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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, 2000
[_] 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.__
The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant on March 1, 2001 was $526,569,673 based on a
closing market price of $24.625 as quoted on the Nasdaq National Market. There
were 39,451,088 shares of common stock outstanding as of March 1, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 20, 2001 are incorporated herein by reference in Part III.
ADTRAN, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2000
Table of Contents
-----------------
Item Page
Number Number
PART I
1. Business................................................................................... 3
2. Properties................................................................................. 11
3. Legal Proceedings.......................................................................... 11
4. Submission of Matters to a Vote of Security Holders........................................ 11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 14
6. Selected Financial Data.................................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16
7A. Quantitative and Qualitative Disclosures About Market Risk................................. 20
8. Financial Statements and Supplementary Data................................................ 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 34
PART III
10. Directors and Executive Officers of the Registrant......................................... 34
11. Executive Compensation..................................................................... 35
12. Security Ownership of Certain Beneficial Owners and Management............................. 35
13. Certain Relationships and Related Transactions............................................. 35
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules, and Reports on Form 8-K.... 35
SIGNATURES......................................................................................... 38
INDEX OF EXHIBITS.................................................................................. 40
2
PART I
ITEM 1. BUSINESS
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Overview
ADTRAN, Inc. designs, develops, and manufactures high-speed digital transmission
equipment for use in today's widespread telecommunications networks. The two
primary consumers of our products are telecommunications services providers
(served by our Carrier Networks division, or CN) and public and private
enterprises (served by our Enterprise Networks division, or EN). These
customers use ADTRAN products to implement high-speed voice and data
communications over copper and fiber network infrastructures. ADTRAN was
incorporated under the laws of Delaware in November 1985 and commenced
operations in January 1986.
Customers
Our service provider, or carrier, customer base includes all of the major
domestic Incumbent Local Exchange Carriers (ILECs); large independent carriers;
a growing number of successful Competitive Service Providers (CSPs); as well as
primary telecom service providers and competitive carriers in other regions of
the world, including Hong Kong, China, Europe, Central America and Australia.
Our enterprise customer base includes private and public enterprises worldwide
in numerous vertical industries. We market our products and services using a
direct sales force complemented by an extensive network of technology
distributors and resellers.
Products
ADTRAN offers more than 500 different products built around a set of core
technologies, and developed to address high-speed digital communications over
the last mile of the local loop ("Local Loop"). The Local Loop is the large
existing infrastructure of the telephone network that connects end users to a
service provider's central office, the facility that provides the local
switching and distribution functions ("Central Office"). Our technologies
support over two million Local Loops worldwide.
ADTRAN's products address two market segments: (i) CN products for use in the
service provider's Local Loop, including Central Office, remote terminal and
customer premises, and (ii) EN products for use at enterprise headquarters,
remote offices and telecommuting locations. In 2000, sales of CN and EN
products accounted for 68% and 32%, respectively, of ADTRAN's sales.
ADTRAN's main product lines for carrier networks include the Total Access(TM)
System and HDSL/HDSL2 transport technologies. The Total Access System is a
distributed access solution that includes broadband and narrowband access
platforms, Time Division Multiplex ("TDM") and Asynchronous Transfer Mode
("ATM") integrated access devices, voice concentrators, and system management
and professional services. Our HDSL/HDSL2 products offer four-wire and two-wire
transport of voice and data over T1 facilities at extended distances with less
engineering. These products are in addition to a comprehensive line of plug-in
transmission, repeater, extension and termination devices for T1, Frame Relay,
Integrated Services Digital Network ("ISDN"), and Digital Data Service ("DDS")
services.
ADTRAN's enterprise networks product line includes solutions for wide area
connectivity across most of today's diverse communications networks and
technologies. We sell a broad range of products for voice, data, video, and
Internet applications across fiber, T3, T1/E1, wireless T1/E1, FT1, Digital
Subscriber Line ("DSL"), ATM, Frame Relay, ISDN, and DDS. Key product lines
include the ATLAS series of Integrated Access Devices, the ADVANTA series of
Virtual Private Network ("VPN") networking devices, the TSU series of T1
Services Units, the IQ series of Frame Relay Performance Monitoring devices, the
ISU series of ISDN Service Units, and the DSU series of DDS Service Units.
Market Trends
Demand for digital transmission technologies is being driven by Internet access,
small office/home office ("SOHO") users, video delivery, on-line data services,
and other applications, all of which require and benefit from the speed,
reliability and low cost of digital transmission. While most service providers
have replaced the copper wireline transmission network between Central Offices
with fiber-optic and digital microwave links (which allow for high-speed digital
transmission), the Local Loop remains predominantly copper wireline. Widespread
replacement of this copper infrastructure remains prohibitively expensive;
therefore, service providers have turned to manufacturers such as ADTRAN for
technologies that upgrade the Local Loop to handle digital transmission in a
cost effective manner.
Many digital delivery technologies are experiencing rapid growth, including
High-Bit-Rate Digital Subscriber Line ("HDSL"), Symmetrical High-Bit-Rate
Digital Subscriber Line ("SHDSL"), also known as G.shdsl, Asymmetrical High-Bit-
Rate Digital Subscriber Line ("ADSL"), and ATM. Numerous higher speed digital
technologies are under development, including additional versions of DSL
technology, hybrid fiber coax, cable modems and other technologies.
Product Development Strategy
ADTRAN's expertise lies in the development of advanced transmission technologies
for copper and fiber loops. We apply these technologies in various products
designed to improve network performance by optimizing the capacity of the
infrastructure, increasing
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transmission speeds, and extending transmission distances. Our current research
and product development activities include development of systems-based
architectures that support new, higher speed technologies in comprehensive
packaged solutions.
For example, we are now producing the Total Access(TM) System--a distributed
access solution that includes carrier-class broadband and narrowband
multiservice access platforms, TDM- and ATM-based Integrated Access Devices
("IADs"), and GR-303 concentrators, along with system management and
professional services. Total Access promotes strategic network planning,
breaking down barriers to profitability, overcoming logistical deployment
issues, and expanding customer reach with the latest, copper-saving
technologies.
In developing our product families, we have continuously improved our design,
purchasing and production processes to lower product costs and have consistently
offered improved products at lower prices to customers. As a result, we believe
that we are a leading provider of Local Loop and Central Office digital
transmission products to services providers. See "Business Strategy."
We pioneered the use of narrowband two-wire technologies in the mid-1990's with
our Total Reach(R) DDS and ISDN range extension products. Still in high demand,
Total Reach products contributed approximately 16% to 2000 revenue.
The innovative signaling technique used in Total Reach enabled ADTRAN to sustain
a strong price and performance advantage for years. Now, that signaling
technique has been modified and adopted for newer T1 two-wire transports, such
as HDSL2, G.shdsl, and SDSL. HDSL2 is the first two-wire standard for T1
facilities, and ADTRAN was the first to market with a standards-compliant
product in late 1999. That product began shipping in volume in 2000.
Now, ADTRAN is leading the industry's newest DSL technology, G.shdsl. We are
the first to develop a standards-compliant G.shdsl chip, and the first to
introduce a G.shdsl deployment solution using the Total Access System. G.shdsl
has strong implications in international markets as well. Standardized by both
U.S. and international committees, G.shdsl represents the first true global DSL
standard, supporting both North American and European specifications.
ADTRAN is significantly diversifying its product lines to meet the changing
requirements of traditional and emerging networks. We are currently developing
products to satisfy emerging demand for Internet Protocol ("IP") and softswitch
network architectures. IP-based networks transport information over the Internet
backbone, as opposed to the Public Switched Telephone Network. New products
under development include VPN tunneling devices and traffic shaping devices.
Business Strategy
Our business objective is to enhance our position as a leading provider of
digital transmission products for the Local Loop. To achieve this objective, we
have adopted the following strategies:
Expand Product Offerings. We are expanding our products in order to offer our
customers more comprehensive systems solutions and a viable migration path from
traditional circuit-switched technologies to next-generation packet-switched
technologies. We are also offering products focused specifically on the
challenges brought about by a competitive service environment.
. We have developed, and are continuing to develop, the Total Access System--a
series of interrelated products and platforms designed to address the needs
of today's carriers. A complete solution ranging from network planning to
professional services, Total Access enables carriers to work with a single
vendor for integrated services. The systems approach offers advantages such
as flexible services, more network interface options, increased bandwidth,
centralized network management, voice and data convergence, single-vendor
support and training, and easier technology migration.
. We have developed, and are continuing to develop, lines of products aimed at
aiding carriers in transforming the Local Loop from a primarily analog,
circuit-switched architecture to a digital, packet-switched architecture.
These products are designed to carry both types of traffic so that carriers
can buy them today to handle their circuit-switched traffic, then, in the
future, simply reconfigure them to handle packet-switched traffic, instead of
having to buy completely new equipment. These new products will also allow
our customers to deploy new services to their customers, such as Voice over
DSL, many of which had not been available in the past, or had been
prohibitively expensive or complex to deploy.
. We are also continuing to develop new products that address the needs of a
competitive service environment. As deregulation occurs, and new players
continually enter the arena, service providers must manage ever-increasing
network traffic, while keeping associated costs in check. Our solutions in
this area include products to converge voice and data onto common circuits,
such as IADs and Digital Subscriber Line Access Multiplexers (DSLAMs). Both
of these devices play an important part in the deployment of Voice over DSL
and other next-generation voice and data transports. Other products address
the migration from four-wire to two-wire networks--a technique many carriers
are using to capitalize on existing copper in both narrowband and broadband
applications.
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Adapt Product Technologies to Address Emerging Markets. We have a proven
ability to adapt product technologies from one market to another. For example,
we adapted many of the product technologies developed for carrier network
products for use in our enterprise networking product lines. We are currently
leveraging this capability in order to address the needs of today's emerging
networks.
Products that support network convergence and other cost-reducing measures,
especially over packet-based networks, are becoming increasingly critical.
ADTRAN has responded with a series of IADs and DSLAMs that help consolidate
voice and data traffic onto common circuits in applications such as Voice over
DSL and Voice over ATM. Many of these products allow carriers to migrate from
traditional circuit-switched technologies to emerging packet-switched
technologies with a software upgrade.
ADTRAN was a pioneer in transmission technologies that allowed voice and data
transport over two wires instead of four. This cost-effective technology
remains in high demand today in both narrowband and broadband networks. The
innovative signaling technique originally developed in our two-wire Total
Reach(R) technology has sustained its price and performance advantage for years.
Now, that signaling technique has been modified and adopted for newer T1 single-
pair transports, such as HDSL2, SHDSL, and SDSL.
Capitalize on Existing Market Leadership Positions. We intend to maintain our
market leadership positions in both carrier and enterprise markets. Our
dedicated engineering organization focuses on applying successful technologies
to new applications, and on developing new technologies to meet emerging market
trends. Through in-house silicon development and engineering efficiency, ADTRAN
has consistently improved product performance while reducing costs, leading to
gains in market share. We will continue to develop innovative new products, and
redesign existing products in order to reduce costs and cycle times. By
focusing on these efforts, we believe we will continue to be a leading low-cost
provider to the industry. We believe that maintaining our leadership in
technology for high-speed digital transmission over copper wire is critical to
our ability to build and maintain strong relationships with incumbent and
competitive carriers, as well as enterprise users, and to achieve leadership in
new markets.
Expand Sales Channels to Drive Market Penetration. We are working to increase
customer adoption of our products by expanding our sales operations and
distribution channels. We are working to expand our sales channel both through
the internal creation of new sales divisions and through the addition of
international sales partners, who will sell our products to customers around the
world. We believe these additions to and expansion of our sales channels will
help us drive increased market penetration in our existing markets, as well as
help us to develop new markets.
Products
ADTRAN is concentrating significant resources on the development of products to
support the migration from TDM to packet technologies such as ATM or Frame
Relay. Packet technologies reduce costs by consolidating multiple users onto
shared circuits, eliminating the idle bandwidth associated with dedicated
circuits. This concept is especially important where carriers are offering
converged voice and data services over DSL to small- and medium-sized business
customers. We offer a comprehensive line of enterprise and carrier-class Frame
Relay products and are building ATM technology into our newest integrated access
systems.
Our product lines, comprised of over 500 products, are built around core
technologies that we developed to address the Central Office and Local Loop
digital communications marketplaces. Our product lines consist of two groups of
inter-related products: (1) CN products and (2) EN products.
CN Products. Systems solutions and DSL technologies make up the core of our CN
product offering. We are the industry's leading HDSL/HDSL2 product supplier,
with equipment in use by a majority of ILECs and numerous other service
providers. We are also a leader in the development of the next generation of
two-wire DSL transport products, SHDSL, also known as G.shdsl. Having assumed a
leadership role with the governing standards bodies that defined this important
advancement, our in-depth understanding of the technology enabled us to produce
the industry's first SHDSL chip set in a joint development effort with Infineon
Technologies AG. These products are vital to carriers who deploy them widely to
service business users needing broadband connectivity.
We are the only equipment provider that has developed its own low-cost chip sets
implementing HDSL, HDSL2 and SHDSL, and we believe that provides a sustainable
competitive advantage moving forward. Our engineers continue to provide timely
technical advances through their effective development process, and our in-house
integrated circuit expertise allows us to deliver highly competitive products
with industry-leading cost positions.
ADTRAN's Total Access(TM) System provides a powerful broadband solution for
carrier networks. It is critical equipment that connects expensive network
infrastructure to the revenue source. CN's Total Access system product line was
strengthened in 2000 by the
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announcement of significant additions. Each addition plays a strategic role in
the deployment of today's efficient distributed access business mode. Together
with announcements scheduled for 2001, they address strong demand for new
capabilities in Local Loop access platforms, serving as Next-Generation
Distributed Loop Carrier (NGDLC) systems, DSLAM, voice concentrators, fiber
distribution platforms, Voice over Digital Subscriber Line deployment systems,
and centralized network management systems. These and other high-growth
applications will continue to drive sales of the Total Access System. Installed
at the Central Office or in a remote terminal, Total Access connects to network
backbones ranging from T1 to fiber, and enables deployment of the widest range
of voice and data services.
The Total Reach(R) family of products uses one of our technological
breakthroughs to extend digital services over one twisted pair of copper wires.
Total Reach addresses some of the major challenges associated with 64 kilobits
per second Frame Relay service deployment such as multiple copper pair
availability, extensive engineering for repeaters and apparatus cases required
for lengthy installs, bridged tap determination and removal efforts, and power
requirements.
We are the industry's primary supplier of U-BR1TEs, which are required to extend
ISDN service from an ISDN capable switch at a hub Central Office to a serving
Central Office. We also supply a substantial portion of the industry's ISDN
mid-span repeaters and interface units.
EN Products. Many of our original EN products evolved from technologies
developed for our CN product lines. Today, some of the technologies being
developed by our EN division have application in CN markets as well.
Frequently, we are able to realize a competitive advantage in the marketplace by
leveraging product development efforts and expertise across our two divisions.
The ATLAS series, introduced in late 1997, has proven effective as a central
site solution for the enterprise dealing with remote connectivity issues
involving one or more different types of service technologies. A single ATLAS
device can handle voice, data and video signals, and is often used to
consolidate traffic and reduce monthly telecommunications pay outs. An ATLAS
unit, combined with the appropriate ADTRAN access devices at the remote end,
provides a complete connectivity solution for virtually any enterprise network.
The ATLAS family now includes the 800, 800 PLUS, 550, 810 PLUS (multinational),
and 890. Members of the ATLAS series are classified as IADs, and essentially
function as bandwidth managers, ISDN access switches, remote access
concentrators, digital cross-connect systems, wide area emulators, routers, dial
backup solutions and Frame Relay switches, all in one. The ATLAS 550, a lower-
cost, lower-capacity version of the ATLAS 800, is a mid-sized platform for
migrating TDM-based networks to packet technologies such as voice over IP and
ATM.
The IAD has become an essential component in converged network architectures,
especially in Voice over DSL applications. To address this growing need, we
have added the Total Access(TM) series of IADs to our EN product lineup. The
typical Voice over DSL model requires interoperability between an IAD, voice
gateway, and DSLAM. In 2000, we established interoperability with leading
third-party voice gateways and DSLAMs, making Total Access IADs suitable for
many network opportunities. Our Total Access IADs are suitable for existing
circuit-switched networks and newer packet-based networks.
Many carriers and enterprise customers are updating the last-mile segment of
their networks from narrowband technologies, such as DDS, ISDN, and T1, to
broadband technologies such as T3 and fiber. We have enjoyed consistent success
in the T3 enterprise market since the introduction of the T3SU 300(TM)
termination device in 1998. Because its innovative design ended the limitations
found in many T3 termination devices, the T3SU 300 gained rapid market
acceptance. Another example of innovative engineering in T3 technology is the
MX2800(TM), a T1/T3 multiplexer introduced in late 1999. The MX2800 provides
intelligent redundancy and other downtime-prevention features at a competitive
price.
In late 2000, we entered the enterprise fiber market with two new optical
transport products. The OCU 45 (Optical Converter Unit) is for use in
applications where the customer seeks to connect copper-based buildings to
fiber. The OSU 300, also introduced late in 2000, is a competitively priced
Optical Service Unit for terminating point-to-point fiber circuits. Built on
the technologies of our highly successful T3SU 300, the OSU 300 handles both
voice and data using a single device, eliminating excess equipment.
We continue to provide a strong, broad offering of products in the enterprise
DSU/CSU marketplace. In 1997, we introduced our "IQ Series" of DSUs and CSUs,
which allows network operators and service providers to monitor and ensure the
quality of service delivered on Frame Relay circuits. These design changes
substantially reduced the manufacturing cost while increasing the utility of the
product to the marketplace.
6
International Markets
ADTRAN serves its international markets through a combination of direct sales
and distribution arrangements. We have formed, and will continue to pursue,
international distribution arrangements built upon core products and
technologies developed by us in an effort to further our penetration into
international markets.
While our complete line of international E1 and four-wire HDSL deployment
products continue to constitute a large portion of our international sales, many
of the domestic product advances made in 2000 have important implications for
ADTRAN in global markets. Two-wire transport that stretches infrastructure,
fiber optics that increase bandwidth, and converged voice/data applications,
such as Voice over DSL, are in high demand in other countries, just as they are
in the U.S.
The international version of the Total Access System offers global service
providers many of the same powerful deployment options that U.S. carriers enjoy.
The new two-wire SHDSL (G.shdsl) international transport standard is being
rapidly accepted abroad, and business models for ATM and Voice over DSL are
similar to those used domestically. With a single platform to support both
international and U.S. business, we should see greater economy of scale in the
future, resulting in improved price and performance for customers.
Although ADTRAN has not yet fully developed its potential in its international
markets and related sales have been modest, we believe that international
markets present a significant opportunity for growth.
Research and Product Development
The markets for our products are characterized by rapidly changing technology,
evolving industry standards and continuing improvements in telecommunications
service offerings of common carriers. If technologies or standards applicable to
our products, or common carrier service offerings based on our products, become
obsolete or fail to gain widespread commercial acceptance, ADTRAN's business may
be adversely affected.
Moreover, the introduction of products embodying new technology, the emergence
of new industry standards or changes in common carrier service offerings could
adversely affect ADTRAN's ability to sell its products. For instance, a large
number of our products have, to date, been designed to apply primarily to the
delivery of digital communications over copper wireline in the Local Loop. While
ADTRAN has competed favorably by developing a high performance line of products,
we expect that the increasing deployment of fiber-optic cable, coaxial cable and
wireless transmission in the Local Loop (each of which uses a significantly
different process of delivery) will require that we develop new products to meet
the demands of these markets when such markets are sufficiently established.
Our sales and profitability in the past have resulted to a significant extent
from our ability to anticipate changes in technology, industry standards and
common carrier service offerings, and to develop and introduce new and enhanced
products. Our continued ability to adapt will be a significant factor in
maintaining or improving our competitive position and our prospects for growth.
Therefore, ADTRAN will continue to make significant investments in product
development, although there can be no assurance that we will have the resources
necessary to continue this strategy successfully or to otherwise respond
appropriately to changing technology, industry standards and common carrier
service offerings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of December 31, 2000, ADTRAN's product development programs were carried out
by over 350 engineers and engineering support personnel, comprising
approximately 21% of ADTRAN's employees. To date, all product development
expenses have been charged to operations as incurred. From time to time,
development programs are conducted by other firms under contract with us, and
related costs are also charged to operations as incurred. During 2000, 1999 and
1998, product development expenditures totaled $50,628,000, $42,018,000, and
$37,222,000, respectively. Because our product development activities are an
important part of our strategy and because of rapidly changing technology and
evolving industry standards, we expect to spend more in product development
activities in 2001 than we did in 2000.
ADTRAN's product development personnel are organized into teams, each of which
is effectively dedicated to a specific product line or lines. However, because
we service each of the CN and EN markets, and because all of the products in
each of the markets share certain similarities, the benefits of ADTRAN's product
development efforts generally are not confined to a particular market, but can
be leveraged to our advantage in all of our markets.
As of December 31, 2000, product development teams were assigned to the
following product lines: CN Loop Technologies (includes teams for Mechanical
Systems; FT1, Total Reach, DDS, and ISDN; G.shdsl and ADSL; and HDSL, HDSL2); CN
Access Platforms (includes teams for Total Access DSLAM; Total Access TDM
Applications; Total Access EMS; Total Access Digital Loop Carrier; and Total
Access IAD and M13 Multiplexers); and EN Connectivity (includes teams for IADs;
Packet Access Products; TDM Access Products; Fixed Broadband Wireless Products;
Fiber Optic Products; and International Products).
Engineering services and advanced technology groups provide support for all of
the product development teams. Each product development team is generally
responsible for sustaining technical support of existing products, improving the
cost or manufacturing of
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products, conceiving new products in cooperation with other groups within ADTRAN
and adapting standard products or technology under supply contracts to other
firms.
In particular, each product development team is charged with implementing
ADTRAN's engineering strategy of reducing product costs for each succeeding
generation of our products in an effort to be a low-cost, high-quality provider
in the industry, without compromising functionality or serviceability. This
strategy has involved setting a price point for the next generation of any given
product with the aim of meeting that price point through innovative engineering.
The key to this strategy is choosing an initial architecture for each product
that enables engineering innovations to result in future cost reductions.
Successful execution of this strategy also requires that we continue to attract
and recruit outstanding engineers, and the continued success of ADTRAN's
recruiting program at Southeastern universities is critical to this effort.
The product development teams are supported by a research group that provides
guidance in applicable digital signal processing technologies, computer
simulation and modeling, CAD/CAM tool sets, custom semiconductor design and
technological forecasting. As product and market opportunities arise, our
organizational structure may be adjusted accordingly. ADTRAN's development
process is conducted in accordance with ISO 9001 and TL 9000, which are the
international standards for quality management systems for design, manufacturing
and service.
We believe that our success in the past has been dependent upon the ability of
our engineering team to establish and maintain a position of product and
technological leadership, and our success in the future will be equally
dependent upon the evolution of new forms of existing products and the
development of new products fulfilling the needs of current and future
customers. Therefore, we will continue to make significant investments in
product development.
Customers
Our carrier customer base includes all of the major domestic ILECs; large
independent carriers; a growing number of successful CSPs; as well as primary
telecom service providers and competitive carriers in other regions of the
world, including Hong Kong, China, Europe, Central America and Australia. Our
enterprise customer base includes private and public enterprises worldwide in
numerous vertical industries.
The major customers of ADTRAN include the following:
Alltel Corporation Verizon Communications Sprint Corporation
AT&T Ingram Micro Tech Data Corporation
Bell Atlantic MCI WorldCom
BellSouth Corporation Qwest (US West)
Cisco SBC Communications, Inc.
Historically, a large percentage of our sales have been made to the Regional
Bell Operating Companies (RBOCs) and major independents (typically more than
50%). While these customers still comprise a large percent of our revenue
source (56% in 2000), recent mergers and acquisitions have affected the mix.
Verizon Communications (formerly GTE and Bell Atlantic) constituted
approximately 14% of our revenue base in 2000. SBC Communications, Inc. and
Sprint Corporation each accounted for at least 12% of our total sales in 2000.
No other customer accounted for 10% or more of our sales in 2000.
In this industry, a supplier must first obtain product approvals from an RBOC or
other carrier to sell its products to them. We are, therefore, involved in a
constant process of submitting succeeding generations of products for approval,
as well as products that deploy new technology or respond to a new technology
demand from an RBOC or other carrier. We have been successful in the past in
obtaining such approvals. However, we can not be certain that we will obtain
such approvals in the future or that sales of such products will continue to
occur. Further, any attempt by an RBOC or other carrier to seek out additional
or alternative suppliers or to undertake, as permitted under applicable
regulations, the production of such products internally could have a material
adverse effect on our operating results.
Marketing, Sales and Distribution
As of December 31, 2000, ADTRAN's marketing and sales programs were conducted
by over 280 employees. ADTRAN sells its CN products in the United States and
Canada directly to the carriers through a field sales organization based in 38
locations (some of these locations are home offices) in the United States.
ADTRAN sells its CN products internationally through field sales offices and
various
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distribution arrangements with a geographically dispersed set of distributors.
ADTRAN sells its EN products, both domestically and internationally, through a
two-tiered network of distributors and resellers.
We have formed, and will continue to pursue, international distribution
arrangements built upon core products and technologies developed by us in an
effort to further our penetration into international markets. Although the
international market channel has not yet been fully developed and related
revenue has been modest, ADTRAN believes that international markets present a
significant opportunity for growth, and ADTRAN continues to focus effort on
positioning itself to take advantage of such opportunity.
Sales to carriers involve protracted product qualification and standardization
processes that can extend for several months or years. Subsequent orders, if
any, are typically placed under single or multi-year supply agreements that are
generally not subject to minimum volume commitments. Carriers generally prefer
having two or more suppliers of most products, so individual orders are
generally subject to competition based on some combination of price, delivery
and other terms. EN products are sold under both exclusive and non-exclusive
distribution arrangements.
ADTRAN's field sales organizations and distributors receive support from
headquarters-based marketing, sales and customer support groups. Under certain
circumstances, other headquarters personnel may become involved in sales and
other activities. We believe that our success in the past has been dependent to
a significant degree upon the ability of our sales and distribution teams to
compete effectively in a highly competitive environment that includes firms with
greater financial resources and more experience than us. Our success in the
future will depend in part upon our ability to attract and retain qualified
sales and marketing personnel who can compete and succeed in this environment.
Customer Service and Support
ADTRAN maintains 24-hour, 7 day-a-week telephone support for all of its
customers, as customers often demand an immediate response to problems with
installed products or with plans for new installations. We provide on-site
support in those circumstances in which problems cannot otherwise be resolved.
Our policy has generally been to follow through with problem resolutions even
after it is established that our products are not the source of the difficulty.
We provide direct installation and service of our products in North America
utilizing our own resources or resources available under nationwide services
contracts with IBM Corporation and Data General Corporation for installation
and service.
Substantially all of our products carry a full ten year return-to-factory
warranty. Warranty returns to date have been relatively insignificant (less than
1%). We believe that our low return rate is a direct result of our commitment to
a rigorous product quality program that has garnered us special recognition by
several key customers.
Manufacturing
The principal steps in the manufacturing process are the purchase and management
of materials, assembly, testing, final inspection, packing and shipping. In
2000, ADTRAN continued to purchase parts and components for assembly of certain
of our products from a large number of suppliers through a worldwide sourcing
program. In addition, we have begun to shift to a process of allowing contract
manufacturers to purchase the materials that they use in the assembly of our
products. Certain key components used in our products are currently available
from only one source, and other key components are available from only a limited
number of sources. In the past, we have experienced delays in the receipt of
certain of our key components, which have resulted in delays in related product
deliveries. We attempt to manage such risks through developing alternative
sources, through engineering efforts designed to obviate the necessity of
certain components, and by maintaining quality relationships and close personal
contact with each of our suppliers. However, we can make no assurance that
delays in deliveries of key components, either to us or to our contract
manufacturers, and consequent delays in product deliveries will not occur in the
future. The inability to obtain sufficient key components as required, or to
develop alternative sources if and as required in the future, could result in
delays or reductions in product shipments which, in turn, could have a material
adverse effect on our customer relationships and operating results.
We rely on subcontractors in the United States, Mexico and Taiwan for assembly
of printed circuit board assemblies, sub-assemblies, chassis, enclosures and
equipment shelves, and, more recently, also to purchase the raw materials used
in and for such assembly. We plan to continue to transition the purchasing of
materials for, assembly and final testing of a significant portion of our lower
priced products to companies in Mexico with which we subcontract. Such assembly
typically can be done by subcontractors at a lower cost than if we assembled
such items internally, which furthers our goal of being a low cost, high quality
provider in the industry. The transition to subcontractors whose core competency
is the manufacture of electronic equipment furthers our goal of being a low
cost, high quality provider in the industry. Subcontract assembly operations
do, however, contribute significantly to production cycle times, but we believe
we can respond more rapidly to uncertainties in incoming order rates by
selecting assembly subcontractors having significant reserve capacity. This
reliance on third-party subcontractors for the assembly of our products involves
several risks, including the unavailability of or interruptions in access to
certain process technologies and reduced control over product quality, delivery
schedules, manufacturing yields and costs. These risks may be exacerbated by
economic or political uncertainties or by natural disasters in foreign countries
in which our subcontractors may be located. We currently have limited foreign
exchange risks as we conduct the majority of all transactions with foreign
vendors or customers in U.S. dollars.
9
We are heavily dependent on four subcontractors. To date, we believe that we
have successfully managed the risks of such dependence on these subcontractors
through a variety of efforts, which include seeking and developing alternative
subcontractors while maintaining existing relationships. However, there can be
no assurance that delays in product deliveries may not occur in the future
because of shortages resulting from this limited number of subcontractors or
from the financial or other difficulties of such parties. The inability to
develop alternative subcontractors if and as required in the future could result
in delays or reductions in product shipments which, in turn, could have a
material adverse effect on our customer relationships and operating results.
While we believe that alternative sources of supply or alternative
subcontractors could be developed if necessary, material delays or interruption
of supply might, nevertheless, arise as a consequence of required retraining and
other activities related to establishing and developing a new supply or
subcontractor relationship and such material delays may have a material adverse
effect on our business and operating results.
Final testing, with the exception of certain lower priced products as discussed
above, and shipment of products to customers occurs in our Huntsville, Alabama
facilities. Our facilities are certified pursuant to ISO 9001, TL 9000 and
certain other telephone company standards, including those relating to emission
of electromagnetic energy and safety specifications.
Backlog and Inventory
A substantial portion of ADTRAN's shipments in any fiscal period relate to
orders received in that period and firm purchase orders released in that fiscal
period by customers under agreements containing non-binding purchase
commitments. Further, a significant percentage of orders require delivery within
48 hours. These factors result in very little order backlog. We believe that
because a substantial portion of customer orders are filled within the fiscal
quarter of receipt, our backlog is not a meaningful indicator of actual sales
for any succeeding period. To meet this demand, ADTRAN maintains a substantial
finished goods inventory.
Our practice of maintaining sufficient inventory levels to assure prompt
delivery of our products increases the amount of inventory which may become
obsolete. The obsolescence of such inventory may have an adverse effect on
ADTRAN's business and operating results.
Competition
The markets for ADTRAN's products are intensely competitive. With the
development of the worldwide communications market and the growing demand for
related equipment, additional manufacturers have entered the markets in recent
years to offer products in competition with ADTRAN. Additionally, certain
companies have, in recent years, developed the ability to deliver fiber-optic
cable, coaxial cable and wireless transmission to certain office centers and
other end-users. Competition would further increase if new companies enter the
market or existing competitors expand their product lines. For instance,
legislation has been enacted that lifts the restrictions that previously
prevented the RBOCs from manufacturing telecommunications equipment. The RBOCs,
which in the aggregate are our largest customers, may increasingly become our
competitors in the markets that we share.
With respect to CN sales, product quality and availability and an established
reputation for customer service are important competitive factors that can
affect our ability to have our products accepted and approved by the individual
carriers. Our CN market competitors include large established firms such as ADC
Telecommunications, Inc. (includes Pairgain), Lucent Technologies, Inc., Nortel
Networks Corporation, Tellabs, Inc., Westell Technologies, Inc. (includes
Teltrend), as well as smaller, specialized firms.
In the EN market, among the significant competitors for subrate CSU/DSU market
share are General DataComm Industries, Inc. and Motorola, Inc. Competitors for
T1 service unit market share include ADC KENTROX, a subsidiary of ADC
Telecommunications, Inc., Paradyne Corp., Quick Eagle Corporation, and Visual
Networks, Inc. ADTRAN now holds a leading market share position in IADs, where
we compete with ACT Networks and Zhone Technologies, Inc. (formerly Premisys).
In broadband T3 and fiber markets, competition varies greatly by product, but
includes Carrier Access Corporation, Quick Eagle Corporation, and Canoga Perkins
Corporation. An increase in competition could reduce our gross profit margins,
may require increased spending by us on product development and sales and
marketing, and may otherwise adversely affect our business.
Proprietary Rights
The name "ADTRAN" and our corporate logo are registered trademarks of ADTRAN. A
number of our product identifiers and names are also registered. We also claim
rights to a number of unregistered trademarks. We have obtained patents on 13
inventions relating to our products and have several patent applications
pending. We will seek additional patents from time to time related to our
research and development activities. We protect our trademarks, patents,
inventions, trade secrets, and other proprietary rights by contract, trademark,
copyright and patent registration, and internal security. We believe, however,
that our competitive success will not depend on the ownership of intellectual
property rights, but primarily on the innovative skills, technical competence
and marketing abilities of our personnel. The telecommunications industry,
nevertheless, is characterized by the existence of an ever increasing number of
patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert exclusive patent, copyright and
other intellectual property rights to technologies that are important to us.
While there are no outstanding infringement lawsuits pending by or against
ADTRAN, it is possible that third parties may assert litigation claims against
us in the future, that assertions by such parties
10
may result in costly litigation, or that we may not prevail in any such
litigation or be able to license any valid and infringed patents from third
parties on commercially reasonable terms. Any infringement claim or other
litigation against or by us could have a material adverse effect on our business
and operating results.
Employees
As of December 31, 2000, ADTRAN had 1,707 full-time employees in the United
States, six in Canada, five in Hong Kong, and four in Europe. Of ADTRAN's total
employees, 280 were in sales, marketing, and service, 365 were in research and
development, 907 were in manufacturing and quality, and 170 were in
administration. None of ADTRAN's employees are represented by a collective
bargaining agreement nor has ADTRAN ever experienced any work stoppage. We
believe that our relationship with our employees is good.
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
ADTRAN's headquarters and principal administrative, engineering and
manufacturing facilities are located on a 22-acre campus in Cummings Research
Park in Huntsville, Alabama. Two office buildings contain 440,000 and 600,000
square feet, respectively. These facilities are projected to accommodate a
total of 3,000 employees. We also lease 65,480 additional square feet to
accommodate manufacturing and engineering activities.
We also maintain 44 sales and service facilities, some of which are home based
offices, 36 located within the United States, two in Canada, one in Hong Kong,
one in Beijing, China, and one in Zurich, Switzerland. The U.S. facilities are
in the following locations: Atlanta, GA, Boston, MA, Chicago, IL, Cleveland, OH,
Columbus, OH, Concord, NH, Dallas, TX, Denver, CO, Detroit, MI, Harrisburg, PA,
Houston, TX, Huntsville, AL, Indianapolis, IN, Las Vegas, NV, Lincoln, NE,
Kansas City, KS, Los Angeles, CA, Minneapolis, MN, Nashville, TN, New York, NY,
Orlando, FL, Philadelphia, PA, Phoenix, AZ, Pittsburgh, PA, Portland, OR,
Providence, RI, Raleigh, NC, Richmond, VA, Sacramento, CA, San Antonio, TX, San
Diego, CA, San Francisco, CA, San Jose, CA, Seattle, WA, St. Louis, MO, Trenton,
NJ, Washington, D.C.
In addition to the home offices listed above, we lease additional office space
in Huntsville, AL, Leawood, KS, Irvine, CA, Englewood, CO, Atlanta, GA, Irving,
TX, Altamonte Springs, FL, Herndon, VA, Crystal Lake, IL, and Bainbridge Island,
WA, which leases expire at various times between 2001 and 2003. See Note 7 of
Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
ADTRAN has been involved from time to time in litigation in the normal course of
its business. We are not aware of any pending or threatened litigation matters
that could have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matter was submitted by ADTRAN to vote of security holders during the fiscal
quarter ended December 31, 2000.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
Set forth below, in accordance with General Instruction G(3) of Form 10-K and
Instruction 3 of Item 401(b) of Regulation S-K, is certain information regarding
the executive officers of ADTRAN. Unless otherwise indicated, the information
set forth is as of December 31, 2000.
Mark C. Smith - Age 60 - Mr. Smith is one of the co-founders of ADTRAN.
1995 to present Chairman of the Board and Chief Executive Officer
1986 - 1995 Chairman of the Board, Chief Executive Officer and
President
11
Lonnie S. McMillian - Age 72 - Mr. McMillian is one of the co-founders of ADTRAN.
1996 to present Senior Vice President-Engineering, Secretary and Director
1986 - 1996 Vice President - Engineering, Secretary, Treasurer and Director
Howard A. Thrailkill - Age 62
1995 to present President, Chief Operating Officer and Director
1992 - 1995 Executive Vice President
John R. Cooper - Age 53
1996 to present Vice President - Finance and Chief Financial Officer
1995 - 1996 President, Sauty Group, Inc.
1991 - 1995 Partner, Coopers & Lybrand L.L.P.
Danny J. Windham - Age 41
1999 to present Vice President and General Manager- EN
1995 - 1999 Vice President-EN Marketing
1994 - 1995 Director of Marketing
1989 - 1994 Manager of Product Management
Thomas R. Stanton - Age 36
1999 to present Vice President and General Manager-CN
1995 - 1999 Vice President - CN Marketing
1995 VP - Marketing & Engineering, Transcrypt International, Inc.
1994 - 1995 Sr. Director, Marketing, E.F. Johnson Company
1993 - 1994 Director, Marketing, E.F. Johnson Company
P. Steven Locke - Age 52
2000 to present Vice President - CN Marketing
1999 - 2000 Vice President, Sprint Local Division Sales for Lucent Technologies
1997 - 1999 Senior Director of Sales, ADTRAN, Inc.
1993 - 1997 Vice President and Central Manager, Business Network Group, Sprint North Supply
M. Melvin Bruce - Age 60
1996 to present Vice President - CN Engineering
1989 - 1996 Vice President, Research and Design, Tel Control Inc.
James D. Butler - Age 42
1999 to present Vice President - EN Sales
1997 - 1999 Director, EN Sales
1995 - 1997 Area Vice President, Motorola Inc. Information Systems Group
Robert A. Fredrickson - Age 50
1996 to present Vice President - CN Sales
1996 Vice President, Broadband Business Development, DSC Communications Corp.
1991 - 1996 Senior Director, Access Products, DSC Communications Corp.
Steven L. Harvey - Age 40
1999 to present Vice President - Competitive Service Provider Sales
1996 - 1999 Vice President - EN Sales
1995 - 1996 Executive Vice President, Data Processing Sciences Corporation
1991 - 1995 Vice President, Data Processing Sciences Corporation
Charles A. O'Donnell - Age 45
1996 to present Vice President - Quality
1993 - 1996 Quality and Technical Resources Manager, Exide Electronics Corporation
12
Jude T. Panetta - Age 41
1994 to present Vice President - Operations
1989 - 1994 Director of Manufacturing, Exide Electronics Corporation
Everette R. Ramage - Age 53
1999 to present Vice President - EN Engineering
1993 - 1999 Engineering Manager, EN DDS Group
Kevin W. Schneider - Age 37
1999 to present Vice President - Technology
1996 - 1999 Chief Scientist
1992 - 1996 Staff Scientist
There are no family relationships among the directors or executive officers.
All officers are elected annually by and serve at the pleasure of the Board of
Directors of ADTRAN.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
ADTRAN's common stock is traded on the NASDAQ National Market (NASDAQ) under the
symbol "ADTN." As of January 31, 2001, ADTRAN had 422 shareholders of record
and approximately 10,740 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:
2000 Quarters High Low
First $80-1/2 $49-1/16
Second $ 73 $44-3/8
Third $73-1/4 $41-1/8
Fourth $48-3/16 $16-9/16
1999 Quarters High Low
First $25-1/2 $15-3/4
Second $36-7/8 $16
Third $42-11/16 $33-3/8
Fourth $55-1/2 $33-3/8
ADTRAN has operated with a policy of retaining earnings, and presently intends
to retain all future earnings for use in the development of its business and
does not anticipate paying any cash dividends in the foreseeable future.
14
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected financial data concerning ADTRAN for and as of the end of
each of the years in the five year period ended December 31, 2000, are derived
from the financial statements of ADTRAN, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected financial data
are qualified in their entirety by the more detailed information and financial
statements, including the notes thereto. The financial statements of ADTRAN as
of December 31, 2000 and 1999 and for each of the years in the three year period
ended December 31, 2000, and the report of PricewaterhouseCoopers LLP thereon,
are included elsewhere in this report.
Year Ended December 31, 2000 1999 1998 1997 1996
(in thousands, except per share data)
Sales
CN (Carrier Networks Division) $315,228 $230,967 $167,500 $171,838 $171,902
EN (Enterprise Networks Division) 147,721 136,240 119,059 93,497 78,219
-------------------------------------------------------------------------------------------------------------------
Total Sales 462,949 367,207 286,559 265,335 250,121
Cost of Sales 233,430 178,629 130,010 130,254 129,953
-------------------------------------------------------------------------------------------------------------------
Gross profit 229,519 188,578 156,549 135,081 120,168
Selling, general and administrative expenses 87,116 71,735 62,061 44,973 34,308
Research and development expenses 50,628 42,018 37,222 30,055 24,648
-------------------------------------------------------------------------------------------------------------------
Operating income 91,775 74,825 57,266 60,053 61,212
Interest income 9,025 5,350 5,824 4,175 2,543
Interest expense (1,802) (2,312) (2,287) (1,839) (895)
Other income (expense) (4) (673) (188) 438 642
Net realized investment gains 84,040
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 183,034 77,190 60,615 62,827 63,502
Provision for income taxes 62,231 26,244 20,306 22,618 23,682
-------------------------------------------------------------------------------------------------------------------
Net income $120,803 $ 50,946 $ 40,309 $ 40,209 $ 39,820
Earnings per common share-basic $ 3.13 $ 1.33 $ 1.03 $ 1.03 $ 1.03
Earnings per common share assuming dilution (1) $ 3.04 $ 1.31 $ 1.03 $ 1.02 $ 1.01
-------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-basic 38,647 38,335 38,982 39,202 39,566
Weighted average shares outstanding 39,704 38,831 39,164 39,565 39,549
assuming dilution (1)
At December 31, 2000 1999 1998 1997 1996
(in thousands, except per share data)
Balance Sheet Data
Working capital $257,636 $181,147 $150,535 $149,184 $140,510
Total assets 546,336 556,296 301,711 282,401 210,207
Total debt 50,000 50,000 50,000 50,000 20,000
Stockholders' equity 434,425 400,052 231,389 212,037 172,879
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method. See Notes 1 and 12 of Notes to Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
Overview
ADTRAN designs, develops, manufactures, markets and services a broad range of
high-speed digital transmission products utilized by providers of
telecommunications services (serviced by ADTRAN's Carrier Networks Division or
CN) and corporate end-users (serviced by ADTRAN's Enterprise Networks Division
or EN) to implement advanced digital data services over existing telephone
networks. We currently sell our products to a large number of carriers,
including all RBOCs, and to private and public enterprises worldwide.
ADTRAN's sales have increased each year due primarily to increases in the number
of units sold to both new and existing customers. These annual sales increases
reflect our strategy of increasing unit volume and market share through the
introduction of succeeding generations of products having lower selling prices
and increased functionality as compared both to the prior generation of a
product and to the products of competitors. An important part of ADTRAN'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, we seek in most instances to be a
low-cost, high-quality provider of products in our markets. ADTRAN's success to-
date is attributable in large measure to our ability to design our products
initially with a view to their subsequent re-design, allowing both increased
functionality and reduced manufacturing costs in each succeeding product
generation. This strategy enables ADTRAN to sell succeeding generations of
products to existing customers while increasing our market share by selling
these enhanced products to new customers.
While ADTRAN has experienced increased sales in each year, our operating results
have fluctuated on a quarterly basis in the past, and operating results may vary
significantly in future periods due to a number of factors. We operate with
very little order backlog. A substantial majority of our 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, a majority of customers typically require prompt
delivery of products. This results in a limited backlog of orders for these
products and requires us to maintain sufficient inventory levels to satisfy
anticipated customer demand. If near-term demand for ADTRAN's products
declines, or if potential sales in any quarter do not occur as anticipated, our
financial results will be adversely affected. Operating expenses are relatively
fixed in the short term; therefore, a shortfall in quarterly revenues could
impact ADTRAN's financial results significantly in a given quarter. Further,
maintaining sufficient inventory levels to assure prompt delivery of our
products increases the amount of inventory which may become obsolete and
increases the risk that the obsolescence of such inventory may have an adverse
effect on our business and operating results.
ADTRAN'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
ADTRAN or our competitors. Accordingly, ADTRAN's historical financial
performance is not necessarily a meaningful indicator of future results, and, in
general, management expects that ADTRAN's financial results may vary from period
to period. See Note 13 of Notes to Financial Statements.
This 2000 Form 10-K contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
ADTRAN's expectations or beliefs, including, but not limited to, statements
concerning (i) the business and financial outlook, (ii) our business, financial
condition or results of operations, and (iii) our business strategy. When used
in this 2000 Form 10-K, 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 Operations," "2000 Compared to 1999," and "Liquidity
and Capital Resources," and those discussed in ADTRAN'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 statements.
16
Results of Operations
The following table presents selected financial information derived from
ADTRAN's statements of income expressed as a percentage of sales for the years
indicated.
Years Ended December 31,
Percentage of Sales 2000 1999 1998
Sales:
CN 68.1% 62.9% 58.5%
EN 31.9 37.1 41.5
- -----------------------------------------------------------------------
Total sales 100.0 100.0 100.0
Cost of sales 50.4 48.7 45.4
- -----------------------------------------------------------------------
Gross profit 49.6 51.3 54.6
Selling, general and administrative expenses 18.8 19.5 21.7
Research and development expenses 10.9 11.4 13.0
- -----------------------------------------------------------------------
Operating income 19.9 20.4 19.9
Interest income 1.9 1.5 2.0
Interest expense (0.4) (0.6) (0.8)
Other income (expense) 0.0 (0.2) 0.1
Net realized investment gains 18.1 0.0 0.0
- -----------------------------------------------------------------------
Income before income taxes 39.5 21.0 21.2
Provision for income taxes 13.4 7.1 7.1
- -----------------------------------------------------------------------
Net income 26.1% 13.9% 14.1%
2000 Compared to 1999
Sales
ADTRAN's sales increased 26.1% from $367,207,000 in 1999 to $462,949,000 in
2000. Sales for the CN division increased 36.4% from $230,967,000 in 1999 to
$315,228,000 in 2000. CN sales, as a percentage of total sales, increased from
62.9% in 1999 to 68.1% in 2000. Sales of EN products increased 8.4% from
$136,240,000 in 1999 to $147,721,000 in 2000. As a percentage of total sales, EN
sales decreased from 37.1% in 1999 to 31.9% in 2000. In general, the increased
sales resulted from increased sales volume to existing customers and from
increased market penetration. The primary factors contributing to the increase
in sales in 2000 were (1) additional market penetration for our HDSL products,
(2) continuing growth in demand for T1 products, (3) continuing growth in sales
of the ATLAS integrated access device, and (4) continuing growth in sales of the
Total Access(TM) product line (primarily directed to the CLEC market).
Cost of Sales
Cost of sales increased from $178,629,000 in 1999 to $233,430,000 in 2000. As a
percentage of sales, cost of sales increased from 48.7% in 1999 to 50.4% in
2000. This increase was due primarily to a rise in material cost as a percentage
of sales. CN cost of sales increased from $122,158,000 in 1999 to $168,342,000
in 2000. CN cost of sales as a percentage of CN sales increased from 52.9% in
1999 to 53.4% in 2000. EN cost of sales increased from $56,472,000 in 1999 to
$65,058,000 in 2000. As a percentage of EN sales, EN cost of sales increased
from 41.5% in 1999 to 44.1% in 2000. An important part of ADTRAN'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 our gross profit margin due to timing
differences between the lowering of product selling prices and the full
recognition of cost reductions. In view of the rapid pace of new product
introductions by ADTRAN, this strategy may result in variations in gross profit
margins that, for any particular financial period, can be difficult to predict.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 21.4% from $71,735,000 in
1999 to $87,116,000 in 2000. The net increase was due to expanding
infrastructure on both sales and support personnel. However, as a percentage of
sales, selling, general and administrative expenses decreased from 19.5% in 1999
to 18.8% in 2000. The decrease is due primarily to operating efficiencies
realized as a result of a larger sales base.
Research and Development Expenses
Research and development expenses increased 20.5% from $42,018,000 in 1999 to
$50,628,000 in 2000. This increase was due to increased engineering costs
associated with new product introductions and feature enhancement activities.
As a percentage of sales,
17
research and development expenses decreased from 11.4% in 1999 to 10.9% in 2000.
ADTRAN continually evaluates new product opportunities and engages in intensive
research and product development efforts. To date, we have expensed all product
research and development costs as incurred. Additionally, ADTRAN frequently
invests heavily in up-front market development efforts prior to the actual
commencement of sales of a major new product. As a result, we may incur
significant research and development expenses and selling, general and
administrative expenses prior to the receipt of revenues from a major new
product group. ADTRAN is presently incurring both research and development
expenses and selling, general and administrative expenses in connection with its
new products and its expansion into international markets.
Interest Expense
Interest expense decreased 22.0% from $2,312,000 in 1999 to $1,802,000 in 2000.
ADTRAN currently pays interest on a $50,000,000 revenue bond, the proceeds of
which were used to expand our facilities in Huntsville, Alabama.
Net Realized Investment Gains
During July 2000, ADTRAN sold certain marketable equity securities (included in
long-term investments in the accompanying condensed balance sheet) for
$91,900,000, net of transaction costs of $4,706,000, resulting in a realized
gain of $85,368,000.
Net Income
As a result of the above factors, income before realized investment gains (net
of income taxes) increased 28.2% from $50,946,000 in 1999 to $65,336,000 in
2000. As a percentage of sales, income before realized investment gains (net of
income taxes) increased from 13.9% in 1999 to 14.1% in 2000. Net income
increased from $50,946,000 in 1999 to $120,802,000 in 2000.
1999 Compared to 1998
Sales
ADTRAN's sales increased 28.1% from $286,559,000 in 1998 to $367,207,000 in
1999. The increased sales resulted from increased sales volume to existing
customers and from increased market penetration. Sales for the CN division
increased 37.9% from $167,500,000 in 1998 to $230,967,000 in 1999. CN sales as a
percentage of total sales increased from 58.5% in 1998 to 62.9% in 1999. Sales
of EN products increased 14.4% from $119,059,000 in 1998 to $136,240,000 in
1999. As a percentage of total sales, EN sales decreased from 41.5% in 1998 to
37.1% in 1999. The primary factors leading to the increase in sales in 1999 were
(1) additional market penetration for our HDSL products, (2) continuing growth
in demand for T1 products, (3) continuing growth in sales of the ATLAS
integrated access device, and (4) the introcution of the Total Access(TM)
product line (primarily directed to the CLEC market).
Cost of Sales
Cost of sales increased from $130,010,000 in 1998 to $178,629,000 in 1999. As a
percentage of sales, cost of sales increased from 45.4% in 1998 to 48.7% in
1999. This increase was due primarily to a rise in material cost as a
percentage of sales. CN cost of sales increased from $75,926,000 in 1998 to
$122,157,000 in 1999. CN cost of sales as a percentage of CN sales increased
from 45.3% in 1998 to 52.9% in 1999. This increase resulted from an increase in
the importance of sales of HDSL products which, for a portion of 1999, were at a
lower margin due to a delay in the transition from one generation of HDSL
products to the succeeding generation. EN cost of sales increased from
$54,084,000 in 1998 to $56,472,000 in 1999. As a percentage of EN sales, EN cost
of sales decreased from 45.4% in 1998 to 41.5% in 1999. An important part of
ADTRAN'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 ADTRAN's gross
profit margin due to timing differences between the lowering of product selling
prices and the realization of cost reductions. In view of the rapid pace of new
product introductions by ADTRAN, this strategy may result in variations in gross
profit margins that, for any particular financial period, can be difficult to
predict.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 15.6% from $62,061,000 in
1998 to $71,735,000 in 1999. Beginning in the first quarter of 1997, ADTRAN
embarked on a program of expanding infrastructure in both sales and support
personnel for its expanded customer base and for increased initiatives in the EN
and international markets, as well as for the introduction and marketing of more
technically enhanced products. This expansion program continued throughout 1997
and through the third quarter of 1998, at which point we determined that we had
developed the sales and support capacity necessary to service our expanded
revenue base. As a result, sales, general, and administrative expenses increased
as a percentage of sales in 1998 compared to 1997 and decreased a percentage
of sales in 1999 compared to 1998. As a percentage of sales, selling, general
and administrative expenses decreased from 21.7% in 1998 to 19.5% in 1999
because of operating efficiencies due to the larger sales base.
18
Research and Development Expenses
Research and development expenses increased 12.9% from $37,222,000 in 1998 to
$42,018,000 in 1999. This increase was due to increased engineering costs
associated with new product introductions and feature enhancement activities. As
a percentage of sales, research and development expenses decreased from 13.0% in
1998 to 11.4% in 1999. ADTRAN continually evaluates new product opportunities
and engages in intensive research and product development efforts. To date,
ADTRAN has expensed all product research and development costs as incurred.
Additionally, ADTRAN frequently invests heavily in up-front market development
efforts prior to the actual commencement of sales of a major new product. As a
result, ADTRAN may incur significant research and development expenses and
selling, general and administrative expenses prior to the receipt of revenues
from a major new product group. ADTRAN is presently incurring both research and
development expenses and selling, general and administrative expenses in
connection with its new products and its expansion into international markets.
Interest Expense
Interest expense increased 1.1% from $2,287,000 in 1998 to $2,312,000 in 1999.
ADTRAN pays interest on a $50,000,000 revenue bond, the proceeds of which were
used to expand our facilities in Huntsville, Alabama.
Net Income
As a result of the above factors, net income increased by 26.4% from $40,309,000
in 1998 to $50,946,000 in 1999. As a percentage of sales, net income decreased
from 14.1% in 1998 to 13.9% in 1999.
Liquidity and Capital Resources
ADTRAN committed to spend approximately an additional $1,500,000 for finalizing
the construction of Phase IV of our corporate headquarters in Huntsville,
Alabama which was completed in October 2000. Over the next several years, we
expect to spend approximately an additional $35,000,000 to equip Phase IV.
Fifty million dollars of ADTRAN's Phase III expansion was approved for
participation in an incentive program offered by the Alabama State Industrial
Development Authority (the "Authority"). That incentive program enables
participating companies to generate Alabama corporate income tax credits that
can be used to reduce the amount of Alabama corporate income taxes that would
otherwise be payable. There can be no assurance that the State of Alabama will
continue to make these corporate income tax credits available in the future, and
we therefore may not realize the full benefit of these incentives. Through
December 31, 2000, the Authority had issued $50,000,000 of its taxable revenue
bonds pursuant to the incentive program and loaned the proceeds from the sale of
the bond to us. We are required to make payments to the Authority in amounts
necessary to pay the principal of and interest on the Authority's Taxable
Revenue Bond, Series 1995, as amended, currently outstanding in the aggregate
principal amount of $50,000,000. The bond matures on January 1, 2020, and bears
interest at the rate of 45 basis points over the money market rate of First
Union National Bank of Tennessee.
ADTRAN's working capital position improved from $181,147,000 as of December 31,
1999 to $257,636,000 as of December 31, 2000 due to cash generated from
operations and the sale of certain marketable equity securities, as discussed
below. ADTRAN has used, and expects to continue to use, the cash generated from
operations for working capital and other general corporate purposes, including:
(1) product development activities to enhance our existing products and develop
new products and (2) the expansion of sales and marketing activities. Inventory
increased 52.3% from December 31, 1999 to December 31, 2000. The increase is
attributable to two factors: (1) our expectations of increased shipments to
existing customers and (2) increasing quantities of certain commodities in
anticipation of marketwide allocations. Accounts receivables increased 36.8%
from December 31, 1999 to December 31, 2000. The increase is a result of our
continued sales growth and extended payment terms for some of our major
customers. Other receivables have increased due to the sale of raw materials to
our subcontractors.
On March 31, 1997, the Board of Directors authorized ADTRAN to re-purchase up to
1,000,000 shares of our outstanding common stock. In October 1998, the Board
approved the re-purchase of an additional 2,000,000 shares. As of December 31,
2000, we had re-purchased 1,121,417 shares of our common stock at a total cost
of $23,612,000.
Capital expenditures totaling $32,540,000, $36,237,000 and $23,096,000 in 2000,
1999 and 1998, respectively, were used to expand our headquarters and to
purchase equipment.
At December 31, 2000, ADTRAN's cash on hand of $27,971,000 and short-term
investments of $60,286,000 placed our potential cash availability at
$88,257,000.
We intend to finance our operations in the future with cash flow from operations
and remaining borrowed taxable revenue bond proceeds. We believe these
available sources of funds to be adequate to meet our operating and capital
needs for the foreseeable future.
19
ITEM 7A. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
ADTRAN has not conducted transactions, established commitments or entered into
relationships requiring disclosures beyond those provided elsewhere in this Form
10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The following financial statements are contained in this report.
Page
Report of Independent Accountants 21
Financial Statements for Years Ended December 31, 2000, 1999 and 1998
Balance Sheets 22
Statements of Income 23
Statements of Changes in Stockholders' Equity 24
Statements of Cash Flows 25
Schedule II - Valuation and Qualifying Accounts 39
20
Report of Independent Accountants
To the Board of Directors and Stockholders of ADTRAN, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of ADTRAN, Inc.
at December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedules listed
in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits in accordance with
auditing standards generally accepted in the United States of America, 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 audit provides a
reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Birmingham, Alabama
January 25, 2001
21
Balance Sheets
- --------------------------------------------------------------------------------
December 31, 2000 and 1999
2000 1999
------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 27,971,313 $ 37,522,337
Short-term investments 60,286,332 41,080,776
Accounts receivable, less allowance for doubtful accounts of $813,003
and $1,018,400 in 2000 and 1999, respectively 82,133,831 60,036,876
Other receivables 35,862,774 4,436,862
Inventory 89,252,729 58,568,773
Prepaid expenses 4,032,438 1,410,286
Deferred income taxes 4,505,008 4,069,937
- -------------------------------------------------------------------------------------------------------------------
Total current assets 304,044,425 207,125,847
Property, plant and equipment, net 123,713,176 104,587,755
Other assets 469,000 220,000
Long-term investments 118,109,404 244,362,579
- -------------------------------------------------------------------------------------------------------------------
Total assets $546,336,005 $556,296,181
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,113,832 $ 12,773,848
Accrued expenses 8,560,073 7,108,248
Income taxes payable 3,734,234 6,096,459
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 46,408,139 25,978,555
Bonds payable 50,000,000 50,000,000
Deferred income taxes 15,342,435 80,265,155
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 111,750,574 156,243,710
- -------------------------------------------------------------------------------------------------------------------
Minority interest in subsidiary 160,000
Stockholders' equity:
Common stock, par value $.01 per share; 200,000,000
shares authorized; 39,446,644 shares issued in 2000
and in 1999 394,466 394,466
Additional paid-in capital 96,707,263 93,564,326
Accumulated other comprehensive income 19,870,288 116,000,000
Retained earnings 332,905,389 212,103,128
- -------------------------------------------------------------------------------------------------------------------
449,877,406 422,061,920
Less treasury stock at cost: 733,192 and 1,047,330
shares in 2000 and 1999, respectively (15,451,975) (22,009,449)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 434,425,431 400,052,471
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $546,336,005 $556,296,181
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
Statements of Income
- --------------------------------------------------------------------------------
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------------------------------------------------
Sales $462,948,721 $367,207,437 $286,558,950
Cost of sales 233,429,280 178,629,643 130,009,879
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 229,519,441 188,577,794 156,549,071
Selling, general and administrative expenses 87,115,889 71,734,959 62,060,907
Research and development expenses 50,628,190 42,017,779 37,221,780
- -----------------------------------------------------------------------------------------------------------------------
Operating income 91,775,362 74,825,056 57,266,384
Interest income 9,024,543 5,349,762 5,824,223
Interest expense (1,802,158) (2,311,667) (2,286,821)
Other income (expense) (4,125) (672,920) (188,530)
Net realized investment gains 84,040,126
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 183,033,748 77,190,231 60,615,256
Provision for income taxes 62,231,487 26,244,677 20,305,606
- -----------------------------------------------------------------------------------------------------------------------
Net income $120,802,261 $ 50,945,554 $ 40,309,650
Weighted average shares outstanding 38,647,288 38,334,507 38,981,558
Weighted average shares outstanding assuming dilution (1) 39,704,286 38,831,091 39,163,763
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share - basic $ 3.13 $ 1.33 $ 1.03
Earnings per common share - assuming dilution (1) $ 3.04 $ 1.31 $ 1.03
- -----------------------------------------------------------------------------------------------------------------------
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
The accompanying notes are an integral part of these financial statements.
23
Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
For the years ended December 31, 2000, 1999 and 1998
Common Stock
Number Par Value Additional Retained Treasury Unrealized Gain Total
of shares ($.01 Per Paid-In Earnings Stock on Marketable Stockholders'
Share) Capital Equity Securities Equity
Balance, December 31, 1997 39,381,264 $393,813 $92,995,338 $120,847,924 ($2,200,000) $ 0 $212,037,075
Net income 40,309,650 40,309,650
Stock options exercised
Various prices per share 42,215 422 57,836 58,258
Purchase of treasury stock:
1,000,081 shares (21,016,047) (21,016,047)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 39,423,479 $394,235 $93,053,174 $161,157,574 ($23,216,047) $231,388,936
Net Income 50,945,554 50,945,554
Unrealized gain on marketable
equity securities (net of
deferred tax of $76,000,000) 116,000,000 116,000,000
Stock options exercised
Various prices per share 23,165 231 192,462 1,532,589 1,725,282
Purchase of treasury stock:
20,160 shares (325,991) (325,991)
Income tax benefit from
exercise of non-qualified
stock options 318,690 318,690
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 39,446,644 $394,466 $93,564,326 $212,103,128 ($22,009,449) $116,000,000 $400,052,471
Net Income 120,802,261 120,802,261
Change in unrealized gain on
marketable securities
(net of deferred tax of
$14,695,744) (40,719,712) (40,719,712)
Reclassification adjustment
for amounts included in net
income, (net of income tax
of $29,954,217)
Stock options exercised (55,410,000) (55,410,000)
Various prices per share 140,217 6,627,900 6,768,117
Purchase of treasury stock:
1,176 shares (70,426) (70,426)
Income tax benefit from
exercise of non-qualified
stock options 3,002,720 3,002,720
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 39,446,644 $394,466 $96,707,263 $332,905,389 ($15,451,975) $ 19,870,288 $434,425,431
During 2000 and 1999, ADTRAN issued 315,314 and 72,911 shares, respectively, of
Treasury Stock to accommodate employee stock option exercise.
Comprehensive income in 2000 of $140,672,549 consists of net income of
$120,802,261 and unrealized gain on marketable securities of $19,870,288 (net of
deferred tax).
Comprehensive income in 1999 of $166,945,554 consists of net income of
$50,945,554 and unrealized gain on marketable securities of $116,000,000 (net of
deferred tax).
The accompanying notes are an integral part of these financial statements.
24
Statements of Cash Flows
- --------------------------------------------------------------------------------
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------------------------------------------------
Cash flows from operating activities:
Net income $ 120,802,261 $ 50,945,554 $ 40,309,650
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 13,418,843 10,546,594 9,002,669
Provision for warranty claims 1,506,432
Gain on sale of property, plant and equipment (5,050)
Gain on sale of long-term investments (84,040,126)
Loss on sale of short-term investments 141,233 417,749 24,367
Deferred income taxes (16,411) (683,237) 1,188,956
Income tax benefit from exercise of non-qualified
stock options 3,002,720 318,690
Change in operating assets:
Accounts receivable (22,096,955) (13,448,557) (5,681,432)
Inventory (30,683,956) 7,131,803 (26,331,473)
Other receivables (31,430,079) (3,743,198) (353,611)
Prepaid expenses (2,622,152) (55,920) (206,078)
Other assets (249,000) (20,000)
Change in operating liabilities:
Accounts payable 21,339,984 1,793,751 1,858,827
Income taxes payable (2,362,225) 5,035,664 (3,518,550)
Accrued expenses 1,451,825 2,122,491 (1,036,560)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (13,344,038) 60,376,334 16,743,197
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (32,540,097) (36,236,622) (23,095,854)
Proceeds from the disposition of property, plant
and equipment 5,050
Proceeds from sale of long-term investments 86,009,950 3,893,832
Purchase of long-term investments (37,027,741) (1,221,411) (5,035,000)
Proceeds from sale of short-term investments 149,445,754 38,581,797 77,093,834
Purchase of short-term investments (168,792,543) (39,285,254) (80,080,029)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,904,677) (34,262,608) (31,117,049)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 6,768,117 1,725,282 58,258
Purchase of treasury stock (70,426) (325,991) (21,016,047)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,697,691 1,399,291 (20,957,789)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (9,551,024) 27,513,017 (35,331,641)
Cash and cash equivalents, beginning of year 37,522,337 10,009,320 45,340,961
Cash and cash equivalents, end of year $ 27,971,313 $ 37,522,337 $ 10,009,320
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
capitalized interest of $0, $0 and $35,172
in 2000, 1999 and 1998, respectively $ 1,802,158 $ 2,311,667 $ 2,276,495
Cash paid during the year for income taxes $ 61,760,406 $ 22,094,478 $ 23,964,517
- ------------------------------------------------------------------------------------------------------------------------------
Non-Cash Transactions:
During 2000, ADTRAN recorded $96,130,000 of unrealized losses related to its
marketable equity securities.
During 1999, ADTRAN recorded $116,000,000 of unrealized gains related to its
marketable equity securities.
The accompanying notes are an integral part of these financial statements
25
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
ADTRAN, Inc. designs, develops, manufactures, markets, and services a broad
range of high-speed digital transmission products utilized by providers of
telecommunications services (serviced by ADTRAN's Carrier Networks Division or
CN) and corporate end-users (serviced by ADTRAN's Enterprise Networks Division
or EN) to implement advanced digital data services over existing telephone
networks. We also customize many of our products for private label distribution
and for original equipment manufacturers to incorporate into their own products.
Most of our CN and EN products are connected to the local loop, which is the
largest existing infrastructure of the telephone network, predominantly
consisting of copper wireline, which connects end-users to a Central Office, the
facility that provides local switching and distribution functions. The balance
of our products are used in the Central Office.
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 approximate fair value
due to the immediate or short-term maturity of these financial instruments. The
carrying amount reported for the bonds payable approximates fair value because
the underlying instruments are at variable rates that re-price frequently.
Investments represent re-marketed preferred stocks, municipal bonds, and
marketable equity securities. Re-marketed preferred stocks are designed to be
marketed as money market instruments. These instruments' dividend rates reset on
a short-term basis to maintain the price of the instruments at par. These
instruments may be redeemed on the date the interest rate resets. The fair value
of short-term investments is estimated based on quoted market prices (see Note
2). Realized gains or losses are computed under the specific identification
method.
Long-term investments represent restricted money market funds (see Note 2),
marketable equity securities, and other equity investments. The fair value of
the restricted money market funds approximate fair value due to a variable
interest rate. The marketable equity securities are reported at market value as
determined by the most recently traded price of the securities at the balance
sheet date, although the securities may not be readily marketable due to the
size of the available market. Unrealized gains and losses, net of tax, are
reported as a separate component of stockholders' equity. Realized gains and
losses are computed under the specific identification method and are included in
current income.
Inventory:
Inventory is carried at the lower of cost or market, with cost being determined
using the first-in, first-out method.
Property, Plant and Equipment:
Property, plant and equipment, which is stated at cost, is depreciated using
methods which approximate straight-line depreciation over the estimated useful
lives of the assets. ADTRAN depreciates its building and land improvements from
five to thirty-nine years, office machinery and equipment from three to seven
years and its engineering machinery and equipment from three to seven years.
Expenditures for repairs and maintenance are charged to expense as incurred;
betterments which materially prolong the lives of the assets are capitalized.
The cost of assets retired or otherwise disposed of and the related accumulated
depreciation are removed from the accounts and the gain or loss on such
disposition is included in income.
Long-Lived Assets:
ADTRAN 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 2000, 1999, and 1998.
Research and Development Costs:
Research and development costs are expensed as incurred.
26
Comprehensive Income:
Comprehensive Income consists of net income and unrealized gains and losses on
marketable securities, net of deferred taxes, and is presented in the Statements
of Changes in Stockholder's Equity.
Income Taxes:
ADTRAN utilizes the asset and liability method of accounting for income taxes
which requires the establishment of deferred tax liabilities and assets, as
measured by enacted tax rates, for all temporary differences caused when the tax
bases of assets and liabilities differ from those reported in the financial
statements.
Interest in Subsidiary:
ADTRAN currently consolidates ADTRAN AG, a Switzerland-based subsidiary, and
reflects the 25% minority interest as minority interest in the accompanying
balance sheet.
Revenue Recognition:
Revenue is generally recognized upon shipment of the product to the customer or,
in the case of remote customer located warehouses, upon delivery to the
customer. Shipping fees are recorded as revenue and the related cost is
included in cost of sales.
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 12).
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 asset 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.
Reclassifications:
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
financial statement presentation.
Recently Issued Accounting Standards:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS No. 138, requires all derivatives to be measured at fair
value and recognized as either assets or liabilities on the balance sheet.
Changes in such fair value are required to be recognized immediately in net
income (loss) to the extent the derivatives are not effective as hedges. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000 and is
effective for interim periods in the initial year of adoption. ADTRAN does not
currently hold any derivative financial instruments.
Note 2 - Investments
At December 31, 2000 and 1999, ADTRAN held the following securities as
available-for-sale or held-to-maturity recorded at amortized cost which
approximates market value, except certain long-term investments in marketable
equity securities which are recorded at market value:
2000
-----------------------------------------------------------------------------------------------------------
Short-term investments, available-for-sale:
Municipal bonds $ 18,395,383
Money market funds 27,636,149
Commercial paper, US Government securities and preferred stock 14,254,800
-----------------------------------------------------------------------------------------------------------
Total short-term investments 2000 $ 60,286,332
Long-term investments:
Restricted money market funds (see Note 5) $ 50,000,000
Money market funds 5,141,267
Municipal bonds 15,045,137
Investment in Marketable Equity Securities 42,113,192
Other equity investments 5,809,808
-----------------------------------------------------------------------------------------------------------
Total long-term investments 2000 $118,109,404
27
1999
-----------------------------------------------------------------------------------------------------------
Short-term investments, available-for-sale:
Municipal bonds $ 35,342,510
Commercial paper, US Government securities and preferred stock 5,738,266
----------------------------------------------------------------------------------------------------------
Total short-term investments 1999 $ 41,080,776
Long-term investments:
Restricted money market funds (see Note 5) $ 50,000,000
Investment in Marketable Equity Securities 193,828,577
Other equity investments 534,002
-----------------------------------------------------------------------------------------------------------
Total long-term investments 1999 $244,362,579
Note 3 - Inventory
At December 31, 2000 and 1999 inventory consisted of the following:
2000 1999
------------------------------------
Raw materials $50,011,508 $30,143,435
Work in process 12,606,275 15,763,155
Finished goods 26,634,946 12,662,183
- ----------------------------------------------------------------------------------------------------------------
$89,252,729 $58,568,773
Note 4 - Property, Plant and Equipment
Property, plant, and equipment was comprised of the following at December 31,
2000 and 1999:
2000 1999
---- ----
Land $ 4,263,104 $ 4,263,104
Building 81,676,034 26,389,365
Construction in progress 44,248,566
Land improvements 9,499,352 9,499,352
Office machinery and equipment 34,584,859 24,590,473
Engineering machinery and equipment 47,112,131 36,013,355
- ---------------------------------------------------------------------------------------------------------------------
177,135,480 145,004,215
Less accumulated depreciation (53,422,304) (40,416,460)
- ---------------------------------------------------------------------------------------------------------------------
$123,713,176 $104,587,755
Note 5 - Alabama State Industrial Development Authority Financing
In conjunction with an expansion of our Huntsville, Alabama facility, ADTRAN was
approved for participation in an incentive program offered by the State of
Alabama Industrial Development Authority (the "Authority"). Pursuant to the
program, on January 13, 1995, the Authority issued $20,000,000 of its taxable
revenue bonds and loaned the proceeds from the sale of the bonds to ADTRAN. The
bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama
(the "Bank"). First Union National Bank of Tennesse, Nashville, Tennessee, (the
"Bondholder") purchased the original bonds from the Bank and made further
advances to the Authority bringing the total amount outstanding to $50,000,000.
An Amended and Restated Taxable Revenue Bond ("Amended and Restated Bond"), was
issued and the original financing agreement was amended. The Amended and
Restated Bond bears interest, payable monthly, at the rate of 45 basis points
over the money market rate of the Bondholder and matures on January 1, 2020.
ADTRAN is required to make payments to the Authority in amounts necessary to pay
the principal of and interest on the Amended and Restated Bond. Included in
long-term investments is $50,000,000, which is restricted for payment of
principal of this bond.
28
Note 6 - Income Taxes
A summary of the components of the provision (benefit) for income taxes as of
December 31 is as follows:
2000 1999 1998
-------------------------------------------------
Current:
Federal $58,300,783 $24,764,291 $17,551,986
State 3,914,293 2,163,623 1,564,664
--------------------------------------------------------------------------------------------------------------------------
Total Current 62,215,076 26,927,916 19,116,650
Deferred tax provision (benefit) 16,411 (683,237) 1,188,956
--------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $62,231,487 $26,244,677 $20,305,606
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate due to the following:
2000 1999 1998
------------------------------------------------
Tax provision computed at the federal statutory rate
(35% in 2000, 1999 and 1998) $64,061,831 $27,016,582 $21,215,340
State income tax provision, net of federal benefit 2,544,290 1,406,353 1,017,032
Federal research credits (2,970,013) (1,880,205) (1,650,877)
Tax exempt income (1,060,586)
Other (344,035) (298,053) (275,889)
- ----------------------------------------------------------------------------------------------------------------------------
$62,231,487 $26,244,677 $20,305,606
Temporary differences which create deferred tax assets and liabilities at
December 31, 2000 and 1999 are detailed below.
2000 1999
------------------------------------------------------------------
Current Non-current Current Non-current
Property, plant and equipment ($4,611,379) ($4,265,155)
Investments (10,731,056) (76,000,000)
Accounts receivable $ 303,413 $ 400,740
Inventory 2,230,423 2,433,811
Accruals 1,371,763 1,235,386
Suspended research and development credit 599,409
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax asset (liability) $4,505,008 ($15,342,435) $4,069,937 ($80,265,155)
No valuation allowance is deemed necessary by management as the realization of
recorded deferred tax assets is considered more likely than not.
Note 7 - Operating Leases
ADTRAN leases office space and equipment under operating leases, which expire at
various dates through 2003. As of December 31, 2000, future minimum rental
payments under the non-cancellable operating leases are approximated as follows:
2001 $454,000
2002 265,000
2003 108,000
$827,000
Rental expense was approximately $846,000, $988,000 and $908,000, in 2000, 1999
and 1998, respectively.
29
Note 8 - Employee Incentive Stock Option Plan and Directors' Stock Option Plan
The Board of Directors of ADTRAN adopted the 1996 Employees Incentive Stock
Option Plan (the "1996 Plan") effective February 14, 1996, as amended, under
which 5,488,100 shares of common stock have been reserved for issuance to
certain employees and officers through incentive stock options and non-qualified
stock options. ADTRAN currently has options outstanding under its 1986 Employee
Incentive Stock Option Plan (the "1986 Plan"), which expired on February 14,
1996. Options granted under the 1996 Plan or the 1986 Plan become exercisable
after one year of continued employment after the date of grant or pursuant to a
five year vesting schedule beginning on the first anniversary of the grant date.
In 2000, the Board of Directors voted to reduce the vesting schedule to four
years beginning on the first anniversary of the grant date for new grants
effective January 2000. Expiration dates of options outstanding under the 1996
Plan and the 1986 Plan at December 31, 2000 range from 2001 to 2010.
The Board of Directors of ADTRAN adopted a Directors' Stock Option Plan
("Director's Plan") effective October 31, 1995, as amended, under which 200,000
shares of common stock have been reserved. The Director's Plan is a formula plan
to provide options to non-employee directors of ADTRAN. At December 31, 2000,
92,000 options had been granted under the plan. Expiration dates of options
outstanding under the Director's Stock Option Plan at December 31, 2000 range
from 2005 to 2010.
Pertinent information regarding the stock plans is as follows:
Weighted
Number Range of Average
of Exercise Exercise Vesting
Options Prices Price Provisions
- -----------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1997 1,276,456 $ .17 - $65.75 $32.24 Various
Options granted 1,018,225 $18.31 - $26.25 $21.46 Various
Options granted 10,250 $30.50 - $31.00 $30.69 Various
Options cancelled (45,370) $21.31 - $65.75 $35.61 Various
Options exercised (42,215) $ .17 - $ 3.33 $ 1.38 Various
- -----------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1998 2,217,346 $ .50 - $65.75 $27.78 Various
Options granted 504,000 $18.13 - $39.69 $35.75 Various
Options granted 642,000 $18.88 - $65.75 $36.05 Various
Options cancelled (166,875) $21.28 - $65.75 $32.52 Various
Options exercised (96,076) $ 50 - $31.75 $17.96 Various
- -----------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1999 3,100,395 $ 1.50 - $65.75 $30.88 Various
Options granted 779,415 $39.00 - $69.81 $67.82 Various
Options granted 616,185 $21.25 - $69.81 $67.12 Various
Options cancelled (130,840) $18.13 - $69.81 $37.36 Various
Options exercised (315,314) $ 1.50 - $65.75 $21.47 Various
- -----------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 2000 4,049,841 $ 1.67 - $69.81 $44.02 Various
The following table summarizes information about stock options outstanding at
December 31, 2000:
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/00 Life Price 12/31/00 Price
$ 1.67 - $ 3.33 30,070 2.10 $ 2.70 30,070 $ 2.70
$12.53 - $21.31 793,525 9.14 $21.15 267,250 $20.94
$21.81 - $27.50 533,526 6.55 $24.64 272,678 $24.51
$30.38 - $46.25 1,131,070 8.25 $36.35 255,102 $36.51
$49.56 - $69.81 1,561,650 8.81 $68.39 206,200 $64.03
- ---------------------------------------------------------------------------------------------
4,049,841 1,031,300
30
The options above were issued at exercise prices which approximate fair market
value at the date of grant. At December 31, 2000, 1,413,660 options were
available for grant under the plans. ADTRAN applies APB Opinion 25 and related
Interpretations in accounting for its stock plans. Accordingly, no compensation
cost has been recognized related to stock options. Had compensation cost for
ADTRAN's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed in SFAS No. 123, ADTRAN's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
2000 1999 1998
--------------------------------------------------------
Net income - as reported $120,802,261 $50,945,554 $40,309,650
Net income - pro forma 108,525,119 44,903,017 35,417,764
Earnings per share - as reported
assuming dilution $ 3.04 $ 1.31 $ 1.03
Earnings per share - pro forma
assuming dilution $ 2.73 $ 1.16 $ .90
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:
2000 1999 1998
-----------------------------------------------------
Dividend yield 0% 0% 0%
Expected life (years) 5 6 5
Expected volatility 55.4% 59.4% 59.1%
Risk-free interest rate 6.18% 5.69% 4.67%
Note 9 - Employee Benefit Plan
In March 1990, ADTRAN adopted an incentive savings plan (the "Savings Plan") for
all of its employees. The Savings Plan provides certain employment benefits to
all eligible employees and qualifies as a deferred arrangement under Section
401(k) of the Internal Revenue Code of 1986, as amended. ADTRAN matches one-half
of a participant's contribution, limited to 5% of a participant's income. An
employee's interest in ADTRAN's contributions becomes 100% vested at the date
participation in the Savings Plan commenced. Charges to operations for the plan
amounted to approximately $1,368,000, $1,288,000, $928,000, in 2000, 1999 and
1998, respectively.
Note 10 - Segment Information and Major Customers
We operate two reportable segments - (1) Carrier Networks (CN) and (2)
Enterprise Networks (EN). The accounting policies of the segments are the same
as those described in the "Summary of Significant Accounting Policies" (see Note
1) to the extent that such policies affect the reported segment information.
ADTRAN evaluates the performance of its segments based on gross profit;
therefore, selling, general and administrative costs, as well as research and
development, interest income/expense, and provision for taxes, is reported on an
entity wide basis only. There are no intersegment revenues.
The table below presents information about the reported sales and gross profit
of ADTRAN for each of the years in the three year period ended December 31,
2000. Asset information by reportable segment is not reported, since we do not
produce such information internally.
2000 1999 1998
Sales Gross Profit Sales Gross Profit Sales Gross Profit
--------------------------------------------------------------------------------------------------
(in thousands)
CN $315,228 $146,886 $230,967 $108,809 $167,500 $ 91,574
EN 147,721 82,663 136,240 79,769 119,059 64,975
- --------------------------------------------------------------------------------------------------------------------------
Total $462,949 $229,519 $367,207 $188,578 $286,559 $156,549
31
The following is sales information by geographic area for the years ended
December 31, 2000, 1999 and 1998:
Sales (in thousands)
2000 1999 1998
--------------------------------------------------
United States $448,810 $357,699 $277,062
Foreign 14,139 9,508 9,497
--------------------------------------------------
$462,949 $367,207 $286,559
Sales of ADTRAN's transmission and test equipment to the Regional Bell Operating
Companies (RBOCs) and GTE, also known as Incumbent Local Exchange Carriers
(ILECs), amounted to approximately 56%, 55% and 49% of total sales during the
years ended December 31, 2000, 1999 and 1998, respectively. ADTRAN's EN Division
sells a significant portion of our products to value added resellers through a
multi-tier distribution system. Sales of this type amounting to 26%, 27%, and
25% of ADTRAN's revenue for each of the years ended December 31, 2000, 1999 and
1998, respectively, were routed through four fulfillment distributors.
Note 11 - Commitments and Contingencies
ADTRAN 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 ADTRAN's opinion that the outcome of such contingencies will
not materially affect our business, operations, financial condition or cash
flows.
Note 12 - Earnings Per Share
A summary of the calculation of basic and diluted earnings per share (EPS) for
the years ended December 31, 2000, 1999 and 1998 is as follows:
For the Year Ended 2000
-----------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $120,802,261 38,647,288 $3.13
Effect of Dilutive Securities
Stock Options 1,056,997
Diluted EPS
Income available to common stockholders
(with dilution) for assumed options exercised $120,802,261 39,704,286 $3.04*
For the Year Ended 1999
-----------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $ 50,945,554 38,334,507 $1.33
Effect of Dilutive Securities
Stock Options 496,584
Diluted EPS
Income available to common stockholders
(with dilution) for assumed options exercised $ 50,945,554 38,831,091 $1.31
32
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 182,205
Diluted EPS
Income available to common stockholders
plus assumed conversions $40,309,650 39,163,763 $1.03
*ADTRAN reported a realized investment gain from the sale of certain marketable
equity securities, resulting in an after tax gain of $55,410,000 ($1.39 per
share assuming dilution). Earnings on a per share basis before the realized
investment gain, assuming dilution, for the twelve months ended December 31,
2000 was $1.65.
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.
2000 1999 1998
- ----------------------------------------- ---------------------------------------- --------------------------------------
Options Exercise Options Exercise Options Exercise
Granted Price Expiration Granted Price Expiration Granted Price Expiration
226,400 $56.25-$65.75 2006 46,000 $31.75-$46.25 2005 58,450 $31.75-$46.25 2005
4,000 $ 65.75 2009 276,000 $39.75-$65.75 2006 307,400 $30.50-$65.75 2006
1,316,150 $40.00-$69.81 2010 23,100 $37.88-$42.72 2007 31,900 $27.50-$42.72 2007
1,083,710 $36.06-$51.44 2009 28,500 $26.25-$30.38 2008
33
Note 13 - Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of
ADTRAN's last eight fiscal quarters. This information has been prepared by
ADTRAN on a basis consistent with our audited financial statements and includes
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of the data.
Three Months Ended
(In thousands, except for per share amounts) March 31 June 30 September 30 December 31
2000 2000 2000 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $99,470 $114,447 $127,277 $121,755
Gross profit 54,404 61,670 65,953 47,492
Operating income 24,470 27,249 30,219 9,837
(2)Net income 16,794 18,648 76,868 8,493
(1)Earnings per common share assuming dilution $ .42 $ .47 $ 1.93 $ .22
Earnings per common share $ .44 $ .48 $ 1.99 $ .22
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(In thousands, except for per share amounts) March 31 June 30 September 30 December 31
1999 1999 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $77,163 $ 88,507 $ 97,067 $104,470
Gross profit 39,494 43,356 50,463 55,265
Operating income 13,226 15,530 21,223 24,846
Net income 9,111 10,716 14,150 16,969
(1)Earnings per common share - assuming dilution $ .24 $ .28 $ .36 $ .43
Earnings per common share $ .24 $ .28 $ .37 $ .44
- ---------------------------------------------------------------------------------------------------------------------------
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
(2) Net Income for the third quarter of 2000 includes the realized gain from
the sale of certain marketable equity securities, resulting in an after tax
gain of $55,410,000.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
No independent certified public accountant of ADTRAN has resigned, indicated any
intent to resign or been dismissed as the independent certified public
accountant of ADTRAN during the three fiscal years ended December 31, 2000 or
subsequent thereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
Information relating to nominees for director of ADTRAN and compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set forth under the
captions "Proposal 1-Election of Directors-Information Regarding Nominees for
Director" and "Section 16(a) Beneficial Ownership Reporting Compliance,"
respectively, in the Proxy Statement for the Annual Meeting of Stockholders to
be held on April 20, 2001. Such information is incorporated herein by reference.
The definitive Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after ADTRAN's fiscal year end. Information relating
to the executive officers of ADTRAN, pursuant to Instruction 3 of Item 401(b) of
Regulation S-K and General Instruction G(3) of Form 10-K, is set forth at Part
I, Item 4(A) of this report under the caption "Executive Officers of the
Registrant." Such information is incorporated herein by reference.
34
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Information relating to executive compensation is set forth under the caption
"Executive Compensation" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
Information relating to ownership of common stock of ADTRAN by certain persons
is set forth under the caption "Share Ownership of Principal Stockholders and
Management" in the Proxy Statement referred to in Item 10 above. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Information relating to existing or proposed relationships or transactions
between ADTRAN and any affiliate of ADTRAN is set forth under the caption
"Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement referred to in Item 10 above. Such information is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Documents Filed as Part of This Report.
1. Financial Statements
The financial statements of ADTRAN and the related report of
independent auditors thereon are set forth under Part II, Item 8 of
this report.
Balance Sheets as of December 31, 2000 and 1999
Statements of Income for the years ended December 31, 2000, 1999 and
1998
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998.
Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998.
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
35
The following exhibits are filed with or incorporated by reference in this
report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration
statement or report is identified in parentheses. We will furnish any
exhibit upon request to: ADTRAN, Inc., Attn: Investor Relations, P. O. Box
140000, 901 Explorer Boulevard, Huntsville, Alabama 35814. There is a
charge of $.50 per page to cover expenses for copying and mailing.
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Statement on Form Incorporation, as S-1, No. 33-81062
amended (Exhibit 3.1 (the "Form S-1 to ADTRAN's Registration
Registration Statement")).
*3.2 Bylaws, as amended.
10.1 Documents relative to (ADTRAN, Inc. consisting of the Form 10-K for
the $50,000,000 Project) issued by following (Exhibit year ended
December Taxable Revenue Bond, the Alabama State 10.3 to ADTRAN's 31,
1994 (the "1994 Series 1995 Industrial Annual Report on Form 10-K")):
Development Authority,
(a) Financing Agreement Development of the State of of Alabama, a
state of Alabama; dated January 1, 1995, Authority, a public
Alabama (the banking corporation among the State corporation
organized "Issuer"), ADTRAN under the laws of Industrial under
the laws and AmSouth Bank the State
(b) Loan Agreement dated between the Issuer January 1, 1995 (the and
ADTRAN; "Loan Agreement"),
(c) Resolution of the Taxable Revenue Bond, Issuer authorizing the
Series 1995 (ADTRAN, issuance of the Inc. Project); $50,000,000
(d) Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc.
Project);
(e) Resolution of ADTRAN authorizing Loan Agreement and the Note; the
Financing Agreement, the
(f) Specimen Note from ADTRAN to January 13, 1995; AmSouth Bank of
Alabama, dated
(g) Pledge Agreement dated January 13, Alabama and ADTRAN; 1995
between AmSouth Bank of
(h) Eighth Amended and Restated and AmSouth Bank of Alabama dated
January 13, 1995; and Closing Agreement between ADTRAN March 24,
1997 and effective
(i) Preliminary Agreement dated and ADTRAN. November 16, 1994 between
the Issuer
10.2 Master Note for Business and Commercial Loans, dated June 1, 1996 and
in the original principal amount of $10,000,000 by and between ADTRAN
and AmSouth Bank of Alabama.
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among ADTRAN
and the stockholders of ADTRAN prior to ADTRAN's initial public
offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K).
10.4 Management Contracts and Compensation Plans:
36
(a) 1996 Employees Stock Incentive Plan (Exhibit 10.4 to ADTRAN's
Annual Report on Form 10-K for the year ended December 31, 1995
(the "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
(b) Reports on Form 8-K. None
*Filed herewith
- ---------------
37
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 29, 2001.
ADTRAN, Inc.
(Registrant)
By:/s/ John R. Cooper
-------------------
John R. Cooper
Vice President - Finance,
Chief Financial Officer, and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2001.
Signature Title
--------- -----
/s/ Mark C. Smith Chairman of the Board, Chief
- -----------------
Mark C. Smith Executive Officer and Director
/s/ Howard A. Thrailkill* President, Chief Operating Officer
- -------------------------
Howard A. Thrailkill and Director
/s/ Lonnie S. McMillian* Senior Vice President, Secretary,
- ------------------------
Lonnie S. McMillian and Director
/s/ W. Frank Blount* Director
- --------------------
W. Frank Blount
/s/ William L. Marks* Director
- ---------------------
William L. Marks
/s/Roy J. Nichols* Director
- ------------------
Roy J. Nichols
/s/ James L. North* Director
- -------------------
James L. North
/s/ John R. Cooper Vice President-Finance,
- ------------------
John R. Cooper Chief Financial Officer, and Treasurer
*By: /s/Mark C. Smith
----------------
Mark C. Smith
as Attorney in Fact
38
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance
Beginning of at end of
Period Additions Deductions Period
Year ended December 31, 2000
Allowance for Doubtful Accounts $1,018,400 $ 20,578 $ 225,975 $ 813,003
Inventory Reserve $5,306,503 $6,347,345 $7,016,167 $4,637,682
Warranty Liability $1,519,945 $3,326,866 $3,326,866 $1,519,945
Year ended December 31, 1999
Allowance for Doubtful Accounts $ 958,805 $ 400,215 $ 340,620 $1,018,400
Inventory Reserve $1,148,731 $6,006,173 $1,848,401 $5,306,503
Warranty Liability $1,519,945 $2,501,073 $2,501,073 $1,519,945
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 893,389 $ 275,025 $ 209,609 $ 958,805
Inventory Reserve $2,249,063 $1,277,237 $2,377,569 $1,148,731
Warranty Liability $1,435,259 $1,600,824 $1,516,138 $1,519,945
39
ADTRAN, INC.
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to ADTRAN's
Registration Statement on Form S-1, No. 33-81062 (the "Form S-1
Registration Statement")).
*3.2 Bylaws, as amended.
10.1 Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995
(ADTRAN, Inc. Project) issued by the Alabama State Industrial
Development Authority, consisting of the following (Exhibit 10.3 to
ADTRAN's Annual Report on Form 10-K for the year ended December 31,
1994 (the "1994 Form 10-K")):
(a) Financing Agreement dated January 1, 1995, among the State
Industrial Development Authority, a public corporation of the
State of Alabama (the "Issuer"), ADTRAN organized under the laws
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 between the
Issuer and ADTRAN; Agreement"),
(c) Resolution of the Issuer authorizing the issuance Taxable Revenue
Bond, Series 1995 (ADTRAN, Inc. of the $50,000,000 Project);
(d) Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc.
Project);
(e) Resolution of ADTRAN authorizing the Financing Loan Agreement and
the Note; Agreement, the
(f) Specimen Note from ADTRAN to AmSouth Bank of January 13, 1995;
Alabama, dated
(g) Pledge Agreement dated January 13, 1995 between Alabama and
ADTRAN; AmSouth Bank of
(h) Eighth Amended and Restated Closing Agreement and AmSouth Bank of
Alabama dated March 24, 1997 between ADTRAN and effective January
13, 1995; and
(i) Preliminary Agreement dated November 16, 1994 and ADTRAN. between
the Issuer
10.2 Master Note for Business and Commercial Loans, AmSouth Bank of
Alabama. dated June 1, 1996 and in the original principal amount
of $10,000,000 by and between ADTRAN and
10.3 Tax Indemnification Agreement dated July 1, 1994 by and among
ADTRAN and the stockholders of ADTRAN prior to ADTRAN's initial
public offering of Common Stock (Exhibit 10.5 to the 1994 Form
10-K).
10.4 Management Contracts and Compensation Plans:
(a) 1996 Employees Stock Incentive Plan (Exhibit 10.4 to ADTRAN's
Annual Report on Form 10-K for the year ended December 31, 1995
(the "1995 Form 10-K")).
(b) 1995 Directors Stock Incentive Plan (Exhibit 10.4 to 1995
Form 10-K).
40
*23 Consent of PricewaterhouseCoopers LLP
*24 Powers of Attorney
*Filed herewith
--------------
41