Accounts receivable and other receivables decreased 35.8% and 53.6%, respectively, from December 31, 2001 to December 31, 2002 due to reduced sales volumes and improved collections. Quarterly accounts receivable days sales outstanding improved 20 days from 61 days as of December 31, 2001 to 41 days as of December 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 29.8% from $56,849,000 as of December 31, 2001 to $39,926,000 as of December 31, 2002. Annualized inventory turnover increased from 2.92 turns as of December 31, 2001 to 3.53 turns as of December 31, 2002. The decrease in inventory is attributable to our continued efforts to streamline our production process, work closely and efficiently with our subcontractors, and increase manufacturing velocity. 

Accounts payable increased 14.4% from December 31, 2001 to December 31, 2002. This increase is primarily related to obtaining more favorable payment terms with a significant supplier and to a shift in sales mix towards prod- ucts produced by subcontract manufacturers. Accrued expenses increased 9.4% from December 31, 2001 to December 31, 2002. This increase is primarily related to the rescission of salary reductions and the variations of timing of payments for salaries. 

In July 2001, the board of directors approved the repurchase of 2,000,000 shares of ADTRAN common stock. As of December 31, 2002, we had repurchased 1,676,552 shares of our common stock at a total cost of $31,747,000. Of this amount, 1,340,135 shares of our common stock were purchased in 2002, at a total cost of $25,207,000. During 2002, 2001 and 2000, ADTRAN issued 187,750 shares, 36,670 shares, and 314,138 shares, respectively, of treasury stock to accommodate employee stock option exercises. 

On January 28, 2002, ADTRAN’s board of directors approved a voluntary stock option exchange program for its employees, executive officers and directors. In conjunction with the exchange offer, ADTRAN filed a Tender Offer Statement on Schedule TO with the Securities and Exchange Commission. Under the option exchange program, employees, executive officers, and directors who held options to purchase ADTRAN’s common stock and who had not received options after July 23, 2001 were given the opportunity to exchange unexercised stock options granted prior to September 30, 2000 with exercise prices of at least $40 per share. For every four shares of an eligible option, three shares were made available under the new option grant. The newly issued options vest according to the vesting schedule of the tendered options. A total of 1,434,400 options were tendered and cancelled. As of December 31, 2002, a total of 991,683 new options were granted to qualified participants in the exchange program. The new option grant was made on August 30, 2002 at an exercise price of $17.39 per share. 

Capital expenditures totaled approximately $13,216,000 and $32,540,000 for the years ended December 31, 2001 and 2000, respectively. These expenditures were used to expand our headquarters and purchase equipment. Capital expenditures totaling $2,647,000 for the year ended December 31, 2002 were used to purchase equipment. 

At December 31, 2002, ADTRAN’s cash on hand of $125,092,000 and short-term investments of $19,747,000 placed our short-term liquidity in cash, cash equivalents and short-term investments at $144,839,000. At December 31, 2001, cash on hand was $81,280,000 and short-term investments were $26,283,000, which placed our short-term liquidity at $107,563,000. 

At December 31, 2002, ADTRAN’s long-term investments increased by 11.7% to $176,331,000 from $157,902,000 at December 31, 2001. This increase was attributable to ADTRAN’s ability to generate cash from operations during 2002 and our transfer of cash in excess of operational requirements to long-term investments. Long-term investments at December 31, 2002 and December 31, 2001 include a restricted balance of $50,000,000 related to the revenue bonds as discussed above. Additionally, ADTRAN has committed to invest an aggregate of $8,000,000 in two private equity funds, of which $835,674 has been invested to date. The duration of each of these commitments is five years with $3,000,000 expiring in 2005 and $5,000,000 expiring in 2007. 

We intend to finance our operations in the future with cash flow from operations and our 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. 

