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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
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 1-5517
SCIENTIFIC-ATLANTA, INC.
(Exact name of Registrant as specified in its charter)
Georgia 58-0612397
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
One Technology Parkway, South 30092-2967
Norcross, Georgia (Zip Code)
(Address of principal executive offices)
770-903-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value New York Stock Exchange
$0.50 per share
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 12 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at August 31, 2000, was approximately $12,500,038,749.
As of August 31, 2000, the Registrant had outstanding 160,938,677 shares of
common stock.
Documents Incorporated By Reference:
Specified portions of the Proxy Statement for the Registrant's 2000 Annual
Meeting of Shareholders are incorporated by reference to the extent indicated
in Part III of this Form 10-K.
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PART I
In this Form 10-K, the words "Scientific-Atlanta," "we," "our,"
"ours," and "us" refer to Scientific-Atlanta, Inc. and its subsidiaries.
Our fiscal year ends on the Friday closest to June 30 of each year.
The references to fiscal year by date refer to our fiscal year ending in that
particular calendar year; for example, fiscal year 1998 refers to our fiscal
year ended June 26, 1998, fiscal year 1999 refers to our fiscal year ended
July 2, 1999 and fiscal year 2000 refers to our fiscal year ended June 30,
2000.
Item 1. Business
General
Scientific-Atlanta, Inc. provides its customers with content
distribution networks, broadband transmission networks, digital interactive
subscriber systems and worldwide customer service and support. We have evolved
from a manufacturer of electronic test equipment for antennas and electronics
for the cable industry to a producer of a wide variety of products for
terrestrial and satellite communications networks, including digital video,
voice and data communications products. During fiscal year 2000, we operated
primarily in two reportable business segments: Broadband and Satellite. The
Broadband segment consists of subscriber and transmission systems, and the
Satellite segment consisted of satellite network and satellite television
network systems. On April 25, 2000, ViaSat, Inc. acquired our satellite
network business, which constituted a substantial part of our satellite
business. We retained our satellite television network business, which
provides the content distribution networks. We now operate only in the
Broadband segment. See the Consolidated Financial Statements included in this
Form 10-K for information concerning Scientific-Atlanta's total sales, profits
and assets by segment.
Broadband
Our Broadband segment includes modulators, demodulators and signal
processors for video and audio receiving stations (often referred to as
"headend" systems), products for distributing communications signals by
coaxial cable and fiber optics from headend systems to subscribers and analog
and digital set-top terminals that enable television sets to receive all
channels transmitted by cable television system operators. Proprietary
software and the operating system used in the terminals, as well as system
manager software at the headend or at the transmission level, was developed by
us and is updated from time to time. The products in the Broadband segment
also include receivers, transmitters, distribution amplifiers, taps and
passives, signal encoders and decoders, controllers, optical amplifiers,
source lasers, digital video compression and transmission equipment and fiber
optic distribution equipment.
Our analog set-tops include units which are addressable from the
headend system so as to permit control of channel authorizations, including
authorizations for pay-per-view events, impulse ordering and automatic
recording of billing information at the cable operator's central facility, and
menu-driven volume controllable units. Sales of analog set-tops constituted
approximately 9 percent of Scientific-Atlanta's total sales for fiscal year
2000, and approximately 24 percent and 33 percent of such sales in each of
fiscal years 1999 and 1998, respectively. As anticipated and announced
previously, sales of analog set-top have declined in response to the
introduction of two-way digital technology.
Sales of digital set-tops constituted approximately 34 percent, 15
percent and 1 percent of Scientific-Atlanta's total sales in fiscal years
2000, 1999 and 1998, respectively. Our Explorer(R) digital set-tops are
designed to enable subscribers to access new services to be developed such as
e-mail over television, video-on-demand, Web browsing, Internet Protocol (IP)
services, and various types of electronic commerce. Several of the advanced
services, including e-mail, video-on-demand and Web browsing, have already
been deployed on our networks.
PowerTV, Inc., our majority-owned subsidiary located in Cupertino,
California, develops and markets operating system, middleware and application
software products for the advanced digital interactive cable television
markets. PowerTV's core product is the PowerTV(R) Operating System, which it
has licensed to
1
Pace Micro Technology plc and Pioneer Corporation. PowerTV has developed a
number of applications: SofaMAIL(TM), an electronic mail system, and
SofaSURF(TM), a web browser. Scientific-Atlanta and PowerTV both conduct
active developer application programs for the Explorer network.
We previously announced that we are a supplier of digital interactive
subscriber systems for high-speed Internet and Voice over IP (VoIP) networks.
However, we expect to deliver our cable modem product in the first half of
calendar year 2001, and we expect to deliver a VoIP product during calendar
year 2001.
Transmission products in the Broadband segment include headend
equipment, RF (radio frequency) amplifiers, line extenders, opto-electronic
transmitters and amplifiers, taps, and passives, which transmit signals via
coaxial cable or fiber optics from the cable operator to the end-user
customer. These products enable operators to transmit video and data over the
same network, with a reverse path for customers to communicate back to the
operator. Sales of RF distribution products constituted approximately 18
percent of Scientific-Atlanta's total sales for fiscal year 2000, and
approximately 16 percent and 18 percent of such sales in fiscal years 1999 and
1998, respectively.
We previously announced that our forward and reverse dense wave
division multiplexing (DWDM) transmitter capabilities would be expanded to 48
wavelengths in October 2000. Instead, our DWDM transmitters are expected to be
upgraded from 16 to 24 wavelengths in October 2000. Scientific-Atlanta's two
channel bdr(TM) product, which uses baseband digital reverse technology, is
currently shipping, and the four channel bdr product is scheduled for general
availability in the fourth calendar quarter, as previously announced.
Scientific-Atlanta is continuing to look at the market demand for the single
channel bdr product and does not expect to begin shipment of that product
until at least the first calendar quarter of 2001. We had previously announced
that shipment of the single channel bdr product would begin in August 2000.
We design, manufacture and sell digital video compression
communications products for use by television broadcasters and cable
operators. Our digital video compression products utilize the open
architecture MPEG-2 technology adopted by an international standards group, of
which we are a founding member. MPEG-2 digital equipment allows headend, set-
top and consumer electronics products and systems to operate together across
networks and in the home.
Our broadband products, both analog and digital, are being utilized by
our traditional cable operator customers to upgrade their networks to provide
new services and new builders of such systems, including telephone companies
and competitive local exchange carriers, to build new video, voice and data
networks.
Satellite
On April 25, 2000, ViaSat, Inc. acquired our satellite network
business (excluding the satellite television networks business) which included
products such as tracking and telemetry equipment, earth observation satellite
ground stations, and intercept systems. We produced satellite earth stations
that receive and transmit signals for video and are utilized in satellite-
based telephone, data and television distribution networks, packet switches,
radar platforms, special receivers, special measurement devices and other
equipment used to track aircraft, missiles, satellites and other moving
objects and to communicate with and receive and record various measurements
and other data from the object. Our data communications products offerings had
included private interactive data systems using VSAT (very small aperture
terminal) technology. In addition, our long experience with advanced satellite
tracking technologies had enabled us to offer a range of gateways, network
management centers, transceivers, and services for the emerging low earth
orbiting (LEO) satellite communications markets prior to the disposition of
our satellite network business.
Scientific-Atlanta retained the satellite television networks
business, which is now known as the Media Networks business of Scientific-
Atlanta. The Media Network business produces encoders, statistical
multiplexers, modulators and receivers. Customers, such as television
programmers, broadcasters, and service providers use these products to deliver
compressed digital video via satellite to cable operators and viewers.
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Services
We have consolidated most of our service functions into a single
service organization, SciCare(TM) Broadband Services, with its goal being to
ensure effective post-sale service for customers using its products, whether
such products are under warranty or no longer under warranty. SciCare
Broadband Services offers a variety of maintenance and service contracts to
customers using products manufactured or sold by Scientific-Atlanta and by
other manufacturers, in addition to providing systems integration,
installation, and professional services.
Marketing and Sales
Our products are sold primarily through our own sales personnel who
work out of offices throughout the United States and various foreign
countries. Certain products are also marketed in the United States through
independent sales representatives and independent distributors. In addition to
direct sales by Scientific-Atlanta, sales in foreign countries are made
through wholly-owned subsidiaries and branch offices, as well as through
independent distributors and independent sales representatives. Sales of our
products are also made to independent system integrators, distributors and
dealers who resell the products to customers. Our management personnel are
also actively involved in marketing and sales activities.
International sales constituted 21 percent of our total sales for
fiscal year 2000, and 22 percent and 32 percent of total sales in fiscal years
1999 and 1998, respectively. Substantially all of these sales were export
sales. See Note 6 of the Notes to Consolidated Financial Statements included
in this Form 10-K.
Sales of products to Time Warner, Inc. and its affiliates were 23
percent of our total sales in fiscal year 2000, and were 16 percent and 11
percent of total sales in fiscal years 1999 and 1998, respectively. Sales of
products to AT&T, which merged with MediaOne during fiscal year 2000, and its
affiliates were 10 percent of our total sales in fiscal year 2000, were 16
percent of total sales in fiscal year 1999 and 12 percent of total sales in
1998. Sales of products to Charter Communications, Inc. and its affiliates
were 14 percent, 7 percent and 2 percent of sales in fiscal years 2000, 1999
and 1998, respectively. Sales to these three customers were principally
broadband products. No other customer accounted for 10 percent or more of our
sales in any of the three years.
Backlog
Our backlog consists of unfilled customer orders believed to be firm
and long-term contracts which have not been completed. Scientific-Atlanta's
backlog as of June 30, 2000 and July 2, 1999 was as follows:
2000 1999
------------ ------------
Broadband........................................... $786,671,000 $448,456,000
Satellite........................................... 25,002,000 80,862,000
Corporate and Other................................. 16,000 90,000
------------ ------------
Total.............................................. $811,689,000 $529,408,000
============ ============
We believe that approximately 90 percent of the backlog existing at
June 30, 2000, will be shipped within the succeeding fiscal year. With respect
to long-term contracts, we include in our backlog only amounts representing
orders currently released for production. The amount contained in backlog for
any contract or order may not be the total amount of the contract or order.
The amount of our backlog at any time does not reflect expected revenues for
any fiscal period.
Product Research and Development and Patents
We conduct an active research and development program to strengthen
and broaden existing products and systems and to develop new products and
systems. Our development strategy is to identify products and systems which
are, or are expected to be, needed by a substantial number of customers in
markets and to allocate a greater share of its research and development
resources to areas with the highest potential for future benefits to
Scientific-Atlanta. In addition, we develop specific applications related to
our present technology. Expenditures
3
in fiscal years 2000, 1999 and 1998 were principally for development of
digital set-top and digital network products, opto-electronic and RF
transmission products, and introduction of our PowerVu(R) products. In fiscal
years 2000, 1999 and 1998, our research and development expenses were
approximately $122.4 million, $117.3 million and $111.5 million, respectively.
We hold patents with respect to certain of our products and actively
seek to obtain patent protection for significant inventions and developments.
Patents are important to our Broadband and Satellite segments. See Item 3.
Legal Proceedings.
Manufacturing
Manufacturing operations range from complete assembly of a particular
product by one individual or small group of individuals to semi-automated
assembly lines for volume production. Because many of our products include
precision electronic components requiring close tolerances, we maintain
rigorous and exacting test and inspection procedures designed to prevent
production errors, and also constantly review our overall production
techniques to enhance productivity and reliability. Our analog set-tops and
taps and passives hardware for the cable television industry are manufactured
primarily by contract vendors with high-quality, high-volume production
facilities. In addition to such manufacturing by contract vendors, we
commenced our own manufacturing of high volume products in fiscal year 1995 in
our Juarez, Mexico facility. We manufacture a variety of products in the
Juarez facility, including digital set-tops and our RF amplifier product line.
We plan to increase the production capacity of our digital set-tops in our
Juarez facility to 1.3 million units per quarter by second quarter fiscal year
2001.
Materials and Supplies
The materials and supplies we purchase are standard electronic
components, such as integrated circuits, wire, circuit boards, transistors,
capacitors and resistors, all of which are produced by a number of
manufacturers. Matsushita Electronic Components Corporation of America and its
affiliates manufacture analog set-tops for us and are a primary supplier of
those set-tops. Cablevision Electronics Co., Ltd and Zinwell Corporation,
Taiwanese companies, are our primary suppliers of taps. We also purchase
aluminum and steel, including castings and semi-fabricated items, produced by
a variety of sources. Our primary supplier of die castings for RF distribution
products is Premiere Die Casting, Inc. Additionally, Motorola, Inc., Broadcom
Corporation and STMicroelectronics are three of our primary suppliers of a
variety of semiconductor products, which are used as components in an array of
products, including set-tops. Anadigics, Inc. is a provider of CATV hybrid
integrated circuits for use in our RF distribution products. We consider our
sources of supply to be adequate and are not dependent upon any single
supplier, except for Matsushita Electronic Components Corporation of America
(and affiliates), Cablevision Electronics Co., Ltd., Zinwell Corporation,
Premiere Die Casting, Inc., Motorola, Inc., Broadcom Corporation, Anadigics,
and STMicroelectronics, for any significant portion of the materials used in
the products we manufacture or for the products we sell. From time to time, we
experience shortages of certain electronic components from our suppliers.
Recently, we have experienced substantial shortages of certain electronic
components from our suppliers and expect that such shortages will continue to
be substantial. These shortages have not had, and are not expected to have, a
material effect on our operations.
Employees
As of June 30, 2000, we employed approximately 10,227 regular full-
time and part-time employees and approximately 407 additional workers employed
through temporary employment agencies. We believe our employee relations are
satisfactory.
Competition
The businesses in which we are engaged are highly competitive. In the
Broadband segment, we compete with a small number of equipment suppliers, most
of which specialize in the production and sale of equipment to cable
television system operators. Our Media Networks business competes with a
variety of satellite television equipment providers. We believe that our
ability to compete successfully results from our marketing strategy,
engineering skills, product features, product performance, ability to provide
post-purchase services, ability to provide quality products at competitive
prices and broad coverage by our sales personnel.
4
Forward-Looking Information
This Form 10-K, the 2000 Annual Report, any Form 10-Q or any Form 8-K
of Scientific-Atlanta or any written or verbal statements made by
representatives of Scientific-Atlanta may include "forward-looking
statements." Please see Exhibit 99 to this Form 10-K for detailed information
about the uncertainties and other factors that may cause actual results to
materially differ from the views stated in such forward-looking statements.
Item 2. Properties
We own and use offices and manufacturing facilities in metropolitan
Atlanta, Georgia; Naperville, Illinois; and Juarez, Mexico, which contain a
total of approximately 434,000 square feet, of which approximately 339,000
square feet are located at the Juarez manufacturing facility.
We also own (i) approximately 130 acres of land and a 138,000 square
foot facility in Gwinnett County, Georgia, which are leased to ViaSat, Inc.,
and (ii) approximately 280 acres of land in Gwinnett County, Georgia, held for
development of a consolidated office site for Scientific-Atlanta. The first
phase of this consolidated office site, 283,000 square feet of engineering and
office facilities, was completed in the third quarter of fiscal year 1999
utilizing a long-term operating lease arrangement. The second phase will be
completed in the third quarter of fiscal year 2001, and will consist of an
additional 299,000 square feet of engineering and office space. We presently
lease two buildings in San Diego County, California, neither of which is
required for present operations, and both of which are under sublease to other
tenants.
In addition to the property we own, which is described above, we lease
additional major manufacturing facilities containing an aggregate of
approximately 336,500 square feet at the following locations under leases
expiring (including renewal options) from 2001 to 2015:
Approximate
Location Square Footage
-------- --------------
Metropolitan Atlanta, Georgia 249,000
Sonderborg, Denmark 71,500
Toronto, Ontario 16,000
We also lease laboratory, office and warehouse space in several
buildings in the metropolitan areas of Atlanta, Georgia; Cupertino,
California; Phoenix, Arizona; Juarez, Mexico; Sonderborg, Denmark; Toronto,
Ontario; Vancouver, British Columbia; Frankfurt, Germany; Sydney, Australia;
and London and Manchester, United Kingdom, and we lease sales and service
offices in 22 domestic and foreign cities.
Item 3. Legal Proceedings
From time to time, we are involved in litigation and legal proceedings
incident to the ordinary course of our business, such as personal injury
claims, employment matters, contractual disputes and intellectual property
disputes. We do not have pending any litigation or proceedings that management
believes will have a material adverse effect, either individually or in the
aggregate, upon us.
Included in the litigation which we currently have pending are several
lawsuits we have filed as plaintiff against Gemstar International Group Ltd.
and affiliated companies. On December 3, 1998, we filed an action against
Gemstar International Group Ltd. (now Gemstar-TV Guide International, Inc.),
in the U.S. District Court in Atlanta. Gemstar-TV Guide International, Inc.
and/or its affiliated entities are referred to hereafter as "Gemstar." The
suit alleges that Gemstar violated federal antitrust laws and misused certain
patents. We seek damages, an injunction and a declaration that eight patents
that Gemstar asserts are related to electronic program guides are invalid,
unenforceable and not infringed. Gemstar has filed a counterclaim against us
alleging infringement of five of the patents.
5
On the next day, December 4, 1998, Gemstar filed a responsive action
against us in the United States District Court in Los Angeles, California
alleging infringement of two of the same patents involved in the Atlanta suit
filed by us on December 3, 1998. The suit asks for damages and injunctive
relief. As indicated below, all proceedings in this case have been stayed.
On December 23, 1998, Gemstar filed a motion with the Judicial Panel
on Multi-district Litigation requesting that the cases filed on December 3rd
and 4th 1998 be consolidated with cases previously filed by Gemstar in
California against General Instrument Corp. and Pioneer Electronic Corp., and
in Oklahoma against TV Guide Networks, Inc. The motion asked that the actions
be consolidated in a U.S. District Court in California. A hearing on the
motion was held, and in April 1999 the Judicial Panel ordered that all cases
(except the action against TV Guide Networks, Inc.) be consolidated, but in
Atlanta rather than California, for all pretrial proceedings. Therefore, all
of these cases are now in the discovery phase in the Atlanta court and the
proceedings in the California case filed by Gemstar have been stayed.
On April 23, 1999, we filed a patent infringement action against
Gemstar in the U.S. District Court in Atlanta. The suit alleges that Gemstar
infringes three Scientific-Atlanta patents relating to electronic program
guides, and seeks damages and injunctive relief.
On June 25, 1999, we filed an action against StarSight Telecast, Inc.,
a subsidiary of Gemstar International Group Ltd., in the U.S. District Court
in Atlanta, seeking a declaratory judgment of invalidity and non-infringement
of two StarSight patents that StarSight asserts are related to electronic
program guides. StarSight initially answered our complaint as to one of the
two patents, and filed a counterclaim against us alleging infringement of this
one patent. After proceedings before the court, StarSight ultimately answered
the complaint as to the second patent, but has not filed a counterclaim based
on that patent. StarSight's counterclaim seeks damages and injunctive relief.
StarSight also filed a motion for preliminary injunctive relief pending the
final outcome of the case. This case is now in the discovery phase.
On July 23, 1999, we filed a patent infringement action against
StarSight in the U.S. District Court in Atlanta. The suit alleges that
StarSight infringes three Scientific-Atlanta patents relating to electronic
program guides, and seeks damages and injunctive relief. This case was
coordinated with the April 23, 1999 action by us against Gemstar described
above, and the coordinated cases are now in the discovery phase.
In both of the cases involving our patents, we seek both damages and
an injunction against the Gemstar defendants, deployment of infringing
programs guides. In the cases challenging the Gemstar defendants' patents, we
seek an injunction against Gemstar's enforcement of these patents. In those
cases where the Gemstar defendants' patents are at issue, they have sought
damages and injunctive relief against us for infringement of certain of those
patents. The party or parties prevailing on their patents in these actions
could be entitled to damages measured either as actual lost profits or as a
reasonable royalty for the past sale of infringing electronic program guides,
and potentially a trebling of damages if the court determines that the losing
party acted willfully. The prevailing party may also be entitled to an
injunction against the future sale of infringing electronic program guides.
Accordingly, an adverse judgment against either us or the Gemstar defendants
could result in an injunction against the future sale by us or the Gemstar
defendants of infringing electronic program guides and could cause the
offending party to have to redesign their program guide to avoid infringement.
None of the actions described above is related to the 1995 American
Arbitration Association arbitration action brought against us by StarSight.
That arbitration action concerned the alleged delay by us in the deployment of
StarSight-capable set-top boxes and our development of a competing electronic
program guide allegedly using StarSight's proprietary information in violation
of a licensing agreement between us and StarSight. StarSight won an award in
that action from the arbitration panel, which we appealed to federal court.
While the appeal was pending the controversy was settled by a cross-license
agreement between the parties. The arbitration action did not address the
issue of patent infringement by either StarSight or us.
6
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Scientific-Atlanta's security
holders during the last quarter of its fiscal year ended June 30, 2000.
Item 4A. Executive Officers of Scientific-Atlanta
The following persons are the executive officers of Scientific-
Atlanta:
Executive
Name Age Officer Since Present Office
---- --- ------------- --------------
James F. McDonald 60 1993 President and Chief Executive
Officer
Conrad J. Wredberg, Jr. 59 1995 Senior Vice President and Chief Operating
Officer
J. Lawrence Bradner 49 1999 Senior Vice President; President, SciCare
Broadband Services
Dwight B. Duke 48 1997 Senior Vice President; President, Transmission
Network Systems
William E. Eason, Jr. 57 1993 Senior Vice President, General Counsel and
Corporate Secretary
H. Allen Ecker 64 1979 Senior Vice President; President, Subscriber
Networks
Wallace G. Haislip 51 1998 Senior Vice President, Chief Financial Officer
and Treasurer
Brian C. Koenig 53 1988 Senior Vice President, Human Resources
John H. Levergood 66 1992 Senior Vice President
Robert C. McIntyre 50 1999 Senior Vice President and Chief Technical Officer
Julian W. Eidson 61 1978 Vice President and Controller
Perry D. Tanner 42 2000 Vice President, Marketing
Patrick M. Tylka 51 2000 Vice President; President, Worldwide Sales
Each executive officer is elected annually and serves at the pleasure
of the Board of Directors.
Mr. Wredberg joined Scientific-Atlanta in 1995 and was elected to the
position of Vice President in May 1995. In November 1995, Mr. Wredberg was
elected as a Senior Vice President, and in January 1997, Mr. Wredberg was
appointed Chairman of the Corporate Operating Committee. In May 1999, Mr.
Wredberg was elected Chief Operating Officer. Mr. Wredberg served as President
of American Microsystem, Inc., a supplier of semiconductors, from 1985 until
1995.
Mr. Bradner joined Scientific-Atlanta in August 1999. Mr. Bradner
served as Chairman and Chief Executive Officer of Syntellect, Inc. from March
1996 to May 1999. Mr. Bradner was Chairman and Chief Executive Officer of
Pinnacle Investment Associates and its wholly-owned subsidiary, Telecorp
Systems, Inc., from January 1991 to March 1996. Mr. Bradner was employed by
Scientific-Atlanta from 1977 to 1990, where he held various management
positions and was elected Vice President in 1987. Mr. Bradner is a director of
Telemate.net, Inc.
Mr. Duke was elected Senior Vice President of Scientific-Atlanta on
April 27, 1998. From June 19, 1996 to April 27, 1998, he served as a Vice
President of Scientific-Atlanta. Prior to June 19, 1996, Mr. Duke was employed
by Scientific-Atlanta in a variety of management positions for more than five
years.
Mr. Haislip was elected to the position of Senior Vice President-
Finance, Chief Financial Officer and Treasurer on April 27, 1998. Prior to
April 27, 1998, Mr. Haislip was employed by Scientific-Atlanta in a variety of
management positions for more than five years.
7
Mr. McIntyre was employed by Scientific-Atlanta from 1991 through
1997. He served as a Vice President of Scientific-Atlanta from February 1995
through November 1995 and as a Senior Vice President of Scientific-Atlanta
from November 1995 through September 1997. From September 1997 through
November 1998, Mr. McIntyre served as Chief Operating Officer and as Chief
Executive Officer from July 1998 to November 1998 of Avex, Inc. Mr. McIntyre
re-joined Scientific-Atlanta as an employee in February 1999 and was elected
Senior Vice President and Chief Technical Officer in May 1999.
Mr. Tanner was elected to the position of Vice President, Marketing in
May 2000. Prior to May 2000, he was employed by Scientific-Atlanta in a
variety of management positions for more than five years.
All other executive officers have been employed by Scientific-Atlanta
in the same or similar capacities for more than five years. There are no
family relationships among the executive officers.
PART II
Item 5. Market for the Registrant's Common Stock and Related Matters
The Common Stock of Scientific-Atlanta is traded on the New York Stock
Exchange (symbol SFA). The approximate number of holders of record of
Scientific-Atlanta's Common Stock at August 31, 2000, was 5,901.
It has been the policy of Scientific-Atlanta to retain a substantial
portion of its earnings to finance the expansion of its business. In 1976,
Scientific-Atlanta commenced payment of quarterly cash dividends and intends
to consider the continued payment of dividends on a regular basis; however,
the declaration of dividends is discretionary with the Board of Directors, and
there is no assurance regarding the payment of future dividends by Scientific-
Atlanta. During fiscal years 1998 and 1999, Scientific-Atlanta paid a $.0075,
respectively, dividend per share each quarter. During fiscal year 2000,
Scientific-Atlanta paid a $.0075 and a $.01 dividend per share in the first
two quarters and the second two quarters, respectively.
Information as to the high and low stock prices and dividends paid for
each quarter of fiscal years 1999 and 2000 is included in Note 5 of the Notes
to Financial Statements included in this Report.
Item 6. Selected Financial Data
Selected Financial Data is set forth on page 28 of this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion of Consolidated Statement of Financial
Position, of Consolidated Statement of Earnings, and of Consolidated Statement
of Cash Flows are set forth on pages 15 and 16, 18 through 22, and 24 and 25
of this Report, respectively.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For the information required for this Item 7A, see Note 1 of the Notes
to Consolidated Financial Statements included in this Form 10-K.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Scientific-Atlanta and notes
thereto, the schedule containing certain supporting information and the report
of independent public accountants are set forth on pages 14 through 43 of this
Report. See Part IV, Item 14 for an index of the statements, notes and
schedule.
8
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10-13 (except for the information set forth at the end of Part I in Item
4A with respect to Executive Officers of Scientific-Atlanta) is incorporated
by reference from Scientific-Atlanta's definitive proxy statement for
Scientific-Atlanta's 2000 Annual Meeting of Shareholders, which is expected to
be filed pursuant to Regulation 14A within 120 days after the end of fiscal
year 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) The consolidated financial statements listed below are included on
pages 14 through 42 of this Report.
Report of Independent Public Accountants.
Consolidated Statements of Financial Position as of June 30, 2000
and July 2, 1999.
Consolidated Statements of Earnings for each of the three years in
the period ended June 30, 2000.
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 2000.
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for each of the three years in the period ended June 30,
2000
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule:
Page
----
Schedule II Valuation and Qualifying Accounts for Each of the
Three Years in the Period ended June 30, 2000. 43
All other Schedules called for under Regulation S-X are not
submitted because they are not applicable or not required or
because the required information is not material or is included in
the financial statements or notes thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits:
Periodic reports, proxy statements and other information filed by
Scientific-Atlanta with the SEC pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the SEC: Midwest Regional Office, Citicorp Center, Suite 1400, 14th Floor,
500 West Madison Street, Chicago, Illinois 60661-2511; and Northeast Regional
Office, Suite 1300, 13th Floor, 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. The SEC also maintains a Web site
(http://www.sec.gov) that makes available reports, proxy statements and other
information regarding Scientific-Atlanta. Scientific-Atlanta's SEC file number
reference is Commission File No. 1-5517.
9
(3) (a) The Composite Statement of Amended and Restated Articles of
Incorporation of Scientific-Atlanta is incorporated by
reference to Scientific-Atlanta's report on Form 10-K for the
fiscal year ended June 27, 1997.
(b) The By-laws of Scientific-Atlanta, as amended, is incorporated
by reference to Scientific-Atlanta's report on Form 10-K for
the fiscal year ended July 2, 1999.
(4) The following instrument defining the rights of security holders is
incorporated by reference to Scientific-Atlanta's Form 8-A
Registration Statement filed on April 7, 1997:
(a) Rights Agreement, dated as of February 23, 1997, between
Scientific-Atlanta and The Bank of New York, as Rights Agent,
which includes as Exhibit A the Preferences and Rights of Series
A Junior Participating Preferred Stock and as Exhibit B the Form
of Rights Certificate.
(10) Material Contracts:
(a) The following material contracts are incorporated by reference
to Scientific-Atlanta's report on Form 10-K for the fiscal year
ended July 1, 1994:
(i) Form of Severance Protection Agreement between
Scientific-Atlanta and Certain Officers and Key
Employees.*
(b) The following material contract is incorporated by reference to
Scientific-Atlanta's report on Form 10-K for the fiscal year
ended June 30, 1995:
(i) Credit Agreement, dated May 11, 1995, by and between
Scientific-Atlanta and NationsBank of Georgia, National
Association, for itself and as agent for other banks
participating in the credit facility.
(c) The following amendments to the Credit Agreement described in
item (b) above are incorporated by reference to Scientific-
Atlanta's report on Form 10-K for its fiscal year ended June 28,
1996:
(i) First Amendment, dated as of December 29, 1995, to the
Credit Agreement.
(ii) Letter Amendment, dated as of April 5, 1996, to the
Credit Agreement.
(iii) Second Amendment, dated as of June 28, 1996, to the
Credit Agreement.
(d) The following material contract is incorporated by reference to
Scientific-Atlanta's Form S-8 Registration Statement, filed on
December 27, 1996:
(i) Non-Qualified Stock Option Agreement between
Scientific-Atlanta, Inc. and James F. McDonald.*
(e) The following amendment to the Credit Agreement described in
item (b) above is incorporated by reference to Scientific-
Atlanta's report on Form 10-Q for the fiscal quarter ended March
28, 1997:
(i) Third Amendment, dated as of January 27, 1997, to the
Credit Agreement.
(f) The following material contracts or amendments to material
contracts are incorporated by reference to Scientific-Atlanta's
report on Form 10-K for the fiscal year ended June 27, 1997:
(i) Letter Amendment, dated as of April 23, 1997, to the
Credit Agreement described in item (b) above.
(ii) Credit and Investment Agreement, dated as of July 30,
1997, among Scientific-Atlanta, Wachovia Capital
Markets, Inc., Wachovia Bank, N.A., as agent, and the
lenders signatories thereto.
(iii) Lease Agreement, dated as of July 30, 1997, between
Wachovia Capital Markets, Inc. and Scientific-Atlanta.
(iv) Acquisition, Agency, Indemnity and Support Agreement
between Scientific-Atlanta and Wachovia Capital
Markets, Inc., dated as of July 30, 1997.
10
(v) Ground Lease, dated as of July 30, 1997, between
Scientific-Atlanta and Wachovia Capital Markets, Inc.
(vi) Scientific-Atlanta, Inc. 1981 Incentive Stock Option
Plan, as amended.*
(vii) Scientific-Atlanta, Inc. 1978 Non-Qualified Stock
Option Plan for Key Employees, as amended.*
(g) The following material contracts or amendments to material
contracts are incorporated by reference to Scientific-Atlanta's
report on Form 10-K for the fiscal year ended June 26, 1998:
(i) Scientific-Atlanta, Inc. Restoration Retirement Plan,
as amended.*
(ii) Letter Amendment, dated as of April 24, 1998, to the
Credit Agreement described in item (b) above.
(h) The following material contracts or amendments to material
contracts are incorporated by reference to Scientific-Atlanta's
report on Form 10-Q for the fiscal quarter ended April 2, 1999:
(i) Form of First Amendment of Severance Protection
Agreement by and between Scientific-Atlanta, Inc. and
Certain Executives*
(ii) Scientific-Atlanta, Inc. Retirement Plan for Non-
Employee Directors*
(iii) Scientific-Atlanta, Inc. Annual Incentive Plan for Key
Employees as amended and restated*
(iv) 1985 Executive Deferred Compensation Plan of
Scientific-Atlanta, Inc., as amended and restated*
(v) Letter Amendment to Credit and Investment Agreement
among Scientific-Atlanta, Inc., Wachovia Bank, N.A. and
Wachovia Capital Markets, Inc.
(vi) Amendment to Credit and Investment Agreement among
Scientific-Atlanta, Inc., Wachovia Bank, N.A. and
Wachovia Capital Markets, Inc.
(vii) Second Amendment to Credit and Investment Agreement
among Scientific-Atlanta, Inc., Wachovia Bank, N.A. and
Wachovia Capital Markets, Inc.
(viii) Fourth Amendment to Credit Agreement between
Scientific-Atlanta, Inc. and NationsBank, N.A. and
other lenders
(ix) First Amendment to Lease Agreement between Scientific-
Atlanta, Inc. and Wachovia Capital Markets, Inc.
(x) Second Amendment to Lease Agreement between Scientific-
Atlanta, Inc. and Wachovia Capital Markets, Inc.
(i) The following material contracts or amendments to material
contracts are incorporated by reference to Scientific-Atlanta's
annual report on Form 10-K for the fiscal year ended July 2,
1999:
(i) Long-Term Incentive Plan of Scientific-Atlanta, Inc.,
as amended and restated.*
(ii) Scientific-Atlanta, Inc. Senior Officer Annual
Incentive Plan, as amended and restated.*
(iii) Amended and Restated Credit Agreement, dated as of May
7, 1999, by and among Scientific-Atlanta and The Bank
of New York and ABN Amro Bank N.V. as co-agents and
NationsBank, N.A. as administrative agent for the
participating lenders.
11
(iv) Amendment No. 1 to the Amended and Restated Credit
Agreement by and among Scientific-Atlanta and The Bank
of New York and ABN Amro Bank N.V. as co-agent and
NationsBank, N.A. as administrative agent for the
participating lenders.
(j) Supplemental Executive Retirement Plan, as amended and
restated.*
(k) Stock Plan for Non-Employee Directors, as amended and restated.*
(l) Non-Employee Directors Stock Option Plan, as amended and
restated.*
(m) Executive Deferred Compensation Plan, as amended and restated.*
(n) 1996 Employee Stock Option Plan, as amended and restated.*
(o) Deferred Compensation Plan for Non-Employee Directors, as
amended and restated.*
(p) Second Amendment to Amended and Restated Credit Agreement dated
as of May 4, 2000 among Scientific-Atlanta and The Bank of New
York and ABN Amro Bank N.V. as co-agents and Bank of America,
N.A., successor to Nationsbank, N.A.
(21) Significant Subsidiaries of Scientific-Atlanta.
(23) Consent of Independent Public Accountants.
(27) Financial Data Schedule.
(99) Cautionary Statements.
- --------
* Indicates management contract or compensatory plan or arrangement.
12
[This Page Intentionally Left Blank]
13
Report of Independent Public Accountants
To the Stockholders of Scientific-Atlanta, Inc.:
We have audited the accompanying consolidated statements of financial
position of Scientific-Atlanta, Inc. (a Georgia corporation) and subsidiaries
as of June 30, 2000, and July 2, 1999, and the related consolidated statements
of earnings, cash flows and stockholders' equity and comprehensive income for
each of the three years in the period ended June 30, 2000 appearing on pages
17, 23, 26 and 27, respectively. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Scientific-Atlanta, Inc. and subsidiaries as of June 30, 2000 and July 2,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000 in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in
Item 14(a)(2) of this Form 10-K is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 26, 2000
Report of Management
The management of Scientific-Atlanta, Inc. (the Company) has the
responsibility for preparing the accompanying financial statements and for
their integrity and objectivity. The statements, which include amounts that
are based on management's best estimates and judgments, have been prepared in
conformity with accepted accounting principles generally accepted in the
United States and are free of material misstatement. Management also prepared
the other information in the Form 10-K and is responsible for its accuracy and
consistency with the financial statements.
The Company maintains a system of internal control over the preparation
of its published annual and interim financial statements. It should be
recognized that even an effective internal control system, no matter how well
designed, can provide only reasonable assurance with respect to the
preparation of reliable financial statements; further, because of changes in
conditions, internal control system effectiveness may vary over time.
Management assessed the Company's system of internal control in
relation to criteria for effective internal control over the preparation of
its published annual and interim financial statements. Based on its
assessment, it is management's opinion that its system of internal control as
of June 30, 2000 is effective in providing reasonable assurance that its
published annual and interim financial statements are free of material
misstatement.
As part of their audit of our financial statements, Arthur Andersen LLP
considered certain elements of our system of internal controls in determining
their audit procedures for the purpose of expressing an opinion on the
financial statements.
The audit committee of the board of directors is composed solely of
outside directors and is responsible for recommending to the board the
independent public accountants to be retained for the year, subject to
stockholder approval. The audit committee meets three times each year to
review with management the Company's system of internal accounting controls,
audit plans and results, accounting principles and practices, and the annual
financial statements.
/s/ James F. McDonald /s/ Wallace G. Haislip
James F. McDonald Wallace G. Haislip
President and Chief Executive Officer Senior Vice President - Finance
Chief Financial Officer and Treasurer
14
Management's Discussion of Consolidated Statements of Financial Position
Scientific-Atlanta had stockholders' equity of $1,215.0 million and cash and
short-term investments of $523.1 million at June 30, 2000. The current ratio
was 3.0:1 at June 30, 2000 compared to 3.1:1 at July 2, 1999.
Receivables were $333.2 million at fiscal year-end, compared to $290.3 million
at the prior year-end. Average days sales outstanding were 65 in fiscal
2000, as compared to 81 days in the prior year. The allowance for doubtful
accounts of $4.1 million decreased $4.0 million primarily due to the
collection of receivables from customers in the Asia Pacific region that had
previously been reserved.
Inventory turnover was 5.7 times in 2000, compared to 4.9 in the prior year.
The improvement in inventory turnover was due to higher sales volume, the
sale of the Satellite Networks business unit which historically had low
inventory turnover rates and management's continued effort to improve
working capital in fiscal year 2000.
Current deferred income taxes increased $12.6 million in fiscal year 2000
primarily due to research and development credit carryforwards and increases
in reserves currently not deductible.
Other current assets of $34.7 million include vendor deposits, license fees,
prepaid taxes, other than income taxes, land held for sale, prepaid software
maintenance fees and other miscellaneous prepaid expenses.
Net property, plant and equipment increased $21.7 million in fiscal year 2000.
Capital additions of $82.8 million included expenditures for equipment and
expansion of manufacturing capacity, primarily in Juarez, Mexico.
Non-current marketable securities consist of investments in common stock of
publicly traded companies and are reported at market value. During fiscal
year 2000 and fiscal year 1999, we recorded unrealized gains of $348.9
million and $12.4 million, respectively, on these securities due to market
value appreciation which are included in accumulated other comprehensive
income.
Other assets, which include investments, license fees, intellectual property,
capitalized software development costs, cash surrender value of company-
owned life insurance and various prepaid expenses, increased $13.5 million
in fiscal year 2000 due primarily to investments of $13.1 million in Bookham
Technology, plc., a UK-based developer and supplier of optical components,
$10.0 million in Luminous Networks, a developer of optical transport
technology and $6.9 million in Broadband Innovations, Inc., a
telecommunications technology company.
Total borrowings at year-end amounted to $0.5 million, $0.3 million lower than
the prior year. The borrowings consist primarily of financing for equipment.
See Note 7.
Accounts payable were $212.1 million at year-end, up from $137.1 million last
year. The increase reflects the higher inventory levels at the end of fiscal
year 2000 as compared to the prior year and the increase in days in accounts
payable to 49 at the end of fiscal year 2000 from 44 at the end of fiscal
year 1999.
Accrued liabilities of $149.4 million include accruals for compensation,
provisions for businesses sold, warranty and service obligations, customer
down-payments, royalties and taxes, excluding income taxes. See Management's
Discussion of Consolidated Statement of Earnings and Notes 3 and 8 for
additional information.
Non-current deferred income taxes of $114.4 million relate primarily to the net
unrealized gain on marketable securities classified as available for sale
under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
At July 2, 1999, we had a net non-current deferred tax asset which was
included in Other Assets.
Other liabilities of $69.8 million are comprised of deferred compensation,
retirement plans, postretirement benefit plans, postemployment benefits and
other miscellaneous accruals. See Note 9 for details.
15
Management's Discussion of Consolidated Statements of Financial Position
(Continued)
Stockholders' equity was $1.21 billion at the end of fiscal year 2000, up
$476.8 million over the prior year. Net earnings of $155.8 million, $116.4
million from the issuance of common stock pursuant to employee benefit and
other stock-based compensation plans and a $213.8 million increase in
accumulated comprehensive income were partially offset by dividend payments
of $5.5 million and the repurchase of 75,000 shares of our stock for $3.7
million. See the Consolidated Statements of Stockholders' Equity and
Comprehensive Income for details.
16
Consolidated Statements of Financial Position
In Thousands
---------------------
2000 1999
- -------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 462,496 $ 300,454
Short-term investments 60,628 --
Receivables, less allowance for doubtful accounts of
$4,134,000 in 2000 and $8,160,000 in 1999 333,242 290,274
Inventories 209,916 189,354
Deferred income taxes 49,681 37,130
Other current assets 34,671 14,249
---------- ----------
Total current assets 1,150,634 831,461
---------- ----------
Property, plant, and equipment, at cost
Land and improvements 20,248 21,161
Buildings and improvements 40,915 31,802
Machinery and equipment 214,295 197,326
---------- ----------
275,458 250,289
Less - accumulated depreciation and amortization 96,209 92,751
---------- ----------
179,249 157,538
---------- ----------
Cost in excess of net assets acquired 7,475 7,900
---------- ----------
Non-current marketable securities 381,983 18,783
---------- ----------
Other assets 60,119 46,592
---------- ----------
Total Assets $1,779,460 $1,062,274
========== ==========
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 386 $ 416
Accounts payable 212,111 137,146
Accrued liabilities 149,402 125,038
Income taxes currently payable 18,264 5,211
---------- ----------
Total current liabilities 380,163 267,811
---------- ----------
Long-term debt, less current maturities 102 370
---------- ----------
Deferred income taxes 114,428 --
---------- ----------
Other liabilities 69,807 55,927
---------- ----------
Commitments and contingencies (Note 14)
Stockholders' equity
Preferred stock, authorized 50,000,000 shares; no
shares issued -- --
Common stock, $0.50 par value, authorized
350,000,000 shares, issued 159,971,077 shares in
2000 and 79,616,712 shares in 1999 79,986 39,808
Additional paid-in capital 339,649 226,390
Retained earnings 607,822 497,403
Accumulated other comprehensive income, net of taxes
of $135,538,000 in 2000 and $4,921,000 in 1999 221,141 7,379
---------- ----------
1,248,598 770,980
Less - Treasury stock, at cost (651,805 shares in
2000 and 2,269,646 shares in 1999) 33,638 32,814
---------- ----------
1,214,960 738,166
---------- ----------
Total Liabilities and Stockholders' Equity $1,779,460 $1,062,274
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes.
17
Management's Discussion of Consolidated Statements of Earnings
The Consolidated Statements of Earnings summarizes Scientific-Atlanta's
operating performance over the last three years, during which time we have
accelerated development of new products, particularly the development,
deployment, production and qualification of our interactive digital
networks at customer sites in North America, and continued our expansion
into international markets.
Net earnings were $155.8 million, or $0.94 per share as compared to $102.3
million, or $0.65 per share in fiscal year 1999. Earnings in fiscal year
1999 included gains of $41.6 million from the sale of certain marketable
securities and the adjustment of our investments in other marketable
securities to market value. Excluding these gains, earnings from continuing
operations in 1999 were $60.7 million, or $0.39 per share.
Our fiscal year 1998 results contain several significant and non-recurring
items. We recorded $76.2 million of restructuring and other one-time pre-
tax charges in the fourth quarter of fiscal year 1998. These charges
include the impairment of assets, such as excess inventory related to the
consolidation of manufacturing operations and the discontinuance of certain
product models, costs to relocate production and the Network Operations
Center (NOC), losses on contracts, costs to abandon facilities, charges to
establish an allowance for doubtful accounts receivable from customers in
the Asia Pacific region and environmental issues. We charged $33.6 million
to cost of sales, $5.9 million to selling and administrative expenses,
$23.4 million to restructuring expense and $13.3 million to other expense.
We also recorded a one-time pre-tax gain of $94.0 million to adjust our
investment in Broadcom Corporation to market value. Net earnings excluding
these one-time special items were $68.5 million, or $0.44 per share.
Sales of $1.72 billion in fiscal year 2000 increased 38 percent over the prior
year. Domestic sales grew $391.3 million, or 41 percent, year-over-year
while international sales increased $80.6 million, or 29 percent, year-
over-year.
During fiscal year 2000, Scientific-Atlanta accelerated the rollout of
advanced two-way digital cable systems which are real-time, interactive
digital networks capable of advanced services such as video-on-demand,
e-mail and Web browsing. During fiscal year 2000, we increased the
production capacity of our digital set-tops in our Juarez facility from
250,000 units per quarter to 1 million units per quarter. We plan to
increase the production capacity of our digital set-tops in the Juarez
facility to 1.3 million units per quarter by the second quarter of fiscal
year 2001.
Broadband segment sales in fiscal year 2000 were $1.55 billion, up 48
percent over the prior year. Sales of subscriber products led the year-
over-year increase with growth of 51 percent driven by the continued rapid
acceleration in the deployment of digital interactive systems and strong
demand for the Explorer(R) set-tops. We shipped more than 1.8 million
Explorer set-tops during fiscal year 2000 as compared to approximately 0.5
million in fiscal year 1999. As anticipated and previously announced, sales
of analog set-tops continued to decline as cable operators shift from
analog to digital products. We expect that the downward trend in sales of
analog set-tops will continue throughout the next fiscal year. Sales of
transmission products increased 44 percent led by growth of 79 percent and
51 percent in sales of opto-electronics and RF (radio frequency) products,
respectively. Satellite segment sales declined 11 percent from the prior
year due to lower sales in the Satellite Networks business unit which
relies significantly on international markets which were negatively
impacted by the weak economic conditions in Eastern Europe and the Asia
Pacific region and the sale of the Satellite Networks business unit to
ViaSat, Inc. in April 2000. We do not expect the sale of the Satellite
Networks business to have a material impact on our results of operations or
financial position. Sales of the Satellite Networks business unit were
approximately 4 percent of total sales in fiscal year 2000 and 8 percent of
total sales in fiscal year 1999.
18
Management's Discussion of Consolidated Statements of Earnings (Continued)
Sales of $1.24 billion in fiscal year 1999 increased 5 percent over the
prior year. Domestic sales grew $160.1 million, or 20 percent, year over
year offsetting weaknesses in markets outside the United States.
International sales declined $98.1 million, or 26 percent, year-over-year.
Broadband segment sales of $1.05 billion in fiscal year 1999 increased 18
percent over the prior year with strong domestic growth in both the
transmission and subscriber businesses driven by the cable industry's
accelerating moves into Internet Protocol based digital interactive
services. The growth in sales of transmission products was driven by cable
system rebuilds. The significant increase in sales of digital products was
the primary factor in the year-to-year increase in the subscriber
businesses. Satellite segment sales in fiscal year 1999 were $184.6
million, down 28 percent from the prior year.
Sales of digital set-tops constituted 34 percent of our total sales in
fiscal year 2000, and approximately 15 percent and 1 percent of our total
sales in fiscal years 1999 and 1998, respectively. Sales of RF products
were approximately 18 percent of our total sales in fiscal year 2000, and
approximately 16 percent and 18 percent of such sales in fiscal years 1999
and 1998, respectively. Sales of analog set-tops constituted 9 percent of
our total sales in fiscal year 2000, and approximately 24 percent and 33
percent of such sales in fiscal years 1999 and 1998, respectively.
International sales were 21 percent of total sales in fiscal year 2000, as
compared to 22 percent and 32 percent of such sales in fiscal years 1999
and 1998, respectively.
Cost of sales as a percent of sales decreased 0.7 percentage points in fiscal
year 2000 from 1999, reflecting the economies of scale associated with
increased manufacturing volumes, the continuing benefit from manufacturing
in Juarez, Mexico and negotiated procurement savings.
Cost of sales as a percent of sales decreased 0.6 percentage points in
fiscal year 1999 from 1998. Cost of sales in fiscal year 1998 included one-
time charges of $33.6 million previously discussed. Excluding these one-
time charges, cost of sales as a percent of sales increased 2.2 percentage
points in fiscal year 1999 over 1998. Margins on digital set-tops, which
were lower than Scientific-Atlanta's average, more than offset gains from
cost reductions from the transfer of RF production to Juarez, Mexico from
Norcross, Georgia, negotiated procurement savings and economies of scale
associated with increased manufacturing volumes.
The materials and supplies we purchase are standard electronic components,
such as integrated circuits, wire, circuit boards, transistors, capacitors
and resistors, all of which are produced by a number of manufacturers.
Matsushita Electronic Components Corporation of America and its affiliates
manufacture analog set-tops for us and are a primary supplier of those set-
tops. Cablevision Electronics Co., Ltd. and Zinwell Corporation, Taiwanese
companies, are primary suppliers of taps. We also purchase aluminum and
steel, including castings and semi-fabricated items, produced by a variety
of sources. Our primary supplier of die castings for our RF distribution
products is Premiere Die Casting, Inc. Anadigics, Inc. is a provider of
CATV hybrid integrated circuits for use in our RF distribution products.
Additionally, Motorola, Inc., Broadcom Corporation and STMicroelectronics
are three of our primary suppliers of a variety of semi-conductor products,
which are used as components in an array of our products, including set-
tops. We consider our sources of supply to be adequate and are not
dependent upon any single supplier, except for those listed above, for any
significant portion of the materials used in the products we manufacture or
for the products we sell. From time to time we experience shortages of
certain electronic components from our suppliers. Recently, we have
experienced substantial shortages of certain electronic components from our
suppliers and expect that such shortages will continue to be substantial.
These shortages have not had, and are not expected to have, a material
effect on our operations.
19
Management's Discussion of Consolidated Statements of Earnings (Continued)
Sales and administrative expenses of $177.6 million were up $15.6 million over
the prior year. Increases in expenses related to the high volume of sales
and higher professional fees more than offset cost reductions from the
restructuring of the Satellite segment. Sales and administrative expenses
of $162.0 million in fiscal year 1999 were $3.6 million lower than 1998.
Research and development expenses were $122.4 million in fiscal year 2000, up
$5.1 million over 1999. Research and development efforts in 2000 continued
to focus on the development of applications and enhancements to Scientific-
Atlanta's interactive broadband networks, particularly for opto-electronic
products, digital set-tops and digital network products. Research and
development expenses were approximately 7 percent of sales in fiscal year
2000 and 9 percent of sales in fiscal years 1999 and 1998. We continue to
invest in research and development programs to support existing products as
well as future potential products and services for our customer base.
Certain software development costs are capitalized when incurred and are
reported at the lower of unamortized cost or net realizable value.
Capitalization of software development costs begins upon the establishment
of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized
software development costs requires considerable judgment by management
with respect to certain external factors, including, but not limited to,
anticipated future revenues, estimated economic life and changes in
software and hardware technologies.
We capitalized $3.4 million, $3.3 million and $2.2 million of software
development costs in fiscal years 2000, 1999 and 1998, respectively. We
recognized revenue on certain of these products and amortized $4.4 million
and $0.6 million of these development costs to cost of sales in fiscal
years 2000 and 1999, respectively. No such revenue was recognized in fiscal
year 1998. Capitalization ceases and amortization begins when the products
are available for general release to customers.
We periodically allocate engineering resources from research and
development efforts for specific customer orders. The revenue from these
orders will be recognized in future periods and, accordingly, the related
costs have been capitalized as inventory. There were no non-recurring
engineering costs capitalized in inventory at June 30, 2000. At July 2,
1999, we had capitalized $9.0 million of such non-recurring engineering
costs capitalized in inventory. During fiscal years 2000, 1999 and 1998, we
recognized revenue on certain of these orders and, accordingly, charged
$9.0 million, $2.2 million and $1.3 million, respectively, to cost of
sales.
We invest in our technology and in select emerging technologies of
innovative companies. During fiscal year 2000, we invested $13.1 million in
Bookham Technology, plc., a UK-based developer and supplier of optical
components, $10.0 million in Luminous Networks, a developer of next-
generation optical transport technology, and $6.9 million in Broadband
Innovations, Inc., a telecommunications technology company specializing in
RF and digital signal processing solutions for broadband communications.
We periodically evaluate our strategic direction including an assessment of
the markets we serve and alternative methods of generating revenues from
our investments in research and development programs, such as licensing of
software and hardware technology.
Restructuring charges of $23.4 million were recorded in the fourth quarter of
fiscal year 1998. The charges included $10.2 million and $3.2 million for
fixed assets to be abandoned and expenses related to the remaining
contractual liabilities for cancelled leases, respectively, as a result of
the consolidation of operations, $5.2 million for severance costs, and $4.8
million for the impairment of certain assets and other miscellaneous
expenses.
20
Management's Discussion of Consolidated Statements of Earnings (Continued)
As part of the restructuring, production of the RF amplifier was transferred
from Norcross, Georgia to Scientific-Atlanta's high volume, low cost
manufacturing facility in Juarez, Mexico during the first half of fiscal year
1999. The Norcross manufacturing facility is focused on medium- to low-volume
products requiring close engineering support. The production of cable headend
equipment was consolidated in Norcross from Vancouver, British Columbia
during the second half of fiscal year 1999. The Melbourne, Florida satellite
services NOC and research and development facility were also relocated to
Norcross. During fiscal year 1998, our European headquarters moved from
London, England to Frankfurt, Germany to better address market opportunities
in continental Europe. The Far East regional headquarters were transferred
from Hong Kong to Singapore. Our Satellite Networks and Communications and
Tracking Systems business units combined in fiscal year 1999 to capitalize on
the combined resources provided by concentrated capabilities in networks,
research and development, marketing and sales, and customer program
management and services.
We substantially completed our restructuring program in fiscal year 1999.
Approximately $1.4 million of the original $23.4 million restructuring charge
will be incurred after June 30, 2000 for expenses related to contractual
obligations under cancelled leases.
Interest expense was $0.6 million, $0.6 million and $0.5 million in fiscal
years 2000, 1999 and 1998, respectively.
Interest income was $19.6 million, an increase of $11.1 million over the prior
year, due to higher average cash balances and the increase in short-term
investments in fiscal year 2000.
Other (income) expense of $0.7 million in fiscal year 2000 included expenses
of $10.3 million related to contractual obligations to minority
shareholders of a majority-owned subsidiary and losses of $2.4 million from
the disposal of fixed assets. During fiscal year 2000, we completed the
sale of certain assets of our Control Systems business unit for $3.3
million of cash and recorded a gain of $1.5 million. We also recorded a
$5.8 million gain from the sale of a portion of our investment in WorldGate
Communications, Inc. (WorldGate). Other (income) expense also included
gains of $5.5 million from the reduction of reserves related to the sale of
two business units. During the year, we determined that our exposure for
indemnifications to the purchasers of these business units and other
miscellaneous expenses related to the dispositions were ultimately less
than we had previously estimated and, accordingly, reduced the reserves. We
also completed the sale of the majority of the Satellite Networks business
unit for $65.3 million of cash. No gain or loss was recognized on this
transaction. At June 30, 2000, we had reserves of approximately
$28.7 million related to the disposition of these three business units to
provide for potential sales price adjustments, expenses related to
contractual commitments to the purchasers, indemnifications to the
purchasers, severance and other miscellaneous expenses related to the
sales. We also reversed approximately $4.5 million of a $5.5 million charge
recorded in fiscal year 1998 for expenses and the potential settlement of
environmental issues. As this environmental matter has progressed, we have
determined that its potential exposure is less than initially anticipated.
At June 30, 2000, we had $0.9 million remaining in the reserve for expenses
and the potential settlement of environmental issues.
Other income of $62.3 million in fiscal year 1999 included gains of $41.3
million and $16.6 million from the sale of our investments in Broadcom
Corporation and Harmonic Inc., respectively, $6.2 million from the
cancellation of a contract under which we were obligated to supply
equipment and $5.0 million from an investment in a partnership. In
addition, during the second quarter of fiscal year 1999, we decided to
dispose of a business unit, Control Systems, which produced devices to
monitor and manage utility service usage, because the business unit did not
fit with our core strategy. We recorded a charge of approximately
21
Management's Discussion of Consolidated Statements of Earnings (Continued)
$6.0 million to adjust the carrying value of the assets to be sold to fair
value, less costs to sell, to adjust the estimated profitability on certain
contracts to allow the purchaser to achieve reasonable margins, to provide
for indemnification to the purchaser and to provide for other miscellaneous
expenses associated with the sale.
Other income of $79.9 million in fiscal year 1998 included a $93.8 million
net gain from the mark-to-market adjustment of marketable securities of
which $94.0 million related to our investment in Broadcom Corporation, a
$9.1 million gain from the sale of certain assets of the Interdiction
business, a loss of $9.0 million from the discontinuance of research and
development efforts related to our CoAxiom(R) telephony products, $6.2
million for estimated losses on the resale of used equipment and
$5.5 million for expenses and the potential settlement of environmental
issues and other miscellaneous items.
During fiscal year 1998, we sold the inventory, manufacturing assets and
intellectual property of our Interdiction business to Blonder Tongue
Laboratories, Inc. (Blonder Tongue) for $19.0 million in cash, Blonder
Tongue stock valued at $1.0 million and an option to acquire additional
shares of Blonder Tongue stock, and recorded a pre-tax gain of $9.1 million.
During fiscal year 1998, we also sold the majority of the net assets of our
Microwave business unit for $8.1 million of cash. No gain or loss was
recognized on the transaction.
The provision for income taxes was 30 percent of pre-tax earnings in fiscal
years 2000, 1999 and 1998. We expect our effective income tax rate will
increase to 34 percent of pre-tax earnings in fiscal year 2001 as the impact
on the tax rate from research and development credits is diminished with
higher levels of pretax earnings. Details of the provision for income taxes
are discussed in Note 10.
Earnings per share of $0.94 in fiscal year 2000 compares with earnings per
share of $0.65 in 1999 and $0.50 in 1998. Average diluted shares outstanding
increased to 164.9 million in fiscal year 2000 from 157.1 million in 1999
due primarily to the issuance of shares pursuant to stock option plans,
401(k) plan and other stock-based compensation arrangements. Average diluted
shares declined in fiscal year 1999 as compared to 1998 due primarily to the
repurchase of 4,648,000 shares of our common stock in 1999. Earnings per
share and weighted average shares outstanding for prior periods have been
restated to reflect the 2-for-1 stock split in March 2000. See Notes 15 and
16.
22
Consolidated Statements of Earnings
(In Thousands, Except Per Share Data) 2000 1999 1998
- -----------------------------------------------------------------------------
Sales $1,715,410 $1,243,473 $1,181,404
- -----------------------------------------------------------------------------
Costs and expenses
Cost of sales 1,212,655 888,162 850,738
Sales and administrative 177,588 162,017 165,639
Research and development 122,403 117,261 111,546
Restructuring -- -- 23,412
Interest expense 564 635 476
Interest income (19,636) (8,526) (5,963)
Other (income) expense, net (747) (62,281) (79,863)
- -----------------------------------------------------------------------------
Total costs and expenses 1,492,827 1,097,268 1,065,985
- -----------------------------------------------------------------------------
Earnings before income taxes 222,583 146,205 115,419
- -----------------------------------------------------------------------------
Provision for income taxes 66,775 43,862 34,626
- -----------------------------------------------------------------------------
Net earnings $ 155,808 $ 102,343 $ 80,793
- -----------------------------------------------------------------------------
Earnings per common share
- -----------------------------------------------------------------------------
Basic $ 0.99 $ 0.67 $ 0.51
Diluted $ 0.94 $ 0.65 $ 0.50
- -----------------------------------------------------------------------------
Weighted average number of common shares
outstanding
- -----------------------------------------------------------------------------
Basic 157,807 153,630 157,384
- -----------------------------------------------------------------------------
Diluted 164,895 157,130 160,006
- -----------------------------------------------------------------------------
See accompanying notes.
23
Management's Discussion of Consolidated Statements of Cash Flows
The Statement of Cash Flows summarizes the main sources of our cash and its
uses. These flows of cash provided or used are summarized by Scientific-
Atlanta's operating activities, investing activities and financing
activities.
Cash and cash equivalents at the end of fiscal year 2000 were $462.5 million,
up $162.0 million from the end of 1999 due to improved earnings and proceeds
from the sale of the Satellite and Control Systems business units and the
issuance of stock. During fiscal year 2000, we transferred $60.6 million
from cash and cash equivalents to short-term investments to improve the
yield on our investments.
We have a $300 million senior credit facility available that provides for
unsecured borrowings up to $150 million which expires May 2001 and up to
$150 million which expires May 2004. There were no outstanding borrowings
under this facility at June 30, 2000 or at July 2, 1999. We believe that
funds generated from operations, existing cash balances and our available
senior credit facility will be sufficient to support growth and planned
expansion of manufacturing capacity.
Cash provided by operating activities was $222.2 million for fiscal year 2000,
compared to $46.2 million for fiscal year 1999. Cash provided by improved
earnings and increases in accounts payable and other liabilities were offset
partially by increases in accounts receivable and inventory levels as
compared to the prior year. See Management's Discussion of the Statement of
Financial Position for details of this performance.
In fiscal year 1999, cash provided by earnings and increases in accounts
payable were also offset partially by increases in accounts receivable and
inventory levels as compared to the prior year.
Cash used by investing activities of $103.7 million included expenditures for
equipment and expansion of manufacturing capacity, primarily in Juarez,
Mexico, purchases of short-term investments and technology investments. Cash
provided by investing activities included proceeds from the sale of the
Satellite and Control System business units and the divestiture of a portion
of our investment in WorldGate Communications, Inc. See Note 2 for
additional discussion of investing activities.
Cash provided by investing activities of $107.0 million in fiscal year 1999
consisted of proceeds from the sale of marketable securities and other
investments offset by investing activities of $51.4 million for expenditures
for equipment and the expansion of manufacturing capacity, primarily in
Juarez, Mexico.
Cash used by investing activities of $14.8 million in fiscal year 1998
included expenditures for equipment, expansion of manufacturing capacity,
primarily in Juarez, Mexico, and other investing activities. Sources of cash
included proceeds from the sales of the Interdiction and Microwave
businesses.
Cash provided by financing activities of $43.5 million included $53.1 million
from the issuance of stock pursuant to stock option and employee benefit
plans offset partially by dividend payments of $5.5 million, the repurchase
of 75,000 shares of Scientific-Atlanta's common stock for $3.7 million and
payments on long-term debt of $0.3 million.
Cash used by financing activities of $28.1 million in fiscal year 1999
included the acquisition of 4,648,000 shares of Scientific-Atlanta's stock
for $65.2 million, dividend payments of $4.6 million and payments on long-
term debt of $0.9 million. We reissue these shares under the Scientific-
Atlanta stock option plans, 401(k) plan, employee stock purchase plan and
other stock-based employee compensation arrangements. The issuance of stock
pursuant to these plans generated cash of $42.6 million.
Cash provided by financing activities was $2.8 million in fiscal year 1998.
Financing activities included the repurchase of 500,000 shares of
Scientific-Atlanta's common stock for
24
Management's Discussion of Consolidated Statements of Cash Flows (Continued)
$7.5 million, dividend payments of $4.7 million and net debt payments of $0.9
million. The issuance of stock pursuant to stock option and employee benefit
plans generated cash of $16.0 million.
----------------
Any statements in Management's Discussion and Analysis of Financial Condition
that are not statements about historical facts are forward-looking statements.
Such forward-looking statements are based upon current expectations but involve
risks and uncertainties. Investors are referred to the Cautionary Statements
contained in Exhibit 99 to this Form 10-K for a description of the various
risks and uncertainties that could cause Scientific-Atlanta's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in Scientific-Atlanta's forward-looking statements. Such
Exhibit 99 is hereby incorporated by reference into Management's Discussion and
Analysis of Financial Condition and Results of Operations.
CoAxiom and Explorer are registered trademarks of Scientific-Atlanta, Inc.
25
Consolidated Statements of Cash Flows
(In Thousands) 2000 1999 1998
- ------------------------------------------------------------------------------
Operating Activities:
- ---------------------
Net earnings from continuing operations $ 155,808 $102,343 $ 80,793
Adjustments to reconcile net earnings from
continuing operations to net cash provided
by operating activities:
(Gains) on marketable securities, net (5,780) (59,465) (93,764)
Depreciation and amortization 50,707 46,075 48,260
Compensation related to stock benefit plans 20,779 9,720 9,680
Provision for losses on accounts receivable (3,165) (1,615) 6,231
Losses on sale of property, plant and
equipment 2,396 4,436 4,297
(Gain) on sale of businesses, net (6,527) -- (9,080)
(Earnings) losses of partnerships, net 754 (6,023) 20
Changes in operating assets and liabilities:
Receivables (55,409) (34,209) (27,748)
Inventories (28,308) (29,809) 42,753
Deferred income taxes (22,570) (15,593) 8,286
Accounts payable and accrued liabilities 74,435 25,185 3,124
Other assets (29,204) (7,867) (9,253)
Other liabilities 71,571 12,658 16,615
Exchange rate fluctuations, net (3,266) 316 50
--------- -------- --------
Net cash provided by operating activities 222,221 46,152 80,264
--------- -------- --------
Investing Activities:
- ---------------------
Purchases of property, plant and equipment (82,772) (51,352) (40,643)
Purchases of short-term investments (60,628) -- --
Proceeds from the sale of businesses 68,606 -- 27,059
Proceeds from the sale of investments 8,719 152,974 --
Other investments (37,713) 4,952 (1,564)
Other 106 469 308
--------- -------- --------
Net cash provided (used) by investing
activities (103,682) 107,043 (14,840)
--------- -------- --------
Financing Activities:
- ---------------------
Principal payments on long-term debt (298) (923) (943)
Dividends paid (5,541) (4,618) (4,723)
Issuance of stock 53,087 42,636 16,002
Treasury shares acquired (3,745) (65,228) (7,511)
--------- -------- --------
Net cash provided (used) by financing
activities 43,503 (28,133) 2,825
--------- -------- --------
Increase in cash and cash equivalents 162,042 125,062 68,249
Cash and cash equivalents at beginning of
year 300,454 175,392 107,143
--------- -------- --------
Cash and cash equivalents at end of year $ 462,496 $300,454 $175,392
========= ======== ========
See accompanying notes.
26
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars In Thousands, Except Per Share Data) 2000 1999 1998
- -------------------------------------------------------------------------------
Preferred Stock
Shares authorized 50,000 50,000 50,000
Shares issued -- -- --
- -------------------------------------------------------------------------------
Common Stock ($0.50 Par Value)
Shares authorized 350,000 350,000 350,000
Shares issued at beginning of year 79,617 79,207 77,995
Issuance of a 2-for-1 stock split effected in
the form of a stock dividend 79,696 -- --
Issuance of shares under employee benefit
plans 633 264 1,095
Issuance of restricted shares 25 146 117
- -------------------------------------------------------------------------------
Shares issued at end of year 159,971 79,617 79,207
- -------------------------------------------------------------------------------
Additional Paid-in Capital
Balance, beginning of year $ 226,390 $195,446 $171,857
Issuance of shares under employee benefit
plans 27,839 11,431 14,042
Tax benefit related to the exercise of stock
options 45,867 15,317 5,719
Issuance of restricted shares to employees 46,759 8,616 3,843
Restricted shares forfeited/canceled 25,891 849 1,934
Unearned compensation -- restricted shares (33,097) (5,269) (1,949)
- -------------------------------------------------------------------------------
Balance, end of year $ 339,649 $226,390 $195,446
- -------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year $ 497,403 $399,678 $323,608
Net income(a) 155,808 102,343 80,793
Issuance of a 2-for-1 stock split effected in
the form of a stock dividend (39,848) -- --
Cash dividends ($0.035 per share in fiscal
year 2000 and $0.03 in fiscal years 1999 and
1998) (5,541) (4,618) (4,723)
- -------------------------------------------------------------------------------
Balance, end of year $ 607,822 $497,403 $399,678
- -------------------------------------------------------------------------------
Accumulated Other Comprehensive Income (loss)
(net of tax)
Balance, beginning of year $ 7,379 $ (123) $ (112)
Foreign currency translation adjustments(b) (1,997) 72 (11)
Unrealized holding gains (losses) on
marketable securities, net of
reclassification adjustments(c) 216,587 7,430 --
Minimum pension liability adjustment(d) (828) -- --
- -------------------------------------------------------------------------------
Balance, end of year $ 221,141 $ 7,379 $ (123)
- -------------------------------------------------------------------------------
Treasury Shares
Balance, beginning of year $ 32,814 $ 2,528 $ 1,627
Treasury shares acquired 3,745 65,228 7,511
Restricted shares forfeited/canceled 25,891 849 1,934
Issuance of shares under employee benefit
plans (28,812) (35,791) (8,544)
- -------------------------------------------------------------------------------
Balance, end of year $ 33,638 $ 32,814 $ 2,528
- -------------------------------------------------------------------------------
Total Stockholders' Equity $1,214,960 $738,166 $632,077
Total Comprehensive Income (a+b+c+d) $ 369,570 $109,845 $ 80,782
- -------------------------------------------------------------------------------
See accompanying notes.
27
Selected Financial Data
(Dollars in Thousands,
Except Per Share Data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------
Sales $1,715,410 $1,243,473 $1,181,404 $1,168,245 $1,047,901
- --------------------------------------------------------------------------------------
Cost of Sales 1,212,655 888,162 850,738 809,081 761,876
Sales and
Administrative Expense 177,588 162,017 165,639 160,613 138,362
Research and
Development Expense 122,403 117,261 111,546 114,344 95,299
Restructuring Expense -- -- 23,412 -- --
Purchased In-Process
Technology -- -- -- -- 14,583
Interest Expense 564 635 476 484 672
Interest Income (19,636) (8,526) (5,963) (3,943) (1,818)
Other (Income) Expense,
Net (747) (62,281) (79,863) (1,513) 28,374
- --------------------------------------------------------------------------------------
Earnings Before Income
Taxes and
Discontinued Operations 222,583 146,205 115,419 89,179 10,553
- --------------------------------------------------------------------------------------
Provision for Income
Taxes 66,775 43,862 34,626 28,537 3,377
- --------------------------------------------------------------------------------------
Earnings Before
Discontinued
Operations 155,808 102,343 80,793 60,642 7,176
- --------------------------------------------------------------------------------------
Earnings (Loss) from
Discontinued
Operations, Net of Tax -- -- -- 3,400 (13,210)
- --------------------------------------------------------------------------------------
Net Earnings (Loss) $ 155,808 $ 102,343 $ 80,793 $ 64,042 $ (6,034)
- --------------------------------------------------------------------------------------
Basic Earnings Per Share
before
Discontinued Operations $ 0.99 $ 0.67 $ 0.51 $ 0.39 $ 0.05
- --------------------------------------------------------------------------------------
Diluted Earnings Per
Share before
Discontinued Operations $ 0.94 $ 0.65 $ 0.50 $ 0.39 $ 0.05
- --------------------------------------------------------------------------------------
Diluted Earnings (Loss)
Per Share $ 0.94 $ 0.65 $ 0.50 $ 0.41 $ (0.04)
- --------------------------------------------------------------------------------------
Cash Dividends Paid Per
Share $ 0.035 $ 0.030 $ 0.030 $ 0.030 $ 0.030
- --------------------------------------------------------------------------------------
Working Capital $ 770,471 $ 563,650 $ 457,830 $ 347,340 $ 301,054
- --------------------------------------------------------------------------------------
Total Assets $1,779,460 $1,062,274 $ 940,223 $ 823,689 $ 763,026
- --------------------------------------------------------------------------------------
Short-Term Debt and
Current
Maturities of Long-
Term Debt $ 386 $ 416 $ 726 $ 842 $ 1,600
Long-Term Debt 102 370 983 1,810 400
Stockholders' Equity 1,214,960 738,166 632,077 532,724 463,356
- --------------------------------------------------------------------------------------
Total Capital Invested $1,215,448 $ 738,952 $ 633,786 $ 535,376 $ 465,356
- --------------------------------------------------------------------------------------
Gross Margin % of Sales 29.3% 28.6% 28.0% 30.7% 27.3%
- --------------------------------------------------------------------------------------
Return on Sales Before
Discontinued
Operations 9.1% 8.2% 6.8% 5.2% 0.7%
- --------------------------------------------------------------------------------------
Return on Average
Stockholders' Equity 17.2% 15.6% 13.9% 13.0% (1.3)%
- --------------------------------------------------------------------------------------
Effective Tax Rate 30% 30% 30% 32% 32%
- --------------------------------------------------------------------------------------
28
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Business
Scientific-Atlanta provides its customers with content distribution networks,
broadband transmission networks, digital interactive subscriber systems and
worldwide customer service and support. We are a producer of a wide variety of
products for terrestrial and satellite communications networks, including
digital video, voice and data communications products.
We operate primarily in two reportable business segments: Broadband and
Satellite. The Broadband segment consists of subscriber and transmission
systems and the Satellite segment consists of satellite network and satellite
television network systems. In April 2000, ViaSat, Inc. acquired our Satellite
Networks business, which constituted a substantial part of our Satellite
segment. We retained the satellite television network business which provides
the content distribution networks.
Our products are sold primarily through our own sales personnel who work out of
offices in Norcross, Georgia and other metropolitan areas in the United States.
Certain products are also marketed in the United States through independent
sales representatives and distributors. In addition to our direct sales, sales
in foreign countries are made through wholly-owned subsidiaries and branch
offices, as well as through independent distributors and independent sales
representatives.
The materials and supplies we purchase are standard electronic components, such
as integrated circuits, wire, circuit boards, transistors, capacitors and
resistors, all of which are produced by a number of manufacturers. Matsushita
Electronic Components Corporation of America and its affiliates manufacture
analog set-tops for us and are a primary supplier of those set-tops.
Cablevision Electronics Co., Ltd. and Zinwell Corporation, Tiawanese companies,
are primary suppliers of taps. We also purchase aluminum and steel, including
castings and semi-fabricated items, produced by a variety of sources. Our
primary supplier of die castings for our RF distribution products is Premiere
Die Casting, Inc. Anadigics, Inc. is a provider of CATV hybrid integrated
circuits for use in our RF distribution products. Additionally, Motorola, Inc.,
Broadcom Corporation and STMicroelectronics are three of our primary suppliers
of a variety of semiconductor products, which are used as components in an
array of our products, including set-tops. We consider our sources of supply to
be adequate and are not dependent upon any single supplier, except for those
listed above, for any significant portion of the materials used in the products
we manufacture or for the products we sell. From time to time, we experience
shortages of certain electronic components from our suppliers. Recently, we
have experienced substantial shortages of certain electronic components and
expect that such shortages will continue to be substantial. These shortages
have not had, and are not expected to have, a material effect on our
operations.
Fiscal Year-End
Scientific-Atlanta's fiscal year ends on the Friday closest to June 30 of each
year. Fiscal year ends are as follows:
2000: June 30, 2000
1999: July 2, 1999
1998: June 26, 1998
Fiscal 1999 includes fifty three weeks.
Consolidation
The accompanying consolidated financial statements include the accounts of
Scientific-Atlanta and all subsidiaries after elimination of all material
intercompany accounts and transactions.
Use of Estimates
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates. The
estimates made by management primarily relate to receivable and inventory
reserves, estimated costs to complete long-term contracts and certain accrued
liabilities, principally relating to warranty and service provisions and
restructuring reserves, compensation, claims, litigation and taxes.
29
Foreign Currency Translation
The financial statements of certain foreign operations are translated into U.S.
dollars at current exchange rates. Resulting translation adjustments are
accumulated as a component of accumulated other comprehensive income and
excluded from net earnings. Foreign currency transaction gains and losses are
included in cost of sales and other income.
Foreign Exchange Contracts
Scientific-Atlanta enters into foreign exchange forward contracts to hedge
certain firm commitments and assets denominated in currencies other than the
U.S. dollar. These contracts are for periods consistent with the exposure being
hedged and generally have maturities of one year or less. To qualify as a
hedge, the item to be hedged must expose us to inventory pricing or asset
devaluation risk and the related contract must reduce that exposure and be
designated by Scientific-Atlanta as a hedge. Gains and losses on foreign
exchange forward contracts, including the cost of the contracts, are deferred
and recognized in income in the same period as the hedged transactions. Our
foreign exchange forward contracts do not significantly subject our results of
operations to risk due to exchange rate fluctuations because gains and losses
on these contracts generally offset losses and gains on the exposure being
hedged. We do not enter into any foreign exchange forward contracts for
speculative trading purposes. If a foreign exchange forward contract did not
meet the criteria for a hedge, we would recognize unrealized gains and losses
as they occur.
Firmly committed purchase exposure and related derivative contracts for fiscal
2001 are as follows:
Japanese Canadian Spanish
Yen Dollar Pesetas
-------- -------- --------
Firmly committed purchase (sales) contracts 7,607 11,512 (105,000)
Notional amount of forward contracts -- 12,100 (105,000)
Average contract amount (Foreign currency/United
States dollar) -- 1.48 153.25
Scientific-Atlanta has no derivative exposure beyond December 2000.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" which we will
adopt in fiscal 2001. Under Statement 133, every derivative instrument is
recorded in the balance sheet as either an asset or a liability measured at its
fair value. Changes in the derivative instrument's fair value must be
recognized currently in earnings unless specific hedge accounting criteria are
met. Management does not believe the adoption of this statement will have a
material impact on our results of operations or financial condition.
Revenue Recognition
Scientific-Atlanta's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
issued by the Securities and Exchange Commission. Revenue is recognized at the
time product is shipped or title passes pursuant to the terms of the agreement
with the customer which include a standard right of return, the amount due from
the customer is fixed and collectibility of the related receivable is
reasonably assured.
Revenues from progress-billed contracts are primarily recorded using the
percentage-of-completion method based on contract costs incurred to date.
Losses, if any, are recorded when determinable. Costs incurred and accrued
profits not billed on these contracts are included in receivables. Unbilled
receivables, which consist of retainage, were $1,269 at June 30, 2000 and
$13,051 at July 2, 1999. It is anticipated that substantially all such amounts
will be collected within one year.
Research and Development Expenditures
Certain software development costs are capitalized when incurred and are
reported at the lower of unamortized cost or net realizable value.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
30
Scientific-Atlanta capitalized $3,401, $3,268 and $2,181 of software
development costs in fiscal years 2000, 1999 and 1998, respectively. We
recognized revenue on certain of these products and charged $4,445 and $603 to
cost of sales in fiscal years 2000 and 1999, respectively. No such revenue was
recognized in fiscal year 1998. Capitalization will cease when the products are
available for general release to customers.
We periodically allocate engineering resources from research and development
efforts for specific customer orders. The revenue from these orders will be
recognized in future periods and, accordingly, the related costs have been
capitalized in inventory. There were no non-recurring engineering costs
capitalized in inventory at June 30, 2000. At July 2, 1999, we had $9,013 of
such non-recurring engineering costs capitalized in inventory. During fiscal
years 2000, 1999 and 1998, we recognized revenue on certain of these orders
and, accordingly, charged $9,013, $2,175 and $1,341 to cost of sales,
respectively.
Depreciation, Maintenance and Repairs
Depreciation is provided using principally the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred. Renewals and betterments are capitalized. The cost and
accumulated depreciation of property retired or otherwise disposed of are
removed from the respective accounts, and the gains or losses thereon are
included in the consolidated statement of earnings.
Warranty Costs
Scientific-Atlanta accrues warranty costs at the time of sale. Expenses related
to unusual product warranty problems and product defects are recorded in the
period the problem is identified.
Earnings Per Share
Basic earnings per share were computed based on the weighted average number of
shares of common stock outstanding. Diluted earnings per share were computed
based on the weighted average number of outstanding common shares and
potentially dilutive shares. Earnings per share have been restated to reflect
the 2-for-1 stock split in March 2000.
Cash and Cash Equivalents
Scientific-Atlanta considers all investments purchased with an original
maturity of three months or less to be cash equivalents.
Short-term Investments
Short-term investments include debt instruments with an original maturity
greater than three months and are classified as trading securities under the
provisions of SFAS No. 115. Investment income is included in interest income.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost includes materials, direct labor, and manufacturing overhead. Market is
defined principally as net realizable value. Inventories include purchased and
manufactured components in various stages of assembly as presented in the
following table:
2000 1999
-------- --------
Raw Materials and
Work-In-Process $163,969 $129,911
Finished Goods 45,947 59,443
-------- --------
Total Inventory $209,916 $189,354
======== ========
Long-Lived Assets
Scientific-Atlanta records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is being amortized on a straight-line
basis over seventeen years. Subsequent to acquisition, Scientific-Atlanta
continually evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of goodwill might warrant revision
or that the remaining balance of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, we use an
estimate of the related business segment's undiscounted net income or other
methods of determining fair value, if more
31
readily determinable, over the remaining life of the goodwill in measuring
whether the goodwill is recoverable.
Non-Current Marketable Securities
Non-current marketable securities consist of investments in common stock and
are stated at market value. All non-current marketable securities are defined
as available for sale under the provisions of SFAS No. 115 and unrealized
holding gains and losses are included, net of taxes, in accumulated other
comprehensive income.
Comprehensive Income
Comprehensive income consists of net income, unrealized gains on marketable
securities defined as available for sale under the provisions of SFAS No. 115,
foreign currency translation adjustments and charges for adjustments to the
minimum pension liability.
Financial Presentation
Certain prior year amounts have been restated to conform to the current year
presentation.
2. Investments, Acquisitions and Dispositions
- --------------------------------------------------------------------------------
During fiscal year 2000, Scientific-Atlanta invested $13,100 in Bookham
Technology, plc., a UK-based developer and supplier of optical components,
$10,000 in Luminous Networks, a developer of next-generation optical transport
technology, and $6,917 in Broadband Innovations, Inc., a telecommunications
technology company specializing in RF and digital signal processing solutions
for broadband communications. In addition, we acquired certain assets of an
optics business for a cash payment of $7,697. To the extent that these
investments represent non-marketable securities, they are recorded under the
cost method of accounting.
During fiscal year 2000, we completed the sale of the majority of the Satellite
Networks business unit and certain assets of the Control Systems business unit
for cash payments of $65,347 and $3,259, respectively.
3. Restructuring Charges
- --------------------------------------------------------------------------------
During fiscal year 1998, we announced a restructuring and consolidation of
worldwide manufacturing operations for reduced cost, improved efficiency and
better customer service. Production of the RF amplifier was transferred from
Norcross, Georgia to our high volume, low cost manufacturing facility in
Juarez, Mexico during the first half of fiscal year 1999. The Norcross
manufacturing facility is focused on medium- to low-volume products requiring
close engineering support. The production of cable headend equipment was
consolidated in Norcross from Vancouver, British Columbia during the second
half of fiscal year 1999. The Melbourne, Florida satellite services Network
Operations Center (NOC) and research and development facility was relocated to
Norcross. During fiscal year 1998, our European headquarters moved from London,
England to Frankfurt, Germany to better address market opportunities in
continental Europe. The Far East regional headquarters were transferred from
Hong Kong to Singapore. Our Satellite Networks and Communications and Tracking
Systems business units combined in fiscal year 1999 to capitalize on the
combined resources provided by concentrated capabilities in networks, research
and development, marketing and sales, and customer program management and
services. These businesses were sold in fiscal year 2000. No gain or loss was
recognized.
During fiscal year 1998, we recorded restructuring charges of $23,412 which
included $10,217 and $3,200 for assets to be abandoned and expenses related to
the remaining contractual liabilities for cancelled leases, respectively, as a
result of the consolidation of operations, $5,173 for severance costs for
approximately 500 employees primarily in manufacturing positions and $4,822 for
the impairment of certain assets and other miscellaneous expenses. As of July
2, 1999, benefits paid and charged against the liability for severance totaled
$6,360, and approximately 560 employees have actually been terminated. The
restructuring plan was substantially completed during fiscal year 1999. As of
June 30, 2000, $5,454 has been charged against the liability for contractual
liabilities for cancelled leases and other miscellaneous costs, and $1,381
32
remains in the liability which is expected to be utilized by 2002 for expenses
related to contractual liabilities for cancelled leases.
The following reconciles the beginning restructuring charge to the liability at
the end of fiscal years 1998, 1999 and 2000:
Contractual
Obligations
under
Fixed Cancelled
Assets Leases Severance Other Total
-------- ----------- --------- ------- --------
Restructuring charge $ 10,217 $3,200 $ 5,173 $ 4,822 $ 23,412
Charges to the
reserve and
assets
written off (10,217) -- (1,321) (2,197) (13,735)
-------- ------ ------- ------- --------
Balance at June 28, 1998 -- 3,200 3,852 2,625 9,677
Charges to the reserve -- (927) (5,039) (2,111) (8,077)
Reserve adjustments -- (673) 1,187 (514) --
-------- ------ ------- ------- --------
Balance at July 2, 1999 -- 1,600 -- -- 1,600
Charges to the reserve -- (219) -- -- (219)
-------- ------ ------- ------- --------
Balance at June 30, 2000 $ -- $1,381 $ -- $ -- $ 1,381
======== ====== ======= ======= ========
4. Other (Income) Expense
- --------------------------------------------------------------------------------
Other income of $747 in fiscal year 2000 included expenses of $10,338 related
to contractual obligations to minority shareholders of a majority-owned
subsidiary and losses of $2,396 from the disposal of fixed assets. During
fiscal year 2000, we completed the sale of certain assets of our Control
Systems business unit for $3,259 of cash and recorded a gain of $1,500. We also
recorded a $5,814 gain from the sale of a portion of our investment in
WorldGate. Other (income) expense also included gains of $5,531 from the
reduction of reserves related to the sale of two business units. During the
year, we determined that our exposure for indemnifications to the purchasers of
these business units and other miscellaneous expenses related to the
dispositions were ultimately less than we had previously estimated and,
accordingly, reduced the reserves. We also completed the sale of the majority
of the Satellite Networks business unit for $65,347 of cash. No gain or loss
was recognized on this transaction. At June 30, 2000, we had reserves of
approximately $28,662 related to the disposition of these three business units
to provide for potential sales price adjustments, expenses related to
contractual commitments to the purchasers, indemnifications to the purchasers,
severance and other miscellaneous expenses related to the sales. We also
reversed approximately $4,540 of a $5,500 charge recorded in fiscal 1998 for
expenses and the potential settlement of environmental issues. As this
environmental matter has progressed, we determined that our potential exposure
is less than initially anticipated. At June 30, 2000, we had $919 remaining in
the reserve for expenses and the potential settlement of environmental issues.
Other income of $62,281 in fiscal year 1999 included gains of $41,329 and
$16,646 from the sale of our investments in Broadcom Corporation (Broadcom) and
Harmonic Inc. (Harmonic), respectively, $6,250 from the cancellation of a
contract under which we were obligated to supply equipment and $4,952 from an
investment in a partnership. In addition, during the second quarter of fiscal
year 1999, we decided to dispose of a business unit, Control Systems, which
produced devices to monitor and manage utility service usage, because the
business unit did not fit with our core strategy. We recorded a charge of
$6,225 to adjust the carrying value of the assets to be sold to fair value,
less costs to sell, to adjust the estimated profitability on certain contracts
to allow the purchaser to achieve reasonable margins, to provide for
indemnification to the purchaser and to provide for other miscellaneous
expenses associated with the sale. There were no charges to the reserve through
July 2, 1999.
Other income of $79,863 in fiscal year 1998 included a gain of $94,000 from the
adjustment of our investment in Broadcom Corporation to market value, a gain of
$9,080 from the sale of certain assets of the Interdiction business, a loss of
$9,000 from the discontinuance of research and development efforts related to
our CoAxiom telephony products, a loss of $6,250 for estimated losses on the
resale of equipment we were contractually obligated to supply, $5,500 for
expenses and the potential settlement of environmental issues and other
miscellaneous items.
During fiscal year 1998, we sold the inventory, manufacturing assets and
intellectual property of our Interdiction business to Blonder Tongue
Laboratories,
33
Inc. (Blonder Tongue) for $19,000 in cash, Blonder Tongue stock valued at
$1,000 and an option to acquire additional shares of Blonder Tongue stock, and
recorded a pre-tax gain of $9,080. During fiscal year 1998, we also sold the
majority of the net assets of the Microwave business unit for $8,059 of cash.
No gain or loss was recognized on this transaction.
5. Quarterly Financial Data (Unaudited)
- -------------------------------------------------------------------------------
Fiscal Quarters
------------------------------------------
2000 First Second Third Fourth
---- -------- -------- -------- --------
Sales $349,319 $372,721 $440,731 $552,639
Gross margin 99,948 109,209 130,075 163,523
Gross margin % 28.6% 29.3% 29.5% 29.6%
Net earnings 25,254 33,372(1) 38,109(2) 59,073
Earnings per share
Basic 0.16 0.21 0.25 0.37
Diluted 0.16 0.20 0.23 0.35
Stock prices
High 29.2188 33.0625 74.5938 74.5000
Low 17.5938 24.1875 25.0938 50.1875
Dividends paid
per share 0.0075 0.0075 0.0100 0.0100
- --------
(1) Includes a gain of $4,046 from the sale of a portion of our investment in
WorldGate.
(2) Includes expenses of $7,237 related to contractual obligations to minority
shareholders of a majority-owned subsidiary, $3,872 from the reduction of
reserves related to businesses sold and $3,178 from the reduction of a
reserve for expenses and potential settlement of environmental issues.
Fiscal Quarters
------------------------------------------
1999 First Second Third Fourth
---- -------- -------- -------- --------
Sales $257,478 $310,747 $320,019 $355,229
Gross margin 70,369 87,822 91,384 105,736
Gross margin % 27.3% 28.3% 28.6% 29.8%
Net earnings 14,994(1) 19,188(2) 20,814 47,347(3)
Earnings per share
Basic 0.09 0.13 0.13 0.32
Diluted 0.09 0.13 0.13 0.30
Stock prices
High 13.4375 11.4375 17.1875 19.6563
Low 8.8438 6.3438 11.2500 13.4375
Dividends paid
per share 0.0075 0.0075 0.0075 0.0075
- --------
(1) Includes a gain of $12,600 from the adjustment of our investment in
Broadcom to market value.
(2) Includes a gain of $14,263 from the adjustment of our investment in
Broadcom to market value, a loss of $7,616 from the sale of one million
shares of our investment in Broadcom, a gain of $4,375 from the
cancellation of a contract and a charge of $4,356 related to the
discontinuance of our Control Systems business unit.
(3) Includes gains of $11,652 from the sale of 720,000 shares of our
investment in Harmonic, $8,721 from the sale of our remaining investment
in Broadcom and $3,466 from an investment in a partnership.
6. Segment Information
- -------------------------------------------------------------------------------
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
We produce a wide variety of products for terrestrial and satellite
communications networks, including digital video, voice and data
communications and operate primarily in two reportable business segments:
Broadband and Satellite. The Broadband segment consists of subscriber and
transmission systems and the Satellite segment consists of satellite network
and satellite television network systems.
The Broadband segment includes modulators, demodulators and signal processors
for video and audio receiving stations (often referred to as "headend"
systems), products for distributing communications signals by coaxial cable
and fiber optics from headend systems to subscribers and analog and digital
set-top terminals that enable television sets to receive all channels
transmitted by system operators. The products in the Broadband segment also
include receivers, transmitters, distribution amplifiers, signal encoders and
decoders, controllers, optical amplifiers, source lasers, digital video
compression and transmission equipment and fiber optic distribution equipment.
In April 2000, ViaSat, Inc. acquired our satellite network business (excluding
the satellite television networks business) which included products such as
tracking and telemetry equipment, earth observation satellite ground stations,
and intercept systems. We produced satellite earth stations that receive and
transmit signals for video and are utilized in satellite-based telephone, data
and television distribution networks, packet switches, radar
34
platforms, special receivers, special measurement devices and other equipment
used to track aircraft, missiles, satellites and other moving objects and to
communicate with and receive and record various measurements and other data
from the object. Our data communications products offerings had included
private interactive data systems using VSAT (very small aperture terminal)
technology. In addition, our long experience with advanced satellite tracking
technologies had enabled us to offer a range of gateways, network management
centers, transceivers, and services for the emerging low earth orbiting (LEO)
satellite communications markets prior to the disposition of our satellite
network business.
Scientific-Atlanta retained the satellite television networks business, which
is now known as the Media Networks business of Scientific-Atlanta. Media
Networks produces encoders, statistical multiplexers, modulators, and
receivers. Customers, such as television programmers, broadcasters, and service
providers use these products to deliver compressed digital video via satellite
to cable operators and viewers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies for internal management reporting
purposes. Certain items, such as restructuring charges and one-time gains and
losses, have not been allocated to the segments. We measure segment performance
based on earnings before taxes. Information on the segments and reconciliations
to consolidated amounts are as follows:
Corporate
and
2000 Broadband Satellite Other(2) Total
- ---- ---------- --------- ---------- ----------
Sales $1,550,122 $164,049 $ 1,239 $1,715,410
Earnings (loss) before
taxes 199,863 (708) 23,428(3) 222,583
Segment assets 661,290(1) 50,061(1) 1,068,109(4) 1,779,460
Depreciation and
amortization expense 36,612 7,525 6,570 50,707
Capital expenditures 72,605 1,489 8,678 82,772
1999
- ----
Sales $1,049,410 $184,626 $ 9,437 $1,243,473
Earnings (loss) before
taxes 95,998 (17,567) 67,774(3) 146,205
Segment assets 505,805(1) 119,266(1) 437,203(4) 1,062,274
Depreciation and
amortization expense 31,378 5,843 8,854 46,075
Capital expenditures 33,096 10,247 8,009 51,352
Corporate
and
1998 Broadband Satellite Other(2) Total
- ---- --------- --------- --------- ----------
Sales $887,279 $255,990 $38,135 $1,181,404
Earnings before taxes 72,634 17,794 24,991(3) 115,419
Segment assets 425,059(1) 118,930(1) 396,234(4) 940,223
Depreciation and amortization
expense 32,660 5,529 10,071 48,260
Capital expenditures 25,701 9,414 5,528 40,643
- --------
(1) Includes accounts receivable, inventory, property, plant and equipment and
intangible assets.
(2) Includes Corporate and business units which have been discontinued or
sold, other than the Satellite business unit.
(3) Includes the gains and losses discussed in Note 4 "Other (Income) Expense"
and restructuring and other one-time charges in 1998. Also includes
interest income of $19,636 in fiscal year 2000, $8,526 in 1999 and $5,963
in 1998.
(4) Consists primarily of cash, short-term investments, marketable securities,
and deferred income taxes.
Sales to Time Warner, Inc. and its affiliates were 23 percent of our total
sales in fiscal year 2000, 16 percent of total sales in 1999 and 11 percent of
total sales in 1998. Sales to Charter Communications and its affiliates were 14
percent of our total sales in fiscal year 2000, and 7 percent of total sales in
1999 and 2 percent of total sales in 1998. Sales to AT&T, which merged with
MediaOne during fiscal year 2000, and its affiliates were 10 percent of our
total sales in fiscal year 2000, 16 percent of total sales in 1999, and 12
percent of total sales in 1998. No other customer accounted for 10 percent or
more of our sales in any of the three years. Export sales accounted for 21
percent of total sales in fiscal year 2000, 22 percent in 1999 and 32 percent
in 1998. Sales of digital set-tops constituted 34 percent, 15 percent and 1
percent of our total sales in fiscal years 2000, 1999 and 1998, respectively.
Sales of RF products were approximately 18 percent of our total sales in fiscal
2000, and approximately 16 percent and 18 percent of such sales in 1999 and
1998, respectively. Sales of analog set-tops constituted 9 percent of our total
sales in fiscal year 2000, and approximately 24 percent and 33 percent of such
sales in 1999 and 1998, respectively.
Sales are attributed to geographic areas based upon the location to which the
product is shipped. Long-
35
lived assets include property, plant and equipment, cost in excess of net
assets acquired, investments other than marketable securities, and intellectual
property.
2000 U.S. Foreign Total
- ---- ---------- -------- ----------
Sales $1,356,206 $359,204 $1,715,410
Long-lived assets 160,346 38,019 198,365
1999
- ----
Sales $ 964,911 $278,562 $1,243,473
Long-lived assets 147,934 35,148 183,082
1998
- ----
Sales $ 804,761 $376,643 $1,181,404
Long-lived assets 148,908 36,854 185,762
Sales in any single country did not exceed 10 percent of total sales in fiscal
years 2000, 1999 or 1998, except for the United States. Long-lived assets in
the United States and Mexico were 81 percent and 10 percent, respectively, of
total long-lived assets in fiscal year 2000. Long-lived assets in any single
country did not exceed 10 percent of total long-lived assets in fiscal years
1999 or 1998 except for the United States.
7. Indebtedness
- --------------------------------------------------------------------------------
At June 30, 2000, we had a $300,000 senior credit facility that provides for
unsecured borrowings up to $150,000 which expires May 4, 2001, and up to
$150,000 which expires May 11, 2004. There were no borrowings outstanding under
this facility at June 30, 2000 or July 2, 1999. Interest on borrowings under
this facility are at varying rates and fluctuate based on market rates.
Facility fees based on the average daily aggregate amount of the facility
commitments are payable quarterly.
Long-term debt at June 30, 2000 had scheduled maturities as follows: $386 - 2001
and $102 - 2002.
Total interest paid, including fees on the senior credit facility, was $480,
$581 and $407, in fiscal years 2000, 1999 and 1998, respectively.
8. Accrued Liabilities
- --------------------------------------------------------------------------------
Accrued liabilities consisted of:
2000 1999
-------- --------
Compensation $ 52,535 $ 29,211
Taxes, other than income taxes 13,916 13,474
Warranty and service 9,449 9,256
Restructuring reserves 1,381 1,600
Other 72,121 71,497
-------- --------
$149,402 $125,038
======== ========
9. Other Liabilities
- --------------------------------------------------------------------------------
Other liabilities consisted of:
2000 1999
------- -------
Retirement $40,012 $34,419
Compensation 17,086 12,911
Other 12,709 8,597
------- -------
$69,807 $55,927
======= =======
10. Income Taxes
- --------------------------------------------------------------------------------
The tax provision differs from the amount resulting from multiplying earnings
before income taxes by the statutory federal income tax rate as follows:
2000 1999 1998
---- ---- ----
Statutory federal tax rate 35.0% 35.0% 35.0%
State income taxes, net of state credits and federal tax
benefit 0.7 2.0 1.1
Tax contingencies and settlements (2.7) (2.3) (0.4)
Research and development tax credit (2.3) (3.7) (4.8)
Other, net (0.7) (1.0) (0.9)
---- ---- ----
30.0% 30.0% 30.0%
==== ==== ====
36
Income tax provision (benefit) includes the following:
2000 1999 1998
-------- -------- -------
Current tax provision
Federal $ 70,760 $ 46,638 $ 7,306
State 4,009 7,708 251
Foreign 10,748 5,107 18,783
-------- -------- -------
85,517 59,453 26,340
-------- -------- -------
Deferred tax provision (benefit)
Federal (17,786) (14,094) 9,602
State (1,728) (3,317) 1,709
Foreign 772 1,820 (3,025)
-------- -------- -------
(18,742) (15,591) 8,286
-------- -------- -------
Total provision for income taxes $ 66,775 $ 43,862 $34,626
======== ======== =======
Total income taxes paid include settlement payments for federal, state and
foreign audit adjustments. The total income taxes paid were $31,386, $54,178
and $19,134 in fiscal years 2000, 1999 and 1998, respectively.
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
2000 1999
------- -------
Current deferred tax assets
Expenses not currently deductible $25,679 $21,008
Inventory valuation 14,754 11,695
Research and development credit carryforwards 5,016 --
Warranty reserves 3,407 3,536
Other 825 1,866
------- -------
Current deferred tax assets 49,681 38,105
Current deferred tax liabilities
Unrealized gain on investments -- (975)
------- -------
Net current deferred tax asset $49,681 $37,130
======= =======
2000 1999
--------- -------
Noncurrent deferred tax assets
Postretirement and postemployment benefits $ 18,925 $16,429
Expenses not currently deductible 5,186 2,461
--------- -------
Noncurrent deferred tax assets 24,111 18,890
Noncurrent deferred tax liabilities
Depreciation and amortization (963) (5,667)
Accumulated comprehensive income items (135,538) (4,920)
Capitalized software (2,038) (2,615)
--------- -------
Net noncurrent deferred tax asset (liability) $(114,428) $ 5,688
========= =======
Valuation allowances for current deferred tax assets and noncurrent deferred
tax assets were not required in fiscal years 2000 or 1999.
The net noncurrent deferred tax asset is included in Other Assets at July 2,
1999.
In fiscal years 2000, 1999 and 1998, earnings before income taxes included
$33,052, $17,242 and $42,375, respectively, of earnings by our foreign
operations.
11. Retirement and Benefit Plans
- --------------------------------------------------------------------------------
We have a defined benefit pension plan covering substantially all of our
domestic employees. The benefits are based upon the employees' years of
service, age and compensation.
Our funding policy is to contribute annually the amount expensed each year
consistent with the requirements of the federal law to the extent that such
costs are currently deductible.
37
The following table sets forth the plan's funded status and amounts recognized
in Scientific-Atlanta's Consolidated Statement of Financial Position at year-
end, using March 31 as a measurement date for all actuarial calculations of
asset and liability values and significant actuarial assumptions:
2000 1999
-------- -------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 91,127 $83,836
Service cost 7,048 6,941
Interest cost 6,166 5,671
Actuarial (gain)/loss (4,398) 3,995
Benefits paid (4,439) (9,316)
Effect of curtailment 2,677 --
Effect of settlement (18,739) --
-------- -------
Benefit obligation at end of year $ 79,442 $91,127
======== =======
Change in Plan Assets
Fair value of plan assets at beginning of year $ 91,267 $94,102
Actual return on plan assets 14,306 6,481
Benefits paid (4,439) (9,316)
Effect of settlement (18,739) --
-------- -------
Fair value of plan at end of year $ 82,395 $91,267
======== =======
2000 1999
-------- -------
Funded status $ (2,953) $ (140)
Unrecognized net actuarial loss 12,586 6,481
Unrecognized transition obligation 3,132 5,059
Unrecognized prior service cost 190 248
-------- -------
Accrued pension cost $ 12,955 $11,648
======== =======
2000 1999 1998
----- ----- -----
Weighted-Average Assumptions
Discount rate 8.00% 7.25% 7.25%
Expected return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase 5.00% 5.00% 5.00%
Plan assets are invested in listed stocks, bonds and short-term monetary
investments.
Our net pension expense was $1,306 in fiscal year 2000, $4,604 in 1999 and
$4,233 in 1998. The components of pension expense are as follows:
2000 1999 1998
------- ------- -------
Service cost $ 7,048 $ 6,941 $ 6,172
Interest cost 6,166 5,671 5,739
Expected return on plan assets (7,487) (7,318) (6,988)
Amortization of transition net asset (656) (656) (656)
Amortization of prior service cost (34) (34) (34)
Amount recognized due to settlement (3,707) -- --
Amount recognized due to curtailment (24) -- --
------- ------- -------
Pension expense $ 1,306 $ 4,604 $ 4,233
======= ======= =======
The settlement and curtailment relate to the sale of the Satellite Networks
business unit.
We have unfunded defined benefit retirement plans for certain key officers and
non-employee directors. Accrued pension cost for these plans was $17,293 at
June 30, 2000 and $12,580 at July 2, 1999. Retirement expense for these plans
was $3,786, $2,494 and $2,195 in fiscal years 2000, 1999 and 1998,
respectively.
In addition to providing pension benefits, we have contributory plans that
provide certain health care and life insurance benefits to eligible retired
employees. The following table sets forth the plans' funded status and amounts
recognized in Scientific-Atlanta's Consolidated Statement of Financial Position
at year-end, using March 31 as a measurement date for all actuarial
calculations of liability values:
2000 1999
------- ------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 7,487 $8,184
Service cost 50 45
Interest cost 521 570
Amendments -- 380
Actuarial (gain)/loss 552 (914)
Benefits paid (1,053) (778)
------- ------
Benefit obligation at end of year $ 7,557 $7,487
======= ======
38
2000 1999
------ ------
Change in Plan Assets
Fair value of plan assets at beginning of year $ 197 $ 171
Company contributions 1,078 804
Benefits paid (1,053) (778)
------ ------
Fair value of plan assets at end of year $ 222 $ 197
====== ======
Funded status $7,335 $7,290
Unrecognized net actuarial gain 2,110 2,810
Unrecognized prior service cost (338) (380)
------ ------
Accrued benefit cost $9,107 $9,720
====== ======
Significant actuarial assumptions are as follows:
2000 1999 1998
----- ----- -----
Weighted-average Assumptions
Discount rate 8.00% 7.25% 7.25%
Expected return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase 5.00% 5.00% 5.00%
The assumed rate of future increase in health care cost was 6.6 percent, 7.3
percent and 7.9 percent for fiscal years 2000, 1999 and 1998, respectively, and
is expected to decrease to 6.0 percent by 2001. The components of
postretirement benefit expense are as follows:
2000 1999 1998
----- ---- ----
Service cost $ 50 $ 45 $ 46
Interest cost 521 570 663
Amortization of net actuarial gain (107) (93) (51)
----- ---- ----
Postretirement benefit expense $ 464 $522 $658
===== ==== ====
A change in the assumed health care trend rate would have the following
effects:
1% 1%
Increase Decrease
-------- --------
Effect on total of 2000 service and interest cost components $ 35 $ (31)
Effect on beginning of year 2000 postretirement benefit
obligation $436 $(389)
12. Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. Short-term investments are
carried at fair value. The fair value of foreign currency forward contracts is
based on quoted market prices.
2000 1999
------------------ ------------------
Carrying/ Carrying/
Contract Fair Contract Fair
Amount Value Amount Value
--------- -------- --------- --------
Cash and cash equivalents $462,496 $462,496 $300,454 $300,454
Short-term investments $ 60,628 $ 60,628 -- --
Marketable securities $ -- $ -- $ 2,438 $ 2,438
Non-current marketable securities $381,983 $381,983 $ 18,783 $ 18,783
Foreign currency forward contracts
Sell $ 685 $ 581 $ 9,229 $ 9,450
Buy $ -- $ -- $ 25,063 $ 23,623
13. Related Party Transactions
- --------------------------------------------------------------------------------
We had sales of $554, $1,907 and $2,289 to Scientific-Atlanta of Shanghai, Ltd.
(SASL) in fiscal years 2000, 1999, and 1998, respectively. We purchased $5,660,
$5,664 and $4,043 of inventory from SASL in fiscal 2000, 1999 and 1998,
respectively. We had a net payable to SASL of $119 at June 30, 2000 and $51 at
July 2, 1999. We had sales of $249 and $79 to Advanced Broadband System
Services, Inc. (ABSS) and purchased services of $17,084 and $16,311 from ABSS
in fiscal years 2000 and 1999, respectively. There were no such sales or
purchases in 1998. We had a net receivable of $1,251 at June 30, 2000 and $32
at July 2, 1999 from ABSS. We also had sales of $2,637, $2,170 and $1,170 in
fiscal years 2000, 1999 and 1998 to Arcodan Visiorep and receivables from
Arcodan Visiorep of $404 at June 30, 2000 and $913 at July 2, 1999. Related
party transactions were at prices and terms equivalent to those available to
and transacted with unrelated parties. SASL and ABSS are partially-owned
subsidiaries of Scientific-Atlanta. We have a minority interest in Arcodan
Visiorep.
39
14. Commitments, Contingencies, and Other Matters
- --------------------------------------------------------------------------------
Rental expense under operating lease agreements for facilities and equipment
for fiscal years 2000, 1999 and 1998 was $16,418, $18,879 and $23,262,
respectively. We pay taxes, insurance, and maintenance costs with respect to
most leased items. Remaining operating lease terms, including renewals, range
up to ten years. Future minimum payments at June 30, 2000, under operating
leases were $40,582. Payments under these leases for the next five years are as
follows: 2001 - $14,347; 2002 - $9,913; 2003 - $7,630; 2004 - $5,002; and 2005
- - $1,888.
We have agreements with certain officers which include certain benefits in the
event of termination of the officers' employment as a result of a change in
control of Scientific-Atlanta.
We are also committed under certain purchase agreements which are intended to
benefit future periods.
We are a party to various legal proceedings arising in the ordinary course of
business. In management's opinion, the outcome of these proceedings will not
have a material adverse effect on our financial position or results of
operations.
15. Common Stock and Related Matters
- --------------------------------------------------------------------------------
In February 2000, we declared a 2-for-1 stock split effected in the form of a
100 percent stock dividend which was paid on March 27, 2000 to shareholders of
record on March 10, 2000. The stock split has been accounted for by a transfer
from retained earnings to common stock in the amount of the par value of the
additional stock issued. All share price, per share amounts and stock option
information included herein have been restated to reflect the stock split. The
number of common shares outstanding and treasury shares in fiscal years 1999
and 1998 have not been restated.
In March 2000, Scientific-Atlanta announced a stock buyback program for the
purchase of up to 8,000,000 shares of our common stock. We plan to use the
shares repurchased for issuance under the company's employee stock option plans
and other benefit plans. As of June 30, 2000, 75,000 shares had been purchased
under this program at an aggregate cost of $3,745.
We also purchased 4,648,000 shares of our common stock at an aggregate cost of
$65,228 during fiscal year 1999 and 500,000 shares at an aggregate cost of
$7,511 during fiscal year 1998.
We have non-qualified and incentive stock option plans to provide key employees
and directors with an increased incentive to work for the success of
Scientific-Atlanta. Generally, the option price for stock options is the market
value at the date of grant and thus, the plans are non-compensatory. The
options expire 10 years after the dates of their respective grants.
We account for the stock purchase and stock option plans under APB Opinion No.
25, which requires compensation costs for fixed awards to be recognized only
when the option price differs from the market price at the grant date. SFAS No.
123 allows a company to follow APB Opinion No. 25 with the following additional
disclosure that shows what our net income and earnings per share would have
been using the compensation model under SFAS No. 123:
2000 1999 1998
-------- -------- -------
Net income As reported $155,808 $102,343 $80,793
Pro forma $ 95,070 $ 91,041 $71,947
Earnings per
share:
Basic As reported $ 0.99 $ 0.67 $ 0.51
Pro forma $ 0.60 $ 0.60 $ 0.46
Diluted As reported $ 0.94 $ 0.65 $ 0.50
Pro forma $ 0.58 $ 0.58 $ 0.45
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal years 2000, 1999 and 1998, respectively:
2000 1999 1998
------- ------- -------
Risk free interest rate 6.44% 5.31% 6.01%
Expected term 5 years 5 years 5 years
Expected forfeiture rate 1% 1% 1%
Volatility 61% 51% 45%
Expected annual
dividends $ 0.035 $ 0.030 $ 0.030
40
The following information pertains to options on Scientific-Atlanta's common
stock for the years ended June 30, 2000 and July 2, 1999:
Number of Weighted Average
2000 Shares Exercise Price
- ---- ---------- ----------------
Outstanding,
beginning of year 11,306,062 $ 9.921
Granted 9,289,039 $43.498
Cancelled (612,365) $17.500
Exercised (4,691,436) $10.731
----------
Outstanding,
end of year 15,291,300 $27.730
==========
Number of Weighted Average
1999 Shares Exercise Price
- ---- ---------- ----------------
Outstanding,
beginning of year 13,046,018 $ 8.882
Granted 3,863,700 $11.641
Cancelled (707,808) $10.841
Exercised (4,895,848) $ 8.394
----------
Outstanding,
end of year 11,306,062 $ 9.921
==========
The following information pertains to options on Scientific-Atlanta's common
stock at June 30, 2000:
Options Outstanding
---------------------------------
Weighted Weighted
Average Average
Range of Remaining Exercise
Exercise Prices Shares Life in Years Price
- --------------- ---------- ------------- --------
$ 1.625 - $10.969 3,313,174 5.73 $ 8.737
$11.250 - $18.500 3,399,237 8.25 $11.995
$23.313 - $30.440 3,248,026 9.31 $23.581
$50.000 - $51.781 4,120,364 9.78 $51.778
$55.625 - $74.590 1,210,499 9.84 $56.675
----------
15,291,300 7.55 $28.007
==========
Options
Exercisable
------------------
Weighted
Average
Range of Exercise
Exercise Prices Shares Price
- --------------- --------- --------
$ 1.625 - $10.969 3,080,943 $ 8.735
$11.250 - $18.500 2,004,686 $11.897
$23.313 - $30.440 812,007 $23.581
$50.000 - $51.781 1,030,091 $51.778
$55.625 - $74.590 302,625 $56.675
---------
7,230,352 $19.418
=========
At June 30, 2000, an additional 3,689,013 shares were reserved under employee
and director stock option plans.
We have an employee stock purchase plan whereby we provide certain purchase
benefits for participating employees. At June 30, 2000, 1,881,676 shares were
reserved for issuance to employees under the plan.
We have a 401(k) plan whereby we match eligible employee contributions in
Scientific-Atlanta stock, subject to certain limitations. Our expense to match
contributions was $6,325, $6,416 and $6,450 in fiscal years 2000, 1999 and
1998, respectively.
We have a stock plan for non-employee directors which provides for 500 shares
of Scientific-Atlanta common stock to be granted to each director annually,
which allows directors to elect to receive all or a portion of his or her
quarterly compensation from us in the form of shares of Scientific-Atlanta
common stock, and which also provides for a retirement award of 1,500 shares of
Scientific-Atlanta common stock annually. At June 30, 2000, 690,428 shares were
reserved for issuance to non-employee directors under the plan.
We issue restricted stock awards and non-qualified stock option grants to
certain officers and key employees under a long-term incentive plan.
Compensation expense for restricted stock awards was $14,454, $3,304 and
$2,670, in fiscal years 2000, 1999 and 1998, respectively. At June 30, 2000,
1,819,861 shares were reserved for issuance under this plan.
At June 30, 2000, a total of 8,080,978 shares of authorized stock were reserved
for the above purposes.
We adopted a Rights Plan effective upon expiration of our previous Shareholder
Rights Plan in April 1997, and pursuant to the Plan declared a dividend of one
Right for each outstanding share of common stock. Pursuant to the terms of the
Plan, following the March 2000 two-for-one stock split, one-half of a Right is
attached to each share of common stock outstanding on or issued after, the date
of such stock split. Each whole Right is to purchase 1/1000th share of
preferred stock at an exercise price of $118. Separate Rights certificates will
be distributed and the Rights will become exercisable if a person or
41
group (i) acquires beneficial ownership of 15 percent or more of Scientific-
Atlanta's common stock, (ii) makes a tender offer to acquire 15 percent or more
of Scientific-Atlanta's common stock, or (iii) is determined by the Board of
Directors to be an "adverse person" as defined by the Plan. If a person or a
group becomes a 15 percent holder (other than by offer for all shares approved
by the Board of Directors) or is determined by the Board of Directors to be an
"adverse person", each Right will entitle the holder thereof, other than the
acquiring shareholder or adverse person, to acquire, upon payment of the
exercise price, common stock of Scientific-Atlanta's having a value equal to
twice the exercise price. If we engage in a merger or other business
combination in which Scientific-Atlanta does not survive, and which is not
approved by the Board of Directors, each Right entitles the holder to acquire
common shares of the surviving company having a market value equal to twice the
exercise price. Following the occurrence of any event described in either of
the two preceding sentences, we are required by the Rights Plan to reserve
sufficient shares of our common stock to permit the exercise in full of all
outstanding Rights. At June 30, 2000, no shares of common stock were reserved
for this purpose. The Rights may be redeemed by us at a price of $0.01 per
Right at any time prior to 10 days after the announcement that a party acquired
15 percent or more of Scientific-Atlanta's common stock or prior to the date
any person or group is determined by the Board of Directors to be an "adverse
person". The Rights have no voting power and, until exercised, no dilutive
effect on earnings per share. If not previously redeemed, the Rights will
expire on April 13, 2007.
In connection with adoption of the new Rights Plan, the Board of Directors
designated 350,000 shares of Series A Junior Participating Preferred Stock from
Scientific-Atlanta's 50,000,000 authorized shares of preferred stock for
issuance under the Rights Plan. Upon issuance, each share of preferred stock is
entitled to a quarterly dividend equal to the greater of $0.01 or 1,000 times
the per share amount of all cash dividends, non-cash dividends, or other
distributions, other than dividends payable in common stock, declared on
Scientific-Atlanta's common stock. At June 30, 2000, there were 79,660 shares
of preferred stock reserved for this purpose.
16. Earnings Per Share
- --------------------------------------------------------------------------------
Basic and diluted earnings per share for the last three fiscal years are as
follows:
Per Share
2000 Earnings Shares Amount
- ---- -------- ------- ---------
Basic earnings per common share:
Net earnings $155,808 157,807 $ 0.99
======== ======= ======
Diluted earnings per common share:
Net earnings $155,808 164,895 $ 0.94
======== ======= ======
Effect of dilutive stock options -- 7,088 $(0.05)
======== ======= ======
Per Share
1999 Earnings Shares Amount
- ---- -------- ------- ---------
Basic earnings per common share:
Net earnings $102,343 153,630 $ 0.67
======== ======= ======
Diluted earnings per common share:
Net earnings $102,343 157,130 $ 0.65
======== ======= ======
Effect of dilutive stock options $ -- 3,500 $(0.02)
======== ======= ======
Per Share
1998 Earnings Shares Amount
- ---- -------- ------- ---------
Basic earnings per common share:
Net earnings $ 80,793 157,384 $ 0.51
======== ======= ======
Diluted earnings per common share:
Net earnings $80,793 160,006 $ 0.50
======== ======= ======
Effect of dilutive stock options $ -- 2,622 $(0.01)
======== ======= ======
The following information pertains to options to purchase shares of common
stock which were not included in the computation of diluted earnings per common
share because the option's exercise price was greater than the average market
price of the common shares and inclusion of the options in the earnings per
share calculation would have been anti-dilutive:
2000 1999 1998
------ ------ ---------
Number of options
outstanding 52,700 78,100 4,247,590
Weighted average
exercise price $68.64 $18.28 $ 11.42
42
Scientific-Atlanta, Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
For Each Of The Three Years In The Period Ended June 30, 2000
(In Thousands)
Col. A Col. B Col. C Col. D Col. E
------ ---------- --------------------------------- ---------- ----------
Additions
Balance at --------------------------------- Balance at
beginning Charged to Charged to end of
Description of period costs and expenses other accounts Deductions period
----------- ---------- ------------------ -------------- ---------- ----------
Deducted on the balance
sheet from asset to
which it applies:
June 30, 2000 --
Allowance for
doubtful accounts.... $ 8,160 $(3,165)(1) $-- $ (861)(6) $ 4,134
======= ======= ==== ======= =======
July 2, 1999 --
Allowance for
doubtful accounts.... $10,052 $(1,615)(2) $-- $ (277)(6) $ 8,160
======= ======= ==== ======= =======
June 26, 1998 --
Allowance for
doubtful accounts.... $ 4,202 $ 6,231 (3) $ 2 $ (383)(6) $10,052
======= ======= ==== ======= =======
June 30, 2000 --
Restructuring
Reserves............. $ 1,600 $ -- (4) $-- $ (219)(7) $ 1,381
======= ======= ==== ======= =======
July 2, 1999 --
Restructuring
Reserves............. $ 9,677 $ -- (4) $-- $(8,077)(7) $ 1,600
======= ======= ==== ======= =======
June 26, 1998 --
Restructuring
Reserves............. $ -- $10,998 (5) $-- $(1,321)(7) $ 9,677
======= ======= ==== ======= =======
Notes:
(1) Includes the collection of $3,730 reserved in fiscal year 1998 for
receivables from customers in the Asia-Pacific region.
(2) Includes the collection of $1,439 reserved in fiscal year 1998 for
receivables from customers in the Asia Pacific region.
(3) Includes charges of $5,895 for receivables from customers in the Asia
Pacific region which was experiencing currency and other economic crises.
(4) There were no restructuring charges in fiscal year 2000 or 1999.
(5) Scientific-Atlanta recorded a restructuring charge of $23,412 in fiscal
year 1998 which included reserves of $10,998 and $12,414 for assets which
were abandoned and the impairment of certain assets.
(6) Amounts represent uncollectible accounts written off. In fiscal year 2000,
includes $439 of allowance for doubtful accounts on receivables of the
Satellite Networks business unit that was sold to ViaSat in April 2000.
(7) Utilization of restructuring reserves for expenses incurred under
obligations under cancelled leases, severance, and other miscellaneous
expenses related to the restructuring.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Scientific-Atlanta, Inc.
(Registrant)
/s/ James F. McDonald September 26, 2000
- ------------------------------------- ------------------
James F. McDonald Date
President and Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ James F. McDonald September 26, 2000
- ------------------------------------- ------------------
James F. McDonald Date
President and Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Wallace G. Haislip September 26, 2000
- ------------------------------------- ------------------
Wallace G. Haislip Date
Senior Vice President--Finance
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Julian W. Eidson September 26, 2000
- ------------------------------------- ------------------
Julian W. Eidson Date
Vice President and Controller
(Principal Accounting Officer)
/s/ Marion H. Antonini September 26, 2000
- ------------------------------------- ------------------
Marion H. Antonini, Director Date
/s/ David W. Dorman September 26, 2000
- ------------------------------------- ------------------
David W. Dorman, Director Date
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
44
/s/ William E. Kassling September 26, 2000
- ------------------------------ ------------------
William E. Kassling, Director Date
/s/ Mylle Bell Mangum September 26, 2000
- ------------------------------ ------------------
Mylle Bell Mangum, Director Date
/s/ David J. McLaughlin September 26, 2000
- ------------------------------ ------------------
David J. McLaughlin, Director Date
/s/ James V. Napier September 26, 2000
- ------------------------------ ------------------
James V. Napier, Director Date
/s/ Sam Nunn September 26, 2000
- ------------------------------ ------------------
Sam Nunn, Director Date
45
EXHIBIT INDEX
(3) (a) The Composite Statement of Amended and Restated Articles of
Incorporation of Scientific-Atlanta is incorporated by reference to
Scientific-Atlanta's report on Form 10-K for the fiscal year ended
June 27, 1997.
(b) The By-laws of Scientific-Atlanta, as amended, is incorporated by
reference to Scientific-Atlanta's report on Form 10-K for the fiscal
year ended July 2, 1999.
(4) The following instrument defining the rights of security holders is
incorporated by reference to Scientific-Atlanta's Form 8-A Registration
Statement filed on April 7, 1997:
(a) Rights Agreement, dated as of February 23, 1997, between Scientific-
Atlanta and The Bank of New York, as Rights Agent, which includes as
Exhibit A the Preferences and Rights of Series A Junior Participating
Preferred Stock and as Exhibit B the Form of Rights Certificate.
(10) Material Contracts:
(a) The following material contracts are incorporated by reference to
Scientific-Atlanta's report on Form 10-K for the fiscal year ended
July 1, 1994:
(i) Form of Severance Protection Agreement between Scientific-Atlanta
and Certain Officers and Key Employees.*
(b) The following material contract is incorporated by reference to
Scientific-Atlanta's report on Form 10-K for the fiscal year ended
June 30, 1995:
(i) Credit Agreement, dated May 11, 1995, by and between Scientific-
Atlanta and NationsBank of Georgia, National Association, for
itself and as agent for other banks participating in the credit
facility.
(c) The following amendments to the Credit Agreement described in item (b)
above are incorporated by reference to Scientific-Atlanta's report on
Form 10-K for its fiscal year ended June 28, 1996:
(i) First Amendment, dated as of December 29, 1995, to the Credit
Agreement.
(ii) Letter Amendment, dated as of April 5, 1996, to the Credit
Agreement.
(iii) Second Amendment, dated as of June 28, 1996, to the Credit
Agreement.
(d) The following material contract is incorporated by reference to
Scientific-Atlanta's Form S-8 Registration Statement, filed on
December 27, 1996:
(i) Non-Qualified Stock Option Agreement between Scientific-Atlanta,
Inc. and James F. McDonald.*
(e) The following amendment to the Credit Agreement described in item (b)
above is incorporated by reference to Scientific-Atlanta's report on
Form 10-Q for the fiscal quarter ended March 28, 1997:
(i) Third Amendment, dated as of January 27, 1997, to the Credit
Agreement.
(f) The following material contracts or amendments to material contracts
are incorporated by reference to Scientific-Atlanta's report on Form
10-K for the fiscal year ended June 27, 1997:
(i) Letter Amendment, dated as of April 23, 1997, to the Credit
Agreement described in item (b) above.
(ii) Credit and Investment Agreement, dated as of July 30, 1997, among
Scientific-Atlanta, Wachovia Capital Markets, Inc., Wachovia
Bank, N.A., as agent, and the lenders signatories thereto.
(iii) Lease Agreement, dated as of July 30, 1997, between Wachovia
Capital Markets, Inc. and Scientific-Atlanta.
(iv) Acquisition, Agency, Indemnity and Support Agreement between
Scientific-Atlanta and Wachovia Capital Markets, Inc., dated as
of July 30, 1997.
46
(v) Ground Lease, dated as of July 30, 1997, between Scientific-
Atlanta and Wachovia Capital Markets, Inc.
(vi) Scientific-Atlanta, Inc. 1981 Incentive Stock Option Plan, as
amended.*
(vii) Scientific-Atlanta, Inc. 1978 Non-Qualified Stock Option Plan
for Key Employees, as amended.*
(g) The following material contracts or amendments to material contracts
are incorporated by reference to Scientific-Atlanta's report on Form
10-K for the fiscal year ended June 26, 1998:
(i) Scientific-Atlanta, Inc. Restoration Retirement Plan, as amended.*
(ii) Letter Amendment, dated as of April 24, 1998, to the Credit
Agreement described in item (b) above.
(h) The following material contracts or amendments to material contracts
are incorporated by reference to Scientific-Atlanta's report on Form
10-Q for the fiscal quarter ended April 2, 1999:
(i) Form of First Amendment of Severance Protection Agreement by and
between Scientific-Atlanta, Inc. and Certain Executives*
(ii) Scientific-Atlanta, Inc. Retirement Plan for Non-Employee
Directors*
(iii) Scientific-Atlanta, Inc. Annual Incentive Plan for Key Employees
as amended and restated*
(iv) 1985 Executive Deferred Compensation Plan of Scientific-Atlanta,
Inc., as amended and restated*
(v) Letter Amendment to Credit and Investment Agreement among
Scientific-Atlanta, Inc., Wachovia Bank, N.A. and Wachovia Capital
Markets, Inc.
(vi) Amendment to Credit and Investment Agreement among Scientific-
Atlanta, Inc., Wachovia Bank, N.A. and Wachovia Capital Markets,
Inc.
(vii) Second Amendment to Credit and Investment Agreement among
Scientific-Atlanta, Inc., Wachovia Bank, N.A. and Wachovia
Capital Markets, Inc.
(viii) Fourth Amendment to Credit Agreement between Scientific-
Atlanta, Inc. and NationsBank, N.A. and other lenders
(ix) First Amendment to Lease Agreement between Scientific-Atlanta,
Inc. and Wachovia Capital Markets, Inc.
(x) Second Amendment to Lease Agreement between Scientific-Atlanta,
Inc. and Wachovia Capital Markets, Inc.
(i) The following material contracts or amendments to material contracts
are incorporated by reference to Scientific-Atlanta's annual report on
Form 10-K for the fiscal year ended July 2, 1999:
(i) Long-Term Incentive Plan of Scientific-Atlanta, Inc., as amended
and restated.*
(ii) Scientific-Atlanta, Inc. Senior Officer Annual Incentive Plan, as
amended and restated.*
(iii) Amended and Restated Credit Agreement, dated as of May 7, 1999,
by and among Scientific-Atlanta and The Bank of New York and ABN
Amro Bank N.V. as co-agents and NationsBank, N.A. as
administrative agent for the participating lenders.
(iv) Amendment No. 1 to the Amended and Restated Credit Agreement by
and among Scientific-Atlanta and The Bank of New York and ABN
Amro Bank N.V. as co-agent and NationsBank, N.A. as
administrative agent for the participating lenders.
47
(j) Supplemental Executive Retirement Plan, as amended and restated.*
(k) Stock Plan for Non-Employee Directors, as amended and restated.*
(l) Non-Employee Directors Stock Option Plan, as amended and restated.*
(m) Executive Deferred Compensation Plan, as amended and restated.*
(n) 1996 Employee Stock Option Plan, as amended and restated.*
(o) Deferred Compensation Plan for Non-Employee Directors, as amended and
restated.*
(p) Second Amendment to Amended and Restated Credit Agreement dated as of
May 4, 2000 among Scientific-Atlanta and The Bank of New York and ABN
Amro Bank N.V. as co-agents and Bank of America, N.A., successor to
Nationsbank, N.A.
(21) Significant Subsidiaries of Scientific-Atlanta.
(23) Consent of Independent Public Accountants.
(27) Financial Data Schedule.
(99) Cautionary Statements.
- --------
* Indicates management contract or compensatory plan or arrangement.
48