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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, 1998
[ ] 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, 1999 was $568,848,869.
There were 39,402,679 shares of Common Stock outstanding as of March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on April 20, 1999 are incorporated herein by reference in Part III.
ADTRAN, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1998
Table of Contents
Item Page
Number Number
PART I
1. Business 3
2. Properties 13
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
7a. Quantitative and Qualitative Disclosures About Market Risk 23
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 37
PART III
10. Directors and Executive Officers of the Registrant 37
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Managemen 38
13. Certain Relationships and Related Transactions 38
PART IV
14. Exhibits, Financial Statement, Financial Statement Schedules,
and Reports on Form 8-K 38
SIGNATURES 41
INDEX OF EXHIBITS 44
PART I
ITEM 1. BUSINESS
OVERVIEW
ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets and
services a broad range of high-speed digital transmission products utilized by
telephone companies ("Telcos") and corporate end-users to implement advanced
digital data services over existing telephone networks. Most of the Company's
Telco and customer premises equipment ("CPE") products are connected to the
local loop ("Local Loop"). The Local Loop is the large existing infrastructure
of the telephone network connecting end-users to a Telco's central office, the
facility that provides the local switching and distribution functions ("Central
Office"). The balance of the Company's products are used in the Telcos' Central
Offices.
The Company's product lines, which are comprised of over 500 principal
products, are built around core technologies developed by the Company to address
the Local Loop and Central Office digital communications marketplace. These
products include a comprehensive line of transmission, repeater, extension and
termination products. The Company also offers a broad line of multiplexers
providing modular flexibility to the CPE marketplace. Separate T-1 and T-3
product lines are sold to Telcos for use within their Central Offices. The
Company has addressed the wireless marketplace with the introduction of a
wireless spread spectrum microwave transceiver.
The Company's products address two market segments: (i) Telco products for
use in the Local Loop or in a Central Office,and (ii)CPE products for end-users.
In 1998, sales of Telco and CPE products accounted for 58.5% and 41.5%
respectively, of the Company's sales. The Company's Telco products deliver cost-
effective digital services such as 56/64 Kbit/sec Digital Data Service ("DDS"),
128 Kbit/sec Integrated Services Digital Network ("ISDN"), 64 Kbit/sec to 1.544
Mbit/sec Frame Relay service ("Frame Relay") and 1.544 Mbit/sec T-1 (24 Channel)
service. In addition, the Company's High bit-rate Digital Subscriber Line
("HDSL") products permit T-1 transmission on up to 12,000 feet of unconditioned
copper wireline while reducing the need for costly mid-span repeaters. The
Company's CPE products provide end-users access to Telco digital services and
often include additional features for specific end-user applications. The
Company has introduced and shipped a number of HDSL, ISDN and other products
which comply with international standards to increase its penetration of
overseas markets. See "Business -Products."
The rapidly expanding requirements for digital transmission in the Local
Loop are being driven by Internet access, small office/home office ("SOHO")
users, video delivery and on-line data services, among other applications, all
of which require and benefit from the speed, reliability and low cost of digital
transmission. While the Telcos have, to a large extent, replaced their wireline
data transmission network between Central Offices with fiber-optic and digital
microwave links which allow for high speed digital transmission, the Local Loop
remains predominantly characterized by low speed analog transmission over copper
wirelines. As a result, there has been considerable impetus for Telcos to
upgrade the Local Loop in the most cost effective manner available. Widespread
replacement of the copper wireline Local Loop remains prohibitively expensive,
so the Telcos have turned to manufacturers such as the Company for technologies
that expand Local Loop capabilities to handle digital transmission without
necessitating this costly replacement. Existing digital delivery technologies,
including Frame Relay, ISDN and HDSL, are all experiencing rapid compound
growth. Numerous higher speed digital technologies are under development,
including many versions of Digital Subscriber Line ("DSL") technology,
Asynchronous Transfer Mode ("ATM"), wireless transmission, hybrid fiber coax,
cable modems and other technologies.
The Company's core technologies expand the digital transmission
capabilities of the Local Loop by enabling increased transmission speed and/or
increased transmission distance. Ongoing research and product development
activities are designed to enhance the distances covered by existing services as
well as to develop new higher speed technologies. For example, during the first
quarter of 1996, the Company demonstrated to the Telcos its new "Total Reach"
delivery technology which increases the distance covered by ISDN services in the
Local Loop from 18,000 feet to 30,500 feet. The same technology has been
incorporated into 64Kbit/sec digital products for use in Frame Relay and DDS
services. In addition, the Company is engaged in research, performance
simulation, and design of higher speed digital technologies for the transport of
data. Current issues for future higher speed digital technologies, including
costs, power consumption and distances reachable, must be resolved for
widespread acceptance and deployment of these technologies.
In developing its product families, the Company has continuously improved
its design, purchasing and production processes to lower product costs and has
consistently offered improved products at lower prices to customers. As a
result, management believes that the Company is a leading provider of Local Loop
and Central Office digital transmission products to Telcos. See "Company
Strategy." The Company's customers include all Regional Bell Operating Companies
("RBOCs"), GTE Corporation, the three largest interexchange carriers, the 1,300
independent telephone companies, Competitive Local Exchange Carriers ("CLEC") as
well as a number of worldwide electronics, communications and industrial
companies. See "Business-Customers."
The Company was incorporated under the laws of Delaware in November 1985
and commenced operations in January 1986.
RECENT DEVELOPMENTS
The Company is continuing a project to expand its facilities in Huntsville,
Alabama in phases over the next two years at a cost expected to exceed
$150,000,000, of which almost $56,585,000 had been incurred at December 31,
1998. 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 such
as the Company to generate Alabama corporate income tax credits that can be used
to reduce the amount of Alabama corporate income taxes that would otherwise be
payable. There can be no assurance that the State of Alabama will continue to
make these corporate income tax credits available in the future, and the Company
therefore may not realize the full benefit of these incentives. The Authority
has issued $50,000,000 of its taxable revenue bonds pursuant to such program and
loaned the proceeds from the sale of the bonds to the Company. The Company is
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
(ADTRAN, Inc. Project), as amended, currently outstanding in the aggregate
principal amount of $50,000,000. Said bond matures on January 1, 2020, and bears
interest at the rate of 45 basis points over the money market rate of First
Union National Bank.
COMPANY STRATEGY
The Company's growth strategy includes the following elements:
FOCUS ON LOCAL LOOP AND CENTRAL OFFICE DIGITAL TRANSMISSION PRODUCTS. Upon
commencing operations in 1986, the Company focused its product strategy upon
capturing a significant market share for sales of Local Loop and Central Office
digital transmission products to Telcos. This focus was the result of the
recognition by the Company's founders of the significant opportunity created by
the elimination of American Telephone & Telegraph Co.'s ("AT&T") monopoly
position in the manufacture of telecommunications equipment. Having achieved a
leading market share of Local Loop and Central Office digital transmission
products, the Company intends to consolidate its position through an integrated
program of new product development, customer service and product excellence.
CAPITALIZE ON EXISTING LEADERSHIP POSITION IN THE TELCO MARKET. As a leader
in the Telco market it serves, the Company intends to apply its sales and
customer service resources to new market opportunities that arise as expanded
services are provided by the Telcos in response to increasing subscriber demand.
In this regard, the Company expects that its in-depth understanding of and
experience with Local Loop and Central Office technology will provide it a
competitive advantage. The Company is committed to replace most of its products
with succeeding generations of products with lower costs, additional product
features and improved serviceability.
ADAPT PRODUCT TECHNOLOGY AND SALES FORCE TO CPE MARKET. Over the past eight
years, the Company has adapted product technology developed for Telco Central
Offices for use in the Company's CPE product lines. As many of the technologies
that are critical to success in the CPE market are identical to those already
developed and refined for the Company's Telco products, the Company has realized
a competitive advantage through leveraging these product development efforts and
expertise in all of its markets. To sell its CPE products to the large number of
end-users which comprise the market, the Company has built a dedicated sales
force and an extensive nationwide network of re-sellers over the past eight
years. The Company intends to continue the expansion of its distribution
channels to address the worldwide market for its CPE products.
EXPAND INTO INTERNATIONAL MARKETS. While international sales are not
currently substantial, international customers have begun to order, and the
Company has shipped, international versions of the Company's Telco and CPE
products. The Company has formed, and will continue to pursue, international
distribution arrangements built upon core products and technology developed by
the Company in an effort to further its penetration into international markets.
The Company has also focused on developing E-1 technology, the predominant
standard for data transmission outside of North America. In the future, the
Company plans to add appropriate support capabilities and introduce new versions
of its products that incorporate E-1 technology and that otherwise comply with
relevant international standards. The Company's development process currently is
conducted in accordance with ISO 9001, the international standard for quality
management systems for design, manufacturing and service.
INVEST IN ENGINEERING AND PRODUCT DEVELOPMENT. The Company expects to
continue its relatively high levels of investment in developing innovative new
products, and redesigning existing products, in order to reduce product costs
and production cycle times, and in so doing will continue its efforts to be a
low cost provider in the industry. New products are generally targeted at
opportunities that promise rapid growth as product costs are reduced and feature
sets are optimized. The Company will also continue to develop and expand its
broad product line serving each of the Telco and CPE markets. The Company
continuously monitors developing technologies and introduces products as defined
standards and markets emerge. This diversification in products and markets will
continue to be a key to the Company's business strategy.
ADAPT TO NEW LOCAL LOOP MEDIA. New Local Loop connections continue to be
implemented primarily with copper wirelines, although the Company anticipates an
increased use of fiber-optic, coaxial and wireless communications in new
installations over the next decade and more. To the extent such alternative
connection methods become economically advantageous, and as such markets develop
and grow, the Company will continue to extend its technical and marketing
experience to develop products meeting the demands of such markets.
COMMIT TO CONSTANT IMPROVEMENTS IN QUALITY AND SERVICE. The Company
believes its success to date has been due in large measure to its commitment to
constantly improve product quality and customer service. This commitment has
been formally recognized in awards received from several of its largest
customers. In the future, product quality is expected to contribute
significantly to the Company's efforts to reduce production cycle times and
product costs.
PRODUCTS
CORE PRODUCT TECHNOLOGY. The Company's product lines, comprised of over 500
principal products, are built around core technologies developed by the Company
to address the Central Office and Local Loop digital communications
marketplaces. Central Office facilities, approximately 30,000 of which are
located throughout North America, provide subscribers with access to a discrete
portion of the network's bandwidth on a switched basis ("switched access") or on
an exclusive basis ("private line"). Typically, access is available in unit
multiples of 56 Kbit/sec (64 Kbit/sec in some locations) increments, although
Telco multiplexing equipment can efficiently aggregate these basic increments
into high speed channels up to T-1 rates (1.544 Mbit/sec), T-3 (45 Mbit/sec) or
faster rates. Individual channels can also be
subdivided to speeds as low as 2.4 Kbit/sec.
Each individual Local Loop circuit is served by a circuit assembly
(consisting of a channel unit, U-Basic Rate Transmission Extender, or "U-BR1TE"
or other similar products manufactured by the Company) that plugs into a Central
Office channel bank or shelf. The speed and functionality of the circuit is
determined by the type of circuit assembly deployed by the Telco. For each such
circuit, Central Office facilities generally make available a corresponding
physical mounting position in a channel bank or shelf, and plug-in circuit
assemblies are installed in accordance with the service ordered by the
subscriber. Other special plug-in circuit assemblies, such as those manufactured
by the Company, are commonly employed to connect or bridge circuits within the
Central Office. Individual communication channels (multiplexer time slots) are
interconnected and switched as appropriate within the Central Office, and the
resultant communications payload is then directed toward the proper destination.
If the communications traffic needs to be delivered to another Central Office,
it is directed toward the inter-office network, usually through a long distance
carrier such as AT&T, MCI or Sprint. At the far-end connection, the process is
reversed. Voice is converted into digital form by circuit assemblies within the
RBOC's Central Office and treated like any other digital information until
delivered to the far-end serving Central Office where it is returned to analog
form in the Local Loop. However, when products such as those sold by the Company
are utilized, data communications traffic remains in digital form end to end.
In recent years, the need for higher volume data communications has led to
the development of "remote huts." Like the Central Office, remote huts provide
subscriber access through plug-in circuit assemblies such as those manufactured
by the Company, but they can take advantage of high capacity fiber-optic links
or multiple copper links to bring service to the local area economically. Remote
huts are then connected by the Local Loop to end-users with products such as
those sold by the Company. The Company also manufactures optional mid-span
repeaters or loop extension devices that extend the service range of the Local
Loop, as well as termination units that may be deployed to monitor and maintain
service to the subscriber.
At the customer's premises, terminating equipment receives the transmitted
signal from the Central Office and converts it to a form useful to end-user
products such as LAN interconnection gear, video conferencing equipment, PBXs,
personal computers and related equipment. In general, the Local Loop and related
CPE products support bi-directional communications traffic.
Today, the Company's product lines consist of two groups of inter- related
products, all evolving from the core product technologies developed for the
Local Loop:
* Telco Central Office and Local Loop digital transmission
products.
* CPE products.
TELCO CENTRAL OFFICE AND LOCAL LOOP DIGITAL TRANSMISSION PRODUCTS. Several
hundred to several thousand circuit assemblies, such as those manufactured by
the Company, are required at each Central Office, since each Local Loop may
require a unit of this type to provide service to each subscriber. In 1998, the
Company delivered more than 894,927 units of this product group, accounting for
74.9% of the Company's total units shipped. Telco products accounted for 58.5%
and 64.8% of the Company's sales in 1998 and 1997, respectively. Sales of Telco
products to original equipment manufacturers ("OEMs") are included in these
percentages. The Company had in prior years reported Telco product sales to OEM
customers in an OEM product section of Form 10-K, and were not part of the Telco
product percentages. The Company now categorizes certain OEM sales as Telco
product sales, as the OEM supply contracts are customer funded modifications of
Telco products.
Typical of the different versions of Central Office channel assemblies
manufactured by the Company are the various OCU dataports and related products,
the fundamental building blocks for delivering DDS and Frame Relay services at
56/64 Kbit/sec rates to subscribers. In response to the Telco's need for a
method to monitor transmission conditions and to detect problems for each
individual circuit, the Company pioneered development of the Digital Data
Station Termination ("DDST") product family. Both the OCU dataports and DDSTs
are produced in relatively high volumes directly related to the increased demand
for DDS and Frame Relay services.
The Total Reach family of products uses one of ADTRAN's own technological
breakthroughs, Simple-Coded Pulse Amplitude Modulation (SC PAM), to extend
digital services over one twisted pair of copper wires. Total Reach DDS
addresses some of the major challenges associated with traditional DDS service
deployment such as multiple copper pair availability in the customer's CSA;
extensive engineering for repeaters and apparatus cases required for lengthy
installs; bridged tap determination and removal efforts; and powering
requirements for customer-located termination devices.
The Company is the industry's primary supplier of U-BR1TEs, which are
required to extend ISDN service from an ISDN capable switch at a hub Central
Office to a serving Central Office or to remote Channel Banks. The Company also
supplies a substantial portion of the industry's ISDN mid-span repeaters. Other
ISDN products include a BR1TE Bank to mount multiple U-BR1TES, T-BR1TES, NT-1
interface units, Total Reach, and outside plant housings for the repeaters.
Late in 1993, the Company commenced deliveries of its HDSL product family.
The Company has chosen to develop its own custom integrated circuits so HDSL
product performance, availability and cost can be carefully managed. Management
believes that demand for this product family will increase steadily as more
affordable versions increasingly become available to the Telcos.
Already the industry leader in HDSL, ADTRAN released its new line of HDSL2
products in the first quarter of 1999. The products are designed according to
the proposed standard developed by the ANSI T1E1.4 Standards Committee, whose
HDSL2 line coding technique originated with ADTRAN's Simple-Coded Pulse
Amplitude Modulation (SC PAM) technology. The ADTRAN HDSL2 products feature
two-wire T1 transport up to 9,000 feet on 26-gauge wire or 12,000 feet on
24-gauge wire. They are also NEBS compliant with Class A2 span powering.
ADTRAN's HDSL2 product line works within industry-standard mechanics, making the
products fully compatible with legacy network equipment.
ADTRAN's carrier class, broadband integrated access device, the Total
Access 3000, offers comprehensive management, enhances reliability, reduces
installation and life-cycle costs, and provides for seamless upgrades to future
products and technologies. The Total Access intelligent access system integrates
ADTRAN's industry-leading loop technologies into an intelligent platform. The
Total Access 3000 supports HDSL, T1/FT1, ISDN, xDSL and optical DS2. A single
chassis can simultaneously support DS3 and DSX-1, or SONET and DSX-1 network
interfaces. One chassis provides the necessary connections to interface with 140
two-wire loops to customer equipment. The Total Access 3000 platform provides
built-in 1:1 HiCap protection for HDSL, T1 and optical DS2. The Total Access
3000 system delivers high-speed digital services at high densities in a compact
6-inch tall by 12-inch deep chassis. The Total Access 3000 system takes a
modular approach with flexible network multiplexer modules including the DS-3
mux and the STS-1 mux; with intuitive management modules, including a Standard
System Controller Unit (SCU) and a Gateway SCU for TL1/NMA, SNMP and Telnet
support; and with versatile loop access modules serving optical and copper local
loops.
Today's sophisticated networks require an increasing degree of monitoring
and management to ensure the reliability of the network to its users.
Industry-standard Transaction Language 1 (TL1) and Simple Network Management
Protocol (SNMP) allow common platform management of a variety of networking
products. In response, ADTRAN offers a broad line of manageable products
designed to satisfy a wide range of management requirements. Many ADTRAN
products are available with integral or optional SNMP and TL1/NMA management
ports. In addition, several of the ADTRAN products can be managed through a
simple terminal interface. ADTRAN management solutions include the company's own
ADVISION, an SNMP application graphical user interface that will control all
ADTRAN SNMP-managed products. ADVISION allows HP Open View to autodetect,
automap and automatically define trap tables for ADTRAN SNMP products.
CPE PRODUCTS. The Company's CPE products have evolved from technology
developed for its Telco product line. As many of the technologies which are
critical to success in the CPE market are identical to those already developed
and refined for the Company's Telco products, the Company has realized a
competitive advantage through leveraging these product development efforts and
expertise in all of its markets. Since initial product deliveries in 1991, CPE
product sales have accounted for 41.5% and 35.2% of the Company's sales in 1998
and 1997, respectively. Sales of CPE products to original equipment
manufacturers ("OEMs") are included in these percentages. The Company had in
prior years reported CPE product sales to OEM customers in an OEM product
section of Form 10-K, and were not part of the CPE product percentages. The
Company now categorizes certain OEM sales as CPE product sales, as the OEM
supply contracts are customer funded modifications of CPE products.
In most cases, a CPE product is purchased and installed by end- user
customers in conjunction with a Telco's digital data transmission service. For
example, a DSU is normally installed with each DDS loop. The Company's DSU
product line was completely upgraded and revamped in 1993 with five new models
that can terminate any standard DDS or Switched 56 digital service available in
North America. In 1994, the product line was expanded to include lower cost
versions as well as a family of shelf mount units. In 1995, products supporting
synchronous data compression and versions supporting the simple network
management protocol were added to the family. In 1996, the flagship products
were once again redesigned to become more modular and flexible. In 1997, the
Company introduced its "IQ Series" of DSU's/CSU's with control and monitor
features for frame relay circuits. These design changes have substantially
reduced the associated manufacturing costs while increasing the utility of the
product to the marketplace. Customer acceptance of this product family has
significantly increased the Company's DSU market share, and management believes
that further gains are possible with the Company's recent enhancements of this
product line. In 1998, Adtran entered the T3 market with the introduction of the
T3SU 300 and focused on developing a family of integrated access devices.
Over the past three years, Frame Relay Services have met with increasing
customer acceptance. As a result, the Company has introduced an expanding family
of Frame Relay products. These products are built from the core technologies
utilized in the existing DSU and TSU product families and are used to connect
end-users to frame relay networks. Other products within this family, known as
Frame Relay IQ units, are used to monitor the service level of frame relay
circuits thereby ensuring the connections is operating properly and
appropriately sized for the application.
The Company believes that its ISDN Service Unit (ISU) with sustained data
transmission rates up to 128 Kbit/sec was the first product of its type when
introduced in 1993. New versions of the product introduced by the Company have
followed, including a model that automatically senses and adapts to virtually
any far- end communications device, including modems, 2 wire or 4 wire DSUs, or
another ISDN terminal adapter. The ISU product family was later extended to
include the ISU 512, a device that allows multiple ISDN lines to be combined for
use by high speed video conferencing equipment. Additionally, ADTRAN has solved
one of the biggest obstacles in successful installation of new ISDN circuits
with the introduction of its "Expert ISDN" technology. Expert ISDN allows CPE
devices to automatically determine key parameters, such as Telco switch type and
Service Profile Identifiers ("SPIDS"). Previously, these parameters were passed
manually from the Telco to the user, who manually entered the information into
the CPE device. ADTRAN's latest ISDN terminal adapter, the Express 3000,
utilizes this technology. Adtran's ISDN terminal adapters have been recognized
by Computer Telephony Magazine as "Products of the Year" and received the "97
Design and Engineering" award at the Winter Consumer Electronics Show (CES).
Late in 1993, initial installations of the Company's T-1 Service Unit
("TSU") were successfully completed. Offering full or fractional T-1 access, the
product line is designed for sophisticated users needing higher speed
interconnection of LANs, remote offices, video delivery systems, graphic
workstations and related equipment. Common plug-in modules are available for
several of the Company's models, tailoring the units for multi- channel data
communications. TSU order rates have increased steadily since the 1993
introduction and now comprise a significant portion of CPE sales. The Company's
technical expertise was recognized in July of 1997 as ADTRAN's TSU 120 TSU/CSU
received a Users Choice Award from Communications News Magazine in the T1/T3
networking category.
Late in 1997, the Company introduced its new Atlas 800 Integrated Access
System. ATLAS is a modular, highly scaleable platform that provides robust
solutions addressing the wide area communication needs of medium to large
corporations as well as network access providers. ATLAS is a powerful host-site
access platform that provides customers with a total integrated end-to-end
solution. ATLAS is useful in networks utilizing traditional leased line
services, switched network services, and frame relay services, thereby
complementing the many remote site products offered by the Company.
INTERNATIONAL MARKETS
The Company serves its international markets through a combination of
direct sales and distribution agreements. The Company has formed, and will
continue to pursue, international distribution arrangements built upon core
products and technologies developed by the Company in an effort to further its
penetration into international markets. In addition, the Company has focused on
developing E-1 technology which, though similar to T-1 technology, has a
transmission rate of 2.048 Mbit/sec and is the predominant standard for data
transmission outside of North America. The Company has tested, received orders
for and shipped HDSL products incorporating E-1 technology. The Company
anticipates that it will develop additional products incorporating E-1
technology. ISDN development work is underway to incorporate compatibility with
European ISDN standards and specific in-country network interface requirements.
Although the Company has not yet fully developed its potential in its
international markets and related sales have been modest (3.3% of total sales in
1998), the Company believes that international markets present a significant
opportunity for growth.
RESEARCH AND PRODUCT DEVELOPMENT
The markets for the Company's products are characterized by rapidly
changing technology, evolving industry standards and continuing improvements in
telecommunications service offerings of common carriers. If technologies or
standards applicable to the Company's products, or common carrier service
offerings based on the Company's products, become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be adversely
affected. Moreover, the introduction of products embodying new technology, the
emergence of new industry standards or changes in common carrier service
offerings could adversely affect the Company's ability to sell its products. For
instance, a large number of the Company's products have, to date, been designed
to apply primarily to the delivery of digital communications over copper
wireline in the Local Loop. While the Company has competed favorably by
developing a high performance line of products, it expects that the increasing
deployment of fiber-optic cable, coaxial cable and wireless transmission in the
Local Loop (each of which uses a significantly different process of delivery)
will require that it develop new products to meet the demands of these markets
when such markets are sufficiently established. The Company's sales and
profitability in the past have resulted to a significant extent from its ability
to anticipate changes in technology, industry standards and common carrier
service offerings, and to develop and introduce new and enhanced products. The
Company's continued ability to adapt will be a significant factor in maintaining
or improving its competitive position and its prospects for growth. Therefore,
the Company will continue to make significant investments in product
development, although there can be no assurance that the Company will have the
resources necessary to continue this strategy successfully or to otherwise
respond appropriately to changing technology, industry standards and common
carrier service offerings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1998 Annual
Report to Stockholders.
As of December 31, 1998, the Company's product development programs were
carried out by 295 engineers and engineering support personnel, comprising
approximately 24% of the Company's employees. To date, all product development
expenses have been charged to operations as incurred. From time to time,
development programs are conducted by other firms under contract with the
Company, and related costs are also charged to operations as incurred. During
1998, 1997 and 1996, product development expenditures totaled $37,221,780,
$30,055,091 and $24,647,425, respectively. Because the Company's product
development activities are an important part of its strategy and because of
rapidly changing technology and evolving industry standards, the Company expects
to spend more in product development activities in 1999 than it did in 1998.
The Company's product development personnel are organized into teams, each
of which is effectively dedicated to a specific product line or lines. However,
because the Company services each of the Telco and CPE markets, and because all
of the products in each of the markets share certain similarities, the benefits
of the Company's product development efforts generally are not confined to a
particular market, but can be leveraged to the Company's advantage in all of its
markets. As of December 31, 1998, product development teams were assigned to the
following product lines: Loop products, Network products, HDSL products, DSU and
Frame Relay products, T-1 multiplexer products, ISDN Telco products, ISDN CPE
products, strategic products and extended range products. In addition,
engineering services and advanced technology groups provide support for all the
product development teams. Each product development team is generally
responsible for sustaining technical support of existing products, improving the
cost or manufacturing of products, conceiving new products in cooperation with
other groups within the Company and adapting standard products or technology
under supply contracts to other firms. In particular, each product development
team is charged with implementing the Company's engineering strategy of reducing
product costs for each succeeding generation of the Company's products in an
effort to be a low cost, high quality provider in the industry, without
compromising functionality or serviceability. This strategy has involved setting
a price point for the next generation of any given product with the aim of
meeting that price point through innovative engineering. The key to this
strategy is choosing an initial architecture for each product that enables
engineering innovations to result in future cost reductions. Successful
execution of this strategy also requires that the Company continue to attract
and recruit outstanding engineers, and the continued success of the Company's
recruiting program at Southeastern universities is critical to this effort.
The product development teams are supported by a research group that
provides guidance in applicable digital signal processing technologies, computer
simulation and modeling, CAD/CAM tool sets, custom semiconductor design and
technological forecasting. As product and market opportunities arise, the
organizational structure may be adjusted accordingly. The Company's development
process is conducted in accordance with ISO 9001, which is the international
standard for quality management systems for design, manufacturing and service.
The Company believes that its success in the past has been dependent upon
the ability of its engineering team to establish and maintain a position of
product and technological leadership, and its success in the future will be
equally dependent upon the evolution of new forms of existing products and the
development of new products fulfilling the needs of current and future
customers. Therefore, the Company will continue to make significant investments
in product development.
CUSTOMERS
The Company's customer base includes each of the RBOCs and most of the
major independent domestic Telcos. The major customers of the Company include:
Alltel Corporation Hong Kong Telecom
Ameritech Corp. Ingram Micro
Azteca Telecommunications Interlink
Bell Atlantic Network Services Metro Marketing
BellSouth Corp. R-Tec
Bloomberg L.P. Southwestern Bell Corp
Cincinnati Bell Sprint Corp.
Cisco Systems, Inc. Tech Data Corp.
Eltrax U.S. West, Inc.
GTE Corp.
Historically, a large percentage of the Company's sales have been to the
RBOCs (29% in 1998) and other Telcos (33.9% in 1998). GTE and Sprint accounted
for 20.3% and 12.4%, respectively, of the Company's total sales in 1998. No
other customer accounted for 10% or more of the Company's sales in 1998.
A supplier such as the Company must first obtain product approvals from an
RBOC or other Telco to sell its products to such RBOC or Telco. The Company,
therefore, is involved in a constant process of submitting for approval
succeeding generations of products as well as products that deploy new
technology or respond to a new technology demand from an RBOC or other Telco.
While the Company has been successful in the past in obtaining such approvals,
there can be no assurance that such approvals or that sales of such products
will continue to occur. Further, any attempt by an RBOC or other Telco to seek
out additional or alternative suppliers or to undertake, as permitted under
applicable regulations, the production of such products internally could have a
material adverse effect on the Company's operating results. See "Government
Regulation."
MARKETING, SALES AND DISTRIBUTION
As of December 31, 1998, the Company's marketing, sales and distribution
programs were conducted by 166 employees. The Company sells its Telco 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. The Company sells its Telco products internationally through
field sales offices and various distribution arrangements with a geographically
dispersed set of distributors. The Company sells its CPE products, both
domestically and internationally, through a network of resellers. The Company
has formed, and will continue to pursue, international distribution arrangements
built upon core products and technology developed by the Company in an effort to
further its penetration into international markets. Although the international
market channel has not yet been fully developed and related revenue has been
modest, the Company believes that international markets present a significant
opportunity for growth, and the Company continues to focus effort on positioning
itself to take advantage of such opportunity.
Sales to Telcos involve protracted product qualification and
standardization processes that can extend for several months or years.
Subsequent orders, if any, are generally placed under single or multi-year
supply agreements that are generally not subject to minimum volume commitments.
Telcos generally prefer having two or more suppliers of most products, so
individual orders are generally subject to competition based on some combination
of price, delivery and other terms. CPE products are sold under both exclusive
and non-exclusive distribution agreements.
The Company's field sales organizations and distributors receive support
from headquarters-based marketing, sales and customer support groups. Under
certain circumstances, other headquarters personnel may become involved in sales
and other activities. The Company believes that its success in the past has been
dependent to a significant degree upon the ability of its sales and distribution
teams to compete effectively in a highly competitive environment that includes
firms with greater financial resources and more experience than the Company. The
Company's success in the future will depend in part upon its ability to attract
and retain qualified sales and marketing personnel who can compete and succeed
in this environment.
CUSTOMER SERVICE AND SUPPORT
The Company maintains 24-hour, 7 day a week telephone support for all of
its customers, as customers often demand an immediate response to problems with
installed products or with plans for new installations. The Company provides
on-site support in those circumstances in which problems cannot otherwise be
resolved. It has generally been the Company's policy to follow through with
problem resolutions even after it is established that the Company's products are
not the source of the difficulty. The Company provides direct installation and
service of its products in North America utilizing its own resources or
resources available under a nationwide services contracts with TSS (formerly
General Electric) and Data General for installation and service. International
Business Machines Corporation ("IBM") purchased General Electric's service
division in 1995 and General Electric assigned the Company's service contract to
IBM under the terms of their sale agreement. The Company has approved the
assignment. The Company also provides training to its customers (on both a paid
and complimentary basis) relative to installation, operation and maintenance of
the Company's products.
Substantially all of the Company's products carry a full ten year
return-to-factory warranty. Warranty returns to date have been relatively
insignificant (less than 1%). The Company believes that its low return rate is
the direct result of its commitment to a rigorous product quality program that
has garnered it special recognition by several key customers. The Company also
offers annual maintenance agreements to its customers which provide that, in
exchange for an annual fee, the Company will provide on-site service, within a
specified time, in response to any reported difficulties in the use or
performance of the Company's products.
MANUFACTURING
The principal steps in the manufacturing process are the purchase and
management of materials, assembly, testing, final inspection, packing and
shipping. The Company purchases parts and components for assembly of its
products from a large number of suppliers through a worldwide sourcing program.
However, certain key components used in the Company's products are currently
available from only one source, and other key components are available from only
a limited number of sources. In the past, the Company has experienced delays in
the receipt of certain of its key components, which have resulted in delays in
related product deliveries. The Company attempts to manage such risks through
developing alternative sources, through engineering efforts designed to obviate
the necessity of certain components, and by maintaining quality relationships
and close personal contact with each of its suppliers. However, there can be no
assurance that delays in deliveries of key components (including particularly
integrated circuits as discussed in greater detail below) and consequent delays
in product deliveries will not occur in the future. The inability to obtain
sufficient key components as required, or to develop alternative sources if and
as required in the future, could result in delays or reductions in product
shipments which, in turn, could have a material adverse effect on the Company's
customer relationships and operating results.
The Company relies on subcontractors in the United States, Mexico and
Taiwan for assembly of printed circuit board assemblies, sub- assemblies,
chassis, enclosures and equipment shelves. The Company subcontracts the assembly
of a significant portion of its lower priced products to companies in Mexico.
Such assembly typically can be done by subcontractors at a lower cost than if
the Company assembled such items internally, which furthers the Company's goal
of being a low cost, high quality provider in the industry. Subcontract assembly
operations do, however, contribute significantly to production cycle times, but
the Company believes it can respond more rapidly to uncertainties in incoming
order rates by selecting assembly subcontractors having significant reserve
capacity. This reliance on third-party subcontractors for the assembly of its
products involves several risks, including the unavailability of or
interruptions in access to certain process technologies and reduced control over
product quality, delivery schedules, manufacturing yields and costs. These risks
may be exacerbated by economic or political uncertainties or by natural
disasters in foreign countries in which the Company's subcontractors may be
located. The Company currently does not undertake any foreign exchange risks as
it conducts all transactions with foreign vendors or customers in U.S. dollars.
The Company is heavily dependent on five subcontractors. To date, the
Company believes that it has successfully managed the risks of such dependence
on these subcontractors through a variety of efforts, which include seeking and
developing alternative subcontractors while maintaining existing relationships.
However, there can be no assurance that delays in product deliveries may not
occur in the future because of shortages resulting from this limited number of
subcontractors or from the financial or other difficulties of such parties. The
inability to develop alternative subcontractors if and as required in the future
could result in delays or reductions in product shipments which, in turn, could
have a material adverse effect on the Company's customer relationships and
operating results. While the Company believes that alternative sources of supply
or alternative subcontractors could be developed if necessary, material delays
or interruption of supply might, nevertheless, arise as a consequence of
required retraining and other activities related to establishing and developing
a new supply or subcontractor relationship and such material delays may have a
material adverse effect on the Company's business and operating results.
Basically, final testing and shipment of products to customers occurs in
the Company's Huntsville, Alabama facilities. The Company's facilities are
certified pursuant to ISO 9001 and certain other telephone company standards,
including those relating to emission of electromagnetic energy and safety
specifications.
BACKLOG AND INVENTORY
A substantial portion of the Company's shipments in any fiscal period
relate to orders received in that period and firm purchase orders released in
that fiscal period by customers under agreements containing non-binding purchase
commitments. Further, a significant percentage of orders require delivery within
48 hours. These factors result in very little order backlog. The Company
believes that because a substantial portion of customer orders are filled within
the fiscal quarter of receipt, the Company's backlog is not a meaningful
indicator of actual sales for any succeeding period. To meet this demand, the
Company maintains a substantial finished goods inventory.
The Company's practice of maintaining sufficient inventory levels to assure
prompt delivery of the Company's products increases the amount of inventory
which may become obsolete. The obsolescence of such inventory may have an
adverse effect on the Company's business and operating results.
COMPETITION
The markets for the Company's products are intensely competitive. With the
development of the worldwide communications market and the growing demand for
related equipment, additional manufacturers have entered the markets in recent
years to offer products in competition with the Company. Additionally, certain
companies have, in recent years, developed the ability to deliver fiber- optic
cable, coaxial cable and wireless transmission to certain office centers and
other end-users. Competition would further increase if new companies enter the
market or existing competitors expand their product lines. For instance,
legislation has been enacted that lifts the restrictions that previously
prevented the RBOCs from manufacturing telecommunications equipment. The RBOCs,
which in the aggregate are the Company's largest customers, may increasingly
become competitors of the Company in the markets served by the Company. See
"Government Regulation" below.
The Company competes for customers on the basis of performance in relation
to price, product features, adherence to standards, quality, reliability,
development capabilities, availability and support. Some of the Company's
competitors and potential competitors have greater financial, technological,
manufacturing, marketing, and personnel resources than the Company.
With respect to Telco sales, product quality and availability and an
established reputation for customer service are important competitive factors
that can affect the Company's ability to have its products accepted and approved
by the individual Telcos. The Company's Telco competitors include large
established firms such as ADC Telecommunications, Inc., Lucent Technologies,
Inc., PairGain Technologies, Inc., Pulse Communications, Inc. (a subsidiary of
Hubbell Incorporated), Tellabs, Inc. and Teltrend, Inc., as well as smaller,
specialized firms.
With the introduction of its CPE product lines, the Company entered a
market segment with entrenched competitors. Among the significant competitors
for standard rate DSU market share are Paradyne Corporation and Racal-Datacom,
Incorporated. Market segment leaders for TSU products include ADC KENTROX, a
subsidiary of ADC Telecommunications, Inc., Paradyne Corp., Digital Link
Corporation and Visual Networks, Inc. The Company's multiplexer product line's
key competitors include Newbridge Networks Corporation, Pulse Communications,
Inc., Carrier Access Corporation and Premisys Communications, Inc. An increase
in competition could reduce the Company's gross profit margins, may require
increased spending by the Company on product development and sales and
marketing, and may otherwise adversely affect the Company's business.
GOVERNMENT REGULATION
The telecommunications industry is subject to regulation in the United
States and other countries. Federal and state regulatory agencies, including the
Federal Communications Commission (the "FCC") and the various state public
utility commissions and public service commissions, regulate most of the
Company's domestic Telco customers. While such regulation does not typically
affect the Company directly, the effects of such regulation on the Company's
customers may, in turn, adversely impact the Company's business and operating
results. For instance, the sale of the Company's products may be affected by the
imposition upon certain of the Company's customers of common carrier tariffs and
the taxation of telecommunications services. In addition, regulatory policies
affecting the availability of common carrier services (such as high-speed
digital transmission lines) and other terms on which common carriers conduct
their business may impede the Company's penetration of certain markets. These
policies are under continuous review and are subject to change. Governmental
authorities also have promulgated regulations which, among other things, set
installation and equipment standards for private telecommunications systems and
require that all newly installed hardware be registered and meet certain
governmental standards.
Other governmental authorities, such as federal and state courts and the
United States Department of Justice, have been in the past, and will likely
continue in the future to be, a major force in shaping the manner in which the
telecommunications business is conducted and telecommunication services are
provided. For instance, the United States telecommunications industry was also
significantly impacted by the landmark Modification of Final Judgment (the
"MFJ"), which governed the structure of the 1984 divestiture by AT&T of its
local operating telephone company subsidiaries (the Divestiture"). The
Divestiture increased competition in the U.S. telecommunications industry by (i)
eliminating the monopoly power that AT&T had enjoyed for years in most U.S.
local and long distance telephone service and equipment markets, and (ii)
prohibiting the RBOCs that emerged from the Divestiture from engaging in certain
lines of business, including the provision of long distance services and the
manufacture of telecommunications equipment. The terms of the Divestiture
provide, however, for the removal of the line of business prohibitions if the
rationale therefor becomes outmoded by technical developments or changes in
competitive conditions.
The Telecommunications Act of 1996 covers a broad range of topics that will
dramatically affect the telecommunications industry. RBOCs now will be allowed
to manufacture equipment three years after they are eligible to enter the long
distance business. The RBOCs, which are among the Company's largest customers,
may increasingly become competitors of the Company in the markets it serves. The
Telecommunications Act of 1996 also provides for RBOCs to enter long distance
markets under certain conditions and long distance carriers may now provide
local service.
The Company's business and operating results may also be adversely affected
by the imposition of certain tariffs, duties and other import restrictions on
components which the Company obtains from non-domestic suppliers, or by the
imposition of export restrictions on products which the Company sells
internationally.
PROPRIETARY RIGHTS
The name "ADTRAN" and the Company's corporate logo are registered
trademarks of the Company. A number of the Company's product identifiers and
names are also registered. The Company also claims rights to a number of
unregistered trademarks. The Company has obtained patents on thirteen inventions
relating to its products and has several patent applications pending. The
Company will seek additional patents from time to time related to its research
and development activities. The Company protects its trademarks, patents,
inventions, trade secrets, and other proprietary rights by contract, trademark,
copyright and patent registration, and internal security. Management believes,
however, that the Company's competitive success will not depend on the ownership
of intellectual property rights, but primarily on the innovative skills,
technical competence and marketing abilities of the Company's personnel. The
telecommunications industry, nevertheless, is characterized by the existence of
an ever increasing number of patents and frequent litigation based on
allegations of patent infringement. From time to time, third parties may assert
exclusive patent, copyright and other intellectual property rights to
technologies that are important to the Company. While there are no outstanding
infringement lawsuits pending by or against the Company, there can be no
assurance that third parties will not assert litigation claims against the
Company in the future, that assertions by such parties will not result in costly
litigation, or that the Company would prevail in any such litigation or be able
to license any valid and infringed patents from third parties on commercially
reasonable terms. Any infringement claim or other litigation against or by the
Company could have a material adverse effect on the Company's business and
operating results.
EMPLOYEES
As of December 31, 1998 the Company had 1,222 full-time employees in the
United States, three in Canada and one in Hong Kong. Of the Company's total
employees, 340 were in sales, marketing, distribution and service, 295 were in
research and development, 443 were in manufacturing, and 148 were in
administration. None of the Company's employees is represented by a collective
bargaining agreement nor has the Company ever experienced any work stoppage.
Management believes the Company's relationship with its employees is good.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, engineering and
manufacturing facilities are located in an office building containing 440,000
square feet located on approximately 22 acres of land in Huntsville, Alabama.
The Company also leases 65,480 additional square feet to accommodate
manufacturing and engineering activities. Construction is underway to expand its
facilities in Huntsville by approximately 600,000 square feet (to accommodate a
projected total of 3,000 employees) over the next two years at a cost expected
to exceed $150,000,000, of which $56,585,000 had been incurred at December 31,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" in the Company's 1998
Annual Report to Stockholders and Note 6 of Notes to Financial Statements.
The Company also maintains 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 1999 and 2005. See Note 8 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the normal
course of its business. The Company is not aware of any pending or threatened
litigation matters that could have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to vote of security holders during
the fiscal quarter ended December 31, 1998.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) of Form 10-K
and Instruction 3 of Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company. Unless otherwise indicated, the
information set forth is as of December 31, 1998.
Mark C. Smith - Age 58 - Mr. Smith is one of the co-founders of
the Company.
1995 to present Chairman of the Board and Chief Executive Officer
1986 - 1995 Chairman of the Board, Chief Executive Officer and
President
Lonnie S. McMillian - Age 70 Mr. McMillian is one of the co-founders of the
Company
1996 to present Senior Vice President, Secretary and Director
1986 - 1996 Vice President - Engineering, Secretary,
Treasurer and Director
Howard A. Thrailkill - Age 60
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 51
1996 to present Vice President - Finance and Chief Financial
Officer
1995 - 1996 President, Sauty Group
1991 - 1995 Partner, Coopers & Lybrand L.L.P.
Danny J. Windham - Age 39
1995 to present Vice President - CPE Marketing
1994 - 1995 Director of Marketing
1989 - 1994 Manager of Product Management
Thomas R. Stanton - Age 34
1995 to present Vice President - Telco Marketing
1995 VP - Marketing & Engineering, Transcrypt
International
1994 - 1995 Sr. Director, Marketing, E.F.Johnson Company
1993 1994 Director, Marketing, E.F. Johnson Company
Peter O. Brackett - Age 57
1996 to present Vice President - Technology
1992 - 1996 Research Manager, Advanced Data Networking,
Bellsouth
M. Melvin Bruce - Age 58
1996 to present Vice President - Engineering
1989 - 1996 Vice President, Research and Design, TCI
Robert A. Fredrickson - Age 48
1996 to present Vice President - Telco Sales
1996 Vice President, Broadband Business Development,
DSC Communications Corp.
1991-1996 Senior Director, Access Products, DSC
Communications Corp.
Steven L. Harvey - Age 38
1996 to present Vice President - CPE Sales
1995 - 1996 Executive Vice President, Data Processing Sciences
1991 - 1995 Vice President, Data Processing Sciences
Charles A. O'Donnell - Age 44
1996 to present Vice President - Quality
1993 - 1996 Quality & Technical Resources Manager, Exide
Electronics Corp.
Jude T. Panetta - Age 39
1994 to present Vice President - Manufacturing
1989 - 1994 Director of Manufacturing, Exide Electronics
There are no family relationships among the directors or executive
officers.
All officers are elected annually by and serve at the pleasure of the Board
of Directors of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
(Nasdaq) under the symbol "ADTN" since the Company's initial public offering of
Common Stock in August 1994. Prior to the initial public offering, there was no
established trading market for the Company's Common Stock. As of January 31,
1999, the Company had 647 shareholders of record and approximately 13,500
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:
1998 Quarters High Low
First $34-3/4 $24
Second $29-3/4 $19-5/8
Third $29-1/8 $20-1/2
Fourth $28-7/8 $15-5/8
1997 Quarters High Low
First $53-1/4 $22-1/2
Second $35-5/8 $20-7/8
Third $44 $23
Fourth $45-1/2 $26
The Company has operated with a policy of retaining earnings, presently
intends to retain all future earnings for use in the development of its business
and does not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data concerning the Company for and as of
the end of each of the years in the five year period ended December 31, 1998,
are derived from the financial statements of the Company, 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 the Company as of December 31, 1998 and 1997 and for each of the years in the
three year period ended December 31, 1998, and the report of
PricewaterhouseCoopers LLP thereon, are included elsewhere in this report.
Year Ended December 31, 1998 1997 1996 1995 1994
(in thousands, except per share data)
INCOME STATEMENT DATA:
Sales
Telco $167,500 $171,838 $171,902 $121,311 $87,888
CPE 119,059 93,497 78,219 60,167 35,552
------------------------------------------------------------
Total sales 286,559 265,335 250,121 181,478 123,440
Cost of Sales 130,010 130,254 129,953 93,007 63,187
-----------------------------------------------------------
Gross profit 156,549 135,081 120,168 88,471 60,253
Selling, general and
administrative expenses 62,061 44,973 34,308 27,260 17,347
Research and development expenses 37,222 30,055 24,648 19,131 13,774
-----------------------------------------------------------
Operating income 57,266 60,053 61,212 42,080 29,132
Interest income 5,824 4,175 2,543 3,205 440
Interest expense (2,287) (1,839) (895) (1,105) (448)
Other income (expense) (188) 438 642 111 (25)
------------------------------------------------------------
Income before income taxes 60,615 62,827 63,502 44,291 29,099
Provision for income taxes (1) 20,306 22,618 23,682 14,833 10,490
------------------------------------------------------------
Net income 40,309 40,209 39,820 29,458 18,609
Earnings per common share
assuming dilution (2) 1.03 1.02 1.01 .75 .51
Earnings per common share-basic (2) 1.03 1.03 1.03 .80 .56
-----------------------------------------------------------
Weighted average shares outstanding
assuming dilution (2) 39,164 39,565 39,549 39,249 36,199
At December 31, 1998 1997 1996 1995 1994
(in thousands, except per share data)
BALANCE SHEET DATA
Working Capital $150,535 $149,184 $140,510 $122,466 $66,368
Total assets 301,711 282,401 210,207 165,767 94,347
Total debt 50,000 50,000 20,000 20,000 0
Stockholders' equity 231,389 212,037 172,879 130,743 85,233
(1) Effective July 1, 1994, the Company converted from an S corporation to a C
corporation for income tax purposes. As an S corporation, the Company was
not subject to income taxes but paid quarterly cash distributions to fund
the income tax liabilities passed through to the stockholders. As a C
corporation, the Company is subject to income taxes at corporate tax rates.
The provision for income taxes for 1994 includes a pro forma amount of
$4,202 for the period from January 1, 1994 to July 1, 1994.
(2) Assumes exercise of dilutive stock options calculated under the treasury
stock method. See Note 1, 9 and 13 of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures, markets and services a broad
range of high-speed digital transmission products utilized by Telcos and
corporate end-users to implement advanced digital data services over existing
telephone networks. The Company currently sells its products to Telcos
(including all of the RBOCs) and private end-users in the CPE market.
The Company's sales have increased in each year due primarily to increases
in the number of units sold to both new and existing customers. These annual
sales increases reflect the Company's strategy of increasing unit volume and
market share through the introduction of succeeding generations of products
having lower selling prices and increased functionality as compared both to the
prior generation of a product and to the products of competitors. An important
part of the Company's strategy is to engineer the reduction of the product cost
of each succeeding product generation and then to lower the product's price
based on the cost savings achieved. As a part of this strategy, the Company
seeks in most instances to be a low-cost, high-quality provider of products in
its markets. The Company's success to-date is attributable in large measure to
its ability to initially design its products with a view to their subsequent
re-design, allowing efficient enhancements of the product in each succeeding
product generation. This strategy has enabled the Company to sell succeeding
generations of products to existing customers as well as to increase its market
share by selling these enhanced products to new customers.
While the Company has experienced increased sales in each year, the
Company's operating results have fluctuated on a quarterly basis in the past,
and operating results may vary significantly in future periods due to a number
of factors. The Company operates with very little order backlog. A substantial
majority of its sales in each quarter results from orders booked in that quarter
and firm purchase orders released in that quarter by customers under agreements
containing non-binding purchase commitments. Furthermore, most Telcos typically
require prompt delivery of products. This results in a limited backlog of orders
for these products and requires the Company to maintain sufficient inventory
levels to satisfy anticipated customer demand. If near term demand for the
Company's products declines or if significant potential sales in any quarter do
not occur as anticipated, the Company's financial results will be adversely
affected. Operating expenses are relatively fixed in the short term; therefore,
a shortfall in quarterly revenues could impact the Company's financial results
significantly in a given quarter. Further, maintaining sufficient inventory
levels to assure prompt delivery of the Company's products increases the amount
of inventory which may become obsolete and increases the risk that the
obsolescence of such inventory may have an adverse effect on the Company's
business and operating results. The Company's operating results may also
fluctuate as a result of a number of other factors, including increased
competition, customer order patterns, changes in product mix, product warranty
returns and announcements of new products by the Company or its competitors.
Accordingly, the Company's historical financial performance is not necessarily a
meaningful indicator of future results, and, in general, management expects that
the Company's financial results may vary from period to period. See Note 14 of
Notes to Financial Statements.
The Company intends to retain all earnings for use in the development of
its business and does not anticipate paying any cash dividends in the
foreseeable future.
This 1998 Annual Report contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning (i) the business and financial outlook of the Company,
(ii) the Company's business, financial condition or results of operations and
(iii) the Company's business strategy. When used in this 1998 Annual Report, the
words "believe," "anticipate," "think," "intend," "will be," and similar
expressions identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. Readers are also urged to carefully review and consider the various
disclosures, including, but not limited to, the disclosures described under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operation," "1998 Compared to 1997," "Liquidity and Capital
Resources," and "Year 2000 Readiness Disclosure," and those discussed in the
Company's filings with the Securities and Exchange Commission, as well as the
general economic conditions and industry trends which could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statement of the Company.
Results of Operations
The following table presents selected financial information derived from
the Company's statements of income expressed as a percentage of sales for the
years indicated.
Years Ended December 31,
Percentage of Sales 1998 1997 1996
Sales:
Telco 58.5% 64.8% 68.7%
CPE 41.5 35.2 31.3
- --------------------------------------------------------------------------
Total sales 100.0 100.0 100.0
Cost of sales 45.4 49.1 51.9
- --------------------------------------------------------------------------
Gross profit 54.6 50.9 48.1
Selling, general and administrative
expenses 21.7 17.0 13.7
Research and development expense 13.0 11.3 9.9
- --------------------------------------------------------------------------
Operating income 19.9 22.6 24.5
Interest income 2.0 1.6 1.0
Interest expense (0.8) (0.7) (0.4)
Other income (expense) 0.1 0.2 0.3
- --------------------------------------------------------------------------
Income before provision for
income taxes 21.2 23.7 25.4
Provision for income taxes 7.1 8.5 9.5
- --------------------------------------------------------------------------
Net income 14.1% 15.2% 15.9%
1998 COMPARED TO 1997
Sales
The Company's sales increased 8% from $265,334,768 in 1997 to $286,558,950
in 1998. The increased sales resulted from increased sales volume to existing
customers and from increased market penetration. Sales to Telcos decreased
slightly from $171,837,883 in 1997 to $167,499,919 in 1998. Telco sales as a
percentage of total sales decreased from 64.8% in 1997 to 58.5% in 1998. Sales
of CPE products increased 27.3% from $93,496,885 in 1997 to $119,059,030 in
1998. As a percentage of total sales, CPE sales increased from 35.2% in 1997 to
41.5% in 1998. The increase in sales of CPE 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 slightly from $130,253,531 in 1997 to $130,009,879
in 1998, primarily as a result of the reduction in component cost. 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 the reduction in component cost and
product design enhancements. Telco cost of sales decreased from $87,269,866 in
1997 to $75,925,769 in 1998. Telco cost of sales as a percentage of Telco sales
decreased from 50.8% in 1997 to 45.3% in 1998. CPE cost of sales increased from
$42,983,665 in 1997 to $54,084,110 in 1998. As a percentage of CPE sales, CPE
cost of sales decreased from 46.0% in 1997 to 45.4% in 1998. An important part
of the Company's strategy is to reduce the product cost of each succeeding
product generation and then to lower the product's price based on the cost
savings achieved. This strategy sometimes results in variations in the Company's
gross profit margin due to timing differences between the lowering of product
selling prices and the full recognition of cost reductions. In view of the rapid
pace of new product introductions by the Company, this strategy may result in
variations in gross profit margins that, for any particular financial period,
can be difficult to predict.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 38.0% from
$44,973,175 in 1997 to $62,060,907 in 1998. The increase was due to additional
sales and support expenditures necessary as a result of the Company's expanded
sales base and increased dollar amounts of these expenses associated with the
ongoing introduction and marketing of enhanced products, increased distribution
activities associated with the CPE market, and general expansion into
international markets. As a percentage of sales, selling, general and
administrative expenses increased from 17.0% in 1997 to 21.7% in 1998.
Research and Development Expenses
Research and development expenses increased 23.8% from $30,055,091 in 1997
to $37,221,780 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. The Company continually evaluates new product
opportunities and engages in intensive research and product development efforts.
To date, the Company has expensed all product research and development costs as
incurred. Additionally, the Company frequently invests heavily in up-front
market development efforts prior to the actual commencement of sales of a major
new product. As a result, the Company may incur significant research and
development expenses and selling, general and administrative expenses prior to
the receipt of revenues from a major new product group. The Company is presently
incurring both research and development expenses and selling, general and
administrative expenses in connection with its new products and its expansion
into international markets.
Interest Expense
Interest expense increased 24.4% from $1,838,814 in 1997 to $2,286,821 in
1998. The Company currently pays interest on $50,000,000 of revenue bond
proceeds of which $20,000,000 was loaned to the Company in January 1995, and
$30,000,000 was loaned to the Company in April 1997. The proceeds were used to
expand the Company's facilities in Huntsville, Alabama. 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. See also "Liquidity and Capital Resources."
Net Income
As a result of the above factors, net income increased slightly from
$40,209,272 in 1997 to $40,309,650 in 1998. As a percentage of sales, net income
decreased from 15.2% in 1997 to 14.1% in 1998.
1997 COMPARED TO 1996
Sales
The Company's sales increased 6.1% from $250,120,836 in 1996 to
$265,334,768 in 1997. The increased sales resulted from increased sales volume
to existing customers and from increased market penetration. Sales to Telcos
remained basically unchanged from $171,901,851 in 1996 to $171,837,883 in 1997.
Telco sales as a percentage of total sales decreased from 68.7% in 1996 to 64.8%
in 1997. Sales of CPE products increased 19.5% from $78,218,985 in 1996 to
$93,496,885 in 1997. The increase in sales of CPE products is attributable to
increased demand for T1 Service Unit (TSU) products and Integrated Services
Digital Network (ISDN) products.
Cost of Sales
Cost of sales increased 0.2% from $129,953,371 in 1996 to $130,253,531 in
1997, primarily as a result of the increase in sales. As a percentage of sales,
cost of sales decreased from 51.9% in 1996 to 49.1% in 1997. This decrease was
primarily attributable to manufacturing efficiencies and product design
enhancements. Telco cost of sales decreased from $89,277,966 in 1996 to
$87,269,866 in 1997. As a percentage of Telco sales, Telco cost of sales
decreased from 51.9% in 1996 to 50.8% in 1997. CPE cost of sales increased from
$40,675,405 in 1996 to $42,983,665 in 1997. As a percentage of CPE sales, CPE
cost of sales decreased from 52.0% in 1996 to 46.0% in 1997. An important part
of the Company's strategy is to reduce the product cost of each succeeding
product generation and then to lower the product's price based on the cost
savings achieved. This sometimes results in variations in the Company's gross
profit margin due to timing differences between the lowering of product selling
prices and the full recognition of cost reductions. In view of the rapid pace of
new product introductions by the Company, this strategy may result in variations
in gross profit margins that, for any particular financial period, can be
difficult to predict.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 31.1% from
$34,308,436 in 1996 to $44,973,175 in 1997 due to additional sales and support
expenditures necessary as a result of the Company's expanded sales base and
increased dollar amounts of these expenses associated with the ongoing
introduction and marketing of enhanced products, increased distribution
activities associated with the CPE market, and general expansion into
international markets. As a percentage of sales, selling, general and
administrative expenses increased from 13.7% in 1996 to 17.0% in 1997.
Research and Development Expenses
Research and development expenses increased 21.9% from $24,647,425 in 1996
to $30,055,091 in 1997. This increase was due to increased engineering costs
associated with new product introductions and feature enhancement activities. As
a percentage of sales, research and development expenses increased from 9.9% in
1996 to 11.3% in 1997. The Company continually evaluates new product
opportunities and engages in intensive research and product development efforts.
To date, the Company has expensed all product research and development costs as
incurred. Additionally, the Company also frequently invests heavily in up-front
market development efforts prior to the actual commencement of sales of a major
new product. As a result, the Company may incur significant research and
development expenses and selling, general and administrative expenses prior to
the receipt of revenues from a major new product group. The Company is presently
incurring both research and development expenses and selling, general and
administrative expenses in connection with its new products and its expansion
into international markets.
Interest Expense
Interest expense increased 105.5% from $894,657 in 1996 to $1,838,814 in
1997. This increase was due to increased borrowings during 1997. The Company
currently pays interest on $50,000,000 of revenue bond proceeds of which
$20,000,000 was loaned to the Company in January 1995, and $30,000,000 was
loaned to the Company in April 1997. The proceeds were used to expand the
Company's facilities in Huntsville, Alabama. See also "Liquidity and Capital
Resources."
Net Income
As a result of the above factors, net income increased 1.0% from
$39,819,904 in 1996 to $40,209,272 in 1997. As a percentage of sales, net income
decreased from 15.9% in 1996 to 15.2% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company is continuing a project to expand its facilities in Huntsville,
Alabama in phases over the next two years at a cost expected to exceed
$150,000,000, of which $56,585,000 had been incurred at December 31, 1998. 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 such as the
Company to generate Alabama corporate income tax credits that can be used to
reduce the amount of Alabama corporate income taxes that would otherwise be
payable. There can be no assurance that the State of Alabama will continue to
make these corporate income tax credits available in the future, and the Company
therefore may not realize the full benefit of these incentives. Through December
31, 1998, the Authority had issued taxable revenue bond in the principal amount
of $50,000,000 pursuant to such program and loaned the proceeds from the sale of
the bond to the Company. The Company is 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 (ADTRAN, Inc. Project), as
amended, currently outstanding in the aggregate principal amount of $50,000,000.
Said bond matures on January 1, 2020, and bears interest at the rate of 45 basis
points over the money market rate of First Union National Bank.
The Company's working capital position improved from $149,183,578 as of
December 31, 1997 to $150,534,759 as of December 31, 1998. This improvement in
the Company's working capital position was due primarily to steady earnings. The
Company has used, and expects to continue to use the cash generated from
operations for working capital and other general corporate purposes, including
(i) product development activities to enhance its existing products and develop
new products and (ii) expansion of sales and marketing activities. Inventory
increased 66.9% for the fiscal year ended December 31, 1998. This increase
occurred during the last six months of the period due to new business relating
to Total Reach technology and new HDSL orders anticipated from a contract
awarded to the Company in October 1998. Sales were weaker than anticipated in
the fourth quarter of 1998 and did not allow the Company to move the amount of
inventory that was planned.
On March 31, 1997, the Board of Directors authorized the Company to
re-purchase up to 1,000,000 shares of the Company's outstanding common stock. In
October 1998, the Board approved the re-purchase of an additional 2,000,000
shares. As of December 31, 1998, the Company had re-purchased 1,100,081 shares
of its common stock at a total cost of $23,216,047.
Capital expenditures totaling $23,095,854, $18,220,850 and $29,661,438 in
1998, 1997 and 1996, respectively, were used to expand the Company's
headquarters and to purchase equipment.
At December 31, 1998, the Company's cash on hand of $10,009,320, short-term
investments of $40,795,068 and $10,000,000 available under a bank line of credit
placed the Company's potential cash availability at $60,804,388. The Company's
$10,000,000 bank line of credit bears interest at the rate of 87.5 basis points
over the 30 day London inter-bank offered rate and expires on May 1, 1999. The
Company anticipates renewing the $10,000,000 bank line of credit upon its
expiration. The Company intends to finance its operations in the future with
cash flow from operations, amounts available under the bank line of credit,
borrowed revenue bond proceeds and possible additional public financings. These
available sources of funds are expected to be adequate to meet the Company's
operating and capital needs for the foreseeable future.
YEAR 2000 READINESS DISCLOSURE
The Company conducted a year 2000 program to assess and mitigate the impact
of the year 2000 issue. The Company believes that all critical information
technology and non-information technology hardware and software systems are year
2000 compliant, including, but not limited to, business systems, network
infrastructure, manufacturing equipment, engineering tools, customer products
and plant facilities.
The Company has completed the inventory and assessment phases of its year
2000 program. The Company's operations are not dependent upon older legacy
source code or mainframe computers as is often the case with systems with
significant year 2000 issues. Therefore, there is little or no date-related code
remediation or conversion necessary to maintain normal business activities. The
primary remaining effort in the year 2000 program is to review and validate the
conclusions reached by the Company's year 2000 assessment. The Company does not
believe that costs associated with bringing the Company's computer systems into
full compliance with the year 2000 issue will result in a material expense to
the Company.
In July of 1998, the Company completed the implementation of new business
software and hardware which has been determined to be year 2000 compliant. The
Company is currently upgrading some secondary systems which have been identified
with minor year 2000 issues. Likewise, testing and year 2000 simulations will be
performed on all Company systems to verify date processing capabilities.
Expected completion of year 2000 simulations and testing is March 1999.
The Company has also contacted and assessed its suppliers and
subcontractors regarding the year 2000 issue and concluded that those suppliers
and subcontractors, which have a material relationship with the Company, are not
expected to cause significant business interruptions to occur as a result of the
year 2000 issue. The Company's assessment of suppliers has identified those most
critical to the Company's operations and a contingency plan has been drafted to
handle issues in the future. The Company's primary external subcontractors are
conducting their own independent internal year 2000 programs and are being
assisted by the Company with their year 2000 preparations where appropriate.
The Company believes that its products are year 2000 compliant. Company
engineers have confirmed product design specifications and have verified product
date processing functionality. Customers are provided individual responses to
product inquiries and the Company has posted detailed year 2000 information on
its web site. The Company does not believe that it will have any material
exposure to contingencies related to the year 2000 issue for products it has
sold.
Based on information presently available, the Company does not anticipate
any material impact on its financial condition or results of operations from the
effect of the year 2000 issue on its internal systems or on those systems of its
major suppliers and customers. However, there can be no guarantee that the
systems of other companies on which the Company relies will be timely converted,
or that a failure to convert by another company would not have a material
adverse impact on the Company. Furthermore, despite the Company's assessments,
there can be no guarantee that there will not be a year 2000 problem arising
from the Company's own system that may have a material adverse impact on the
Company.
As of December 31, 1998, the Company had spent approximately $100,000 for
year 2000 compliance. The Company expects to spend approximately $60,000 in
1999. The Company does not separately track these internal costs incurred for
the Y2K project. These costs, however, consist principally of the related
payroll costs of its information systems group.
ITEM 7A. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company 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.
Page
Report of Independent Certified Public Accountants 24
Financial Statements for Years Ended December 31, 1998,
1997 and 1996
Balance Sheets 25
Statements of Income 26
Statements of Changes in Stockholders' Equity 27
Statements of Cash Flows 28
Report of Independent Certified Public Accountants on
Supplementary Information 42
Schedule II - Valuation and Qualifying Accounts 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of ADTRAN, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income, changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of ADTRAN, Inc. (the Company) at
December 31, 1998 and 1997, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards 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
Birmingham, Alabama
January 14, 1999
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $10,009,320 $45,340,961
Short-term investments 40,795,068 37,833,240
Accounts receivable, less allowance
for doubtful accounts of $958,805
and $893,389 in 1998 and 1997, 46,588,319 40,906,887
respectively
Other receivables 697,074 343,463
Inventory 65,700,576 39,369,103
Prepaid expenses 1,354,366 1,148,288
Deferred income taxes 2,416,685 2,458,136
---------------------------------
Total current assets 167,561,408 167,400,078
Property, plant and equipment,net 78,894,317 64,801,132
Other assets 220,000 200,000
Long-term investments 55,035,000 50,000,000
----------------------------------
Total assets $301,710,725 $282,401,210
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,980,097 $ 9,121,270
Accrued salaries 1,828,462 1,927,364
Accrued income taxes 1,060,795 4,579,345
Accrued taxes other than income
taxes 252,548 180,611
Warranty liability 1,519,945 1,435,259
Compensated absences 1,384,802 972,651
----------------------------------
Total current liabilities 17,026,649 18,216,500
Bonds payable 50,000,000 50,000,000
Deferred income taxes 3,295,140 2,147,635
----------------------------------
70,321,789 70,364,135
Total liabilities
Stockholders' equity:
Common stock, par value $.01 per
share; 200,000,000 shares
authorized; 39,423,479 shares
issued in 1998 and 39,381,264
in 1997 394,235 393,813
Additional paid-in capital 90,640,451 90,582,615
Retained earnings 163,570,297 123,260,647
---------------------------------
254,604,983 214,237,075
Less treasury stock at cost:
1,100,081 and 100,000 shares
in 1998 and 1997, respectively (23,216,047) (2,200,000)
-----------------------------------
Total stockholders'equity 231,388,936 212,037,075
-----------------------------------
Total liabilities and $301,710,725 $282,401,210
stockholders' equity
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INCOME
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Sales $286,558,950 $265,334,768 $250,120,836
Cost of sales 130,009,879 130,253,531 129,953,371
-------------------------------------------------
Gross profit 156,549,071 135,081,237 120,167,465
Selling, general and administrative
expenses 62,060,907 44,973,175 34,308,436
Research and development expenses 37,221,780 30,055,091 24,647,425
-------------------------------------------------
Income from operations 57,266,384 60,052,971 61,211,604
Other income (expenses):
Interest income 5,824,223 4,175,032 2,542,417
Interest expense (2,286,821) (1,838,814) (894,657)
Other (188,530) 437,639 642,432
---------------------------------------------------
3,348,872 2,773,857 2,290,192
Income before income taxes 60,615,256 62,826,828 63,501,796
Provision for income taxes 20,305,606 22,617,556 23,681,892
---------------------------------------------------
Net income $40,309,650 $40,209,272 $39,819,904
Weighted average shares
outstanding assuming dilution (1) 39,163,763 39,565,497 39,548,654
Earnings per common share -
assuming dilution (1) $1.03 $1.02 $1.01
Earnings per common share - basic $1.03 $1.03 $1.03
The accompanying notes are an integral part of these financial statements.
(1) Assumes exercise of dilutive stock options calculated under the
treasury stock method.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
Common Stock
Number Par Value Additional Retained Treasury Total
of shares ($.01 Per Paid-In Earnings Stock Stockholders'
Share) Capital Equity
Balance,December 31, 1995 37,462,275 $374,623 $89,404,177 $40,964,511 $0 $130,743,311
Stock options exercised:
Various prices per share 1,307,239 13,072 768,686 781,758
Income tax benefit from exercise
of non-qualified stock options 1,533,926 1,533,926
Net income 39,819,904 39,819,904
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 38,769,514 387,695 90,172,863 82,318,341 0 172,878,899
Stock options exercised:
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 benefirt from exercise
of non-qualified stock options 733,034 733,034
Net income 40,209,272 40,209,272
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 39,381,264 393,813 90,582,615 123,260,647 (2,200,000) 212,037,075
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)
Net income 40,309,650 40,309,650
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 39,423,479 $394,235 $90,640,451 $163,570,297 ($23,216,047) $231,388,936
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities:
Net income $40,309,650 $40,209,272 $39,819,904
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 9,002,669 7,342,518 4,890,303
Provision for warranty claims 1,506,432 1,435,259 2,110,614
Gain (loss) on sale of property,
plant, and equipment (9,884) 40,572
Gain (loss) on sale of short-
term investments classified
as available-for-sale 24,367 (6,063) 405,789
Deferred income taxes 1,188,956 (313,867) 104,561
Change in operating assets:
Accounts receivable (5,681,432) (7,081,327) (4,590,757)
Inventory (26,331,473) 1,423,543 4,204,549
Other assets (579,689) 932,165 (1,083,019)
Change in operating liabilities:
Accounts payable 1,858,827 (228,996) (390,321)
Other liabilities (4,555,110) 1,284,106 (50,491)
-------------------------------------------------
Net cash provided by operating activities 16,743,197 44,986,726 45,461,704
-------------------------------------------------
Cash flows from investing activities:
Expenditures for property,
plant and equipment (23,095,854) (18,220,850) (29,661,438)
Proceeds from the disposition of
property, plant, and equipment 58,297 4,602
and equipment
Purchase of long-term investments (5,035,000) (50,000,000)
Purchase of short-term investments
classified as available-for-sale (2,986,195) (5,271,247) (8,309,030)
--------------------------------------------------
Net cash used in investing activities (31,117,049) (73,433,800) (37,965,866)
--------------------------------------------------
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 58,258 415,870 781,758
Income tax benefit from exercise
of non-qualified stock options 733,034 1,533,926
Purchase of treasury stock (21,016,047) (2,200,000)
-------------------------------------------------
Net cash (used in)provided by
financing activities (20,957,789) 28,948,904 2,315,684
-------------------------------------------------
Net(decrease)increase in cash and
cash equivalents (35,331,641) 501,830 9,811,522
Cash and cash equivalents,
beginning of year 45,340,961 44,839,131 35,027,609
-------------------------------------------------
Cash and cash equivalents, end of year $10,009,320 $45,340,961 $44,839,131
-------------------------------------------------
Supplemental disclosure of cash
flow information:
Cash paid during the year for interest,
net of capitalized interest of
$35,172, $204,153 and $393,096 in
1998, 1997and 1996, respectively $2,276,495 $1,844,741 $909,368
Cash paid during the year for $23,964,517 $20,042,644 $22,151,925
income taxes ----------------------------------------------
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets, and
services a broad range of high-speed digital transmission products utilized by
telephone companies ("Telcos") and corporate end-users to implement advanced
digital data services over existing telephone networks. The Company also
customizes many of its products for private label distribution and for original
equipment manufacturers to incorporate into their own products. Most of the
Company's Telco and customer premises equipment (CPE) products are connected to
the local loop, which is the large existing infrastructure of the telephone
network, predominantly consisting of copper wireline, which connects end-users
to a Telco's Central Office. The Central Office is the Telco facility that
provides local switching and distribution functions. The balance of the
Company's products are used in the Telcos' Central Offices.
Cash and Cash Equivalents:
Cash and cash equivalents represent demand deposits, money market accounts,
and short-term investments classified as held-to-maturity (see Note 2) with
original maturities of three months or less.
Financial Instruments:
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amount reported for the bonds payable approximates fair value
because the underlying instruments are at variable rates that re-price
frequently.
Short-term investments represent re-marketed preferred stocks and municipal
bonds classified as available-for-sale securities. Re- marketed preferred stocks
are designed to be marketed as money market instruments. These instruments'
interest rates reset on a short-term basis to maintain the price of the
instruments at par. These instruments may be redeemed on the date the interest
rate resets. The fair value of short-term investments is estimated based on
quoted market prices (see Note 2). Realized gains or losses are computed under
the specific identification method.
Inventory:
Inventory is carried at the lower of cost or market, with cost being
determined using the first-in, first-out method.
Property, Plant, and Equipment:
Property, plant, and equipment, which is stated at cost, is depreciated
using methods which approximate straight-line depreciation over the estimated
useful lives of the assets. Expenditures for repairs and maintenance are charged
to expense as incurred; betterments which materially prolong the lives of the
assets are capitalized. The cost of assets retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts and the gain
or loss on such disposition is included in income.
Long-Lived Assets:
The Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying values. There were no such losses recognized during 1998, 1997, and
1996.
Research and Development Costs:
Research and development costs are expensed as incurred.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes:
The Company utilizes the asset and liability method of accounting for
income taxes which requires the establishment of deferred tax liabilities and
assets, as measured by enacted tax rates, for all temporary differences caused
when the tax bases of assets and liabilities differ from those reported in the
financial statements.
Earnings Per Share:
Earnings per common share and earnings per common share - assuming dilution
are 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 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information, that requires the use of the management approach in identifying
operating segments of the Company. Under the management approach, operating
segments of an enterprise are identified in a manner consistent with how the
Company makes operating decisions and assesses performance. SFAS No. 131 also
requires disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not affect results of operations or
financial position but did affect the disclosure of segment information (see
Note 11).
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS No. 130, Reporting
Comprehensive Income, which requires the reporting and display of comprehensive
income and its components in an entity's financial statements. The Company
adopted SFAS 130 during 1998 and, for the three years ending December 31, 1998,
1997 and 1996, there were no differences between net income and comprehensive
income.
In June 1998, the 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,
1999 and is effective for interim periods in the initial year of adoption. The
Company does not currently hold any derivative financial instruments.
Note 2 - Investments
At December 31, 1998 and 1997, the Company held the following securities as
available-for-sale or held-to-maturity recorded at amortized cost which
approximates fair value:
1998
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
1997
Short-term investments, available-for-sale:
Municipal bonds $10,333,240
Re-marketed preferred stocks:
GE Capital preferred asset corporation A series A 5,000,000
Muniyield Fund Auction market preferred series A 5,000,000
VKM Investment Grade Municipal Trust preferred 5,000,000
Nuveen Premium Income Fund preferred series M 2,500,000
Duff & Phelps RP series C 5,000,000
Van Kampen Merritt Municipal Income 5,000,000
-----------
Total short-term investments 1997 $37,833,240
Long-term investments:
Restricted money market funds (see Note 6) $50,000,000
----------
Total long-term investments 1997 $50,000,000
Note 3 - Inventory
At December 31, 1998 and 1997 inventory consisted of the following:
1998 1997
Raw materials $39,787,631 $24,199,720
Work in process 7,935,771 2,565,179
Finished goods 17,977,174 12,604,204
----------------------------
$65,700,576 $39,369,103
Note 4 - Property, Plant, and Equipment
Property, plant, and equipment was comprised of the following at December
31, 1998 and 1997:
1998 1997
Land $ 4,263,104 $ 4,263,104
Building 28,684,088 28,673,642
Construction in progress 12,119,342 3,081,702
Land improvements 9,499,352 7,963,770
Office machinery and equipment 22,683,087 17,184,334
Engineering machinery and equipment 31,548,285 24,534,852
--------------------------------
108,797,258 85,701,404
Less accumulated depreciation (29,902,941) (20,900,272)
---------------------------------
$78,894,317 $64,801,132
Note 5 - Line of Credit
The Company has a $10,000,000 line of credit at a bank, which bears
interest at the rate of 87.5 basis points over the 30 day London inter-bank
offered rate. At December 31, 1998 and 1997, the Company had no borrowings
outstanding under this line. The line of credit expires on May 1, 1999.
Note 6 - Alabama State Industrial Development Authority Financing
In conjunction with an expansion of its Huntsville, Alabama facility, the
Company was approved for participation in an incentive program offered by the
State of Alabama Industrial Development Authority (the "Authority"). Pursuant to
such program, on January 13, 1995, the Authority issued $20,000,000 of its
taxable revenue bonds pursuant to such program and loaned the proceeds from the
sale of the bonds to the Company. The bonds were originally purchased by AmSouth
Bank of Alabama, Birmingham, Alabama (the "Bank"). First Union National Bank of
Tennessee, Nashville, Tennessee (the "Bondholder") purchased the original bond
from the Bank and made further advances to the Authority bringing the total
amount outstanding to $50,000,000. An Amended and Restated Taxable Revenue Bond
(ADTRAN, Inc. Project), Series 1995, was issued and the original financing
agreement was amended. The Amended and Restated Bond bears interest, payable
monthly, at the rate of 45 basis points over the money market rate of the
Bondholder and will mature on January 1, 2020. The Company 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 are
$50,000,000 which is restricted for payment of the principal amount of this
bond. Construction on the project began in March 1995 and certain phases were
completed by December 31, 1998.
Note 7 - Income Taxes
A summary of the components of the provision (benefit) for income taxes as
of December 31 is as follows:
1998 1997 1996
Current:
Federal $17,551,986 $21,251,520 $21,329,522
State 1,564,664 1,679,903 2,247,809
----------------------------------------
Total Current 19,116,650 22,931,423 23,577,331
Deferred tax provision (benefit) 1,188,956 (313,867) 104,561
----------------------------------------
Total provision for income taxes $20,305,606 $22,617,556 $23,681,892
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate due to the following:
1998 1997 1996
Tax provision computed at the federal statutory rate
(35% in 1998, 1997 and 1996) $21,215,340 $21,989,390 $22,225,629
State income tax provision, net of federal benefit 1,017,032 1,091,936 1,461,076
Federal research credits (1,650,877) (1,248,925) (151,500)
Permanent differences and other (275,889) 785,155 146,687
-------------------------------------------
$20,305,606 $22,617,556 $23,681,892
Temporary differences which create deferred tax assets and liabilities at
December 31, 1998 and 1997 are detailed below.
1998 1997
Current Non- Current Non-
current current
Property, plant and equipment ($3,295,140) ($2,147,635)
Accounts receivable $422,758 $ 381,022
Inventory 844,519 1,130,083
Accruals 1,149,408 947,031
---------------------------------------------------------
Deferred tax asset
(liability) $2,416,685 ($3,295,140) $2,458,136 ($2,147,635)
No valuation allowance is deemed necessary by management as the realization
of recorded deferred tax assets is considered more likely than not.
Note 8 - Operating Leases
The Company leases office space and equipment under operating leases. As of
December 31, 1998, future minimum rental payments under the non- cancellable
operating leases are approximately as follows:
1999 $ 962,000
2000 525,000
2001 228,000
2002 215,000
2003 108,000
----------
$2,038,000
Rental expense was approximately $908,000, $657,000 and $851,000, in 1998,
1997 and 1996, respectively.
Note 9 - Employee Incentive Stock Option Plan and Directors' Stock
Option Plan
The Board of Directors of the Company adopted the 1996 Employees Incentive
Stock Option Plan (the "1996 Plan") effective February 14, 1996, under which
2,488,100 shares of common stock were reserved for issuance to certain employees
and officers through incentive stock options and non-qualified stock options. In
addition, the Company currently has options outstanding under its 1986 Employee
Incentive Stock Option Plan (the "1986 Plan"), which plan expired on February
14, 1996. Options granted under the 1996 Plan or the 1986 Plan become
exercisable after one year of continued employment after the date of grant or
pursuant to a five year vesting schedule beginning on the first anniversary of
the grant date. Expiration dates of options outstanding under the 1996 Plan and
the 1986 Plan at December 31, 1998 range from 1999 to 2008.
The Board of Directors of the Company adopted a Directors' Stock Option
Plan effective October 31, 1995 under which 70,000 shares of common stock have
been reserved. The Plan is a formula plan to provide options to non-employee
directors of the Company. At December 31, 1998, 42,000 options had been granted
under the plan. Expiration dates of options outstanding under the Director's
Stock Option Plan at December 31, 1998 range from 2005 to 2008.
Pertinent information regarding the Plans is as follows:
Weighted
Number Range of Average
of Exercise Exercise Vesting
Options Prices Price Provisions
Options outstanding,December 31, 1995 2,170,395 $.06 -$46.25 $1.83 100% /year
Options granted 342,000 $39.75 -$65.75 $63.99 20% /year
Options granted 7,950 $30.50 -$65.75 $44.43 100% /year
Options cancelled (9,050) $3.33 -$65.75 $61.78 various
Options exercised (1,307,239) $.06 -$31.75 $0.60 100% /year
------------------------------------------------------
Options outstanding, December 31, 1996 1,204,056 $.11 -$65.75 $20.38 various
Options granted 697,750 $22.00 -$42.38 $25.62 various
Options granted 3,000 $42.72 -$42.72 $42.72 various
Options granted 21,700 $25.37 -$45.78 $32.26 various
Options cancelled (38,300) $22.00 -$65.75 $50.89 various
Options exercised (611,750) $.11 -$31.75 $.68 various
------------------------------------------------------
Options outstanding, December 31, 1997 1,276,456 $.17 -$65.75 $32.24 various
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
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/98 Life Price 12/31/98 Price
$.50 - $3.33 137,541 3.47 $2.24 137,541 $2.24
$12.53 -$21.31 959,625 9.17 $21.22 8,000 $12.53
$22.00 -$28.50 723,580 8.57 $25.29 141,724 $25.47
$30.38 -$46.25 115,100 7.83 $36.81 80,290 $36.64
$56.25 -$65.75 281,500 7.57 $65.34 116,800 $65.11
- ---------------------------------------------------------------------------------------------------------
2,217,346 484,355
The options above were issued at exercise prices which approximate fair
market value at the date of grant. At December 31, 1998, 528,695 options were
available for grant under the plans. The Company applies APB Opinion 25 and
related Interpretations in accounting for its stock plans. Accordingly, no
compensation cost has been recognized related to stock options. Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method prescribed in SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
Net income - as reported $40,309,650 $40,209,272 $39,819,904
Net income - pro forma 35,417,764 37,634,225 38,018,766
Earnings per share - as reported
assuming dilution $1.03 $1.02 $1.01
Earnings per share - pro forma
assuming dilution $.90 $.96 $.96
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
typically do not vest for several years and additional awards are made each
year. The fair value of each option grant is estimated on the grant date using
the Black-Scholes option- pricing model with the following weighted-average
assumptions:
1998 1997 1996
Dividend yield 0% 0% 0%
Expected life (years) 5 5 5
Expected volatility 59.1% 49.1% 48.7%
Risk-free interest rate 4.67% 6.06% 7.09%
Note 10 - Employee Benefit Plan
In March 1990, the Company adopted an incentive savings plan (the "Savings
Plan") for all of its employees. The Savings Plan provides certain employment
benefits to all eligible employees and qualifies as a deferred arrangement under
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company
matches one-half of a participant's contribution, limited to 5% of a
participant's income. An employee's interest in the Company's contributions
becomes 100% vested at the date participation in the Savings Plan commenced.
Charges to operations for the plan amounted to approximately $928,000, $717,000,
$547,000, in 1998, 1997 and 1996, respectively.
Note 11 - Segment Information and Major Customers
The Company operates two reportable segments - (1) Telco and (2) CPE. 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. The Company 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 the Company for each of the years in the three year period ended
December 31, 1998. Asset information by reportable segment is not reported,
since the Company does not produce such information internally.
1998 1997 1996
Sales Gross Sales Gross Sales Gross
Profit Profit Profit
(in thousands)
Telco $167,500 $91,574 $171,838 $ 84,568 $171,902 $ 82,624
CPE 119,059 64,975 93,497 50,513 78,219 37,544
-----------------------------------------------------------------------
Total $286,559 $156,549 $265,335 $135,081 $250,121 $120,168
The following is sales information by geographic area for the years ended
December 31:
Sales (in thousands)
1998 1997 1996
United States $277,062 $242,230 $231,703
Foreign 9,497 23,105 18,418
-------------------------------------
$286,559 $265,335 $250,121
Sales of the Company's transmission and test equipment to the Regional Bell
Operating Companies (RBOCs) amounted to approximately 29%, 33% and 36% of total
sales during the years ended December 31, 1998, 1997 and 1996, respectively. At
December 31, 1998, 1997 and 1996 respectively, 21%, 26% and 23% of the accounts
receivable balance consisted of amounts due from RBOCs.
Note 12 - Contingencies
The Company has 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 the Company's opinion that the outcome of such
contingencies will not materially affect its 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, 1998, 1997 and 1996 is as follows:
FOR THE YEAR ENDED 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
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
FOR THE YEAR ENDED 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to common
stockholders $40,209,272 39,201,871 $1.03
EFFECT OF DILUTIVE SECURITIES
Stock Options 0 363,626
DILUTED EPS
Income available to common
stockholders + assumed conversions 40,209,272 39,565,497 $1.02
FOR THE YEAR ENDED 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to common
stockholders $39,819,904 38,603,289 $1.03
EFFECT OF DILUTIVE SECURITIES
Stock Options 0 945,365
DILUTED EPS
Income available to common
stockholders + assumed conversions $39,819,904 39,548,654 $1.01
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.
1998 1997 1996
Options Exercise Options Exercise Options Exercise
Granted Price Expiration Granted Price Expiration Granted Price Expiration
58,450 $31.75-$46.25 2005 3,500 $46.25 2005 6,000 $46.25 2005
284,450 $56.25-$65.75 2006 294,400 $56.25-$65.75 2006 8,500 $56.25-$59.50 2005
20,450 $39.63-$46.25 2006 17,700 $37.63-$42.38 2007 309,000 $63.75-$65.75 2005
2,500 $30.50-$30.75 2006
23,700 $35.63-$42.72 2007
8,200 $27.50-$28.50 2007
28,500 $26.25-$30.38 2008
Note 14 - Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each
of the Company's last eight fiscal quarters. This information has been prepared
by the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
data.
(In thousands,except for per share amounts) THREE MONTHS ENDED
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
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
THREE MONTHS ENDED
(In thousands,except for per share amounts) March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Net sales $61,231 $59,125 $70,579 $74,400
Gross profit 31,791 28,632 36,092 38,566
Income from operations 14,258 10,291 16,778 18,726
Net income 9,522 6,980 11,141 12,566
Earnings per common share - assuming dilution $.24 $.18 $.28 $.32
Earnings per common share - basic $.25 $.18 $.28 $.32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No independent certified public accountant of the Company has resigned,
indicated any intent to resign or been dismissed as the independent certified
public accountant of the Company during the three fiscal years ended December
31, 1998 or subsequent thereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to nominees for director of the Company is set forth
under the caption "Election of Directors-Information Regarding Nominees for
Director" in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 20, 1999. Such information is incorporated herein by reference.
The definitive Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the Company's fiscal year end. Information
relating to the executive officers of the Company, pursuant to Instruction 3 of
Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10- K, is set
forth at Part I, Item 4(A) of this report under the caption "Executive Officers
of the Registrant." Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
caption "Executive Compensation" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information relating to ownership of Common Stock of the Company by certain
persons is set forth under the caption "Share Ownership of Principal
Stockholders and Management" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to existing or proposed relationships or transactions
between the Company and any affiliate of the Company is set forth under the
caption "Compensation Committee Interlocks and Insider Participation" in the
Proxy Statement referred to in Item 10 above. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents Filed as Part of This Report.
1. Financial Statements
The financial statements of the Company and the related report
of independent auditors thereon are set forth under Part II, Item 8
of this report.
Balance Sheets as of December 31, 1998 and 1997
Statements of Income for the years ended December 31, 1998, 1997
and 1996
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
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. The Company will furnish any exhibit upon request to:
ADTRAN, Inc., Attn: Investor Relations, P. O. Box 140000, 901 Explorer
Boulevard, Huntsville, Alabama 35814. There is a charge of $.50 per page to
cover expenses for copying and mailing.
Exhibit
Number Description
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No.33-81062 (the "Form S-1 Registration
Statement")).
3.2 Bylaws, as amended (Exhibit 3.2 to the Form S-1 Registration Statement).
10.1 Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995
(ADTRAN,Inc. Project)issued by the Alabama State Industrial Development
Authority,consisting of the following (Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form
10-K")):
(a) Financing Agreement dated January 1, 1995, among the State Industrial
Development Authority, a public corporation organized under the laws
of the State of Alabama (the "Issuer"), the Company and AmSouth Bank
of Alabama, a state banking corporation under the laws of the State of
Alabama;
(b) Loan Agreement dated January 1, 1995 (the "Loan Agreement"), between
the Issuer and the Company;
(c) Resolution of the Issuer authorizing the issuance of the $50,000,000
Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project);
(d) Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project);
(e) Resolution of the Company authorizing the Financing Agreement, the
Loan Agreement and the Note;
(f) Specimen Note from the Company to AmSouth Bank of Alabama, dated
January 13, 1995;
(g) Pledge Agreement dated January 13, 1995 between AmSouth Bank of
Alabama and the Company;
(h) Eighth Amended and Restated Closing Agreement between the Company and
AmSouth Bank of Alabama dated March 24, 1997 and effective January 13,
1995; and
(i) Preliminary Agreement dated November 16, 1994 between the Issuer and
the Company.
10.2 Master Note for Business and Commercial Loans, dated June 1, 1996 and in
the original principal amount of $10,000,000 by and between the Company and
AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among the Company
and the stockholders of the Company prior to the Company's initial public
offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K).
10.4 Management Contracts and Compensation Plans:
(a) 1996 Employees Stock Incentive Plan (Exhibit 10.4 to 1995 Form 10-K).
(b) 1995 Directors Stock Incentive Plan (Exhibit 10.4 to 1995 Form
10-K).
*23 Consent of PricewaterhouseCoopers LLP
*24 Powers of Attorney
*27 Financial Data Schedule
(b) Reports on Form 8-K. None
*Filed herewith
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, 1999.
ADTRAN, Inc.
(Registrant)
By: /s/ John R. Cooper
JOHN R. COOPER
Vice President - Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 1999.
Signature Title
/s/ Mark C.Smith Chairman of the Board, Chief
Mark C. Smith Executive Officer and Director
Howard A Thrailkill* President, Chief Operating Officer
Howard A.Thrailkill and Director
Lonnie S. McMillian* Sr. Vice President, Secretary,
Lonnie S. McMillian and Director
William L. Marks* Director
William L. Marks
Roy J. Nichols* Director
Roy J. Nichols
James L. North* Director
James L. North
/s/ John R. Cooper Vice President-Finance and
John R. Cooper Chief Financial Officer
*By: /s/Mark C. Smith
Mark C Smith
as Attorney in Fact
Report of Independent Accountants
To the Board of Directors
ADTRAN, Inc.
Our audits of the financial statements of ADTRAN, Inc. referred to in our
report dated January 14, 1999 appearing on page 24 of this Form 10-K also
included an audit of the financial statement schedule listed in Item 14 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
January 14, 1999
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance
Beginning of at end of
Period Additions Deductions Period
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
Year ended December 31, 1996
Allowance for Doubtful Accounts $544,526 $430,789 $102,591 $ 872,724
Inventory Reserve $660,151 $222,881 $ 883,032
Warranty Liability $523,027 $503,129 $1,026,156
ADTRAN, INC.
INDEX OF EXHIBITS
Exhibit
Number Description
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-81062 (the "Form S-1
Registration Statement")).
3.2 Bylaws, as amended (Exhibit 3.2 to the Form S-1 Registration Statement).
10.1 Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995
(ADTRAN,Inc. Project) issued by the Alabama State Industrial Development
Authority, consisting of the following (Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994
Form 10-K")):
(a) Financing Agreement dated January 1, 1995, among the State Industrial
Development Authority, a public corporation organized under the laws
of the State of Alabama (the "Issuer"), the Company and AmSouth Bank
of Alabama, a state banking corporation under the laws of the State of
Alabama;
(b) Loan Agreement dated January 1, 1995 (the "Loan Agreement"), between
the Issuer and the Company;
(c) Resolution of the Issuer authorizing the issuance of the $50,000,000
Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project);
(d) Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project);
(e) Resolution of the Company authorizing the Financing Agreement, the
Loan Agreement and the Note;
(f) Specimen Note from the Company to AmSouth Bank of Alabama, dated
January 13, 1995;
(g) Pledge Agreement dated January 13, 1995 between AmSouth Bank of
Alabama and the Company;
(h) Eighth Amended and Restated Closing Agreement between the Company and
AmSouth Bank of Alabama dated March 24, 1997 and effective January 13,
1995; and
(i) Preliminary Agreement dated November 16, 1994 between the Issuer and
the Company.
10.2 Master Note for Business and Commercial Loans, dated June 1, 1996 and in
the original principal amount of $10,000,000 by and between the Company and
AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among the Company
and the stockholders of the Company prior to the Company's initial public
offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K).
10.4 Management Contracts and Compensation Plans:
(a) 1996 Employees Stock Incentive Plan (Exhibit 10.4 to 1995 Form 10-K).
(b) 1995 Directors Stock Incentive Plan (Exhibit 10.4 to 1995 Form 10-K).
*23 Consent of PricewaterhouseCoopers LLP
*24 Powers of Attorney
*27 Financial Data Schedule
*Filed herewith