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, 2002
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)
(256) 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, 2002
- ----------------------- -----------------------------
Common Stock, $.01 Par Value 38,562,322 shares
1
ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2002
Table of Contents
-------------------
Item Page
Number PART I. FINANCIAL INFORMATION Number
- ------ ------
1 Financial Statements:
Condensed Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 (audited) 3
Condensed Statements of Income for the three months
ended March 31, 2002 and 2001 (unaudited) 4
Condensed Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
3 Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 16
SIGNATURE 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATMENTS
- ---------------------------
ADTRAN, INC.
CONDENSED BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents................................ $83,388,445 $ 81,280,409
Short-term investments................................... 30,823,999 26,282,961
Accounts receivable, less allowance for
doubtful accounts of $3,533,447 and $3,882,099
in 2002 and 2001, respectively........................ 55,757,007 60,598,867
Other receivables........................................ 7,412,297 9,609,478
Inventory, net........................................... 47,204,889 56,849,470
Prepaid expenses......................................... 3,230,713 3,486,470
Deferred income taxes.................................... 5,904,755 5,904,755
----------- ------------
Total current assets........................... 233,722,105 244,012,410
Property, plant and equipment, less accumulated
depreciation of $74,265,786 and $70,092,383
in 2002 and 2001, respectively........................... 116,254,421 120,133,445
Other assets.................................................. 469,000 489,000
Long-term investments......................................... 173,789,118 157,901,718
------------ ------------
$524,234,644 $522,536,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 17,032,758 $ 15,551,685
Accrued expenses......................................... 9,577,472 7,721,682
Income taxes payable..................................... 4,067,670 3,352,049
------------ ------------
Total current liabilities.......................... 30,677,900 26,625,416
Long term liabilities:
Bonds payable............................................ 50,000,000 50,000,000
Deferred income taxes.................................... 5,696,732 8,283,601
------------ ------------
Total liabilities................................... 86,374,632 84,909,017
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share,
200,000,000 shares authorized: 39,445,198 shares
issued in 2002 and 2001.........-..................... 394,452 394,452
Additional paid-in capital............................... 96,292,937 96,384,091
Accumulated other comprehensive income................... 4,793,431 9,374,389
Retained earnings........................................ 354,574,610 350,233,932
Less treasury stock at cost: 882,876 and 910,236
shares in 2002 and 2001, respectively................ (18,195,418) (18,759,308)
------------ ------------
Total stockholders' equity............................... 437,860,012 437,627,556
------------ ------------
$524,234,644 $522,536,573
============ ============
See notes to condensed financial statements
3
ADTRAN, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Sales........................................................... $83,341,983 $105,275,747
Cost of sales................................................... 43,983,153 59,841,309
------------ -------------
Gross profit........................................... 39,358,830 45,434,438
Selling, general and administrative expenses.................... 20,789,822 26,064,836
Research and development expenses............................... 13,834,261 14,848,714
------------ -------------
Operating income....................................... 4,734,747 4,520,888
Interest expense................................................ (690,283) (503,556)
Other income, net............................................... 1,984,256 1,980,787
--------- ---------
Income before provision for income taxes........................ 6,028,720 5,998,119
Provision for income taxes...................................... (1,688,042) (2,039,362)
------------ ----------
Net income............................................. $4,340,678 $3,958,757
============ ==========
Weighted average shares outstanding............................. 38,557,574 38,718,662
============ ============
Weighted average shares outstanding assuming
dilution (1).................................................... 38,760,293 38,863,521
============ ============
Earnings per common share - basic............................... $ .11 $ .10
============ ============
Earnings per common share - assuming dilution (1)............... $ .11 $ .10
============ ============
(1) Assumes exercise of dilutive stock options calculated under the
treasury stock method
See notes to condensed financial statements
4
ADTRAN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income................................................. $4,340,678 $3,958,757
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................... 4,174,335 4,009,675
(Gain) loss on sale of short-term investments.......... (81,694) 17,134
Loss on sale of long-term investments.................. 80,802 --
Change in operating assets and liabilities.............
Accounts receivable, net........................... 4,841,860 12,253,910
Inventory, net..................................... 9,644,581 (6,919,475)
Other receivables.................................. 2,196,249 22,586,228
Prepaid expenses and other assets.................. 275,757 (202,113)
Accounts payable................................... 1,481,073 (13,585,121)
Accrued expenses................................... 1,855,790 1,279,395
Income taxes payable............................... 715,621 (866,030)
------- ---------
Net cash provided by operating activities.................. 29,525,052 22,532,360
---------- ----------
Cash flows from investing activities:
Expenditures for property, plant and equipment............. (294,379) (5,591,143)
Proceeds from sales of short-term investments.............. 5,824,658 14,233,193
Purchases of short-term investments........................ (10,290,950) (15,988,066)
Proceeds from sales of long-term investments............... 14,378,564 9,991,030
Purchases of long-term investments......................... (37,507,645) (2,468,426)
------------ -----------
Net cash (used in) provided by investing activities........ (27,889,752) 176,588
------------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock..................... 472,736 113,865
------- -------
Net cash provided by financing activities.................. 472,736 113,865
------- -------
Net increase in cash and cash equivalents....................... 2,108,036 22,822,813
Cash and cash equivalents, beginning of period.................. 81,280,409 27,971,313
---------- ----------
Cash and cash equivalents, end of period........................ $83,388,445 $50,794,126
=========== ===========
See notes to condensed financial statements
5
ADTRAN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed balance sheet of ADTRAN, Inc. ("ADTRAN") at March 31, 2002
has been derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. The accompanying unaudited condensed financial statements of
ADTRAN have been prepared pursuant to the rules and regulations for reporting on
Quarterly Reports 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, 2002 are not necessarily indicative of the
results that may be expected to occur for the year ending December 31, 2002. The
interim statements should be read in conjunction with the financial statements
and notes thereto included in ADTRAN's latest Annual Report on Form 10-K.
2. INVENTORY
At March 31, 2002 and December 31, 2001, inventory consisted of the following:
March 31, December 31,
2002 2001
---- ----
Raw materials $26,923,694 $32,838,488
Work in progress 2,535,654 5,154,555
Finished goods 17,745,541 18,856,427
---------- ----------
Inventory, net $47,204,889 $56,849,470
=========== ===========
3. COMPREHENSIVE INCOME
Comprehensive income consists of net income or loss and unrealized gains and
losses on marketable securities, net of deferred taxes. Comprehensive loss of
$240,280 at March 31, 2002, consists of net income of $4,340,678 and unrealized
losses on marketable securities of $4,580,958 (net of deferred tax).
Comprehensive income of $6,832,630 at December 31, 2001, consists of net income
of $17,328,529 and unrealized losses on marketable securities of $10,495,899
(net of deferred tax).
6
4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share (EPS) for
the three months ended March 31, 2002 and 2001 is as follows:
For the Three Months Ended March 31, 2002
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $4,340,678 38,557,574 $0.11
Effect of Dilutive Securities
Stock Options 202,719
Diluted EPS
Income available to common stockholders
plus assumed conversions $4,340,678 38,760,293 $0.11
For the Three Months Ended March 31, 2001
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $3,958,757 38,718,662 $0.10
Effect of Dilutive Securities
Stock Options 144,859
Diluted EPS
Income available to common stockholders
plus assumed conversions $3,958,757 38,863,521 $0.10
7
5. SEGMENT INFORMATION
ADTRAN operates two reportable segments - (1) the Carrier Network Division and
(2) the Enterprise Network Division. We evaluate the performance of our segments
based on gross profit; therefore, selling, general and administrative costs, as
well as research and development, interest income/expense, and provision for
income taxes are reported on an entity wide basis only. There are no
inter-segment revenues.
The table below presents information about the reported sales and gross profit
of ADTRAN's segments for the three months ended March 31, 2002 and 2001. Asset
information by reportable segment is not reported, since ADTRAN does not produce
such information internally.
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
Sales Gross Profit Sales Gross Profit
----- ------------ ----- ------------
Carrier Network $53,333,390 $23,781,687 $69,217,660 $26,172,558
Enterprise Network 30,008,593 15,577,143 36,058,087 19,261,880
----------- ----------- ------------ -------------
Total $83,341,983 $39,358,830 $105,275,747 $45,434,438
=========== =========== ============ =============
The following is sales information by product and geographic area for the three
months ended March 31, 2002 and 2001.
Sales by Product
Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Digital Business Transport (DBT) / Total Reach(R) $11,639,415 $27,340,664
High-bit-rate Digital Subscriber Line (HDSL) / T1 45,055,896 53,601,789
Systems 26,646,672 24,333,294
---------------- -----------------
Total $83,341,983 $105,275,747
================ =================
Sales by Geographic Region
Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
United States $78,768,299 $101,626,918
Foreign 4,573,684 3,648,829
------------- --------------
Total $83,341,983 $105,275,747
============= ==============
8
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, which has an effective date of June 30, 2001 for all
business combinations initiated after this date. This statement requires all
business combinations within the scope of the Statement to be accounted for
using the purchase method of accounting. SFAS No. 141 does not currently impact
ADTRAN.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, which has an effective date starting with
fiscal years beginning after December 15, 2001. This statement addresses the
accounting for goodwill and other intangible assets. SFAS No. 142 does not
currently impact ADTRAN.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations ("ARO"), which has an effective date
for financial statements for fiscal years beginning after June 15, 2002. This
statement addresses the diversity in practice for recognizing asset retirement
obligations and requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an ARO, an entity must capitalize the
cost by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. ADTRAN does
not expect the impact of SFAS No. 143 to be material to ADTRAN's March 31, 2002
financial statements or results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which has an
effective date for financial statements for fiscal years beginning after
December 15, 2001. This statement, which supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. Additionally, this
statement expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. ADTRAN adopted SFAS No. 144 effective January 1, 2002, and
the impact was not material to ADTRAN's March 31, 2002 financial statements.
7. LIABILITY FOR WARRANTY RETURNS
ADTRAN's products generally include warranties of five or ten years for product
defects. ADTRAN accrues for warranty returns at cost to repair or replace
products. This liability is included in accrued expenses in the accompanying
balance sheets. The liability for warranty returns totaled approximately
$1,277,000 as of December 31, 2001 and March 31, 2002.
8. FINANCIAL INSTRUMENTS
ADTRAN evaluates its available-for-sale and held-to-maturity investments for
related events or changes in circumstances that indicate a decline in value that
is other than temporary. An impairment charge is recognized in the period in
which an other than temporary decline is identified in an amount equal to the
9
excess of the carrying value over the fair value. There were no such impairment
charges recognized during the quarter ended March 31, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
OVERVIEW
ADTRAN designs, develops, manufactures, markets and services a broad range of
high speed network access products utilized by providers of telecommunications
services (serviced by ADTRAN's Carrier Networks Division or CN) and corporate
end-users (serviced by ADTRAN's Enterprise Networks Division or EN). We
currently sell our products to a large number of carriers, including all RBOCs
(Regional Bell Operating Companies), and to private and public enterprises
worldwide.
Although total sales did not increase this year compared to last year due to an
overall downturn in the telecommunications market, we have protected revenue by
maintaining our strategy of increasing unit volume and market share through the
introduction of succeeding generations of products having lower selling prices
and increased functionality as compared both to the prior generation of a
product and to the products of competitors. An important part of ADTRAN's
strategy is to engineer the reduction of the product cost of each succeeding
product generation and then to lower the product's price based on the cost
savings achieved. As a part of this strategy, we seek in most instances to be a
low-cost, high-quality provider of products in our markets. ADTRAN's success
to-date is attributable in large measure to our ability to design our products
initially with a view to their subsequent re-design, allowing both increased
functionality and reduced manufacturing costs in each succeeding product
generation. This strategy enables ADTRAN to sell succeeding generations of
products to existing customers while increasing our market share by selling
these enhanced products to new customers.
Our operating results have fluctuated on a quarterly basis in the past, and
operating results may vary significantly in future periods due to a number of
factors. We operate with very little order backlog. A substantial majority of
our sales in each quarter results from orders booked in that quarter and firm
purchase orders released in that quarter by customers under agreements
containing non-binding purchase commitments. Furthermore, a majority of
customers typically require prompt delivery of products. This results in a
limited backlog of orders for these products and requires us to maintain
sufficient inventory levels to satisfy anticipated customer demand. If near-term
demand for ADTRAN's products declines, or if potential sales in any quarter do
not occur as anticipated, our financial results could be adversely affected.
Operating expenses are relatively fixed in the short term; therefore, a
shortfall in quarterly revenues could impact ADTRAN's financial results
significantly in a given quarter. Further, maintaining sufficient inventory
levels to assure prompt delivery of our products increases the amount of
inventory which may become obsolete and increases the risk that the obsolescence
of such inventory may have an adverse effect on our business and operating
results.
ADTRAN's operating results may also fluctuate as a result of a number of other
factors, including increased competition, customer order patterns, changes in
product mix, product warranty returns and announcements of new products by
ADTRAN or our competitors. Accordingly, ADTRAN's historical financial
performance is not necessarily a meaningful indicator of future results, and, in
general, management expects that ADTRAN's financial results may vary from period
to period.
10
CRITICAL ACCOUNTING POLICIES
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its financial statements:
. We review customer contracts to determine if all of the requirements
for revenue recognition have been met prior to recording revenues from
sales transactions. We generally record sales revenue upon shipment of
our products, net of any discounts, since: (i) we generally do not have
significant post-delivery obligations, (ii) the product price is fixed
and determinable, (iii) collection of the resulting receivable is
probable, and (iv) product returns are reasonably estimable. We
generally ship products upon receipt of a purchase order from a
customer. Shipping terms are evaluated, and revenue on products shipped
is recorded in accordance with the applicable terms per each respective
contract.
. We maintain allowances for doubtful accounts for losses resulting from
the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances
may be required.
. We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating
the quality of our component suppliers, our warranty obligation is
affected by product failure rates, material usage and other rework
costs incurred in correcting a product failure. Should actual product
failure rates, material usage or other rework costs differ from our
estimates, revisions to the estimated warranty liability may be
required.
. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If
actual future demand or market conditions are less favorable than those
projected by management, additional inventory write-downs may be
required.
. We hold minority interests in publicly traded companies whose share
prices may be volatile. We record an investment impairment charge when
we believe an investment has experienced a decline in value that is
other than temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses
or an inability to recover the carrying value of the investments that
may not be reflected in an investment's current carrying value, thereby
possibly requiring an impairment charge in the future.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2001
SALES
ADTRAN's sales decreased 20.8% from $105,275,747 in the three months ended March
31, 2001 to $83,341,983 in the three months ended March 31, 2002. The decrease
was primarily the result of decreased spending by our customers, which we
believe to be a result of both economic and industry-wide factors.
11
Carrier Network sales decreased from $69,217,660 in the three months ended
March 31, 2001 to $53,333,390 in the three months ended March 31, 2002. Carrier
Network sales as a percentage of total sales decreased from 65.7% in the three
months ended March 31, 2001 to 64.0% in the three months ended March 31, 2002.
Enterprise Network sales decreased from $36,058,087 in the three months ended
March 31, 2001 to $30,008,593 in the three months ended March 31, 2002.
Enterprise Network sales as a percentage of total sales increased from 34.3% in
the three months ended March 31, 2001 to 36.0% in the three months ended March
31, 2002. Foreign sales increased 25.3% from $3,648,829 in the three months
ended March 31, 2001 to $4,573,684 in the three months ended March 31, 2002.
This increase is due to growing acceptance of ADTRAN products in international
markets.
COST OF SALES
Cost of sales decreased 26.5% from $59,841,309 in the three months ended March
31, 2001 to $43,983,153 in the three months ended March 31, 2002. The cost of
sales decrease quarter over quarter is related to the difference in first
quarter revenues in each period. As a percentage of sales, cost of sales
decreased from 56.8% in the three months ended March 31, 2001 to 52.8% in the
three months ended March 31, 2002. An important part of ADTRAN's strategy is to
reduce the product cost of each succeeding product generation and then to lower
the product's price based on the cost savings achieved. This strategy, as
described above, sometimes results in variations in ADTRAN's gross profit margin
due to timing differences between the recognition of cost reductions and the
lowering of product selling prices. In view of the rapid pace of new product
introductions by ADTRAN, this strategy may result in variations in gross profit
margins that, for any particular financial period, can be difficult to predict.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 20.2% from $26,064,836 in
the three months ended March 31, 2001 to $20,789,822 in the three months ended
March 31, 2002. This decrease is a result of a reduction in force, mandatory
salary reductions, and other cost reductions implemented in the second half of
2001. However, selling, general and administrative expenses as a percentage of
sales remained relatively unchanged from 24.8% in the three months ended March
31, 2001 to 24.9% in the three months ended March 31, 2002. Nevertheless,
selling, general and administrative expenses as a percent of sales will
generally fluctuate whenever there is significant fluctuation in revenues during
the periods being compared.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 6.8% from $14,848,714 in the three
months ended March 31, 2001 to $13,834,261 in the three months ended March 31,
2002. ADTRAN continually evaluates new product opportunities and engages in
intensive research and product development efforts. To date, ADTRAN has expensed
all product research and development costs as incurred. As a result, ADTRAN may
incur significant research and development expenses prior to the receipt of
revenues from a major new product group. As a percentage of sales, research and
development expenses increased from 14.1% in the three months ended March 31,
2001 to 16.6% in the three months ended March 31, 2002. ADTRAN will continue to
incur research and development expenses in connection with its new products and
its expansion into international markets. Research and development expenses as a
percent of sales will fluctuate whenever there is a significant fluctuation in
revenues during the periods being compared.
INTEREST EXPENSE
Interest expense increased 37.1% from $503,556 for the three months ended March
31, 2001 to $690,283 in the three months ended March 31, 2002. This increase is
primarily related to an increase in the interest rate on the $50,000,000 revenue
bond, the proceeds of which were used to expand our facilities in Huntsville,
Alabama.
12
OTHER INCOME
Other income remained relatively unchanged from $1,980,787 for the three months
ended March 31, 2001 to $1,984,256 in the three months ended March 31, 2002.
INCOME TAXES
Our effective annual tax rate increased slightly from 27% in 2001 to 28% as of
March 31, 2002. Income taxes decreased 17.2% from $2,039,362 in the three months
ended March 31, 2001 to $1,688,042 in the three months ended March 31, 2002.
NET INCOME
As a result of the above factors, net income increased 9.6% from $3,958,757 in
the three months ended March 31, 2001 to $4,340,678 in the three months ended
March 31, 2002. As a percentage of sales, net income increased from 3.8% in the
three months ended March 31, 2001 to 5.2% in the three months ended March 31,
2002.
LIQUIDITY AND CAPITAL RESOURCES
ADTRAN completed the construction of Phase IV of our corporate headquarters in
Huntsville, Alabama, in October 2000. We have spent approximately $20,000,000 in
equipping Phase IV and expect to spend approximately $25,000,000 over the next
several years. Fifty million dollars of ADTRAN's Phase III expansion was
approved for participation in an incentive program offered by the Alabama State
Industrial Development Authority (the "Authority"). The incentive program
enables participating companies to generate Alabama corporate income tax credits
that can be used to reduce the amount of Alabama corporate income taxes that
would otherwise be payable. There can be no assurance that the State of Alabama
will continue to make these corporate income tax credits available in the
future, and therefore, ADTRAN may not realize the full benefit of these
incentives. Through March 31, 2002, the Authority had issued $50,000,000 of its
taxable revenue bonds pursuant to the incentive program and loaned the proceeds
from the sale of the bonds to ADTRAN. We are required to make payments to the
Authority in the amounts necessary to pay the principal of and interest on the
Authority's Taxable Revenue Bond, Series 1995, as amended, currently outstanding
in the aggregate principal amount of $50,000,000. The bond matures on January 1,
2020, and bears interest at the rate of 20 basis points over the money market
account-based rate of First Union National Bank. Included in long-term
investments is $50,000,000 of restricted funds, which is a collateral deposit
against the principal of this bond.
ADTRAN's working capital position decreased 6.8% from $217,876,000 as of
December 31, 2001 to $203,044,000 as of March 31, 2002. Accounts receivable and
other receivables decreased 8.0% and 22.9%, respectively from December 31, 2001
to March 31, 2002 due to reduced sales volumes and improved collections.
Accounts payable increased 9.5% from December 31, 2001 to March 31, 2002. ADTRAN
has used, and expects to continue to use, the cash generated from operations for
working capital and other general corporate purposes, including (i) product
development activities to enhance its existing products and develop new products
and (ii) expansion of sales and marketing activities. Inventory decreased 17.0%
from $56,849,000 as of December 31, 2001 to $47,205,000 as of March 31, 2002.
The decrease in inventory is attributable to management's continued efforts to
streamline our production process and increase manufacturing velocity.
13
In October 1998, the Board of Directors authorized ADTRAN to re-purchase
2,000,000 shares of our outstanding common stock. In July 2001, the Board
approved the re-purchase of an additional 2,000,000 shares. As of March 31,
2002, we had re-purchased 336,417 shares of our common stock at a total cost of
$6,540,000 under these programs.
Capital expenditures totaling $294,379 in the three months ended March 31, 2002
were used for the purchase of equipment and $5,591,143 in the first three months
of 2001 were used to expand our headquarters and purchase equipment.
At March 31, 2002, ADTRAN's cash on hand of $83,388,445 and short-term
investments of $30,823,999 placed our short-term cash availability at
$114,212,444. At December 31, 2001, cash on hand was $81,280,409 and short-term
investments were $26,282,961, which placed our short-term cash availability at
$107,563,370.
At March 31, 2002, ADTRAN's long-term investments increased by 10.1% to
$173,789,118 from $157,901,718 at December 31, 2001. This increase was
attributable to ADTRAN's ability to generate cash from operations during the
quarter. Long-term investments include a restricted balance of $50,000,000
related to the revenue bonds as discussed above.
INVESTMENT POLICY
ADTRAN's short-term investments represent the liquid and working funds for the
present and future operations of the company. These assets are invested with
appropriate diversification to preserve capital, provide liquidity, and generate
returns appropriate to current instruments in prevailing market conditions.
Long-term investments are likewise invested to preserve principal and liquidity,
while maximizing overall returns on our monetary assets. This is achieved
through conservative investments and appropriate diversification in fixed
income, public equity, and private equity portfolios.
We intend to finance our operations in the future with cash flow from operations
and remaining borrowed taxable revenue bond proceeds. We believe these available
sources of funds to be adequate to meet our operating and capital needs for the
foreseeable future.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides
a safe harbor for forward-looking statements made by or on behalf of ADTRAN.
ADTRAN and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this report and
our other filings with the Securities and Exchange Commission and in our reports
to our stockholders. Generally, the words, "believe," "expect," "intend,"
"estimate," "anticipate," "will," "may," "could" and similar expressions
identify forward-looking statements. We caution you that any forward-looking
statements made by or on our behalf are subject to uncertainties and other
factors that could cause such statements to be wrong. Some of these
uncertainties and other factors are listed below. They have been discussed in
our most recent Form 10-K filed on March 29, 2002 with the SEC as well as in
prior SEC filings. Though we have attempted to list comprehensively these
important factors, we caution investors that other factors may prove to be
important in the future in affecting our operating results. New factors emerge
from time to time, and it is not possible for us to predict all of these
factors, nor can we assess the impact each factor or combination of factors may
have on our business. You are further cautioned not to place undue reliance on
those forward-looking statements because they speak only of our
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views as of the date the statements were made. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
The following are some of the risks that could affect our financial performance
or could cause actual results to differ materially from those expressed or
implied in our forward-looking statements:
. We must continue to update and improve our products and develop new
products in order to compete and to keep pace with improvements in
telecommunications technology.
. Our dependence on a limited number of suppliers may prevent us from
delivering our products on a timely basis, which could have a material
adverse effect on customer relations and operating results.
. Our dependence on subcontractors may result in reduced control over
product quality, delayed delivery of products and/or increased
manufacturing costs, each of which could negatively effect customer
relations and operating results.
. We compete in markets that have become increasingly competitive, which may
results in reduced gross profit margins and market share.
. We depend heavily on sales to certain customers; the loss of any of these
customers would significantly reduce our revenues and net income.
. The lengthy approval process required by the RBOCs and other carriers
could result in fluctuations in our revenues.
. Consolidation in the Competitive Service Provider market could result in a
significant decrease in our revenue.
. Increased sales volume in international markets could result in increased
costs or loss of revenue due to factors inherent in these markets.
. Our success depends on our ability to reduce the selling prices of
succeeding generations of our products.
. Our failure to adequately protect our intellectual property rights could
adversely effect the development and commercialization of our products.
. Two stockholders own or may influence a significant amount of our common
stock and may continue to have significant influence on our affairs.
. The price of our common stock has been volatile and may continue to
fluctuate substantially.
The foregoing list of risks is not exclusive.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
ADTRAN has not conducted transactions, established commitments or entered into
relationships requiring disclosures beyond those provided elsewhere in this Form
10-Q.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 (h)* Amendment to First Amended and Restated Financing
Agreement and First Amended and Restated Loan Agreement
dated as of January 3, 2002 by and between First Union
National Bank and ADTRAN, Inc.
(i)* Amended and Restated Investment Agreement dated as of
January 3, 2002 by and between ADTRAN, Inc. and First
Union National Bank.
(j)* Assignment and Assumption Agreement dated as of January
3, 2002 by and between AmSouth Bank of Alabama and First
Union National Bank.
*Filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 2002.
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 14, 2002 /s/ James E. Matthews
-----------------------------------
James E. Matthews
Senior Vice President - Finance and
Chief Financial Officer
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