Document/Exhibit Description Pages Size
1: 10-K Form 10-K for Fiscal Year End 12/31/96 30 151K
2: EX-10.1 Eighth Amended and Restated Closing Agreement 3 13K
3: EX-10.2 Master Note 6± 24K
4: EX-11 Statement Re: Computation of Per Share Earnings 1 6K
5: EX-13 Annual Report to Shareholders 40 170K
6: EX-23 Consent of Coopers & Lybrand L.L.P. 1 6K
7: EX-24 Powers of Attorney 8 19K
8: EX-27 Article 5 Financial Data Schedule 2 8K
NET INCOME* NET SALES STOCKHOLDERS' EQUITY
(in $ Millions) (in $ Millions) (in $ Millions)
* Pro forma for
years prior to 1995
1991 -- $ 6.5m 1991 -- $ 42.6 1991 -- $ 16.7m
1992 -- $ 8.7m 1992 -- $ 57.0 1992 -- $ 22.0m
1993 -- $ 8.5m 1993 -- $ 72.4 1993 -- $ 29.8m
1994 -- $18.6m 1994 -- $123.4 1994 -- $ 85.2m
1995 -- $29.5m 1995 -- $181.5 1995 -- $130.7m
1996 -- $39.8m 1996 -- $250.1 1996 -- $172.9m
ONE
Report to
Stockholders
ADTRAN achieved record sales and earnings for 1996. The Company's sales
increased 38 percent to $250,120,836, while earnings increased from $.75 per
share to $1.01 per share. Revenue growth across our major product lines of
DDS/Frame Relay Access, ISDN, and HDSL/T1 was 11 percent, 41 percent, and 72
percent, respectively. Revenue growth across our major markets of Telco,
Customer Premises Equipment (CPE), Original Equipment Manufacturing (OEM), and
International was 43 percent, 37 percent, 22 percent, and 70 percent,
respectively.
The Company's investment in engineering and technology resulted in 125 new
products being released during the year.
In the Telco market, revenue in all product lines grew and benefited from new
product introductions. DDS/Frame Relay Access product introductions included a
new generation of Channel Units approved by our OEM customer base for direct
sales to our Telco customers. New and expanded local loop performance monitoring
and enhanced deployment platforms continued to differentiate ADTRAN 64 kilobit
products from those of our competitors.
We further enhanced our dominant position during 1996 in the supply of ISDN
extension products to the Telco marketplace. A new platform, the BR1/10, allows
deployment of 20 ISDN lines in only 2-3/4 inches of chassis height. New
generations of reduced cost, improved performance U-BR1TES and Repeaters allowed
us to retain our leadership position in this fast growing market.
During the year, we introduced a new technological concept called "Total
Reach." Currently, a major and almost prohibitive cost results when ISDN is
installed at distances over 15,000-18,000 feet. Our "Total Reach" technology
allows for economical ISDN installation for distances of up to 30,000 feet,
without the use of repeaters. Field trials have been successfully installed and
production initiated.
The use of HDSL in the installation of T1 service expanded during the year at
a much faster rate than anticipated. A new line of low voltage (-135 volt) HDSL
products was introduced, allowing for both a remote unit and a mid-span repeater
to be line powered. Major engineering and technology investments were initiated,
with the goal of driving HDSL market share to levels consistent with those of
our DDS & ISDN Telco products.
In the Customer Premises Equipment market, new product introductions fueled
growth across all product areas. DDS/Frame Relay Access products were enhanced
with the addition of SNMP performance monitoring and expanded by the addition of
a new Frame Relay Access Device (FRAD) product line being readied for
introduction early in the first quarter. Installation of ISDN Terminal Adapters
(modems) was greatly simplified with the introduction of the Express XR and XRT
ISDN terminal adapters. ADTRAN's new Expert ISDN technology solved the major
problems associated with setting up and optioning ISDN devices. Expert ISDN
removes human error by automatically programming the ISDN modem with the
necessary phone company information, including switch type and service profile
TWO
identifiers. The T1 market for our products exceeded expectations as new and
expanded products were introduced. The TSU line of multiplexers continued to
gain market share because of the introduction of new modules that support
numerous new applications. The inclusion of SNMP throughout the T1 line will
serve to further expand the market for these products in the coming year.
Both our OEM and International markets experienced growth as each of the new
Telco and CPE products became available to those customers.
The breadth and depth of the Company's management staff were significantly
increased during the year. Bob Fredrickson joined the Company as Vice President
Telco Sales, and Tom Stanton was promoted to Vice President Telco Marketing.
These two seasoned professionals will now lead our sales and marketing expansion
in our largest market area of Telco customers. Steve Harvey joined the Company
as Vice President of CPE Sales. He joined Danny Windham, our Vice President of
CPE Marketing, and this team has the goal of growing CPE revenue to that of our
established Telco levels. Also added to the management staff in 1996 was Greg
Peters, Vice President-International, who will lead in expanding our
international presence. Melvin Bruce joined the Company as Vice President of
Engineering, and Peter Bracket joined the Company as Vice President of
Technology. Both of these seasoned executives bring years of experience to these
roles and will enhance our expansion in these core areas. John Cooper joined the
Company as Vice President Finance and Chief Financial Officer, while Irwin
Goldstein retains the position of Vice President of Administration. Charles
O'Donnell joined the Company as Vice President Quality and Customer Services and
is charged with enhancing this area, viewed by many as best in class.
During the year, both John Jurenko, our founding Vice President of Sales and
Marketing, and Jerry Moore, our Vice President of Technology, reached
retirement. Both of these executives will remain as consultants and continue
providing access to their expertise. Lonnie McMillian, a founder, original Board
Member, and Vice President of Engineering, will now head our Center of New
Technology and Innovation. Mr. McMillian, with one of the most creative minds of
any of our employees, is now hard at work defining and initiating new product
market segments for our future.
The Company's efforts and achievements during the year have been extensive
and will provide an even stronger base for future growth. All of us at ADTRAN
are excited by the growth of our industry and the leadership role we play in our
respective markets.
/s/Mark C. Smith /s/Howard A. Thrailkill
Mark C. Smith Howard A. Thrailkill
Chairman and CEO President and COO
THREE
PHOTO OF CONNECTING WALKWAY BETWEEN NORTH
TOWER AND SOUTH TOWER
CORPORATE PROFILE
ADTRAN, Inc. designs, develops, and manufactures ADvanced TRANsmission
products for high-speed digital communications. Incorporated in 1985, ADTRAN
began operations in 1986, following AT&T's divestiture of the Regional Bell
Operating Companies (RBOCs) with restrictions that effectively barred their
manufacturing of equipment. These events created an opportunity for companies
such as ADTRAN to supply network equipment to the seven RBOCs as well as more
than 1,300 independent telephone companies in the United States. At the same
time, sophisticated users were demanding the flexibility, reliability, and
economy afforded by emerging digital transmission technology. ADTRAN's founders
recognized the importance of the transition from analog to digital loop
technology using the existing copper wire network.
Today, ADTRAN supplies equipment for both ends of the local loop, that
portion of the network which connects homes and businesses to telephone company
network equipment, typically housed in a facility referred to as a Central
Office. The majority of this local loop infrastructure consists of twisted pair
copper wire. Today, more than 700 million such copper wire local loops are
installed worldwide, with 160 million in place in the United States. Industry
projections call for the installation of new copper local loops to outpace that
of any other transmission medium for several years to come.
Telephone companies' (Telcos) huge investment in copper wire infrastructure
mandates adapting existing local loops to meet growing data communication needs.
THROUGH THE APPLICATION OF INNOVATIVE ENGINEERING AND TECHNOLOGY, ADTRAN HAS
PROSPERED AS A LEADING SUPPLIER OF TELCO PRODUCTS WHICH TRANSFORM COPPER WIRE
LOCAL LOOPS INTO HIGH-SPEED DIGITAL NETWORKS.
Having firmly established a leading position with our Telco products, we
subsequently adapted that technology for use by end-users and earned a growing
share of the
FOUR
Customer Premises Equipment (CPE) market. Both our Telco and CPE product lines
have produced rapid, profitable growth, resulting in our being selected as a
Nasdaq 100 Index stock by the Nasdaq Stock Market in 1996.
With over a million ADTRAN-based local loops operating worldwide, we have
become a leading supplier of Digital Data Service (DDS), Integrated Services
Digital Network (ISDN), and T1/High-bit-rate Digital Subscriber Line (HDSL)
digital loop products. These products are sold to all the RBOCs, most of the
domestic independent Telcos, a large number of corporate end-users, and a
growing number of international customers. In addition, we provide
custom-designed products for many well-known original equipment manufacturers
(OEMs).
ADTRAN is headquartered in Huntsville, Alabama, with sales offices
strategically located throughout the United States. We also sell our products
through a network of more than two hundred domestic and international value
added resellers and distributors, and we are aggressively augmenting those
world-wide resources.
BUSINESS PHILOSOPHY
Supporting customers beyond their expectations is the primary philosophy
guiding business decisions at ADTRAN. Our success has been built upon a
commitment to total customer satisfaction, which requires continually developing
and improving products to meet changing needs while maintaining the highest
level of quality and customer support.
AN ISO 9001 COMPANY, ADTRAN EMPLOYS CONSISTENT QUALITY PROCESSES FROM INITIAL
PRODUCT DESIGN AND DEVELOPMENT TO THE COMPREHENSIVE TESTING OF EVERY UNIT
DELIVERED. ADTRAN QUALITY ACHIEVEMENTS HAVE BEEN RECOGNIZED ON MANY OCCASIONS,
INCLUDING BY BEING SELECTED AS A PACIFIC BELL QUALITY PARTNER EACH YEAR SINCE
1991.
Our product programs follow a process that has proven consistently successful
and placed ADTRAN in a leading position in the industry. First, we seek early
identification of appropriate local loop market segments offering the potential
for future high unit volume demand. Once established in a market, we drive for
market share by constantly reducing costs and leveraging the benefits associated
with manufacturing economies of scale. Finally, we strive to develop a full
complement of products, consolidating and protecting our position in the
selected market segment.
ADTRAN maintains a strong commitment to developing products that extend the
performance of the existing copper network to its full potential. Most recently,
ADTRAN has participated in the early stages of development of Digital Subscriber
Line (DSL) products that have quickly established an important presence in the
market. This promising technology allows the current Telco infrastructure to
support demand for innovative new services such as remote access to corporate
networks, distance learning, and high speed Internet access.
ADTRAN implements extensive Product Qualification procedures, which ensure
consistent performance over specified temperature, humidity, line length, and
supply voltage conditions.
PHOTO OF PRODUCT QUALIFICATION
LAB TEMPERATURE AND SUPPLY
VOLTAGE TESTING EQUIPMENT.
FIVE
PHOTO OF SEVERAL TYPES OF END-USER
DIGITAL COMMUNICATIONS EQUIPMENT
DESIGNED AND MANUFACTURED BY ADTRAN.
ADTRAN provides for a broad range of products for telcos and end-users of telco
services, including DDS/Frame Relay, ISDN, T1/HDSL, and other emerging
technologies.
SIX
MARKETS SERVED
ADTRAN products are targeted at two primary markets: Network equipment for
Telcos and network access equipment for end-users of Telco services. ADTRAN is a
major supplier to these two markets in the United States and is making advances
in the international market, enhancing our position as a worldwide leader in the
telecommunications industry.
Both Telcos and their end-user customers utilize our products to deploy
DDS/Frame Relay, ISDN, and T1/HDSL service. Today, ADTRAN offers more than 200
principal products supporting these services, differentiated by the transmission
rate or capacity they provide, as well as features such as dedicated (leased) or
switched (dial-up) access. End-users consider these factors, along with cost,
when selecting the digital service that best fits their needs.
DDS is a widely deployed leased line (dedicated) digital service, that has
provided reliable wide area network (WAN) connections in corporate networks for
many years. DDS circuits, supporting data transmission rates from 2.4 to 64
kbps, are used most often by corporate customers who transfer information among
multiple locations for several hours a day. For example, DDS service is
frequently used to link ATM machines to banks. Frame Relay, a new technology
deployed over an existing DDS or T1 network, is a digital packet service,
providing the benefits of DDS but at a substantially lower cost. For digital
circuits that require DDS data rates on a less frequent basis, a switched
version of DDS service is often used.
ISDN is a switched access digital service; i.e., a user can dial other
locations as required and hang up when the connection is no longer needed. ISDN
subscribers can use Basic Rate ISDN circuits to carry two voice conversations at
once, voice and data signals simultaneously, or data-only signals at rates up to
128,000 bits per second. This service is beneficial to customers who need to
transfer large files periodically. ISDN is also becoming a preferred solution
for remote access, Internet access, and telecommuting.
T1 is a leased line digital service transporting up to 24 individual voice or
data channels. Operating at rates up to 1.544 Mbps, it is used to transmit large
volumes of data or voice traffic that modern corporate networks demand. In
recent years, HDSL technology, developed by ADTRAN and others, has made it
possible to deliver T1 service much more quickly and economically.
In 1996, as in the past, Telco products provided the largest contribution to
ADTRAN revenue, comprising 60 percent of total revenue. CPE and OEM product
revenue made up 28 percent and 12 percent, respectively. Telco revenue grew 43
percent, while CPE revenue expanded by more than 35 percent. International sales
have become increasingly important and now contribute more than 7 percent of
total sales.
SEVEN
PHOTO OF ADTRAN PRODUCT
INTEROPERABILITY LAB WITH
ADTRAN EMPLOYEE SITTING
AT TERMINAL.
TELCO OVERVIEW
ADTRAN supplies a full range of local loop and network equipment to Telcos,
enabling economic, efficient deployment of digital services. We supply the
circuit assemblies used by Telcos to provide digital services to their
customers, the repeaters that allow increased deployment range, and the network
termination devices that allow circuits to be tested up to the customer's
facility.
Our Telco product revenue increased 43 percent, from $105 million in 1995 to
more than $150 million in 1996. The Telco business base continues to grow
steadily, fueled by the recent 1996 Telecommunications Act mandating
deregulation of local exchange carriers. The Act allows new market entrants into
the service provider business, significantly increasing the market for ADTRAN
Telco products. Today our markets include all the RBOCs, major and smaller
independent telephone companies as well as a growing number of the international
service providers.
TO ADDRESS THESE MARKETS, WE CONSISTENTLY INTRODUCE NEW TECHNOLOGIES THAT
INCREASE EFFICIENCY AND REDUCE COSTS, WHILE STEADFASTLY MAINTAINING A COMMITMENT
TO QUALITY AND PERFORMANCE. FOR EXAMPLE, OUR INNOVATIVE TOTAL REACH PRODUCTS,
BASED ON REPEATERLESS TECHNOLOGY, ARE REVOLUTIONIZING DIGITAL DATA SERVICE
DEPLOYMENT BY ENABLING TELCOS TO DRAMATICALLY CUT DEPLOYMENT COSTS, INSTALLATION
TIMES, AND MAINTENANCE REQUIREMENTS.
DDS
In the 1980s, ADTRAN DDS products established our reputation as a leader in
digital transmission. Newer digital transmission services have since emerged,
yet DDS continues to hold a strong position because of its large installed base,
simplicity, and availability. In addition, new cost-effective service offerings
such as Frame Relay are being deployed over existing digital networks. With
market research predicting a compound annual growth rate for Frame Relay
exceeding 30 percent through the year 2000, demand for DDS should continue to
grow.
A noteworthy recent accomplishment within our DDS product line has been the
addition of performance monitoring capability, which allows more efficient
deployment and maintenance of the DDS circuits.
ISDN
The attractive pricing and widespread availability of ISDN, along with its
ability to enhance major new applications such as Internet, work-at-home, and
remote office/WAN connection, are increasing demand for the service.
FOUR-TO-EIGHT TIMES FASTER THAN ANALOG MODEMS USED FOR INTERNET ACCESS TODAY,
ISDN PROVIDES TRANSMISSION OF BOTH VOICE AND DATA SIMULTANEOUSLY OVER A SINGLE
LINE.
THE ISDN OPPORTUNITY
[LINE GRAPH APPEARS HERE]
[Enlarge/Download Table]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
100,000 150,000 200,000 300,000 350,000 450,000 700,000 1.25m 1.75m 2.4m 3.15m 3.85m
Domestic BRI Circuits (000)
Source: Dataquest (February 1997)
NINE
ADTRAN's Total Reach range extension products allow Telco service providers to
deploy ISDN and DDS services to remote locations without the use of costly
repeaters.
[PHOTO OF TOTAL REACH(TM) ENCLOSURE AND HOUSING]
In 1996, we enhanced our ISDN product offerings by adding Performance
Monitoring and introducing our new BR1/10 digital loop carrier (DLC) and Total
Reach Range Extension Products. The BR1/10 is the most compact unit available
today, yet provides the most economical method of delivering Basic Rate ISDN
services over a T1 carrier system.
OUR TOTAL REACH TECHNOLOGY REVOLUTIONIZED ISDN BY EXTENDING THE BASIC RATE
ISDN SERVICE DEPLOYMENT RANGE FAR BEYOND LIMITATIONS OF THE PAST, WITHOUT THE
NEED FOR REPEATERS AND ENVIRONMENTAL ENCLOSURES.
Because of the reduction of equipment, installation, and maintenance costs,
our Total Reach family of products significantly lowers the cost of ISDN
deployment to remote locations, typically comprising 20% or more of total ISDN
customers.
T1/HDSL
In the past, Telcos have delivered T1 using a series of repeaters to extend
the service. Now, HDSL products from ADTRAN allow Telcos to deploy T1 circuits
without using repeaters, allowing for quicker, easier, more economical
installation. In addition, T1/HDSL accommodates newer network services such as
Frame Relay, Fractional T1, and Primary Rate ISDN service in order to meet
specific customer needs.
For services beyond normal range, we provide the HDSL Range.
THE HDSL OPPORTUNITY
[LINE GRAPH APPEARS HERE]
[Download Table]
1990 91 92 93 94 95 96 97 98
---- ---- ---- ---- ---- ---- ---- ---- -----
Fractional T1 N/A N/A 220k 300k 450k 550k 800k 1.05m
HDSL T1 100k 150k 200k 300k 375k 550k 675k 750k
Fiber T1 100k 150k 175k 250k 300k 350k 370k 375k
Repeater T1 80k 100k 125k 200k 210k 208k 125k 110k
New Domestic T1/E1 Circuits (000)
Sources: TRA & Forward Concepts, IDC, Frost & Sullivan, & Company Estimates
TEN
[PHOTO OF ADTRAN ACT 2300 CHASSIE AND OCU DP MODULES]
The Act 2300 provides advanced provisioning and monitoring capabilities to new
and existing special services networks.
Extender as an outside plant, range extension solution that doubles the range
of deployment. These HDSL products carry on our commitment to improve
performance, reduce cost, and serve the needs of our customers.
NETWORK PRODUCTS
ADTRAN markets a full range of intelligent channel bank products for special
applications that meet service providers' needs for greater network management
and control. Based on industry-standard technology, the products accept
dataports from a variety of vendors. ADTRAN dataports add advanced capabilities
such as performance monitoring, local and remote provisioning, and redundancy.
A promising 1996 product addition, the ACT 2300 channel bank, is the
centerpiece of the ADTRAN intelligent channel bank family. The ACT 2300, along
with the ADTRAN Site Manager (network management platform), intelligent channel
units, and bank upgrade products, represent a system that allows Telcos to add
intelligence into their special services networks for future growth, while
protecting their investments in existing technologies.
WIRELESS
The ADTRAN TRACER is the first of a new product family designed to meet the
wireless infrastructure needs of end-users, Telcos, and cellular/PCS service
providers. It allows cellular service providers and local Telcos to expand their
coverage areas with cost effective wireless links. The TRACER can also be used
for the point-to-point, high speed connections demanded by voice, video, and
data transfer applications in campus environments.
OUR COMMITMENT
The ADTRAN Telco products team moved decisively in 1996 to focus on new
market opportunities. As 1997 begins, we pledge to remain a leader in local loop
products and technology and to maintain our commitment to value and service for
our customers.
ELEVEN
Adtran Express XRT unit being used in a work-at-home environment.
CPE OVERVIEW
ADTRAN supplies the Customer Premises Equipment (CPE) market with a complete
line of high-performance equipment for corporate end-users of digital services.
Much of the equipment developed for this market utilizes technology from the
Telco products ADTRAN develops. As a result, our CPE products hold a competitive
advantage over other companies, since building equipment for both ends of the
telecommunication network allows an increased degree of interoperability, higher
unit volumes, and lower cost.
CPE MARKET GROWTH IS DRIVEN BY SEVERAL FORCES; PRIMARY AMONG THESE IS GROWTH
OF THE INTERNET. TODAY, AN ESTIMATED 25 MILLION PEOPLE HAVE INTERNET
CONNECTIONS; BY THE YEAR 2000 THAT NUMBER IS PROJECTED TO HAVE INCREASED TO 160
MILLION, ALL REQUIRING SOME TYPE OF INTERNET ACCESS.
Another CPE market driver is the increasing demand for remote access
to corporate networks by employees working from home, whether full time
TWELVE
telecommuting or traditional employees working during off hours. A third
driver is enterprise connectivity, the need for businesses to connect multiple
sites such as branch offices. Finally, electronic commerce, which is soon to
become an important way of conducting business, requires Internet connection.
ADTRAN HAS DEVELOPED A COMPLETE LINE OF CPE PRODUCTS, DESIGNED TO OFFER
CONNECTIVITY OPTIONS THAT ADDRESS A CUSTOMER'S SPEED, AVAILABILITY, AND COST
CRITERIA IN THE AREAS OF DDS/FRAME RELAY, ISDN, AND T1/HDSL.
Like all ADTRAN products, our high-performance CPE equipment is reliable and
user-friendly.
THE DDS/FRAME RELAY MARKET
ADTRAN's CPE market offerings began with a line of data service units (DSUs)
first introduced in 1991. Now comprised of over 100 individual products, the DSU
family has become one of the most comprehensive lines of DSUs available today.
New DSU products in 1996 included a broad fourth generation family of DSUs
with embedded Simple Network Management Protocol (SNMP). ADTRAN has also
introduced a line of Frame Relay products for 1997. Frame Relay is a digital
packet service which provides a permanent virtual connection to the network and
is deployed over an infrastructure similar to current DDS and T1 connections.
Frame Relay provides all the benefits of DDS at a lower cost than multiple
dedicated circuits allow. Popular in the IBM networking world and particularly
in branch offices, applications and equipment for Frame Relay service are
similar to those for DDS, making it easier for users to migrate to this service.
Service providers have elected to promote Frame Relay by reducing its price
relative to standard DDS.
THE DDS/FRAME RELAY OPPORTUNITY
94 95 96 97 98 99
----- ----- ----- ----- ----- ------
FRADS............... $400k $525k $750k $950k $1.1m $1.45m
MULTI RATE DSUs..... $325k $325k $375k $450k $550k $600k
Source: International Data Corporation
[PHOTO APPEARS HERE]
ADTRAN's FSU series of FRADs provide customers with a cost-effective means of
transporting multiprotocol data and voice over frame relay networks. Through a
series of ESP option cards, units can be configured to support a combination of
data, voice, and dial backup applications.
THIRTEEN
ISDN MARKET
ISDN service has continued to grow as demand for high-speed connection for
homes and remote offices increases. ISDN provides data transfer rates four to
eight times faster than the analog modems widely used for Internet access today.
ADTRAN products support basic rate ISDN, providing low-cost solutions for
telecommuting, connecting the small office/home office (SOHO), accessing the
Internet, and other applications.
IN 1996, ADTRAN MADE GREAT STRIDES IN MAKING ISDN PRACTICAL FOR THE
NON-TECHNICAL CUSTOMER. WE INTRODUCED EXPERT ISDN, AN ADTRAN PATENT-PENDING
TECHNOLOGY WHICH SIMPLIFIES SERVICE INSTALLATION, TRANSLATING A DIFFICULT AND
FRUSTRATING TASK INTO AN EASY AND CONVENIENT ONE.
Two of seven new products added to our ISDN product family in 1996, the
Express XR and the Express XRT, won an Innovations '97 Design and Engineering
award at the International Winter Consumer Electronics Show (CES). The Express
XR and XRT are ISDN modems equipped with Expert ISDN. The Express XRT was also
named a 1996 Computer Telephony Product of the Year.
New additions to the family also included the ISU 512 S/T; the Express XL and
Express XLT, a family of ISDN router products; and the third generation of the
NT1 ACE. The ISDN CPE market now has a total of nearly 50 product offerings that
contributed to a 41 percent increase in ISDN revenue in 1996.
[PHOTO OF ADTRAN FRAME RELAY PRODUCTS RECENTLY ANNOUNCED.]
The Adtran ISU 512 is one of the most popular inverse multiplexers for Basic
Rate ISDN, providing connections of up to 512 kilobits per second. Its ease of
use, features, and price make it attractive for many applications including
corporate videoconferencing, medical imaging and remote broadcasting.
FOURTEEN
[PHOTO OF ADTRAN T1 END-USER EQUIPMENT]
ADTRAN offers an extensive line of T1 CSUs, T1 DSU/CSUs and T1 multiplexers for
a variety of end-user applications. Providing support for T1 network
termination, frame relay circuit termination, LAN to LAN connectivity, and
voice/data multiplexing, the ADTRAN T1 CPE product family delivers value and
flexibility.
T1/FT1
ADTRAN entered the T1 CPE market in 1994 with a small family of T1 Service
Unit (TSU) products. Now our TSU family has expanded to include more than 50
products. The TSU products and available plug-in modules are designed to support
various data and voice applications including LAN connectivity, digital and
analog voice, and videoconferencing. Our application- specific plug-in modules
can be combined in various ways to meet specific customer needs, making the
T1/FT1 product line flexible and practical. ADTRAN's T1 CPE product line
experienced an impressive overall 68 percent revenue increase over 1995.
THE FUTURE OF THE ADTRAN CPE MARKET
The CPE market faces a bright future as growing numbers of faster, more
reliable networks are built. At ADTRAN, we are developing products that address
the emerging T3 market, a service which is 28 times faster than a T1 line. In
certain cases, customers requiring multiple T1s find it less expensive to
purchase a T3 line. We are also developing host-site products for use at
corporate networking centers to provide more efficient networking options.
Currently, our products focus primarily on remote site needs. Development of
host site products will allow us to sell a complete solution to the customer by
providing the central connection point for all remote site products. As we
expand into new markets, we will continue our commitment to fully support the
markets addressed by our existing products.
THE T1 CPE OPPORTUNITY
[LINE GRAPH APPEARS HERE]
94 95 96 97 98 99
----- ----- ----- ----- ----- -----
T1/FT1 DSUs $225m $300m $375m $425m $500m $550m
T1/FTI CSUs $ 75m 90m $105m $125m $140m $150m
[PLOT POINTS TO COME]
FIFTEEN
INTERNATIONAL MARKET OVERVIEW
In 1996, we strengthened our position in the international marketplace. Our
revenue increased 70 percent, growing from less than $11 million in 1995 to over
$18 million. International revenue now represents 7 percent of total sales.
We expanded our revenue base in the Asia-Pacific region, Latin America, and
Europe by focusing on international network requirements, responding to specific
customer needs, and diversifying our product families. In countries where
telecom authorities faced national deregulation, the market opened up to
competing service providers, resulting in increased demand for ADTRAN's HDSL
products. In 1996, ISDN product sales also grew steadily because of accelerated
demands for home office and Internet access and corporate requirements for
increased bandwidth. Building on our HDSL and ISDN success, ADTRAN expanded
product offerings and received certification and approval on multiple products.
TO STRENGTHEN OUR POSITION IN THE INTERNATIONAL MARKETPLACE, WE ARE DESIGNING
NEW PRODUCTS WITH INTERNATIONAL SPECIFICATIONS AND STANDARDS IN MIND AND
ADAPTING EXISTING PRODUCTS TO MEET THESE REQUIREMENTS.
We are currently adding resources to address promising international markets
and expanding existing distribution alliances to service them. We are also
forging important new relationships to meet market and product requirements
unique to international customers.
[PHOTO OF BIG BEN IN LONDON]
Big Ben, Parliament and River Thames, London
SIXTEEN
Market for the Registrant's Common Stock and
Related Stockholder Matters
The Company's Common Stock has been traded on the Nasdaq National Market
(Nasdaq) under the symbol "ADTN" since the Company's initial public offering
of Common Stock in August 1994. Prior to the initial public offering, there
was no established trading market for the Company's Common Stock. As of
January 31, 1997, the Company had 561 shareholders of record and
approximately 10,500 beneficial owners of shares held in street name. The
following table shows the high and low closing sale prices per share for the
Common Stock as reported by Nasdaq for the periods indicated:
Fiscal 1995 High Low
First Quarter $30-3/8 $20
Second Quarter $37-3/4 $26-7/8
Third Quarter $38-1/4 $30
Fourth Quarter $55-1/2 $33-1/4
Fiscal 1996 High Low
First Quarter $54-3/4 $26-1/2
Second Quarter $73-1/2 $45
Third Quarter $75-1/4 $47-1/2
Fourth Quarter $52-1/4 $33-1/2
The prices per share for the common stock give retroactive effect to the 2-
for-1 stock split effective May 12, 1995.
The Company has operated with a policy of retaining earnings, presently
intends to retain all future earnings for use in the development of its
business and does not anticipate paying any cash dividends in the foreseeable
future.
The following selected financial data concerning the Company for and as of
the end of each of the years in the five year period ended December 31, 1996
are derived from the financial statements of the Company, which financial
statements have been audited by Coopers & Lybrand L.L.P., independent
accountants. The selected financial data are qualified in their entirety by
the more detailed information and financial statements, including the notes
thereto, included elsewhere in this report. The financial statements of the
Company as of December 31, 1995 and 1996 and for each of the years in the
three year period ended December 31, 1996, and the report of Coopers &
Lybrand L.L.P. thereon, are included elsewhere in this report.
17
Selected Financial Data
Year Ended December 31,
(in thousands, except
per share data) 1992 1993 1994 1995 1996
Income Statement Data:
Sales:
Telco(1) $36,849 $42,795 $64,830 $105,400 $150,310
OEM(1) 16,428 19,841 33,568 24,739 30,288
CPE(1) 3,765 9,775 25,042 51,339 69,523
----------------------------------------------------------------------
Total sales 57,042 72,411 123,440 181,478 250,121
Cost of sales 27,694 36,769 63,187 93,007 129,953
----------------------------------------------------------------------
Gross profit 29,348 35,642 60,253 88,471 120,168
Selling, general and
administrative
expenses 8,472 11,898 17,347 27,260 34,308
Research and development
expenses 7,188 10,033 13,774 19,131 24,647
----------------------------------------------------------------------
Operating income 13,688 13,711 29,132 42,080 61,213
Interest income 25 7 440 3,205 2,542
Interest expense (82) (424) (448) (1,105) (895)
Other income (expense) 102 (13) (25) 111 642
----------------------------------------------------------------------
Income before income
taxes(2) 13,733 13,281 29,099 44,291 63,502
Provision for income
taxes(2) 0 0 6,288 14,833 23,682
----------------------------------------------------------------------
Historical net income(2) 13,733 13,281 22,811 29,458 39,820
Pro forma provision for
income taxes(2) 5,041 4,825 4,202
----------------------------------------------------------------------
Pro forma net income(2) 8,692 8,456 18,609 29,458 39,820
----------------------------------------------------------------------
Pro forma net income per
share(2)(3) .25 .25 .52 .75 1.01
----------------------------------------------------------------------
Weighted average shares
outstanding(3) 34,124 34,061 36,132 39,290 39,566
----------------------------------------------------------------------
S corporation
distributions(2) $ 8,063 $ 5,494 $ 5,483
----------------------------------------------------------------------
At December 31,
(in thousands except
per share data) 1992 1993 1994 1995 1996
Balance Sheet Data:
Working capital $13,315 $19,795 $66,368 122,466 $140,510
Total assets 31,947 46,304 94,347 165,767 210,207
Total debt 6,500 10,100 0 20,000 20,000
Stockholders' equity 21,974 29,757 85,233 130,743 172,879
(1) Represents sales of the Company's Telco, OEM and CPE products. These amounts
are not derived from the Company's audited financial statements.
(2) Effective July 1, 1994, the Company converted from an S corporation to a C
corporation for income tax purposes. As an S corporation, the Company was
not subject to income taxes but paid quarterly cash distributions to fund
the income tax liabilities passed through to the stockholders. The Company
also paid a cash distribution of $3,121,816 to its stockholders in December
1992 in an amount approximately equal to their original investment in the
Company's Common Stock. As a C corporation, the Company is subject to income
taxes at corporate tax rates. The pro forma income statement data herein
presents the provision for income taxes, net income and netincome per share
as if the Company had been subjec t to corporate income taxes for all
periods presented.
(3) Reflects a 3-for-2 split of the Company's Common Stock which was effected on
August 1, 1994, and a 2 for-1 split of the Common Stock which was effected
on May 12, 1995. Also assumes exercise of dilutive stock options calculated
under the treasury stock method. See Notes 1 and 10 of Notes to Financial
Statements.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company designs, develops, manufactures, markets and services a broad
range of high speed digital transmission products utilized by Telcos and
corporate end-users to implement advanced digital data services over existing
telephone networks. The Company currently sells its products to Telcos
(including all of the RBOCs), OEMs and, since 1991, private end-users in the CPE
market.
The Company's sales have increased in each year due primarily to increases in
the number of units sold to both new and existing customers. These annual sales
increases reflect the Company's strategy of increasing unit volume and market
share through the introduction of succeeding generations of products having
lower selling prices and increased functionality as compared both to the prior
generation of a product and to the products of competitors. An important part of
the Company's strategy is to engineer the reduction of the product cost of each
succeeding product generation and then to lower the product's price based on the
cost savings achieved. As a part of this strategy, the Company seeks in most
instances to be a low cost, high quality provider of products in its markets.
The Company's success to date is attributable in large measure to its ability to
initially design its products with a view to their subsequent re-design,
allowing efficient enhancements of the product in each succeeding product
generation. This strategy has enabled the Company to sell succeeding generations
of products to existing customers as well as to increase its market share by
selling these enhanced products to new customers.
While the Company has experienced increased sales in each year, the Company's
operating results have fluctuated on a quarterly basis in the past, and
operating results may vary significantly in future periods due to a number of
factors. The Company operates with very little order backlog. A substantial
majority of its sales in each quarter results from orders booked in that quarter
and firm purchase orders released in that quarter by customers under agreements
containing nonbinding purchase commitments. Furthermore, most Telcos typically
require prompt delivery of products; this results in a limited backlog of orders
for these products and requires the Company to maintain sufficient inventory
levels to satisfy anticipated customer demand. If near term demand for the
Company's products declines or if significant potential sales in any quarter do
not occur as anticipated, the Company's financial results will be adversely
affected. The Company currently does not undertake any foreign exchange risks,
as all transactions with foreign vendors or customers are conducted in currency
of the United States. Operating expenses are relatively fixed in the short term;
therefore, a shortfall in quarterly revenues could impact the Company's
financial results significantly in a given quarter. Further, maintaining
sufficient inventory levels to assure prompt delivery of the Company's products
increases the amount of inventory which may become obsolete and increases the
risk that the obsolescence of such inventory may have an adverse effect on the
Company's business and operating results. The Company's operating results may
also fluctuate as a result of a number of other factors, including increased
competition, customer order patterns, changes in product mix, product warranty
returns and announcements of new products by the Company or its competitors.
Accordingly, the Company's historical financial performance is not necessarily a
meaningful indicator of future results, and, in general, management expects that
the Company's financial results may vary from period to period. See Note 13 of
Notes to Financial Statements.
On August 16, 1994, the Company completed an initial public offering of Common
Stock, receiving net proceeds (after deduction of underwriting discounts and
other offering expenses) of $37,867,963 from the sale of 2,300,000 shares of
Common Stock (on a pre-split basis). The Company used the offering proceeds to
repay the full amount of principal and interest owed on certain revenue bonds
issued to construct and equip the Company's headquarters and manufacturing
facility in Huntsville, Alabama and to repay all amounts outstanding under its
bank line of credit and for general working capital purposes. On June 29, 1995,
the Company and certain stockholders of the Company (the "Selling Stockholders")
19
sold a total of 3,125,100 shares of Common Stock to the public. Of the 3,125,100
shares offered, 500,000 shares were offered by the Company and 2,625,100 shares
were offered by the Selling Stockholders. The Company received net proceeds
(after deduction of underwriting discounts and other offering expenses) of
$15,705,362 from the sale of 500,000 shares of Common Stock at the public
offering price of $33 per share. The Company did not receive any of the proceeds
from the sale of shares by the Selling Stockholders. The Company has used and
expects to continue to use the proceeds of the public offerings for working
capital and other general corporate purposes, including product development
activities to enhance its existing products and develop new products and
expansion of sales and marketing activities.
The Company operated as an S corporation for tax purposes through June 30,
1994. Effective July 1, 1994, the Company converted from an S corporation to a C
corporation and became subject to corporate income taxes. The Company intends to
retain all earnings for use in the development of its business and does not
anticipate paying any cash dividends in the foreseeable future.
Results of Operations
The following table presents selected financial information derived from the
Company's statements of income expressed as a percentage of sales for the years
indicated.
Years Ended December 31
Percentage of Sales 1994 1995 1996
Sales:
Telco 52.5% 58.1% 60.1%
CPE 20.3 28.3 27.8
OEM 27.2 13.6 12.1
-----------------------------------------------------------------------
Total sales 100.0 100.0 100.0
Cost of sales 51.2 51.3 51.9
-----------------------------------------------------------------------
Gross profit 48.8 48.7 48.1
Selling, general and
administrative expenses 14.0 15.0 13.7
Research and development
expenses 11.2 10.5 9.9
-----------------------------------------------------------------------
Operating income 23.6 23.2 24.5
Interest income 0.4 1.8 1.0
Interest expense (0.4) (0.6) (0.4)
Other income (expense) 0.0 0.0 0.3
-----------------------------------------------------------------------
Income before provision
for income taxes 23.6 24.4 25.4
Provision for income taxes
(pro forma prior to
July 1, 1994) (1) 8.5 8.2 9.5
-----------------------------------------------------------------------
Net income (pro forma prior
to July 1, 1994)(1) 15.1% 16.2% 15.9%
(1)Prior to July 1, 1994, the Company was an S corporation for income tax
purposes and passed its taxattributes through to its stockholders. Effective
July 1, 1994, the Company converted from an S corporation to a C corporation
and therefore became subject to corporate income taxes for the third and
fourth quarters of 1994. The indicated amounts in the table reflect, for
periods prior to July 1, 1994, the unaudited pro forma effects of income
taxes on the Company's operations as if the Company had been subject to
corporateincome taxes prior to July 1, 1994.
20
1996 Compared to 1995
Sales
The Company's sales increased 37.8% from $181,478,065 in 1995 to $250,120,836
in 1996. The increased sales resulted primarily from increased sales volume to
existing customers and from increased market penetration. Sales to Telcos
increased 42.6% from $105,399,953 in 1995 to $150,310,111 in 1996 due primarily
to increased sales of Integrated Services Digital Network (ISDN) products and
increased sales of High bit-rate Digital Subscriber Line (HDSL) products. Unit
sales volume for Telco products increased by 52.7% from 1995 to 1996. Telco
sales as a percentage of total sales increased from 58.1% in 1995 to 60.1% in
1996 primarily as a result of increased sales volume of ISDN and HDSL products
during the 1996 period. Sales of CPE products increased 35.4% from $51,338,868
in 1995 to $69,523,067 in 1996. The increase in sales of CPE products is
attributable to increased demand for ISDN products and T1 Service Unit (TSU)
products. OEM sales increased 22.4% from $24,739,244 in 1995 to $30,287,658 in
1996. This increase was due to new contracts for customer funded modifications
of standard DDS, ISDN and HDSL designs. OEM products are generally customized
versions of the Company's Telco and CPE products. The financial effect of the
increase in overall unit volume was offset somewhat by lower unit selling prices
for many of the Company's products.
Cost of Sales
Cost of sales increased 39.7% from $93,006,672 in 1995 to $129,953,371 in
1996, primarily as a result of the increase in sales. As a percentage of sales,
cost of sales increased from 51.3% in 1995 to 51.9% in 1996. An important part
of the Company's strategy is to reduce the product cost of each succeeding
product generation and then to lower the product's price based on the cost
savings achieved. This sometimes results in variations in the Company's gross
profit margin due to timing differences between the lowering of product selling
prices and the full recognition of cost reductions. In view of the rapid pace of
new product introductions by the Company, this strategy may result in variations
in gross profit margins that, for any particular financial period, can be
difficult to predict.
Provision for Losses On Inventory
A provision for losses on inventory of $3,862,396 in 1996 was comprised
primarily of assorted assembled products and assorted raw material. The
provision for inventory losses as a percentage of sales decreased from 1.6% in
1995 to 1.5% in 1996. The Company decreased its inventory levels in 1996 due to
overall manufacturing efficiencies associated with production of the Company's
products. The reduction in inventory was accomplished without any interruption
in prompt delivery of the Company's products to its customers. Obsolescence of
assembled products generally was caused by technological changes driven by an
effort to provide total customer satisfaction.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 25.9% from $27,259,610
in 1995 to $34,308,436 in 1996 due to additional sales and support expenditures
necessary as a result of the Company's expanded sales base. However, the larger
sales base caused selling, general and administrative expenses as a percentage
of sales to decrease from 15.0% in 1995 to 13.7% in 1996.
Research and Development Expenses
Research and development expenses increased 28.8% from $19,131,457 in 1995 to
$24,647,425 in 1996. This increase was due to increased engineering costs
associated with new product introductions and product cost and feature
enhancement activities. As a percentage of sales, however, research and
development expenses declined from 10.5% in 1995 to 9.9% in 1996. The Company
continually evaluates new product opportunities and engages in intensive
research and product development efforts. To date, the Company has expensed all
product research and development costs as incurred. Additionally, the Company
also frequently invests heavily in up-front market development efforts prior to
21
the actual commencement of sales of a major new product. As a result, the
Company may incur significant research and development expenses and selling,
general and administrative expenses prior to the receipt of revenues from a
major new product group. The Company is presently incurring both research and
development expenses and selling, general and administrative expenses in
connection with its new products and its expansion into international markets.
Interest Expense
Interest expense decreased 19.0% from $1,105,156 in 1995 to $894,657 in 1996.
This decrease was due to capitalization of the interest cost as a part of the
cost of acquiring certain assets. The Company currently pays interest on
$20,000,000 of revenue bond proceeds loaned to the Company in January 1995,
which proceeds are being used to expand the Company's facilities in Huntsville,
Alabama. See "Liquidity and Capital Resources."
Net Income
As a result of the above factors, net income increased 35.2% from $29,457,727
in 1995 to $39,819,904 in 1996. As a percentage of sales, net income decreased
from 16.2% in 1995 to 15.9% in 1996.
1995 Compared to 1994
Sales
The Company's sales increased 47.0% from $123,440,202 in 1994 to $181,478,065
in 1995. The increased sales resulted primarily from increased sales volume to
existing customers and from increased market penetration. Sales to Telcos
increased 62.6% from $64,829,910 in 1994 to $105,399,953 in 1995, due primarily
to increased sales of ISDN products and increased sales of HDSL products. Unit
sales volume for Telco products increased by 44.3% from 1994 to 1995. Telco
sales as a percentage of total sales increased from 52.5% in 1994 to 58.1% in
1995, primarily as a result of increased sales volume of ISDN and HDSL products
during the 1995 period. Sales of CPE products increased 105.0% from $25,042,299
in 1994 to $51,338,868 in 1995. The increase in sales of CPE products was
attributed to increased demand for DDS, ISDN and TSU products. OEM sales
decreased 26.3% from $33,567,993 in 1994 to $24,739,244 in 1995. This decrease
was attributable primarily to reduced demand related to mature programs combined
with the low volume normally encountered on new programs. In addition, the
Company converted numerous products originally developed under OEM contract
status to ADTRAN standard product status. This conversion was accomplished with
permission from the OEM contract holders and was done to allow ADTRAN to pursue
markets directly that will no longer support a two tier distribution structure.
The financial effect of the increase in overall unit volume was offset somewhat
by lower unit selling prices for many of the Company's products.
Cost of Sales
Cost of sales increased 47.2% from $63,187,366 in 1994 to $93,006,672 in 1995,
primarily as a result of the increase in sales. As a percentage of sales, cost
of sales increased only slightly from 51.2% in 1994 to 51.3% in 1995 as the
Company continued to maintain manufacturing efficiencies associated with higher
unit volume sales.
Provision for Losses On Inventory
A provision for losses on inventory of $2,887,877 in 1995 was comprised
primarily of assorted assembled products and assorted raw material. The
provision for inventory losses as a percentage of sales remained the same at
1.6% in 1994 and 1995. The Company increased its inventory levels in 1995 to
assure prompt delivery of the Company's products, which in turn increased the
amount of inventory which could become obsolete.
22
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 57.1% from $17,346,759
in 1994 to $27,259,610 in 1995 due to additional sales and support expenditures
necessary as a result of the Company's expanded sales base. Selling, general and
administrative expenses as a percentage of sales increased from 14.0% in 1994 to
15.0% in 1995. The increase resulted primarily from increased dollar amounts of
these expenses associated with the ongoing introduction of HDSL products,
increased distribution activities associated with the CPE market, and general
expansion into international markets.
Research and Development Expenses
Research and development expenses increased 38.9% from $13,774,038 in 1994 to
$19,131,457 in 1995. This increase was due to increased engineering costs
associated with new product introductions and product cost and feature
enhancement activities. As a percentage of sales, however, research and
development expenses declined from 11.2% in 1994 to 10.5% in 1995 due to the
increased sales in 1995. The Company continually evaluates new product
opportunities and engages in intensive research and product development efforts.
Interest Expense
Interest expense increased 146.9% from $447,547 in 1994 to $1,105,156 in 1995.
This increase was the result of interest paid on $20,000,000 of revenue bond
proceeds loaned to the Company in January 1995, which proceeds are being used to
finance the expansion of the Company's facilities in Huntsville, Alabama. See
"Liquidity and Capital Resources."
Provision for Income Taxes
The Company operated through June 30, 1994 as an S corporation under
Subchapter S of the Internal Revenue Code and comparable state tax laws. The
Company therefore was not subject to corporate income taxes, and its tax
liabilities instead were passed through to its stockholders for all periods
through June 30, 1994. Effective July 1, 1994, the Company converted from an S
corporation to a C corporation for income tax purposes and therefore became
subject to corporate income taxes for the third and fourth quarters of 1994. The
Company's statements of income set forth elsewhere in this report include, for
periods prior to July 1, 1994, a presentation of the pro forma effects of income
taxes on the Company's operations as if the Company had been subject to
corporate income taxes prior to July 1, 1994.
Net Income
As a result of the above factors, net income increased 58.3% from $18,608,605
in 1994 to $29,457,727 in 1995. As a percentage of sales, net income increased
from 15.1% in 1994 to 16.2% in 1995.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's only long-term debt outstanding as of December 31, 1996
consisted of a loan in the amount of $20,000,000 related to the expansion of the
Company's facilities in Huntsville, Alabama. The Company is continuing a project
to expand its facilities in Huntsville in several phases over the next three
years at a cost of approximately $131,000,000, of which $36,255,906 has been
incurred at December 31, 1996. The debt associated with fifty million dollars of
the project has been approved for participation in an incentive program offered
by the Alabama State Industrial Development Authority (the "Authority"). That
program enables participating companies such as the Company to generate Alabama
corporate income tax credits that can be used to reduce the amount of Alabama
corporate income taxes that would otherwise be paid. In January 1995, the
Authority issued $20,000,000 of its taxable revenue bonds pursuant to such
program and loaned the proceeds from the sale of the bonds to the Company. The
bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama
(the "Bank") and bear interest, payable monthly, at the rate of 87.5 basis
23
points over the 30 day London inter-bank offered rate and mature on January 1,
2020. First Union National Bank of Tennessee, Nashville, Tennessee (the
"Bondholder") has agreed to purchase the Original Bond from AmSouth and to make
further advances to the Authority with the total amount not to exceed
$50,000,000. Upon approval by the Authority, an Amended and Restated Taxable
Revenue Bond (Adtran, Inc. Project) Series 1995 will be issued and the Original
Financing Agreement will be amended. The Company anticipates that the Amended
and Restated Bond and associated documents will be completed during the second
quarter of 1997. The Amended and Restated Bond will bear interest, payable
monthly, at the rate of 45 basis points over the money market rate of the
Bondholder and will mature on January 1, 2020. The Company has agreed to make
payments to the Authority in amounts necessary to pay the principal of and
interest on the Amended and Restated Bond. Construction on the project began in
March 1995 and certain phases were completed by December 31, 1996.
The Company's working capital position improved from $122,465,725 as of
December 31, 1995 to $140,509,802 in 1996. This improvement in the Company's
working capital position was due primarily to increased earnings. The Company
has used, and expects to continue to use, the remaining proceeds of its earlier
public offerings for working capital and other general corporate purposes,
including (i) product development activities to enhance its existing products
and develop new products and (ii) expansion of sales and marketing activities.
Inventory decreased 9.3% for the twelve months ended December 31, 1996 due to
overall efficiencies in manufacturing operations.
Capital expenditures totaling $12,790,517 in 1995 and $29,661,438 in 1996 were
used to expand the Company's headquarters and to purchase equipment.
At December 31, 1996, the Company's cash on hand of $44,839,131, short-term
investments of $32,555,930 and $10,000,000 available under a bank line of credit
placed the Company's potential cash availability at $87,395,061. The Company's
$10,000,000 bank line of credit bears interest at the rate of 87.5 basis points
over the 30 day London inter-bank offered rate and expires in May 1997. The
Company anticipates renewing the $10,000,000 bank line of credit upon its
expiration.
The Company intends to finance its operations in the future with cash flow
from operations, the remaining net proceeds of its earlier public offerings,
amounts available under the bank line of credit, borrowed revenue bond proceeds
and possible additional public financings. These available sources of funds are
expected to be adequate to meet the Company's operating and capital needs for
the foreseeable future.
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
ADTRAN, Inc.
We have audited the accompanying balance sheets of ADTRAN, Inc. as of December
31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ADTRAN, Inc. as of December 31,
1995, and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Cooper & Lybrand L.L.P.
---------------------------
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
January 14, 1997
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements and related notes of ADTRAN, Inc. were
prepared by management, which has the primary responsibility for the integrity
of the financial information therein. The statements were prepared in conformity
with generally accepted accounting principles appropriate in the circumstances
and include amounts which are necessarily based on management's judgment.
Financial information presented elsewhere in this report is consistent with that
in the financial statements.
Management maintains a comprehensive system of internal accounting controls
and relies on the system to discharge its responsibility for the integrity of
the financial statements. This system provides reasonable assurance that
corporate assets are safeguarded, and that transactions are recorded in such a
manner as to permit the preparation of reliable financial information.
Reasonable assurance recognizes that the cost of a system of internal accounting
controls should not exceed the related benefits. This system of internal
accounting controls is augmented by written policies and procedures and the
careful selection and training of qualified personnel. As of December 31, 1996,
management was aware of no material weaknesses in the ADTRAN system of internal
accounting controls.
The financial statements have been audited by the Company's independent
certified public accountants, whose opinion is expressed above. Their audit was
conducted in accordance with generally accepted auditing standards, and as such,
they obtained an understanding of the Company's systems of internal accounting
controls and conducted such tests and related procedures as they deemed
necessary to arrive at an opinion on the fairness of presentation of the
financial statements.
/s/ Mark C. Smith /s/ John R. Cooper
---------------------- -----------------------
Mark C. Smith John R. Cooper
Chairman and CEO Vice President and CFO
26
Balance Sheets
December 31, 1995 and 1996
[Enlarge/Download Table]
1995 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 35,027,609 $ 44,839,131
Short-term investments 24,652,689 32,555,930
Accounts receivable, less allowance for doubtful accounts of
$544,526 and $872,724 in 1995 and 1996, respectively 29,234,803 33,825,560
Other receivables 857,303 362,578
Inventory 44,997,195 40,792,646
Prepaid expenses 683,594 2,261,338
Deferred income taxes 1,068,861 1,598,750
------------------------------------------------------------------------------------------------------
Total current assets 136,522,054 156,235,933
Property, plant, and equipment, net 29,245,252 53,971,213
------------------------------------------------------------------------------------------------------
Total assets $165,767,306 $210,207,146
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,740,587 $ 9,350,266
Accrued salaries 1,332,141 2,454,194
Accrued income taxes 1,310,841 1,803,706
Accrued taxes other than income taxes 586,150 338,997
Accrued interest payable 74,305 59,594
Warranty liability 523,027 1,026,156
Compensated absences 489,278 693,218
------------------------------------------------------------------------------------------------------
Total current liabilities 14,056,329 15,726,131
Bonds payable 20,000,000 20,000,000
Deferred income taxes 967,666 1,602,116
------------------------------------------------------------------------------------------------------
Total liabilities 35,023,995 37,328,247
------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $.01 per share; 60,000,000 shares
authorized; 37,462,275 shares issued and outstanding
in 1995; 38,769,514 in 1996 374,623 387,695
Additional paid-in capital 89,404,177 90,172,863
Retained earnings 40,964,511 82,318,341
------------------------------------------------------------------------------------------------------
Total stockholders' equity 130,743,311 172,878,899
Total liabilities and stockholders' equity $165,767,306 $210,207,146
=======================================================================================================
The accompanying notes are an integral part of these financial statements.
27
Statements of Income
for the years ended December 31, 1994, 1995, and 1996
[Enlarge/Download Table]
1994 1995 1996
Sales $123,440,202 $181,478,065 $250,120,836
Cost of sales 63,187,366 93,006,672 129,953,371
------------------------------------------------------------------------------------------------------
Gross profit 60,252,836 88,471,393 120,167,465
Selling, general, and administrative expenses 17,346,759 27,259,610 34,308,436
Research and development expenses 13,774,038 19,131,457 24,647,425
-----------------------------------------------------------------------------------------------------
Income from operations 29,132,039 42,080,326 61,211,604
Other income (expenses):
Interest income 440,151 3,204,902 2,542,417
Interest expense (447,547) (1,105,156) (894,657)
Other (25,144) 111,219 642,432
-----------------------------------------------------------------------------------------------------
(32,540) 2,210,965 2,290,192
-----------------------------------------------------------------------------------------------------
Income before income taxes 29,099,499 44,291,291 63,501,796
Provision for income taxes 6,288,675 14,833,564 23,681,892
-----------------------------------------------------------------------------------------------------
Net income (historical) 22,810,824 29,457,727 39,819,904
-----------------------------------------------------------------------------------------------------
Pro forma provision for income taxes 4,202,219
-----------------------------------------------------------------------------------------------------
Net income (pro forma in 1994) $ 18,608,605 $ 29,457,727 $39,819,904
-----------------------------------------------------------------------------------------------------
Net income per common and common equivalent
share (pro forma in 1994) $0.52 $0.75 $1.01
-----------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares oustanding 36,131,940 39,289,507 39,566,090
-----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1994, 1995, and 1996
[Enlarge/Download Table]
Common Stock
Price Par Value Additional Total
Number Of Per ($.01 Per Paid-In Retained Treasury Stockholders'
Shares Share Share) Capital Earnings Stock Equity
BALANCE, DECEMBER 31, 1993 15,663,690 $156,637 $ 2,919,559 $27,091,267 $(410,000) $ 29,757,463
Purchase of treasury stock:
750 shares $6.67 (5,000) (5,000)
Stock options exercised
through issuance of
treasury stock:
60,000 shares $0.11 (393,332) 400,000 6,668
2,250 shares $3.00 (8,250) 15,000 6,750
Stock options exercised
through issuance of
common stock:
Various prices per
share 109,908 1,099 125,270 126,369
Transfer in connection
with conversion from
an S corporation to
a C Corporation
(see Note 7) 33,057,603 (33,057,603)
Issuance of common stock
through initial public
offering, net of
offering costs 2,300,000 $16.46 23,000 37,844,963 37,867,963
Income tax benefit from
exercise of
nonqualified stock
options 145,763 145,763
Distribution to
stockholders (5,483,467) (5,483,467)
Net income 22,810,824 22,810,824
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 18,073,598 180,736 73,545,813 11,506,784 0 85,233,333
Stock options exercised
through issuance of
common stock:
Various prices per
share 460,619 4,606 342,283 346,889
Issuance of common
stock in June 1995
through a public
offering of shares,
net of offering costs 500,000 $31.41 5,000 15,700,362 15,705,362
Issuance of shares to
effect stock split.
(see Note 8) 18,428,058 184,281 (184,281)
Net income 29,457,727 29,457,727
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 37,462,275 374,623 89,404,177 40,964,511 0 130,743,311
Stock options exercised
through issuance of
common stock:
Various prices per
share 1,307,239 13,072 768,686 781,758
Income tax benefit from
exercise of nonqualified
stock options 1,533,926 1,533,926
Net income 38,819,904 39,819,904
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 38,769,514 $387,695 $90,172,863 $82,318,341 $ 0 $172,878,899
------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral pert of these financial statements.
29
Statements of Cash Flows
for the years ended December 31, 1994, 1995, and 1996
[Enlarge/Download Table]
1994 1995 1996
Cash flows from operating activities:
Net income $ 22,810,824 $ 29,457,727 $ 39,819,904
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,252,549 3,052,798 4,890,303
Provision for losses on accounts receivable 300,000 172,621 430,637
Provision for losses on inventory 2,013,201 2,887,877 3,862,396
Provision for warranty claims 639,081 776,908 2,110,614
Loss on sale of property, plant, and equipment 82,644 8,842 40,572
Loss on sale of short-term investments classified
as available-for-sale 169,766 405,789
Change in operating assets:
Accounts receivable (5,852,356) (11,384,955) (5,021,394)
Inventory (13,939,944) (20,360,721) 342,153
Other current assets (1,149,441) (302,634) (978,458)
Change in operating liabilities:
Accounts payable 1,292,104 3,245,924 (390,321)
Other liabilities 71,177 1,584,749 (50,491)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,519,839 9,308,902 45,461,704
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Expenditures for property, plant, and equipment (4,051,716) (12,790,517) (29,661,438)
Proceeds from the disposition of
property, plant, and equipment 70,233 14,250 4,602
Purchase of short-term investments
classified as available-for-sale (8,500,000) (16,322,455) (8,309,030)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,481,483) (29,098,722) (37,965,866)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in borrowings under line of credit (1,100,000)
Proceeds from capital lease obligation 1,000,000
Payment of capital lease obligation (10,000,000)
Proceeds from bond issuance 20,000,000
Proceeds from public offering, net of expenditures 37,867,963 15,705,362
Proceeds from issuance of common stock 139,787 346,889 781,758
Income tax benefit from exercise of
nonqualified stock options 145,763 1,533,926
Purchase of treasury stock (5,000)
Distribution to stockholders (5,483,467)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,565,046 36,052,251 2,315,684
------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18,603,402 16,262,431 9,811,522
Cash and cash equivalents, beginning of year 161,776 18,765,178 35,027,609
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 18,765,178 $ 35,027,609 $ 44,839,131
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
capitalized interest of $235,928 in 1995
and $393,096 in 1996 $ 479,415 $ 1,030,851 $ 909,368
Cash paid during the year for income taxes $ 6,824,070 $ 13,033,140 $ 22,151,925
The accompanying notes are an integral part of these financial statements.
30
Notes to Financial Statements
1. Summary of Significant Accounting Policies
ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets, and
services a broad range of high-speed digital transmission products utilized by
telephone companies ("Telcos") and corporate end-users to implement advanced
digital data services over existing telephone networks. The Company also
customizes many of its products for private label distribution and for original
equipment manufacturers to incorporate into their own products. Most of the
Company's Telco and customer premises equipment products are connected to the
local loop, which is the large existing infrastructure of the telephone network,
predominantly consisting of copper wireline, which connects end-users to a
Telco's central office. The central office is the Telco facility that provides
local switching and distribution functions. The balance of the Company's
products are used in the Telcos' central offices.
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits, money market accounts,
and short-term investments classified as held-to-maturity (see Note 2) with
original maturities of three months or less.
Financial Instruments
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amount reported for the bonds payable approximates fair value
because the underlying instruments are at variable rates that reprice
frequently.
Short-term investments represent remarketed preferred stocks and municipal
bonds classified as available-for-sale securities under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, (SFAS 115), which the Company adopted
effective January 1, 1994. SFAS 115 requires that these investments be
classified as either held-to-maturity, trading, or available-for-sale
securities. Remarketed Preferred Stocks are designed to be marketed as money
market instruments. These instruments' interest rates reset on a short-term
basis to maintain the price of the instruments at par. These instruments may be
redeemed on the date the interest rate resets. The fair value of short-term
investments is estimated based on quoted market prices (see Note 2). Realized
gains or losses are computed under the specific identification method.
Inventory
Inventory is carried at the lower of cost or market, with cost being
determined using the first-in, first-out method.
Property, Plant, and Equipment
Property, plant, and equipment, which is stated at cost, is depreciated using
methods which approximate straight-line depreciation over the estimated useful
lives of the assets. Expenditures for repairs and maintenance are charged to
expense as incurred; betterments which materially prolong the lives of the
assets are capitalized. The cost of assets retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts and the gain
or loss on such disposition is included in income.
Long-Lived Assets
The Company recognizes impairment losses on long lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying values. There were no such losses recognized during 1994, 1995, and
1996.
31
Research and Development Costs
Research and development costs are expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Income Taxes
Effective July 1, 1994, concurrent with the Company's conversion from an S
corporation to a C corporation for income tax purposes (see Note 7), the Company
adopted the asset and liability method of accounting for income taxes. This
method 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. The adoption of the asset and liability method did not have a
material impact on the financial statements.
Net Income Per Share
Net income per common and common equivalent share (pro forma) is based on the
weighted average number of shares of common stock outstanding during each period
and the assumed exercise of dilutive stock options (less the number of treasury
shares assumed to be purchased from the proceeds using the market price of the
Company's common stock).
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements and related footnotes to conform with the 1996 presentation. These
reclassifications had no impact on retained earnings or net income.
32
2. Investments
At December 31, 1995 and 1996, the Company held the following securities as
available-for-sale or held-to-maturity recorded at amortized cost which
approximates fair value:
1995
Short term investments, available-for-sale:
Municipal Bonds $24,652,689
----------------------------------------------------------------
Cash equivalents, held-to-maturity:
General Motors Acceptance, zero coupon bonds
mature January 17, 1996 $ 4,986,731
Ford Motor Credit, zero coupon bonds,
mature January 17, 1996 4,986,731
Chevron Oil Company, zero coupon bonds,
mature January 18, 1996 4,986,000
General Electric Credit, zero coupon bonds,
mature January 18, 1996 4,986,000
$19,945,462
----------------------------------------------------------------
1996
Short-term investments, available-for-sale:
Municipal Bonds $10,055,930
Remarketed preferred stocks:
GE Capital preferred asset
corporation A series A 5,000,000
Merrill Lynch preferred series G 5,000,000
Muniyield Fund Auction preferred series A 5,000,000
VKM Investment Grade Municipal Trust
preferred 5,000,000
Nuveen Premium preferred series A 2,500,000
----------------------------------------------------------------
$32,555,930
================================================================
Cash equivalents, held-to-maturity:
Triple A One Plus, zero coupon bonds
mature January 10, 1997 $ 4,992,889
Receivables Capital, zero coupon bonds,
mature January 10, 1997 4,992,889
Barton Corporation, zero coupon bonds,
mature January 15, 1997 4,989,248
Three Rivers Funding, zero coupon bonds,
mature January 16, 1997 4,988,533
$19,963,559
================================================================
3. Inventory
At December 31, 1995 and 1996, inventory consisted of the following:
1995 1996
Raw materials $27,390,750 $24,454,251
Work in process 4,428,437 2,963,220
Finished goods 13,178,008 13,375,175
----------------------------------------------------------------
$44,997,195 $40,792,646
================================================================
33
4. Property, Plant, and Equipment
Property, plant, and equipment comprised the following at December 31, 1995
and 1996:
1995 1996
Land $ 2,149,469 $ 4,263,104
Building 12,642,588 26,230,470
Construction in progress 3,511,987 2,021,525
Land improvements 2,995,292 7,177,261
Office machinery and
equipment 4,594,880 8,338,789
Engineering machinery
and equipment 12,228,540 19,577,071
----------------------------------------------------------------
38,122,756 67,608,220
Less accumulated
depreciation (8,877,504) (13,637,007)
----------------------------------------------------------------
$29,245,252 $ 53,971,213
================================================================
5. Line of Credit
The Company has a $10,000,000 line of credit at a bank, which bears interest
at the rate of 87.5 basis points over the 30 day London inter-bank offered rate.
At December 31, 1996, the Company had no borrowings against this line. The line
of credit expires on May 1, 1997.
6. Alabama State Industrial Development Authority Financing
In contemplation of an expansion of its Huntsville, Alabama facility, the
Company was approved for participation in an incentive program offered by the
State of Alabama Industrial Development Authority (the "Authority"). Pursuant to
such program, on January 13, 1995, the Authority issued $20 million of its
taxable revenue bonds pursuant to such program and loaned the proceeds from the
sale of the bonds to the Company. The bonds were originally purchased by AmSouth
Bank of Alabama, Birmingham, Alabama (the "Bank"), and bear interest, payable
monthly, at the rate of 87.5 basis points over the 30 day London inter-bank
offered rate and mature on January 1, 2020. First Union National Bank of
Tennessee, Nashville, Tennessee (the "Bondholder") has agreed to purchase the
original bond from the Bank and to make further advances to the Authority with
the total amount not to exceed $50,000,000. Upon approval by the Authority, an
Amended and Restated Taxable Revenue Bond (Adtran, Inc. Project) Series 1995
will be issued and the original financing agreement will be amended. The Company
anticipates that the Amended and Restated Bond and associated documents will be
completed during the second quarter of 1997. The Amended and Restated Bond will
bear interest, payable monthly, at the rate of 45 basis points over the money
market rate of the Bondholder and will mature on January 1, 2020. The Company
has agreed to make payments to the Authority in amounts necessary to pay the
principal of and interest on the Amended and Restated Bond. Construction on the
project began in March 1995 and certain phases were completed by December 31,
1996.
34
7. Income Taxes
Effective July 1, 1994, the Company converted from an S corporation to a C
corporation for income tax purposes and therefore is subject to corporate income
taxes. The 1994 statement of income includes a presentation of the pro forma
effects of income taxes on the Company's operations as if the Company had been
subject to corporate income taxes prior to July 1, 1994. As of July 1, 1994,
deferred income tax assets and liabilities were recorded to reflect differences
between the bases of the Company's assets and liabilities for financial
reporting and income tax purposes.
The 1994 financial statements reflect the transfer of the Company's retained
earnings as an S corporation to additional paid-in-capital in connection with
the July 1, 1994 conversion to a C corporation. This transfer reflects the
assumption of a constructive distribution to the prior S corporation
stockholders followed by an assumed contribution to the paid-in capital of the
Company.
A summary of the components of the historical and pro forma tax provisions
as of December 31 is as follows:
1994 1995 1996
Historical:
Current:
Federal $5,626,413 $13,896,982 $21,329,522
State 621,542 968,492 2,247,809
-----------------------------------------------------------------------
Total Current 6,247,955 14,865,474 23,577,331
Deferred 40,720 (31,910) 104,561
-----------------------------------------------------------------------
Historical provision
for income taxes for
period after June 30,
1994 6,288,675 14,833,564 23,681,892
Pro forma provision for
income taxes for period
prior to July 1, 1994 4,202,219
-----------------------------------------------------------------------
Total provision
for income taxes $10,490,894 $14,833,564 $23,681,892
=======================================================================
The provision for income taxes differs from the amounts computed by applying
the federal statutory rate due to the following:
1994 1995 1996
Tax provision computed
at the federal statutory
rate (34% in 1994, 35%
in 1995 and 1996) $ 9,893,830 $15,501,952 $22,225,629
State income tax provision,
net of federal benefit 758,212 629,520 1,461,076
Federal research credits (329,774) (815,408) (151,500)
Permanent differences and
other 168,626 (482,500) 146,687
-------------------------------------------------------------------------
$10,490,894 $14,833,564 $23,681,892
=========================================================================
35
Temporary differences which create deferred tax assets and liabilities at
December 31, 1995 and 1996 are detailed below.
1995 1996
Current Noncurrent Current Noncurrent
Property, plant
and equipment ($967,666) ($1,602,116)
Accounts receivable $201,257 $341,584
Inventory 493,456 584,204
Accruals 374,148 672,962
------------------------------------------------------------------------------
Deferred tax asset
(liability) $1,068,861 ($967,666) $1,598,750 ($1,602,116)
==============================================================================
No valuation allowance is deemed necessary by management as the realization of
recorded deferred tax assets is considered more likely than not.
8. Stock Split
On April 20, 1995, the stockholders approved the board of directors'
recommendation to increase authorized common stock from 30 million shares to 60
million shares, par value $.01.
Following approval by the board of directors, the Company declared a 2 for 1
stock split, payable on May 12, 1995, to stockholders of record on April 27,
1995. All common stock information included in the financial statements, except
in the statements of changes in stockholders' equity, give retroactive effect to
this stock split.
9. Operating Leases
The company leases office space and equipment under operating leases. As of
December 31, 1996, minimum rental payments under the noncancelable operating
leases are approximately as follows:
1997 $540,000
1998 387,000
1999 271,000
2000 92,500
-----------------------------------------------------------------------
$1,290,500
=======================================================================
Rental expense was approximately $464,000, $447,000 and $851,000 in 1994,
1995 and 1996, respectively.
10. EMPLOYEE INCENTIVE STOCK OPTION PLAN and DIRECTOR'S STOCK OPTION PLAN
1996 Employees Incentive Stock Option Plan
The Board of Directors of the Company adopted the 1996 Employees Incentive
Stock Option Plan (the "1996 Plan") effective February 14, 1996, under which
488,100 shares of common stock have been reserved as of December 31, 1996 for
issuance to certain employees and officers through incentive stock options and
nonqualified stock options. At December 31, 1996, there were no shares of common
stock issued under the 1996 Plan as initial vesting will not occur until 1997.
In addition, the Company currently has options outstanding under its 1986
Employee Incentive Stock Option Plan (the "1986 Plan"), which plan expired on
February 14, 1996. Options granted under the 1996 Plan or the 1986 Plan become
exercisable after one year of continued employment after the date of grant or
pursuant to a five year vesting schedule beginning on the first anniversary of
the grant date. Expiration dates of options outstanding under the 1996 Plan and
the 1986 Plan at December 31, 1996 range from 1997 to 2007.
36
Director's Stock Option Plan
The Board of Directors of the Company adopted a Director's Stock Option Plan
effective October 31, 1995 under which 70,000 shares of common stock have been
reserved. The Plan is a formula plan to provide options to non-employee
directors of the Company. At December 31, 1996, 28,000 options have been granted
under the plan. Expiration dates of options outstanding under the Director's
Stock Option Plan at December 31, 1996 range from 2005 to 2006.
Pertinent information regarding the Plans is as follows:
[Enlarge/Download Table]
Weighted
Range of Average
Number Exercise Exercise Vesting
of Options Prices Price Provisions
Options outstanding,
December 31, 1993 3,218,640 $ .06 - $3.34 $0.43 100% / year
Options granted 28,250 $3.33 -$12.53 $5.91 100% / year
Options exercised (344,316) $ .06 - $1.67 $0.41 100% / year
-------------------------------------------------------------------------------------
Options outstanding
December 31, 1994 2,902,574 $.06 - $12.53 $0.49 100% / year
Options granted 84,350 $22.50 - $46.25 $34.86 100% / year
Options cancelled (1,450) $31.75 $31.75 100% / year
Options exercised (815,079) $.06 - $3.33 $0.43 100% / year
--------------------------------------------------------------------------------------
Options outstanding,
December 31, 1995 2,170,395 $.06 - $46.25 $1.83 100% / year
Options granted 342,000 $39.75 - $65.75 $63.99 20% / year
Options granted 7,950 $30.50 - $65.75 $44.43 100% / year
Options cancelled (9,050) $3.33 - $65.75 $61.78 various
Options exercised (1,307,239) $.06 - $31.75 $0.60 100% / year
--------------------------------------------------------------------------------------
Options outstanding,
December 31, 1996 1,204,056 $.11 - $65.75 $20.38 various
======================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1996:
[Enlarge/Download Table]
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/96 Life Price 12/31/96 Price
$0.11 - $0.11 251,800 0.45 $0.11 251,800 $0.11
$0.17 - $0.17 176,000 1.89 $0.17 176,000 $0.17
$0.50 - $0.50 127,415 2.20 $0.50 127,415 $0.50
$0.75 - $2.50 170,666 4.08 $1.85 170,666 $1.85
$3.00 - $3.33 59,525 6.84 $3.31 59,525 $3,31
$12.53 - $12.53 8,000 7.66 $12.53 8,000 $12.53
$22.50 - $46.25 93,150 8.89 $36.44 68,200 $35.60
$56.25 - $56.25 5,000 9.54 $56.25 0 $0.00
$59.50 - $59.50 3,500 9.56 $59.50 0 $0.00
$63.75 - $63.75 22,500 9.65 $63.75 0 $0.00
$65.75 - $65.75 286,500 9.53 $65.75 0 $0.00
--------------------------------------------------------------------------------------
1,204,056 861,606
======================================================================================
37
The options above were issued at exercise prices which approximate fair market
value at the date of grant. At December 31, 1996, 200,600 shares are available
for grant under the plans.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock plans. Accordingly, no compensation cost has been recognized
related to stock options. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed in SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
1995 1996
Net income - as reported $29,457,727 $39,819,904
Net income - pro forma $28,852,035 $38,018,766
Earnings per share -
as reported $.75 $1.01
Earnings per share -
pro forma $.73 $.96
The pro forma amounts reflected above are not representative of the effects on
reported net income in future years because, in general, the options granted
typically do not vest for several years and additional awards are made each
year. The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1995 1996
Dividend yield 0% 0%
Expected life (years) 5 5
Expected volatility (range) 49.40% - 52.37% 48.59% - 49.25%
Risk-free interest rate
(range) 6.23% - 8.29% 5.86% - 7.12%
11. Employee Benefit Plan
In March 1990, the Company adopted an incentive savings plan (the Savings
Plan) for all of its employees. The Savings Plan provides certain employment
benefits to all eligible employees and qualifies as a deferred arrangement under
Section 401(k) of the Internal Revenue Code. The Company matches one-third of a
participant's contribution, limited to 5% of a participant's income. An
employee's interest in the Company's contributions becomes 100% vested at the
date participation in the Savings Plan commenced. Charges to operations for the
plan amounted to $260,392, $415,791, and $547,072 in 1994, 1995, and 1996,
respectively.
12. Major Customers
Sales of the Company's transmission and test equipment to the Regional Bell
Operating Companies (RBOCs) amounted to approximately 38%, 40% and 36% of total
sales during the years ended December 31, 1994, 1995 and 1996, respectively. At
December 31, 1994, 1995 and 1996, respectively, 27%, 36%, and 23% of the
accounts receivable balance consisted of amounts due from RBOCs.
38
13. Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. This information has been prepared by
the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
data.
Three Months Ended
(In thousands, except for share amounts)
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
Net sales $38,097 $45,462 $48,002 $49,917
Gross profit 18,672 21,723 23,446 24,630
Income from
operations 9,091 10,423 11,250 11,317
Net income 6,075 7,048 7,770 8,566
Net income per
common and common
equivalent share 0.15 0.18 0.20 0.22
Three Months Ended
(In thousands, except for share amounts)
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
Net sales $54,544 $63,305 $62,635 $69,637
Gross profit 25,735 29,960 29,419 35,054
Income from
operations 12,976 15,802 14,963 17,472
Net Income 8,623 10,340 9,406 11,451
Net income per
common and common
equivalent share 0.22 0.26 0.24 0.29
39
Directors and Executive Officers
Mark C. Smith
Chairman of the Board and Chief Executive Officer of the Company
Lonnie S. McMillian
Senior Vice President - Engineering, Secretary and Director of the Company
Howard A. Thrailkill
President, Director of the Company, and Chief Operating Officer of the Company.
O. Gene Gabbard
Director of the Company; Director of Dynatech Corporation, telecommunications
equipment manufacturer; InterCel, Inc., a provider of wireless communications
services; and Mindspring Enterprises, Inc., a provider of Internet access
services.
William L. Marks
Director of the Company; Chairman of the Board and Chief Executive Officer
of Whitney Holding Corp., the holding company for Whitney National Bank
of New Orleans.
Roy J. Nichols
Director of the Company; Vice Chairman of the Board and Chief Technical Officer
of Nichols Research Corporation (a defense and information systems company),
Huntsville, Alabama
James L. North
Director of the Company and Counsel to the Company since it commenced operations
in 1986. Attorney with James L. North and Associates, Birmingham, Alabama.
John R. Cooper
Vice President - Finance and Chief Financial Officer of the Company.
Danny J. Windham
Vice President - CPE Marketing
Thomas R. Stanton
Vice President - Telco Marketing
Irwin O. Goldstein
Vice President - Administration
Peter O. Brackett
Vice President - Technology
M. Melvin Bruce
Vice President - Engineering
Robert A. Fredrickson
Vice President - Telco Sales
Steven L. Harvey
Vice President - CPE Sales
Jude T. Panetta
Vice President - Manufacturing
Gregory A. Peters
Vice President - International Sales
Corporate Address
901 Explorer Boulevard
P.O. Box 140000
Huntsville, Alabama 35814-4000
Registrar and Transfer Agent
First Union National Bank of
North Carolina
Charlotte, North Carolina
Independent Auditors
Coopers & Lybrand L.L.P.
Birmingham, Alabama
General Counsel
James L. North, Attorney at Law
Birmingham, Alabama
Special Counsel
Long, Aldridge & Norman
Atlanta, Georgia
Form 10-K
The Company's 1996 Annual Report on Form 10-K (without exhibits) as filed with
the Securities and Exchange Commissions is available to stockholders without
charge upon written request to:
Investor Relations
ADTRAN, Inc.
901 Explorer Blvd.
Huntsville, Alabama 35806
Price Range of Common Stock
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ADTN" since the Company's initial public offering of
Common Stock in August 1994. Prior to the initial public offering, there
was no established trading market for the Company's Common Stock. As of
January 31, 1997, the Company had 561 shareholders of record and approximately
10,500 beneficial owners of shares held in street name.
[Download Table]
FISCAL 1996 HIGH LOW
First Quarter $54-3/4 $26-1/2
Second Quarter $73-1/2 $45
Third Quarter $75-1/4 $47-1/2
Fourth Quarter $52-1/4 $33-1/2
Annual Meeting
The 1997 Annual Meeting of Shareholders will be held at the Company
Headquarters, 901 Explorer Blvd., Huntsville, Alabama, on Wednesday, April 23,
1997 at 10:00 a.m. local time.
Web Address
http://www.adtran.com
40
Dates Referenced Herein and Documents Incorporated by Reference
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