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, 1996
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) 971-8000
(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 May 7, 1996
- - ---------------------------- --------------------------
Common Stock, $.01 Par Value 38,640,965 shares
ADTRAN, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
-----------------
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
- - ------ ------
1 Financial Statements:
Condensed Balance Sheets as of December 31, 1995
and March 31, 1996 3
Interim Condensed Statements of Income for the three
months ended March 31, 1995 and 1996 4
Interim Condensed Statements of Cash Flows for the three
months ended March 31, 1995 and 1996 5
Notes to Interim 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADTRAN, INC.
CONDENSED BALANCE SHEETS
ASSETS
December 31, March 31,
1995 1996
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents........................ $ 35,027,609 $ 33,302,382
Short-term investments........................... 24,652,689 26,849,624
Accounts receivable, less allowance for
doubtful accounts of $544,526 and $544,526
in 1995 and 1996, respectively................. 29,234,803 29,117,479
Other receivables................................ 857,303 192,532
Inventory........................................ 44,997,195 51,280,181
Prepaid expenses................................. 683,594 1,193,826
Deferred tax assets.............................. 1,068,861 1,068,861
------------ ------------
Total current assets 136,522,054 143,004,885
Property, plant, and equipment, less accumulated
depreciation of $8,877,504 and $9,850,147
in 1995 and 1996, respectively................. 29,245,252 34,232,635
------------ ------------
$165,767,306 $177,237,520
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 9,740,587 $ 8,464,310
Accrued salaries................................ 1,332,141 849,636
Accrued income taxes............................ 1,310,841 5,350,601
Accrued taxes other than income taxes.......... 586,150 588,347
Accrued interest payable........................ 74,305 300,938
Warranty liability.............................. 523,027 523,027
Compensated absences............................ 489,278 638,980
------------ ------------
Total current liabilities 14,056,329 16,715,839
Long term liabilities:
Long term debt.................................. 20,000,000 20,000,000
Deferred income taxes........................... 967,666 967,666
------------ ------------
Total liabilities 35,023,995 37,683,505
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share
60,000,000 shares authorized; 37,462,275
and 38,633,890 shares issued in 1995 and
1996, respectively............................ 374,623 386,339
Additional paid-in capital...................... 89,404,177 89,579,777
Retained earnings............................... 40,964,511 49,587,899
------------ ------------
Total stockholders' equity...................... 130,743,311 139,554,015
------------ ------------
$165,767,306 $177,237,520
============ ============
See notes to interim condensed financial statements
3
ADTRAN, INC.
INTERIM CONDENSED STATEMENTS OF INCOME
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
1995 1996
----------- -----------
Sales......................................... $38,096,590 $54,544,441
Cost of sales................................. 19,422,631 28,860,274
----------- -----------
Gross profit................................. 18,673,959 25,684,167
Selling, general and administrative expenses.. 5,413,444 7,257,687
Research and development expenses............. 4,169,638 5,450,426
----------- -----------
Operating income............................. 9,090,877 12,976,054
Interest expense.............................. (299,028) (280,036)
Interest income............................... 611,724 594,635
Other income (expense)........................ 2,748 (183,208)
----------- -----------
Income before provision for income taxes...... 9,406,321 13,107,445
Provision for income taxes.................... (3,331,719) (4,484,057)
----------- ----------
Net income................................... $ 6,074,602 $ 8,623,388
=========== ===========
Net income per common and common
equivalent share............................. $ .16 $ .22
=========== ===========
Weighted average common and common
equivalent shares outstanding (1)............ 38,995,272 39,549,106
=========== ===========
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
See notes to interim condensed financial statements
4
ADTRAN, INC.
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
1995 1996
------------- ------------
Cash flows from operating activities:
Net income...................................................... $ 6,074,602 $ 8,623,388
Adjustments to reconcile net income to net cash.................
provided by operating activities:
Depreciation............................................... 678,753 975,566
Provision for losses on accounts receivable................ (264) (1,191)
Provision for losses on inventory.......................... 457,609 596,741
Gain on sale of property, plant and equipment............. (329)
Loss on short term investments............................. 316,165
Change in operating assets:
Accounts receivable (1,777,290) 118,515
Inventory (6,169,695) (6,879,727)
Other receivables (228,399) 664,771
Prepaid expenses (290,153) (510,232)
Change in operating liabilities:
Accounts payable 453,497 (1,045,552)
Accrued salaries (304,078) (482,505)
Accrued income taxes 3,341,720 4,039,760
Accrued taxes other than income taxes 243,828 2,197
Accrued interest payable 66,111 226,633
Compensated absences 129,741 149,702
Other payables (167,646) (230,725)
------------ -----------
Net cash provided by operating activities....................... 2,508,336 6,563,177
------------ -----------
Cash flows from investing activities:
Expenditures for property, plant and equipment.................. (1,828,014) (5,967,222)
Proceeds from the disposition of property, plant and equipment.. 4,602
Net purchase of short-term investments.......................... (9,294,056) (2,513,100)
------------ -----------
Net cash used in investing activities........................... (11,122,070) (8,475,720)
------------ -----------
Cash flows from financing activities:
Proceeds from bond issuance..................................... 20,000,000
Proceeds from issuance of common stock.......................... 71,185 187,316
------------ -----------
Net cash provided by financing activities...................... 20,071,185 187,316
------------ -----------
Net increase (decrease) in cash and
cash equivalents............................................. 11,457,451 (1,725,226)
Cash and cash equivalents, beginning of period.................... 18,765,178 35,027,609
------------ -----------
Cash and cash equivalents, end of period.......................... $ 30,222,629 $33,302,382
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of $0 and $58,055
of capitalized interest in 1995 and 1996, respectively........ $ 232,917 $ 111,458
============ ===========
Cash paid during the period for taxes........................... $ 0 $ 500,000
============ ===========
See notes to interim condensed financial statements
5
ADTRAN, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 footnotes required
by generally accepted accounting principles for complete financial statements
are not included herein. 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.
Interim statements are subject to possible adjustments in connection
with the annual audit of the Company's accounts for the full year 1996. 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, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
2. INVENTORY
At December 31, 1995 and March 31, 1996, inventory consisted of the
following:
December 31, March 31,
1995 1996
------------ -----------
Raw materials................................. $27,390,750 $28,538,205
Work in progress.............................. 4,428,437 6,167,713
Finished goods................................ 13,178,008 16,574,263
----------- -----------
$44,997,195 $51,280,181
=========== ===========
3. THE ALABAMA STATE INDUSTRIAL DEVELOPMENT AUTHORITY
In conjunction with the expansion of its Huntsville, Alabama facility,
the Company has been approved for participation in an incentive program offered
by the Alabama State Industrial Development Authority (the "Authority").
Pursuant to such program, in January 1995, the Authority issued $20,000,000 of
its taxable revenue bonds and loaned the proceeds from the sale of the bonds to
the Company. The bonds were purchased by AmSouth Bank of Alabama, Birmingham,
Alabama (the "Bank"), and the Company and the Bank have agreed to keep the
proceeds from such bonds invested in short-term commercial paper until such time
as the proceeds are needed by the Company to pay the costs of construction.
Prior to the Company using the proceeds for construction costs, the Company, the
Authority, and the Bank would be required to enter into further documentation to
allow such use of proceeds. The Company has agreed to make payments to the
Authority in amounts necessary to pay the principal of and interest on such
bonds. The bonds bear interest, payable monthly, at the rate of 87.5 basis
points over the 30 day London inter-bank interest rate and mature on January 1,
2020. Construction on the project began in March 1995 and certain phases should
be completed by the end of 1996.
6
4. STOCK SPLIT
On April 20,1995, the stockholders of the Company approved the board
of directors' recommendation to increase the Company's authorized Common
Stock from 30,000,000 shares to 60,000,000 shares, par value $.01.
Following approval by the Company's stockholders, the board of directors
declared a 2-for-1 stock split, payable on May 12, 1995, to stockholders of
record on April 27, 1995. Information regarding net income per common and
common equivalent share and weighted average common and common equivalent shares
outstanding included in the financial statements gives effect to this stock
split.
5. PUBLIC OFFERING
On June 29, 1995, the Company and certain stockholders of the Company
(the "Selling Stockholders") 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 $15,699,812 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 for working
capital and other general corporate purposes, including product development
activities to enhance its existing products and develop new products as well as
expansion of sales and marketing activities.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, will require the Company, for the year
- - ---------------------------------------
ended December 31, 1996, to either account for the estimated fair value of stock
options granted as compensation expense or continue to account for them under
present rules. If the Company chooses to continue to account for stock options
granted under present rules, as management believes is likely, disclosure will
be required of the pro forma impact of accounting for the estimated fair value
of stock options granted as compensation expense.
7
ITEM 2. 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 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 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.
On June 29, 1995, the Company and certain stockholders of the Company (the
"Selling Stockholders") 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 $15,699,812 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 for working
capital and other general corporate purposes, including product development
activities to enhance its existing products and develop new products as well as
expansion of sales and marketing activities.
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.
8
INTERIM RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1996
SALES
The Company's sales increased 43.2% from $38,096,590 in the first three months
ended March 31, 1995 to $54,544,441 in the first three months ended March 31,
1996. The increased sales resulted from increased sales volume to existing
customers and from increased market penetration. Sales to Telcos increased
65.1% from $19,617,819 in the three months ended March 31, 1995 to $32,385,385
in the three months ended March 31, 1996. The increase in Telco sales in the
first quarter of 1996 resulted 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 51.5% in the three months ended March 31, 1995 to 59.4% in the
three months ended March 31, 1996 due to increased sales volume of ISDN and HDSL
products during the first quarter of 1996. Sales of CPE products increased
47.8% from $10,247,034 in the three months ended March 31, 1995 to $15,143,210
in the three months ended March 31, 1996 as a result of increased sales of ISDN
products, T1 Service Unit ("TSU") products and Digital Data Service ("DDS")
products. OEM sales decreased 14.8% from $8,231,738 in the three months ended
March 31, 1995 to $7,015,846 in the three months ended March 31, 1996. 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 48.6% from $19,422,631 in the three months ended March
31, 1995 to $28,860,274 in the three months ended March 31, 1996, primarily as a
result of the increase in sales. As a percentage of sales, cost of sales
increased from 51.0% in the three months ended March 31, 1995 to 52.9% in the
three months ended March 31, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 34.1% from $5,413,444
in the three months ended March 31, 1995 to $7,257,687 in the three months ended
March 31, 1996. The increase was 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 14.2% in the three months
ended March 31, 1995 to 13.3% in the three months ended March 31, 1996.
9
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 30.7% from $4,169,638 in the three
months ended March 31, 1995 to $5,450,426 in the three months ended March 31,
1996. 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, however, research and development expenses declined from
10.9% in the three months ended March 31, 1995 to 10.0% in the three months
ended March 31, 1996 due to the increased sales in the first quarter of 1996.
INTEREST EXPENSE
Interest expense decreased 6.4% from $299,028 in the three months ended March
31, 1995 to $280,036 in the three months ended March 31, 1996. This decrease
was due to capitalization of interest cost as a part of the historical cost of
acquiring certain assets, as required in Statement of Financial Accounting
Standards No. 34 (SFAS 34), "Capitalization of Interest Cost." 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" below.
NET INCOME
As a result of the above factors, net income increased 42.0% from $6,074,602
in the three months ended March 31, 1995 to $8,623,388 in the three months ended
March 31, 1996. As a percentage of sales, net income decreased only slightly
from 15.9% in the three months ended March 31, 1995 to 15.8% in the three months
ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in August 1994 and a second public
offering in June 1995, the Company financed its operations primarily with cash
flow from operations, supplemented with borrowings under its bank line of credit
as needed.
The Company's only long-term debt outstanding as of March 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 has commenced a project to expand
its facilities in Huntsville in several phases over the next five years at a
cost of up to $50,000,000. 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 offset up to the entire amount of the debt incurred to finance the project.
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 purchased by AmSouth Bank of Alabama, Birmingham,
Alabama (the"Bank"), and the Company and the Bank have agreed to keep the
proceeds from such bonds invested in short-term commercial paper until such time
as the proceeds are needed by the Company to pay the costs of construction.
Prior to the Company using the proceeds for construction costs, the Company, the
Authority, and the Bank would be required to enter into further documentation to
allow such use of proceeds. The Company has agreed to make payments to the
Authority in amounts necessary to pay the principal of, and interest on, such
bonds. The bonds bear interest, payable monthly, at the rate of 87.5 basis
points over the 30 day London
10
inter-bank interest rate and mature on January 1, 2020. Construction on the
project began in March 1995 and certain phases should be completed by the end of
1996. The Company expects to use the proceeds of additional revenue bonds
pursuant to such program to equip its expanded facilities over the next five
years. There can be no assurance that the State of Alabama will continue to
make these corporate income tax credits available in the future.
The Company's working capital position improved from $122,465,725 as of
December 31, 1995 to $126,289,046 as of March 31, 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
the 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.
Increased earnings for the three months ended March 31, 1996 were reflected in
an increase in inventory as compared to the twelve months ended December 31,
1995. Inventory increased 14.0% during the period as a result of the increase in
sales and a desire by the Company to ship larger orders to customers from
available stock.
Capital expenditures totaling $12,790,517 in 1995 and $5,967,222 in the first
three months of 1996 were used to expand the Company's headquarters and to
purchase equipment.
At March 31, 1996, the Company's cash on hand of $33,302,382, short-term
investments of $26,849,624 and $5,000,000 available under a bank line of credit
placed the Company's potential cash availability at $65,152,006 as of March 31,
1996, of which $20,000,000 will be used to expand the Company's facilities under
the incentive program described above. The Company's $5,000,000 bank line of
credit bears interest at the lender's prime rate and expires in May 1996. The
Company intends to renew the $5,000,000 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 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.
11
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
---------- -----------
11 Weighted Average Common and Common Equivalent
Shares Outstanding
27 Financial Data Schedule
(b) Reports on Form 8-K. None
12
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 13, 1996 /s/ Irwin O. Goldstein
----------------------
Irwin O. Goldstein
Vice President - Finance and Administration
and Chief Financial and Accounting Officer
(Duly Authorized Officer)
13
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION PAGE NO.
------- ----------- --------
11 Weighted Average Common and Common Equivalent Shares
Outstanding 15
27 Financial Data Schedule 16
14