SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ______ to ______ Commission File Number 0-24612 ADTRAN, INC. (Exact name of Registrant as specified in its charter) Delaware 63-0918200 (State of Incorporation) (I.R.S. Employer Identification No.) 901 Explorer Boulevard, Huntsville, Alabama 35806-2807 (Address of principal executive offices, including zip code) (205) 963-8000 (Registrant's telephone number, including area code) --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date: Class Outstanding at April 30, 1997 Common Stock, $.01 Par Value 39,209,139 shares Page 1 of 16 Index of Exhibits on Page 14
ADTRAN, INC. Quarterly Report on Form 10-Q For the Quarter Ended March 31, 1997 Table of Contents Item Number PART I. FINANCIAL INFORMATION Page Number 1 Financial Statements: Condensed Balance Sheets as of December 31, 1996 and March 31, 1997 3 Condensed Statements of Income for the three months ended March 31, 1996 and 1997 4 Condensed Statements of Cash Flows for the three months ended March 31, 1996 and 1997 5 Notes to Condensed Financial Statements 6 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION 6 Exhibits and Reports on Form 8-K 12 SIGNATURE 13 INDEX OF EXHIBITS 14
PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADTRAN, INC. CONDENSED BALANCE SHEETS <TABLE> <CAPTION> ASSETS December 31, March 31, 1996 1997 (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents................ $44,839,131 $49,542,844 Short-term investments................... 32,555,930 30,550,210 Accounts receivable, less allowance for doubtful accounts of $872,724 and $870,842 in 1996 and 1997, respectively........................ 33,825,560 32,704,720 Other receivables....................... 362,578 295,595 Inventory............................... 40,792,646 48,082,345 Prepaid expenses........................ 2,261,338 1,965,379 Deferred tax assets..................... 1,598,750 1,598,750 ------------ ------------ Total current assets 156,235,933 164,739,843 Property, plant and equipment, less accumulated depreciation of $13,637,007 and $15,350,751 in 1996 and 1997, respectively......... 53,971,213 59,779,483 ------------ ------------ $210,207,146 $224,519,326 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable...................... $9,350,266 $10,909,111 Accrued salaries...................... 2,454,194 1,494,429 Accrued income taxes.................. 1,803,706 5,609,550 Accrued taxes other than income taxes. 338,997 337,318 Accrued interest payable.............. 59,594 59,594 Warranty payable...................... 1,026,156 1,026,156 Accrued vacation...................... 693,218 859,804 ----------- ----------- Total current liabilities 15,726,131 20,295,962 Long term liabilities: Long term debt........................ 20,000,000 20,000,000 Deferred income taxes................. 1,602,116 1,602,116 ----------- ----------- Total liabilities 37,328,247 41,898,078 ----------- ---------- Stockholders' equity: Common stock, par value $.01 per share 60,000,000 shares authorized: 38,769,514 and 39,202,689 shares issued in 1996 and 1997, respectively 387,695 392,027 Additional paid-in capital............ 90,172,863 90,388,612 Retained earnings..................... 82,318,341 91,840,609 ----------- ------------ Total stockholders' equity............. 172,878,899 182,621,248 ------------ ------------ $210,207,146 $224,519,326 ============ ============ </TABLE> See notes to condensed financial statements
ADTRAN, INC. CONDENSED STATEMENTS OF INCOME Unaudited <TABLE> <CAPTION> Three Months Ended March 31, 1996 1997 <S> <C> <C> Sales................................... $54,544,441 61,230,184 Cost of sales........................... 28,809,326 29,438,797 ------------ ----------- Gross profit.................. 25,735,115 31,791,387 Selling, general and administrative expenses.............................. 7,257,687 10,537,516 Research and development expenses....... 5,501,374 6,995,257 ----------- ---------- Income from operations........ 12,976,054 14,258,614 Interest expense........................ (280,036) (242,534) Other income, net....................... 411,427 862,465 ------------ ----------- Income before income taxes............... 13,107,445 14,878,545 Provision for income taxes............... (4,484,057) (5,356,277) ------------ ------------ Net income..................... $8,623,388 $9,522,268 ========== ========== Net income per common and common equivalent share............... $ .22 $ .24 ----------- ---------- Weighted average common and common equivalent shares outstanding.. 39,549,106 39,557,130 =========== =========== </TABLE> See notes to condensed financial statements
ADTRAN, INC. CONDENSED STATEMENTS OF CASH FLOWS Unaudited <TABLE> <CAPTION> Three Months Ended March 31, 1996 1997 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income............................................... $8,623,388 $9,522,268 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................... 975,566 1,716,073 Provision for losses on accounts receivable........... (1,191) 0 Provision for losses on inventory..................... 596,741 211,975 (Gain) loss on sale of property, plant and equipment.. (329) (2,197) (Gain) loss on short-term investments................. 316,165 5,720 Change in operating assets: Accounts receivable.............................. 118,515 1,120,839 Inventory........................................ (6,879,727) (7,501,674) Other receivables................................ 664,771 66,984 Prepaid expenses................................. (510,232) 295,959 Change in operating liabilities: Accounts payable................................. (1,276,277) 1,558,845 Accrued salaries................................. (482,505) (959,765) Accrued income taxes............................. 4,039,760 3,805,845 Accrued taxes other than income taxes............ 2,197 (1,679) Accrued interest payable......................... 226,633 0 Accrued vacation................................. 149,702 166,586 ---------- --------- Net cash provided by operating activities............... 6,563,177 10,005,779 ----------- ----------- Cash flows from investing activities: Expenditures for property, plant and equipment........... (5,967,221) (7,536,817) Proceeds from the disposition of property, plant and equipment 4,602 14,671 Net (purchase) sale of short-term investments............ (2,513,100) 2,000,000 ----------- ----------- Net cash provided by (used in) investing activities...... (8,475,720) (5,522,146) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock................... 187,316 220,080 ----------- ---------- Net cash provided by financing activities................ 187,316 220,080 ----------- ---------- Net increase (decrease) in cash and cash equivalents..... (1,725,227) 4,703,713 Cash and cash equivalents, beginning of period................ 35,027,609 44,839,131 ----------- ---------- Cash and cash equivalents, end of period...................... $33,302,382 $49,542,844 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest, net of $393,096 and $72,966 of capitalized interest in 1996 and 1997, respectively........................ $ 111,458 $ 242,534 =========== =========== Cash paid during the period for taxes.................... $ 500,000 $ 1,714,580 =========== =========== </TABLE> See notes to condensed financial statements
ADTRAN, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements of ADTRAN,Inc. (the "Company") have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997.The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. 2. INVENTORY At December 31, 1996 and March 31, 1997, inventory consisted of the following: December 31, March 31, 1996 1997 Raw materials $24,454,251 $26,419,020 Work in progress 2 963,220 4,761,198 Finished goods 13,375,175 16,902,127 ----------- ----------- $40,792,646 $48,082,345 =========== =========== 3. THE ALABAMA STATE INDUSTRIAL DEVELOPMENT AUTHORITY The Company's long-term debt outstanding as of March 31, 1997 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 $41,261,967 had been incurred at March 31, 1997. The debt associated with $50,000,000 of this 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 payable. In January 1995, the Authority issued $20,000,000 of its taxable revenue bonds (the "Original Bond"), pursuant to such program and loaned the proceeds from the sale of the Original Bond to the Company. The Original Bond was purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the "Bank"), pursuant to a Financing Agreement dated January 1, 1995 (the "Original Financing Agreement"). First Union National Bank of Tennessee (the "Bondholder") agreed to purchase the Original Bond from the Bank. On April 21, 1997, the Authority adopted a resolution authorizing the amendment of documents relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project). On April 25, 1997, the Bondholder, pursuant to the First Amended and Restated Financing Agreement dated April 25, 1997, purchased the Original Bond from the Bank. The Authority issued an additional $30,000,000 of its taxable revenue bonds (the "Amended and Restated Bond"), pursuant to such program and loaned the proceeds form the sale of the Amended and Restaed Bond to the Company, increasing the Company's long-term debt to $50,000,000 as of April 25, 1997. The Amended and Restated Bond was purchased by the Bondholder. 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 Original Bond and the Amended and Restated Bond. Construction on the project began in March 1995 and certain phases were completed by March 31, 1997. There can be no assurance that the State of Alabama will continue to make these corporate income tax credit available in the future, and the Company therefore may not realize the full benefit of these incentives. 4. RECENT ACCOUNTING DEVELOPMENTS In February 1997, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 supersedes existing generally accepted accounting principles relative to the calculation of earnings per share, is effective for years ending after December 15, 1997 and requires restatement of all prior period earnings per share information upon adoption. Generally, SFAS 128 requires a calculation of basic earnings per share, which takes into consideration income (loss) available to common shareholders and the weighted average of common shares outstanding. SFAS 128 also requires the calculation of a diluted earnings per share, which takes into account the impact of all additional common shares that would have been outstanding if all dilutive potential common shares relating to options, warrants, and convertible securities had been issued, as long as their effect is dilutive, with a related adjustment of income available for common shareholders, as appropriate. SFAS 128 requires dual presentation of basic and diluted earnings per share on the face of the statement of operations and requires a reconciliation of the numerator and denominator of the basic earnings per share computation. The Company does not expect the effect of its adoption of SFAS 128 to be material.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets and services a broad range of high speed digital transmission products utilized by telephone companies ("Telcos") and corporate end-users to implement advanced digital data services over existing telephone networks. The Company currently sells its products to Telcos (including all of the Regional Bell Operating Companies), Original Equipment Manufacturers ("OEMs") and, since 1991, private end-users in the Customer Premises Equipment ("CPE") market. The Company's sales have increased each year due primarily to increases in the number of units sold to both new and existing customers. These annual sales increases reflect 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 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. The Company intends to retain all earnings for use in the development of its business and does not anticipate paying any cash dividends in the foreseeable future. When used in this Form 10-Q, the words "believe," "anticipate," "think," "intend," "will be," and similar expression identify forward looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward looking statements which speak only as of the date hereof. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including the disclosures made in other periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission.
Results of Operations - Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1997 Sales The Company's sales increased 12.3% from $54,544,441 in the three months ended March 31, 1996 to $61,230,184 in the three months ended March 31, 1997. The increased sales resulted from an increase in sales volume to existing customers and from increased market penetration. Sales to Telcos increased 14.9% from $32,385,385 in the three months ended March 31, 1996 to $37,208,097 in the three months ended March 31, 1997. The increase in Telco sales in the 1997 period resulted primarily from increased sales of Integrated Services Digital Network ("ISDN") products and increased sales of High bit-rate Digital Subscriber Line ("HDSL") products. Telco sales as a percentage of total sales increased from 59.4% in the three months ended March 31, 1996 to 60.8% in the three months ended March 31, 1997. Sales of CPE products increased 16.0% from $15,143,210 in the three months ended March 31, 1996 to $17,568,943 in the three months ended March 31, 1997, as a result of increased CPE sales of ISDN products and T1 Service Unit ("TSU") products. OEM sales decreased 8.0% from $7,015,846 in the three months ended March 31, 1996 to $6,453,144 in the three months ended March 31, 1997. This decrease was attributable primarily to reduced demand related to mature programs combined with the low volume normally encountered on new programs. Additionally, the Company has 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 the Company 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 2.2% from $28,809,326 in the three months ended March 31, 1996 to $29,438,797 in the three months ended March 31, 1997, primarily as a result of the increase in sales. As a percentage of sales, cost of sales decreased from 52.8% in the three months ended March 31, 1996 to 48.1% in the three months ended March 31, 1997. An important part of the Company's strategy is to reduce the product cost of each succeeding product generation and then to lower the product's price based on the cost savings achieved. This strategy sometimes results in variations in the Company's gross profit margin due to timing differences between recognition of cost reductions and the lowering of product selling prices. In view of the rapid pace of new product introductions by the Company, this strategy may result in variations in gross profit margins that,for any particular financial period, can be difficult to predict. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 45.2% from $7,257,687 in the three months ended March 31, 1996 to $10,537,516 in the three months ended March 31, 1997. The increase was 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 13.3% in the three months ended March 31, 1996 to 17.2% in the three months ended March 31, 1997. Research and Development Expenses Research and development expenses increased 27.2% from $5,501,374 in the three months ended March 31, 1996 to $6,995,257 in the three months ended March 31, 1997. The increase was due to increased engineering costs associated with new product introductions and product cost and feature enhancement activities. As a percentage of sales, research and development expenses increased from 10.1% in the three months ended March 31, 1996 to 11.4% in the three months ended March 31, 1997.
Interest Expense Interest expense decreased 13.4% from $280,036 in the three months ended March 31, 1996 to $242,534 in the three months ended March 31, 1997. This decrease was due to capitalization of the interest cost incurred as a part of the cost of acquiring certain assets. The Company paid 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" below. Net Income As a result of the above factors, net income increased 10.4% from $8,623,388 in the three months ended March 31, 1996 to $9,522,268 in the three months ended March 31, 1997. As a percentage of sales, net income decreased slightly from 15.8% in the three months ended March 31, 1996 to 15.6% in the three months ended March 31, 1997. Liquidity and Capital Resources 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 $41,261,967 had been incurred at March 31, 1997. The debt associated with $50,000,000 of this project has been approved for participation in an incentive program offered by the Alabama State Industrial Development Authority (the "Authority"). The Authority issued an additional $30,000,000 of its taxable revenue bonds (the "Amended and Restated Bond"), pursuant to such program and loaned the proceeds from the sale of the Amended and Restated Bond to the Company, increasing the Company's long-term debt to $50,000,000 as of April 25, 1997. The Company will make payments to the Authority in amounts necessary to pay the principal of and interest on the Amended and Restated Bond, which matures on January 1, 2020. The Company's working capital position improved from $140,509,802 as of December 31, 1996 to $144,443,881 as of March 31, 1997. This improvement in the Company's working capital position was due primarily to increased earnings. The Company has used, and expects to continue to use, the remaining proceeds of prior 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 increased 17.9% from December 31, 1996 to March 31, 1997. This increase was attributable to the Company's desire to ship larger orders to customers from available stock. Capital expenditures totaling $29,661,438 in 1996 and $7,536,817 in the first three months of 1997 were used to expand the Company's headquarters and to purchase equipment. At March 31, 1997, the Company's cash on hand of $49,542,844 short-term investments of $30,550,210 and $10,000,000 available under a $10,000,000 bank line of credit placed the Company's potential cash availability at $90,093,054, of which a portion is being used to expand the Company's facilities under the incentive program described above. 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 intends to renew its $10,000,000 bank line of credit upon expiration. The Company intends to finance its operations in the future with cash flow from operations, the remaining net proceeds of the public offerings, amounts available under the bank line of credit, borrowed taxable 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.
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are being filed with this report. Exhibit No. Description 10.1 Documents relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) issued by the State Industrial Development Authority. (a) First Amended and Restated Financing Agreement dated April 25, 1997 among the State Industrial Development Authority,a public corporation organized under the laws of the State of Alabama (the "Authority"), the Company and First Union National Bank of Tennessee, a national banking corporation (the Bondholder); (b) First Amended and Restated Loan Agreement dated April 25, 1997 between the Authority and the Company; (c) First Amended and Restated Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project); (d) First Amended and Restated Specimen Note from the Company the the Bondholder, dated April 25, 1997; (e) Investment Agreement dated April 25, 1997 among the Company, the Bondholder and AmSouth Bank of Alabama, an Alabama banking corporation; (f) Resolution of the Authority authorizing the amendment of certain documents dated April 25, 1997 relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project); (g) Resolution of the Company authorizing the First Amended and Restated Financing Agreement, the First Amended and Restated Loan Agreement, the First Amended and Restated Note and the Investment Agreement. 11 Weighted Average Common and Common Equivalent Shares Outstanding 27 Financial Data Schedule (b) Reports on Form 8-K. None
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADTRAN, INC. (Registrant) Date: May 9, 1997 /s/John R. Cooper ----------------- John R. Cooper Vice President - Finance and Chief Financial Officer
INDEX OF EXHIBITS Exhibit No. Description Page Number 10.1 Documents relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc.Project issued by the State Industrial Development Authority. (a) First Amended and Restated Financing Agreement dated April 25, 1997, among the State Industrial Development Authority, a public corporation organized under the laws of the State of Alabama (the "Authority") the Company and First Union National Bank of Tennessee, a national banking corporation (the Bondholder) (b) First Amended and Restated Loan Agreement dated April 25, 1997 between the Authority and the Company; (c) First Amended and Restated Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project); (d) First Amended and Restated Specimen Note from the Company the the Bondholder, dated April 25, 1997; (e) Investment Agreement dated April 25, 1997 among the Company, the Bondholder and AmSouth Bank of Alabama, an Alabama banking corporation; (f) Resolution of the Authority authorizing the amendment of certain documents dated April 25, 1997 relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project); (g) Resolution of the Company authorizing the First Amended and Restated Financing Agreement, the First Amended and Restated Loan Agreement, the First Amended and Restated Note and the Investment Agreement. 11 Weighted Average Common and Common Equivalent Share Outstanding 15 27 Financial Data Schedule 16