of
December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $24,764,293 $17,551,986 $21,251,520
State 2,163,623 1,564,664 1,679,903
- --------------------------------------------------------------------------------------------------------------------------
Total Current 26,927,916 19,116,650 22,931,423
Deferred tax provision (benefit) (683,237) 1,188,956 (313,867)
- --------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $26,244,679 $20,305,606 $22,617,556
</TABLE>
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Tax provision computed at the federal statutory rate
(35% in 1999, 1998 and 1997) $27,016,582 $21,215,340 $21,989,390
State income tax provision, net of federal benefit 1,406,355 1,017,032 1,091,936
Federal research credits (1,880,205) (1,650,877) (1,248,925)
Permanent differences and other (298,053) (275,889) 785,155
- -------------------------------------------------------------------------------------------------------------------------
$26,244,679 $20,305,606 $22,617,556
</TABLE>
Temporary differences which create deferred tax assets and liabilities at
December 31, 1999 and 1998 are detailed below.
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Current Non-current Current Non-current
<S> <C> <C> <C> <C>
Property, plant and equipment ($4,265,155) ($3,295,140)
Investments (76,000,000)
Accounts receivable $ 400,740 $ 422,758
Inventory 2,433,811 844,519
Accruals 1,235,385 1,149,408
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax asset (liability) $4,069,936 ($80,265,155) $2,416,685 ($3,295,140)
</TABLE>
No valuation allowance is deemed necessary by management as the realization of
recorded deferred tax assets is considered more likely than not.
29
<PAGE>
Note 8 - Operating Leases
ADTRAN leases office space and equipment under operating leases. As of December
31, 1999, future minimum rental payments under the non-cancellable operating
leases are approximately as follows:
<TABLE>
<S> <C>
2000 $ 551,000
2001 368,000
2002 216,000
2003 108,000
$1,243,000
</TABLE>
Rental expense was approximately $988,000, $908,000 and $657,000, in 1999, 1998
and 1997, respectively.
Note 9 - Employee Incentive Stock Option Plan and Directors' Stock Option Plan
The Board of Directors of ADTRAN adopted the 1996 Employees Incentive Stock
Option Plan (the "1996 Plan") effective February 14, 1996, as amended, under
which 2,488,100 shares of common stock were reserved for issuance to certain
employees and officers through incentive stock options and non-qualified stock
options. In addition, non-qualified options for 612,000 shares were granted in
1999 and become effective upon approval of additional option shares by our
stockholders. Because approval is anticipated, these options have been included
in the tables below and in the calculation of earnings per share. We currently
have options outstanding under our 1986 Employee Incentive Stock Option Plan
(the "1986 Plan"), which 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, 1999
range from 2000 to 2009.
The Board of Directors of ADTRAN adopted a Directors' Stock Option Plan
("Director's Plan") effective October 31, 1995, as amended, under which 200,000
shares of common stock have been reserved. The Director's Plan is a formula plan
to provide options to non-employee directors of ADTRAN. At December 31, 1999,
72,000 options had been granted under the plan. Expiration dates of options
outstanding under the Director's Stock Option Plan at December 31, 1999 range
from 2005 to 2009.
Pertinent information regarding the stock plans is as follows:
<TABLE>
<CAPTION>
Weighted
Number Range of Average
of Exercise Exercise Vesting
Options Prices Price Provisions
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Options granted 1,018,225 18.31 - $26.25 $ 21.46 Various
Options granted 10,250 30.50 - $31.00 $ 30.69 Various
Options cancelled (45,370) 21.31 - $65.75 $ 35.61 Various
Options exercised (42,215) $ .17 - $ 3.33 $ 1.38 Various
- --------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1998 2,217,346 $ .50 - $65.75 $ 27.78 Various
Options granted 504,000 18.13 - $39.69 $ 35.75 Various
Options granted 642,000 18.88 - $65.75 $ 36.05 Various
Options cancelled (166,875) 21.28 - $65.75 $ 32.52 Various
Options exercised (96,076) $ .50 - $31.75 $ 17.96 Various
Options outstanding, December 31, 1999 3,100,395 $ 1.50 - $65.75 $30.875 Various
</TABLE>
30
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/99 Life Price 12/31/99 Price
<S> <C> <C> <C> <C> <C> <C>
$ 1.50 - $ 3.33 110,150 3.47 $ 2.28 110,150 $ 2.28
$12.53 - $21.31 896,135 8.72 $21.13 168,760 $20.75
$21.81 - $27.50 652,400 7.56 $25.26 240,913 $25.33
$30.38 - $46.25 1,161,310 9.07 $36.09 76,180 $36.19
$56.25 - $65.75 281,500 6.59 $63.49 160,200 $63.70
- ---------------------------------------------------------------------------------------------------------------------
3,100,395 756,203
</TABLE>
The options above were issued at exercise prices which approximate fair market
value at the date of grant. At December 31, 1999, 290,420 options were
available for grant under the plans. ADTRAN 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
ADTRAN'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, ADTRAN's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $50,945,554 $40,309,650 $40,209,272
Net income - pro forma 44,190,609 35,417,764 37,634,225
Earnings per share - as reported
assuming dilution $ 1.31 $ 1.03 $ 1.02
Earnings per share - pro forma
assuming dilution $ 1.14 $ .90 $ .96
</TABLE>
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>
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected life (years) 6 5 5
Expected volatility 59.4% 59.1% 49.1%
Risk-free interest rate 5.69% 4.67% 6.06%
</TABLE>
Note 10 - Employee Benefit Plan
In March 1990, ADTRAN 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. ADTRAN matches one-half
of a participant's contribution, limited to 5% of a participant's income. An
employee's interest in ADTRAN's contributions becomes 100% vested at the date
participation in the Savings Plan commenced. Charges to operations for the plan
amounted to approximately $1,288,000, $928,000, $717,000, in 1999, 1998 and
1997, respectively.
31
<PAGE>
Note 11 - Segment Information and Major Customers
We operate two reportable segments - (1) CN and (2) EN. The accounting policies
of the segments are the same as those described in the "Summary of Significant
Accounting Policies" (see Note 1) to the extent that such policies affect the
reported segment information. ADTRAN evaluates the performance of its segments
based on gross profit; therefore, selling, general and administrative costs, as
well as research and development, interest income/expense, and provision for
taxes, is reported on an entity wide basis only. There are no intersegment
revenues.
The table below presents information about the reported sales and gross profit
of ADTRAN for each of the years in the three year period ended December 31,
1999. Asset information by reportable segment is not reported, since we do not
produce such information internally.
<TABLE>
<CAPTION>
1999 1998 1997
Sales Gross Profit Sales Gross Profit Sales Gross Profit
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
CN $230,967 $108,809 $167,500 $ 91,574 $171,838 $ 84,568
EN 136,240 79,768 119,059 64,975 93,497 50,513
- --------------------------------------------------------------------------------------------------------------------------
Total $367,207 $188,577 $286,559 $156,549 $265,335 $135,081
</TABLE>
The following is sales information by geographic area for the years ended
December 31:
<TABLE>
<CAPTION>
Sales (in thousands)
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
United States $357,699 $277,062 $242,230
Foreign 9,508 9,497 23,105
--------------------------------------------------------
$367,207 $286,559 $265,335
</TABLE>
Sales of ADTRAN's transmission and test equipment to the Regional Bell Operating
Companies (RBOCs) and GTE, also known as Incumbent Local Exchange Carriers
(ILECs), amounted to approximately 55%, 49% and 52% of total sales during the
years ended December 31, 1999, 1998 and 1997, respectively. ADTRAN's EN Division
sells a significant portion of our products to value added resellers through a
multi-tier distribution system. Sales of this type amounting to 27%, 25%, and
16% of ADTRAN's revenue for each of the years ended December 31, 1999, 1998 and
1997 respectfully were routed through four fulfillment distributors.
Note 12 - Contingencies
We have certain contingent liabilities resulting from litigation arising in the
normal course of business. Although the outcome of any litigation can never be
certain, it is ADTRAN's opinion that the outcome of such contingencies will not
materially affect our business, operations, financial condition or cash flows.
Note 13 - Earnings Per Share
A summary of the calculation of basic and diluted earnings per share for the
years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
For the Year Ended 1999
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $50,945,554 38,334,507 $1.33
Effect of Dilutive Securities
Stock Options 0 496,584
Diluted EPS
Income available to common stockholders
(with dilution) for assumed options exercised $50,945,554 38,831,091 $1.31
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended 1998
--------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $40,309,650 38,981,558 $1.03
Effect of Dilutive Securities
Stock Options 0 182,205
Diluted EPS
Income available to common stockholders
+ assumed conversions $40,309,650 39,163,763 $1.03
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended 1997
--------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
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
</TABLE>
The following options were outstanding during the respective year, 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.
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------- ------------------------------------------ ---------------------------------------
Options Exercise Options Exercise Options Exercise
Granted Price Expiration Granted Price Expiration Granted Price Expiration
<S> <C> <C> <C> <C> <C> <C> <C> <C>
46,000 $31.75-$46.25 2005 58,450 $31.75-$46.25 2005 3,500 $46.25 2005
276,000 $39.75-$65.75 2006 307,400 $30.50-$65.75 2006 294,400 $56.25-$65.75 2006
23,100 $37.88-$42.72 2007 31,900 $27.50-$42.72 2007 17,700 $37.63-$42.38 2007
1,083,710 $36.06-$51.44 2009 28,500 $26.25-$30.38 2008
</TABLE>
33
<PAGE>
Note 14 - Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of
ADTRAN's last eight fiscal quarters. This information has been prepared by
ADTRAN on a basis consistent with our audited financial statements and includes
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of the data.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except for per share amounts) March 31 June 30 September 30 December 31
1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $77,163 $88,507 $97,067 $104,470
Gross profit 39,494 43,356 50,463 55,265
Income from operations 13,226 15,530 21,223 24,846
Net income 9,111 10,716 14,150 16,969
Earnings per common share - assuming dilution $ .24 $ .28 $ .36 $ .43
Earnings per common share - basic $ .24 $ .28 $ .37 $ .44
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except for per share amounts) March 31 June 30 September 30 December 31
1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $65,327 $71,155 $77,044 $ 73,033
Gross profit 35,919 38,950 42,310 39,370
Income from operations 14,283 14,441 16,377 12,165
Net income 9,893 10,145 11,441 8,831
Earnings per common share - assuming dilution $ .25 $ .26 $ .29 $ .23
Earnings per common share - basic $ .25 $ .26 $ .29 $ .23
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
No independent certified public accountant of ADTRAN has resigned, indicated any
intent to resign or been dismissed as the independent certified public
accountant of ADTRAN during the three fiscal years ended December 31, 1999 or
subsequent thereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
Information relating to nominees for director of ADTRAN 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
21, 2000. Such information is incorporated herein by reference. The definitive
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after ADTRAN's fiscal year end. Information relating to the executive
officers of ADTRAN, pursuant to Instruction 3 of Item 401(b) of Regulation S-K
and General Instruction G(3) of Form 10-K, is set forth at Part I, Item 4(A) of
this report under the caption "Executive Officers of the Registrant." Such
information is incorporated herein by reference.
34
<PAGE>
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 ADTRAN 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 ADTRAN and any affiliate of ADTRAN 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.
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 ADTRAN 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, 1999 and 1998
Statements of Income for the years ended December 31, 1999, 1998 and
1997
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997.
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and 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. We 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.
35
<PAGE>
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to
ADTRAN'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 Alabama State
Industrial Development Authority, consisting of the following
(Exhibit 10.3 to ADTRAN'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"), ADTRAN 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 ADTRAN;
(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 ADTRAN authorizing the Financing Agreement,
the Loan Agreement and the Note;
(f) Specimen Note from ADTRAN to AmSouth Bank of Alabama, dated
January 13, 1995;
(g) Pledge Agreement dated January 13, 1995 between AmSouth
Bank of Alabama and ADTRAN;
(h) Eighth Amended and Restated Closing Agreement between
ADTRAN 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 ADTRAN.
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 ADTRAN and AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among
ADTRAN and the stockholders of ADTRAN prior to ADTRAN'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).
36
<PAGE>
*23 Consent of PricewaterhouseCoopers LLP
*24 Powers of Attorney
*27 Financial Data Schedule
(b) Reports on Form 8-K. None
*Filed herewith
- ---------------
37
<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, 2000.
ADTRAN, Inc.
(Registrant)
By: /s/ John R. Cooper
------------------------------
John R. Cooper
Vice President - Finance, Chief
Financial Officer, and Treasurer
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, 2000.
Signature Title
--------- -----
/s/ Mark C. Smith Chairman of the Board, Chief
- ------------------------ Executive Officer and Director
Mark C. Smith
Howard A. Thrailkill* President, Chief Operating Officer
- ------------------------ and Director
Howard A. Thrailkill
Lonnie S. McMillian* Senior Vice President, Secretary,
- ------------------------ and Director
Lonnie S. McMillian
W. Frank Blount* Director
- ------------------------
W. Frank Blount
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,
- ------------------------ Chief Financial Officer, and Treasurer
John R. Cooper
*By: /s/Mark C. Smith
-------------------
Mark C. Smith
as Attorney in Fact
38
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance
Beginning of at end of
Period Additions Deductions Period
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for Doubtful Accounts $ 958,805 $ 400,215 $ 340,620 $1,018,400
Inventory Reserve $1,148,731 $6,006,173 $1,848,401 $5,306,503
Warranty Liability $1,519,945 $2,501,073 $2,501,073 $1,519,945
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 893,389 $ 275,025 $ 209,609 $ 958,805
Inventory Reserve $2,249,063 $1,277,237 $2,377,569 $1,148,731
Warranty Liability $1,435,259 $1,600,824 $1,516,138 $1,519,945
Year ended December 31, 1997
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
</TABLE>
39
<PAGE>
ADTRAN, INC.
INDEX OF EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to
ADTRAN'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 Alabama State
Industrial Development Authority, consisting of the following
(Exhibit 10.3 to ADTRAN'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"), ADTRAN 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 ADTRAN;
(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 ADTRAN authorizing the Financing Agreement,
the Loan Agreement and the Note;
(f) Specimen Note from ADTRAN to AmSouth Bank of Alabama, dated
January 13, 1995;
(g) Pledge Agreement dated January 13, 1995 between AmSouth
Bank of Alabama and ADTRAN;
(h) Eighth Amended and Restated Closing Agreement between
ADTRAN 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 ADTRAN.
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 ADTRAN and AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among
ADTRAN and the stockholders of ADTRAN prior to ADTRAN's initial
public offering of Common Stock (Exhibit 10.5 to the 1994 Form
10-K).
10.4 Management Contracts and Compensation Plans:
40
<PAGE>
(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 PricewaterhouseCoopers LLP
*24 Powers of Attorney
*27 Financial Data Schedule
*Filed herewith
--------------
41
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-78417) of ADTRAN, Inc. of our report dated
January 12, 2000, relating to the financial statements, and financial statement
schedules, which appears in this Annual Report on Form 10-K
/s/ PricewaterhouseCoopers LLP
--------------------------
PricewaterhouseCoopers LLP
Birmingham, Alabama
March 15, 2000
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ Mark C. Smith
------------------------------
Mark C. Smith
Chairman of the Board, Chief
Executive Officer and Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ Howard A. Thrailkill
---------------------------------------
Howard A. Thrailkill
President, Chief Operating Officer, and
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ Lonnie S. McMillian
---------------------------------
Lonnie S. McMillian
Senior Vice President, Secretary,
and Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ W. Frank Blount
-------------------
W. Frank Blount
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ William L. Marks
--------------------
William L. Marks
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ Roy J. Nichols
------------------
Roy J. Nichols
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Mark C. Smith 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, 1999, and
any and all amendments thereto, and other documents in connection therewith and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 29 day of March, 2000.
/s/ James L. North
------------------
James L. North
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND
THE CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,500,674
<SECURITIES> 41,080,776
<RECEIVABLES> 61,055,276
<ALLOWANCES> 1,018,400
<INVENTORY> 58,568,773
<CURRENT-ASSETS> 207,125,847
<PP&E> 145,004,215
<DEPRECIATION> 40,416,460
<TOTAL-ASSETS> 556,296,181
<CURRENT-LIABILITIES> 25,978,555
<BONDS> 50,000,000
0
0
<COMMON> 394,466
<OTHER-SE> 400,052,471
<TOTAL-LIABILITY-AND-EQUITY> 556,296,181
<SALES> 367,207,437
<TOTAL-REVENUES> 367,207,437
<CGS> 178,629,643
<TOTAL-COSTS> 178,629,643
<OTHER-EXPENSES> 71,743,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,311,667
<INCOME-PRETAX> 77,190,231
<INCOME-TAX> 26,244,679
<INCOME-CONTINUING> 50,945,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,945,554
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.31
</TABLE>
