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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 27, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5517
SCIENTIFIC-ATLANTA, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-0612397
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation 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
on which registered
Title of each class
New York Stock Exchange
Common Stock, par value
$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 September 9, 1997, was approximately $1,783,375,582.
As of September 9, 1997, the Registrant had outstanding 78,424,676 shares of
common stock.
Documents Incorporated By Reference:
Specified portions of the Proxy Statement for the Registrant's 1997 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
ITEM 1.BUSINESS
GENERAL
Scientific-Atlanta, Inc. (the "Company") provides its customers with
the products and services they need to develop the advanced terrestrial and
satellite networks which deliver entertainment, information and
communications. The Company's products connect information generators with
information users via broadband terrestrial and satellite networks, and
include applications for the converging cable, telephone, and data networks.
The Company operates primarily in one business segment,
Communications, providing satellite-based and terrestrial-based networks to a
range of customers in a variety of applications, and providing network
management and systems integration to add value to those networks. This
segment represents over 90% of consolidated sales, operating profit and
identifiable assets.
The Company has 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. The
Company's products include receivers, transmitters, distribution amplifiers,
modulators, demodulators, signal encoders and decoders, controllers, optical
amplifiers, source lasers, set-top (home communications) terminals, digital
audio terminals, digital video compression and transmission equipment, fiber
optic distribution equipment, and satellite earth station antennas. These
products, and integrated systems and networks using these and other products,
are sold to CATV system operators, telephone companies, communications
carriers, communications network operators, utility companies and multi-
facility business organizations which use communications satellites for
intracompany communications. Sales are also made to independent system
integrators, distributors and dealers who resell the products to some of the
above types of customers.
The Company sells transmission products, including RF (radio
frequency) amplifiers, line extenders, optoelectronic transmitters,
optoelectronic amplifiers and taps and passives, which transmit signals via
coaxial cable or via fiber optic cable from the cable operator to the end-user
customer. The Company's transmission 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 19% of the Company's total sales for fiscal 1997,
and approximately 21% and 17% of such sales in fiscal years 1996 and 1995,
respectively.
The Company also sells 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 by fiber optic cable from headend systems to subscribers, set-top
terminals that enable television sets to receive all channels transmitted by
system operators, and interdiction equipment which enables connections,
disconnections and changes in service to be made from the headend.
In February 1997, the Company acquired Arcodan A/S, a prominent Danish
manufacturer of headend systems, opto-electronics and RF distribution
equipment. This acquisition is expected to enhance the Company's position as a
global manufacturer and marketer of communications products. Arcodan serves
customers such as cable operators, installers and systems integrators
throughout Scandinavia and the rest of Europe. Arcodan employs approximately
270 people. Development and manufacturing take place at its facility in
So/nderborg, Denmark. Its products are distributed through its subsidiaries in
Germany and Poland; a partly-owned subsidiary in France; and through a direct
sales and distribution network in Europe.
The Company's set-top terminals 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
1
and automatic recording of billing information at the cable operator's central
facility, and menu-driven volume controllable units. Sales of set-top
terminals constituted approximately 30% of the Company's total sales for
fiscal year 1997, and approximately 27% and 26% of such sales in fiscal years
1996 and 1995, respectively. Proprietary software used in the terminals, as
well as system manager software at the headend system or at the transmission
level, was developed by the Company and is updated from time to time. The
Company's new digital home communications terminals enable subscribers to
access new services such as advanced pay-per-view ordering of special events
and movies, fully interactive home shopping services, electronic program
guides and more.
During fiscal year 1997, the Company commenced manufacture and sales
of a telephone return cable modem and announced its intention to develop a
two-way RF cable modem. However, the market for all cable modems has developed
more slowly than originally anticipated by the Company. As a result, the
Company is re-evaluating the need for a stand alone two-way RF modem in fiscal
1998. A two-way data solution is currently included in one of the Company's
digital set-top product offerings.
The Company's products, both analog and digital, are being utilized by
cable operators and Regional Bell Operating Companies to upgrade existing
networks to provide new services and to build new video, voice and data
networks. They are also utilized by electric utilities in load management
systems which monitor and control power usage and monitor power outages. The
Company's products are also utilized by programmers and broadcasters to
transmit their programs to viewers.
The Company's satellite earth stations receive and transmit signals
for video, voice and data and are utilized in satellite-band telephone, data
and television distribution networks. Some of these earth stations are part of
national and international communications systems which communicate by means
of a satellite with earth stations in other countries or with other earth
stations in the same national network. Earth stations in these systems may be
connected with local telephone, teletype, television or other terrestrial
communications networks. The Company's earth stations, signal encoders and
decoders, packet switches and controllers are also used in private business
networks for the exchange of audio, video and data via satellite among various
office, manufacturing and sales facilities and for the delivery of television
programming to hotels, motels and apartment complexes. The Company's data
communications product offerings include private interactive data systems
using VSAT (very small aperture terminal) technology.
The Company designs, manufactures and sells digital video compression
communications products for direct satellite broadcast and cable television
systems and digital storage and retrieval products for applications such as ad
insertion for television broadcasters and cable operators. The Company's
compression products utilize the open architecture MPEG-2 technology developed
by an international standards group. MPEG-2 digital equipment allows cable,
telephone, computer and consumer electronics products and systems to operate
together across networks and in the home.
The Company's satellite products and systems include tracking and
telemetry equipment, earth observation satellite ground stations, shipboard
and command telephony and facsimile communications products and intercept
systems. The Company produces telemetry instruments, 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.
The Company develops services and applications which can be utilized
by its customers on their terrestrial-based and satellite-based networks. Such
applications include (i) a system which enables power companies to detect
power failures automatically, (ii) transmittal of information over cable
networks via modem, and (iii) interactive video games.
2
OTHER PRODUCTS AND SERVICES.
The Company's microwave instrumentation systems are used to design and
manufacture antennas for communication and radar systems. Products include
pattern recorders, receivers, positioners and various display units, which
measure, record and display various characteristics of antennas such as signal
pattern, gain, phase, amplitude and frequency.
The Company has consolidated its service functions into a service
organization, 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. This service organization offers a variety of
maintenance and service contracts to companies using products manufactured or
sold by the Company.
MARKETING AND SALES
The Company's products are sold primarily through its own sales
personnel who work out of offices in Atlanta and other metropolitan areas in
the United States and around the world. Certain products are also marketed in
the United States through independent sales representatives and independent
distributors. Sales in foreign countries are made through wholly-owned
subsidiaries and branch offices, as well as through independent distributors
and independent sales representatives. The Company's management personnel are
also actively involved in marketing and sales activities.
The Company's international sales constituted 37% of the Company's
total sales for fiscal year 1997 and 36% and 34% of total sales in fiscal
years 1996 and 1995, respectively. Substantially all of these sales were
export sales. Foreign subsidiary sales were not material for any of these
fiscal years. See Note 3 of the Notes to Financial Statements included in this
Report. Sales to Europe were 16% of total sales in fiscal 1997 and were 12%
and 16% of total sales in fiscal 1996 and 1995, respectively.
A limited number of cable television operators provide communications
services to a large percentage of U.S. households, and the loss of one or more
of these operators as customers could have a material adverse effect on the
Company's sales. Sales to Time Warner, Inc. and its affiliates were 11% of the
Company's total sales in fiscal 1997 and were 13% of total sales in fiscal
1995. No customer (or group of customers under common control) accounted for
more than 10% of the Company's total sales in fiscal 1996.
BACKLOG
The Company's backlog consists of unfilled customer orders believed to
be firm and long-term contracts which have not been completed. The Company's
backlog as of June 27, 1997, and June 28, 1996, was $483,463,000 and
$378,582,000, respectively.
The Company believes that approximately 90% of the backlog existing at
June 27, 1997 will be shipped within the succeeding fiscal year. With respect
to long-term contracts, the Company includes in its 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 the Company's backlog at any time does not reflect
expected revenues for any fiscal period.
PRODUCT RESEARCH AND DEVELOPMENT AND PATENTS
The Company conducts an active research and development program to
strengthen and broaden its existing products and systems and to develop new
products and systems. The Company's development strategy is to identify
products and systems which are, or are expected to be, needed by a substantial
number of customers in the Company's markets and to allocate a greater share
of its research and development resources to areas with the highest potential
for future benefits to the Company. In addition, the Company develops specific
applications
3
related to its present technology. Expenditures in fiscal 1997, 1996 and 1995
were principally for development of commercial digital cable products,
satellite network products, cable telephony products and interactive data
communications products. In fiscal 1997, 1996 and 1995, the Company's research
and development expenses were approximately $114,344,000, $95,299,000, and
$82,378,000, respectively. The Company, with the consent of its product
development partner, Siemens, plans to decrease its research and development
efforts related to cable telephony products, because the markets for cable
telephony products have not developed as quickly as the Company previously
anticipated.
The Company holds patents with respect to certain of its products and
actively seeks to obtain patent protection in the U.S. and in other countries
for significant inventions and developments.
MANUFACTURING
The Company develops, designs, fabricates, manufactures, assembles or
acquires its products. 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 the
Company's products include precision electronic components requiring close
tolerances, the Company maintains rigorous and exacting test and inspection
procedures designed to prevent production errors, and also constantly reviews
its overall production techniques to enhance productivity and reliability. The
Company's set-top terminals and certain pole-line hardware for the CATV
industry are also manufactured by contract vendors with high-quality, high-
volume production facilities. In addition to such manufacturing by contract
vendors, the Company commenced its own manufacturing of set-top terminals in
fiscal year 1995 in its new Juarez, Mexico facility. In fiscal year 1997, the
Company completed a 124,000 square foot addition to its manufacturing facility
in Juarez, Mexico. The Company manufactures a variety of products in its
Juarez, Mexico facility, including a portion of its 8600x(TM) advanced analog
set-tops. During fiscal year 1998, the Company expects to launch the
production of its Explorer(R) set-top in the Juarez, Mexico facility.
MATERIALS AND SUPPLIES
The materials and supplies purchased by the Company are standard
electronic components, such as custom integrated circuits, wire, circuit
boards, transistors, capacitors and resistors, all of which are produced by a
number of manufacturers. Matsushita Electronic Components Co., Ltd.
manufactures set-top terminals for the Company and is a primary supplier of
those terminals. Cablevision is a primary supplier of taps for the Company.
The Company also purchases aluminum and steel, including castings and semi-
fabricated items produced by a variety of sources. The Company considers its
sources of supply to be adequate and is not dependent upon any single
supplier, except for Matsushita Electronic Components Co., Ltd. and
Cablevision, for any significant portion of the materials used in the products
it manufactures or the products it sells.
EMPLOYEES
The Company employed, as of June 27, 1997, approximately 5,343 regular
full-time and part-time employees and approximately 743 additional workers
employed through temporary employment agencies. The Company believes its
employee relations are satisfactory.
COMPETITION
The businesses in which the Company is engaged are highly competitive.
The Company competes with domestic and international companies that have
substantially greater resources and a larger number of products, as well as
with smaller specialized companies. Some of the Company's customers are in
businesses closely related to the production of such products and are,
therefore, potential competitors of the Company. The Company believes that its
ability to compete successfully results from its marketing strategy,
engineering skills, ability to provide post-purchase services, ability to
provide quality products at competitive prices and broad coverage by its sales
personnel.
FORWARD-LOOKING INFORMATION
This Form 10-K, the 1997 Annual Report, any Form 10-Q or any Form 8-K
of the Company or any written or verbal statements made by representatives of
the Company 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.
4
ITEM 2.PROPERTIES
The Company owns and uses in its operations office and manufacturing
facilities in metropolitan Atlanta, Georgia, Chicago, Illinois and Juarez,
Mexico, which comprise five sites containing a total of approximately 631,200
square feet.
The Company also owns (i) approximately 130 acres of land in Gwinnett
County, Georgia, where antenna test ranges and a hub station used in providing
interactive data communications services are located, (ii) approximately 219
acres of land in Walton County, Georgia, held for future antenna test range
expansion, and (iii) approximately 280 acres of land in Gwinnett County,
Georgia, held for future development of and expansion of a consolidated campus
for the Company. The Company presently leases 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.
Additional major manufacturing facilities containing an aggregate of
approximately 361,500 square feet are leased by the Company at the following
locations under leases expiring (including renewal options) from 2001 to 2015:
APPROXIMATE
LOCATION SQUARE FOOTAGE
-------- --------------
Norcross, Georgia 249,000
Sonderborg, Denmark 71,500
Vancouver, British Columbia 25,000
Toronto, Ontario 16,000
The Company also leases laboratory, office and warehouse space in
several buildings in the metropolitan areas of Atlanta, Georgia; Cupertino,
California; Tempe, Arizona; Phoenix, Arizona; El Paso, Texas; Sonderborg,
Denmark; Toronto, Ontario; Vancouver, British Columbia; Melbourne, Florida;
and Manchester, United Kingdom, and the Company leases sales and service
offices in 29 domestic and foreign cities.
ITEM 3.LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings which
may or could have a material adverse impact on the Company or its operations.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended June 27, 1997.
5
EXECUTIVE OFFICERS OF THE COMPANY
The following persons are the executive officers of the Company:
Executive
Name Age Officer Since Present Office
---- --- ------------- --------------
James F. McDonald 57 1993 President and Chief Executive
Officer
John E. Breyer 62 1989 Senior Vice President
William E. Eason, Jr. 54 1993 Senior Vice President, General
Counsel and Corporate Secretary
H. Allen Ecker 61 1979 Senior Vice President, Technical
Operations and Chief Technical
Officer
Larry L. Enterline 44 1997 Senior Vice President, Worldwide
Sales and Service
Brian C. Koenig 50 1988 Senior Vice President, Human
Resources
John H. Levergood 63 1992 Senior Vice President and Member
of Corporate Operating Committee
Raymond D. Lucas 59 1989 Senior Vice President, Strategic
Operations and Chief Strategic
Officer
Harvey A. Wagner 56 1994 Senior Vice President-Finance,
Chief Financial Officer and
Treasurer
Conrad Wredberg, Jr. 56 1995 Senior Vice President and
Chairman of Corporate Operating
Committee
Dwight B. Duke 45 1997 Vice President and Member of
Corporate Operating Committee
Julian W. Eidson 58 1978 Vice President, Controller and
Member of Corporate Operating
Committee
Each executive officer is elected annually and serves at the pleasure
of the Board of Directors. Each executive officer, except Mr. Eidson, serves
on the Corporate Management Committee of the Company.
Mr. McDonald was elected President and Chief Executive Officer of the
Company effective July 15, 1993. He was a general partner of J. H. Whitney &
Company, a private investment firm, from 1991 until his employment by the
Company. From 1989 to 1991 he was President and Chief Executive Officer of
Prime Computer, Inc., a supplier of CAD/CAM software and computer systems.
Prior to that time he was President and Chief Executive Officer of Gould,
Inc., a computer and electronics company (1984 to 1989) and held a variety of
positions with IBM Corporation (1963 to 1984).
Mr. Eason has been a partner at Paul, Hastings, Janofsky & Walker
since 1989. He has been Corporate Secretary of the Company since August 1993,
and became Senior Vice President and General Counsel
6
in February 1994. Paul, Hastings, Janofsky & Walker performs legal services
for the Company. Mr. Eason receives a fixed salary from the Firm for work
which he performs for clients of the Firm other than the Company, but has no
interest in the Firm's earnings and profits.
Mr. Enterline was elected Senior Vice President, Worldwide Sales and
Service of the Company on February 23, 1997. From January 1996 through January
1997, Mr. Enterline was a consultant in the telecommunications industry,
providing consulting services to companies such as the Company and Compression
Labs, Inc. From 1989 through January 1996, Mr. Enterline was employed in a
variety of management positions with the Company.
Mr. Levergood re-joined the Company in December 1992 as a Senior Vice
President. He had previously been employed by the Company in various
managerial positions (most recently as Chief Operating Officer) until December
1989. From January through June 1990, he was President and Chief Operating
Officer of Dowden Communications, an operator of cable television systems. He
was an independent communications consultant from June 1990 until he re-joined
the Company in 1992.
Mr. Wagner was Vice President-Finance and Chief Financial Officer of
Computervision Corporation, a supplier of CAD/CAM/CAE software and services
from September 1989 until he joined the Company in his current position in
June 1994.
Mr. Wredberg joined the Company 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 of the Company, and in January 1997, Mr.
Wredberg was appointed Chairman of the Corporate Operating Committee. Mr.
Wredberg served as President of American Microsystem, Inc., a supplier of
semiconductors, from 1985 until 1995.
Mr. Duke was elected Vice President of the Company on June 19, 1996.
Prior to that date, Mr. Duke was employed by the Company in a variety of
management positions for more than five years.
All other executive officers have been employed by the Company 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 the Company is traded on the New York Stock
Exchange (symbol SFA). The approximate number of holders of record of the
Company's Common Stock at September 9, 1997, was 6,487.
It has been the policy of the Company to retain a substantial portion
of its earnings to finance the expansion of its business. In 1976, the Company
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 the Company. During
fiscal years 1997 and 1996, the Company paid out a $.015 dividend per share
each quarter.
Information as to the high and low stock prices and dividends paid for
each quarter of fiscal years 1997 and 1996 is included in Note 6 of the Notes
to Financial Statements included in this Report.
7
ITEM 6.SELECTED FINANCIAL DATA
Selected Financial Data is set forth on page 26 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 of this
Report, respectively.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is not yet required, per General Instruction 1 to
Item 305 of Regulation S-K.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and notes
thereto, the schedule containing certain supporting information and the report
of independent public accountants are set forth on pages 13 through 39 of this
Report. See Part IV, Item 14 for an index of the statements, notes and
schedules.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Pursuant to General Instruction G(3) to Form 10-K, the information
required in Items 10 through 13 (except for the information set forth at the
end of Part I with respect to Executive Officers of the Company) is
incorporated by reference from the Company's definitive proxy statement for
the Company's 1997 Annual Meeting of shareholders, which is expected to be
filed pursuant to Regulation 14A within 120 days after the end of the
Company's 1997 fiscal year.
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 13 through 38 of this Report.
Report of Independent Public Accountants.
Consolidated Statement of Financial Position as of June 27, 1997
and June 28, 1996.
Consolidated Statement of Earnings for each of the three years in
the period ended June 27, 1997.
Consolidated Statement of Cash Flows for each of the three years
in the period ended June 27, 1997.
Notes to Consolidated Financial Statements.
8
(2) Financial Statement Schedule:
Page
----
Schedule II Valuation and Qualifying Accounts for Each of the 39
Three Years in the Period ended June 27, 1997.
All other Schedules called for under Regulation S-X are not
submitted because they are not applicable or are 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.
A report on Form 8-K was filed on April 7, 1997, to report the Company's
Rights Agreement which is incorporated by reference under (c)(4)(a)
below.
(c) Exhibits:
(3) (a) Composite Statement of Amended and Restated Articles of
Incorporation of the Company.
(b)By-laws of the Company, as amended.
(4) The following instrument defining the rights of security holders is
incorporated by reference to the Company's Form 8-A Registration
Statement filed on April 7, 1997:
(a)Rights Agreement, dated as of February 23, 1997, between the
Company 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)Agreement pertaining to the compensation of Sidney Topol.*
(b)Scientific-Atlanta, Inc. Non-Employee Directors Stock Option Plan,
as amended.*
(c)Scientific-Atlanta, Inc. 1981 Incentive Stock Option Plan, as
amended.*
(d)1985 Executive Deferred Compensation Plan of Scientific-Atlanta,
Inc., as amended.*
(e)Scientific-Atlanta, Inc. Annual Incentive Plan for Key Executives,
as amended.*
(f)Scientific-Atlanta, Inc. 1978 Non-Qualified Stock Option Plan for
Key Employees, as amended.*
(g)Scientific-Atlanta, Inc. Senior Officer Annual Incentive Plan.*
(h)Scientific-Atlanta, Inc. Restoration Retirement Plan, as amended.*
(i)The following material contracts are incorporated by reference to
the Company's report on Form 10-K for the fiscal year ended July 1,
1994:
(i) Scientific-Atlanta, Inc. Supplemental Executive Retirement
Plan.*
(ii) 1994 Scientific-Atlanta, Inc. Executive Deferred
Compensation Plan.*
(iii) Form of Severance Protection Agreement between the
Company and Certain Officers and Key Employees.*
9
(j) The following material contract is incorporated by reference to
the Company's report on Form 10-K for the fiscal year ended June
30, 1995:
(i) Credit Agreement, dated May 11, 1995, by and between the
Company and NationsBank of Georgia, National Association,
for itself and as agent for other banks participating in
the credit facility.
(k) The following material contract is incorporated by reference to
the Company's report on Form 10-Q for its fiscal quarter ended
December 29, 1995:
(i) Amended and Restated Scientific-Atlanta, Inc. Retirement
Plan for Non-Employee Directors.*
(l) The following amendments to the Credit Agreement described in
item (j) above are incorporated by reference to the Company'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.
(m) The following material contracts are incorporated by reference to
the Company's report on Form 10-Q for the fiscal quarter ended
September 27, 1996:
(i) Long-Term Incentive Plan of Scientific-Atlanta, Inc., as
amended and restated by the Board on November 13, 1996.*
(ii) Stock Plan for Non-Employee Directors, as amended and
restated by the Board on November 13, 1996.*
(iii) Scientific-Atlanta, Inc. 1992 Employee Stock Option
Plan, as amended and restated by the Board on November
13, 1996.*
(iv) Deferred Compensation Plan for Non-Employee Directors of
Scientific-Atlanta, Inc., as amended and restated by the
Board on November 13, 1996.*
(n) The following material contract is incorporated by reference to
the Company'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.*
(o) The following material contract is incorporated by reference to
the Company's Post-Effective Amendment No. 1 to its Form S-8
Registration Statement, filed on January 7, 1997:
(i) 1996 Employee Stock Option Plan.*
(p) The following material contract is incorporated by reference to
the Company's Form S-8 Registration Statement, filed on March 11,
1997:
(i) Non-Qualified Stock Option Agreement between Scientific-
Atlanta, Inc. and Larry L. Enterline.*
10
(q) The following amendment to the Credit Agreement described in item
(j) above is incorporated by reference to the Company'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.
(r) Letter Amendment, dated as of April 23, 1997, to the Credit
Agreement described in item (j) above.
(s) Credit and Investment Agreement, dated as of July 30, 1997, among
the Company, Wachovia Capital Markets, Inc., Wachovia Bank, N.A.,
as agent, and the lenders signatories thereto.
(t) Lease Agreement, dated as of July 30, 1997, between Wachovia
Capital Markets, Inc. and the Company.
(u) Acquisition, Agency, Indemnity and Support Agreement between the
Company and Wachovia Capital Markets, Inc., dated as of July 30,
1997.
(v) Ground Lease, dated as of July 30, 1997, between the Company and
Wachovia Capital Markets, Inc.
(w) The Rights Agreement included as Exhibit 4(a) above, which
Agreement is hereby incorporated by reference.
(11) Computation of Earnings Per Share of Common Stock.
(21) List of Significant Subsidiaries.
(23) Consent of Independent Public Accountants.
(27) Financial Data Schedule.
(99) Cautionary Statements.
- --------
* Indicates management contract or compensatory plan or arrangement.
11
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12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Scientific-Atlanta, Inc.:
We have audited the accompanying consolidated statement of financial
position of Scientific-Atlanta, Inc. (a Georgia corporation) and subsidiaries
as of June 27, 1997 and June 28, 1996 and the related consolidated statements
of earnings and cash flows for each of the three years in the period ended
June 27, 1997 appearing on pages 17, 23, and 25, 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 generally accepted auditing
standards. 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 27, 1997 and June 28, 1996 and the
results of their operations and their cash flows for each of the three years
in the period ended June 27, 1997 in conformity with generally accepted
accounting principles.
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.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 5, 1997
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 generally accepted accounting principles 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 27, 1997 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/ Harvey A. Wagner
- ------------------------------------- -------------------------------
James F. McDonald Harvey A. Wagner
President and Chief Executive Officer Senior Vice President - Finance
Chief Financial Officer and
Treasurer
13
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14
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Scientific-Atlanta had stockholders' equity of $532.6 million and cash and
cash equivalents of $107.1 million at June 27, 1997. The current ratio of
2.4:1 at June 27, 1997 compared to 2.1:1 at June 28, 1996.
CASH AND CASH EQUIVALENTS at the end of 1997 were $107.1 million, up $86.2
million over last year. Cash generated from earnings, accounts receivable
collections, reductions in inventory levels, and the sale of discontinued
operations and the sale of land and a building not required for current
operations exceeded expenditures for equipment, expansion of manufacturing
capacity and the acquisition of Arcodan A/S (Arcodan). Arcodan is a Danish
manufacturer of advanced analog and digital headend systems, opto-
electronics and RF (radio frequency) distribution equipment. See Note 2.
Ending working capital, excluding cash, was $240.2 million, or 20.6 percent
of sales, as compared to $280.1 million or 26.7 percent of sales in the
prior year.
RECEIVABLES were $238.2 million at year-end, compared to $252.9 million at the
prior fiscal year-end. Average days sales outstanding decreased to 76 for
1997 from 79 for 1996 due to improved collections of accounts receivable.
The allowance for doubtful accounts as a percent of gross receivables was
1.7 percent in 1997, up slightly over the prior year.
INVENTORY turnover was 4.1 times in 1997, compared to 3.1 in the prior year.
The improvement in inventory turnover was due to lower average inventory
balances in 1997 as compared to 1996 reflecting management's effort to
improve working capital by reducing inventory levels.
CURRENT DEFERRED INCOME TAXES decreased $19.7 million due to decreases in
nondeductible reserves, including usage during 1997 of a reserve of $25.4
million recorded in 1996 related to an arbitration award. See Note 4 for
details about the arbitration award.
OTHER CURRENT ASSETS, which include assets held for sale, prepaid insurance,
deposits, royalties, license fees and other miscellaneous prepaid expenses,
decreased $11.5 million due primarily to the sale in 1997 of the net assets
of the defense-related businesses discontinued in 1996 (see Note 5 for
details) and land held for resale.
NET PROPERTY, PLANT AND EQUIPMENT increased by $15.8 million in 1997 as
capital spending exceeded depreciation and disposals. Capital additions of
$53.1 million included expenditures for equipment, and expansion of
manufacturing capacity, primarily in Juarez, Mexico.
COST IN EXCESS OF NET ASSETS ACQUIRED increased $5.1 million in 1997,
including $5.8 million recorded with the acquisition of Arcodan. See Note 2
for details.
OTHER ASSETS, which include license fees, investments, intellectual property,
capitalized software development costs, cash surrender value of company-
owned life insurance and various prepaid expenses, increased $5.3 million
in 1997 due primarily to capitalized software development costs and
additional investments. See Notes 1 and 2.
TOTAL BORROWINGS at year-end amounted to $2.7 million, up $0.7 million over
the prior year. The borrowings include industrial development bonds,
working capital loans for foreign subsidiaries and financing for equipment.
Working capital borrowings by foreign subsidiaries decreased $1.3 million
during 1997. Details of borrowings are shown in Note 7.
The Company has a $300 million senior credit facility that provides for
unsecured borrowings up to $150 million which expire May 1998 and up to
$150 million which expire May 2000. There were no outstanding borrowings
under this facility at June 27, 1997 or June 28, 1996. The facility may be
used to supplement funds generated internally to support the growth of the
Company.
ACCOUNTS PAYABLE were $123.7 million at year-end, up from $106.5 million last
year. The increase reflects higher production levels in the fourth quarter
of 1997 as compared to 1996. Days in
15
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(CONTINUED)
accounts payable decreased to 49 in 1997 from 56 in 1996.
ACCRUED LIABILITIES of $111.7 million include accruals for compensation,
warranty and service, customer down-payments, royalties and taxes,
excluding income taxes. Reductions in accruals related to an arbitration
award recorded in 1996 were offset partially by higher accruals for
royalties and compensation. See Note 8 for details.
OTHER LIABILITIES of $39.4 million are comprised of deferred compensation,
retirement plans, postretirement benefit plans, postemployment benefits and
other miscellaneous accruals. See Note 9 for details.
STOCKHOLDERS' EQUITY was $532.6 million at the end of 1997, up $69.0 million
over the prior year. Net earnings of $64.0 million and $13.5 million from
the issuance of common stock pursuant to employee benefit plans were
partially offset by dividend payments of $4.6 million, the repurchase of
225,000 shares of the Company's stock for $3.0 million, and a $0.9 million
decline in accumulated translation adjustments. See Note 17 for details.
16
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
In Thousands
------------------
1997 1996
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $107,143 $ 20,930
Receivables, less allowance for doubtful accounts of
$4,202,000 in 1997 and $3,826,000 in 1996 238,179 252,882
Inventories 209,570 215,767
Deferred income taxes 31,323 50,979
Other current assets 10,886 22,413
-------- --------
TOTAL CURRENT ASSETS 597,101 562,971
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, AT COST
Land and improvements 19,854 18,173
Buildings and improvements 32,229 38,628
Machinery and equipment 206,760 162,073
-------- --------
258,843 218,874
Less - Accumulated depreciation and amortization 92,423 68,275
-------- --------
166,420 150,599
-------- --------
COST IN EXCESS OF NET ASSETS ACQUIRED 11,263 6,191
-------- --------
OTHER ASSETS 48,831 43,561
-------- --------
TOTAL ASSETS $823,615 $763,322
======== ========
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current maturities of long-term
debt $ 842 $ 1,600
Accounts payable 123,675 106,542
Accrued liabilities 111,737 127,546
Income taxes currently payable 13,507 26,229
-------- --------
TOTAL CURRENT LIABILITIES 249,761 261,917
-------- --------
LONG-TERM DEBT, less current maturities 1,810 400
-------- --------
OTHER LIABILITIES 39,394 37,353
-------- --------
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 77,995,475 shares in 1997 and
77,255,528 shares in 1996 38,998 38,628
Additional paid-in capital 171,857 163,143
Retained earnings 323,608 264,206
Accumulated translation adjustments (186) 740
-------- --------
534,277 466,717
Less - Treasury stock, at cost (113,000 shares in 1997
and 265,640 shares in 1996) 1,627 3,065
-------- --------
532,650 463,652
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $823,615 $763,322
======== ========
- ------------------------------------------------------------------------------
See accompanying notes.
17
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS
The Consolidated Statement of Earnings summarizes Scientific-Atlanta's
operating performance over the last three years, during which time the
Company has accelerated development of new products and expanded into
international markets.
EARNINGS FROM CONTINUING OPERATIONS in 1997 were $60.6 million, as compared to
$7.2 million in 1996. Earnings from continuing operations in 1996 included
one-time, after-tax charges of $19.5 million for the resolution of an
arbitration proceeding and $9.9 million for the write-off of purchased in-
process technology. Excluding these charges in 1996, earnings from
continuing operations in 1997 increased $24.0 million, or 66 percent over
the prior year. Higher sales volume and improved gross margins, which were
the primary factors in the year-to-year increase, were offset partially by
increased sales and administrative expenses and research and development
expenses.
SALES of $1,168.2 million in 1997, increased 11 percent over the prior year.
Higher domestic sales volume of subscriber products, particularly advanced
analog set-tops, was the major contributor to the increase. Sales volume of
distribution equipment, primarily RF products, also contributed to the
increase. Sales in 1997 of satellite systems increased slightly over the
prior year driven by sales of the Company's recently introduced PowerVuTM
digital video systems. Sales volume of video game adapters declined as
compared to the prior year. Sales of set-tops constituted approximately 30
percent of the Company's total sales in 1997, and approximately 27 percent
and 26 percent of such sales in 1996 and 1995, respectively. Sales of RF
products were approximately 19 percent of the Company's total sales in 1997,
and approximately 21 percent and 17 percent of such sales in 1996 and 1995,
respectively. International sales were 37 percent of total sales in 1997, as
compared to 36 percent and 34 percent of such sales in 1996 and 1995,
respectively.
Sales of $1,047.9 million in 1996 were 6 percent lower than the prior year.
Lower sales volumes of video game adapters and analog set-tops more than
offset increases in sales of distribution equipment and satellite systems,
excluding sales to Orbit Communications Company (Orbit). Sales of satellite
systems in 1996 included sales of $4.5 million to Orbit for its direct-to-
home satellite services, $78.3 million lower than the prior year due to
substantial completion of deliveries in 1995.
Sales in 1996 were negatively impacted by reduced levels of orders from
domestic cable operators and telephone companies. The Company believes that
the capital spending in telecommunications markets was affected as cable
television operators and telephone companies developed strategies to take
advantage of provisions in the Telecommunications Act of 1996.
COST OF SALES as a percent of sales decreased 3.4 percentage points as compared
to 1996. Improved margins reflect the impact of internal programs to improve
quality and reduce cost, the ramp-up of the Juarez, Mexico manufacturing
facility, and favorable exchange rates on Japanese yen compared to the prior
year. Favorable margin improvements were offset partially by increased
volumes of certain subscriber products which have a lower margin than some
of the Company's other products.
The Company recently completed a 124,000 square foot addition to its
manufacturing facility in Juarez, Mexico. The Company currently
manufactures a portion of its 8600X advanced analog set-tops in Juarez and
expects to launch production of its Explorer 2000 digital set-top in Juarez
during fiscal 1998. The Company believes that it will be able to
manufacture certain products at its new high-quality, high volume facility
in Juarez and expanded facilities in Atlanta, Georgia at costs competitive
with those currently charged by contract vendors.
Cost of sales as a percent of sales in 1996 increased 0.9 percentage points
over 1995. Unfavorable exchange rates in Japanese yen and costs associated
with planned expansion of manufacturing capacity offset cost reductions.
18
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
The materials and supplies purchased by the Company are standard electronic
components, such as custom integrated circuits, wire, circuit boards,
transistors, capacitors and resistors, all of which are produced by a
number of manufacturers. Matsushita Electronic Components Co., Ltd.
manufactures set-top terminals for the Company and is a primary supplier of
those terminals. Cablevision is a primary supplier of taps for the Company.
The Company also purchases aluminum and steel, including castings and semi-
fabricated items produced by a variety of sources. The Company considers
its sources of supply to be adequate and is not dependent upon any single
supplier, except for Matsushita Electronic Components, Ltd. and
Cablevision, for any significant portion of the materials used in the
products it manufactures or the products it sells.
Certain material purchases are denominated in Japanese yen and,
accordingly, the purchase price in U.S. dollars is subject to change based
on exchange rate fluctuations. Currently, the Company has forward exchange
contracts to purchase yen to hedge a portion of its exposure on purchase
commitments for a period of twelve months.
SALES AND ADMINISTRATIVE EXPENSES of $160.6 million in 1997 increased $22.3
million over the prior year. Increased selling expenses reflect costs
associated with higher sales volumes, ongoing investments to support
expansion into international markets, particularly in the Asia Pacific and
Latin American regions, and to support the introduction of new products and
a build-up in the infrastructure to handle the growth the Company is
experiencing. The Company is continuing to invest in opportunities to expand
into international markets and introduce new products. Administrative
expenses increased as higher consulting fees, administrative expenses of ATx
Telecom Systems Inc. (ATx) acquired in June 1996 and Arcodan A/S acquired in
February 1997, and other miscellaneous items more than offset cost
reductions from internal processes and systems improvements.
Sales and administrative expenses of $138.4 million in 1996 were slightly
lower than the prior year. Selling expenses were flat reflecting the
slightly lower sales volume in 1996. Administrative expenses declined
slightly in 1996 as the Company continued efforts to improve internal
processes and systems to enhance quality and the overall cost structure.
RESEARCH AND DEVELOPMENT expenses of $114.0 million increased $19.0 million
over 1996, reflecting the Company's continued investment in research and
development programs to support existing products and new product
initiatives. New product initiatives include high speed cable data modems,
cable telephony products, interactive settops and home automation products
for the utility industry. The Company expects to begin shipment of
interactive settops during the first half of fiscal 1998.
During fiscal year 1997, the Company commenced manufacture and sales of a
telephone return cable modem and announced its intention to develop a two-
way RF cable modem. However, the market for all cable modems has developed
more slowly than originally anticipated by the Company. As a result, the
Company is reevaluating the need for a stand alone two-way RF modem in
fiscal 1998. A two-way solution is currently included in one of the
Company's digital set-top product offerings.
The Company, with the consent of its product development partner, Siemens,
plans to decrease its research and development efforts related to cable
telephony products because the markets for cable telephony products has not
developed as quickly as the Company previously anticipated.
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
19
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
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 sales,
estimated economic life and changes in software and hardware technologies.
During 1997, the Company capitalized $2.0 million of software development
costs. Capitalization will cease when the product is available for general
release to customers. Software development costs were not material and,
therefore, were not capitalized in 1996 or 1995.
The Company periodically allocates 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. At June 27, 1997 the Company had
capitalized $5.5 million of such non-recurring engineering costs. There
were no material non-recurring engineering costs capitalized at June 28,
1996 or June 30, 1995.
The Company anticipates that spending on research and development will
increase at a slightly lower rate in 1998.
The Company periodically evaluates the strategic direction of the Company
including an assessment of the markets the Company serves and alternative
methods of generating revenues from its investments in research and
development programs, such as licensing of software and hardware
technology.
Research and development expenses of $95.3 million in 1996 increased $12.9
million over 1995. Research and development activity increased in most
businesses, particularly in the development of digital products and cable
telephony products.
PURCHASED IN-PROCESS TECHNOLOGY was $14.6 million in 1996. In connection with
the acquisition of ATx Telecom Systems, Inc. on June 28, 1996, the Company
recorded a pre-tax charge of $14.6 million for purchased in-process
technology which had not yet reached technological feasibility and had no
alternative future use. ATx is a supplier of Erbium Doped Fiber Amplifiers
(EDFA) fiber optic products for hybrid fiber/coax (HFC) networks. The
acquisition reflects the Company's strategic commitment to maintaining its
role in the rapidly growing opto-electronic market with a full range of
fiberoptic technology.
INTEREST EXPENSE was $0.5 million, $0.7 million, and $0.8 million in 1997,
1996, and 1995, respectively. The year-to-year decreases reflect lower
average working capital borrowings by foreign subsidiaries.
INTEREST INCOME was $3.9 million, an increase of $2.1 million over the prior
year, reflecting higher average cash balances in fiscal 1997. Interest
income of $1.8 million in 1996 was lower than the prior year due to the
lower average cash balances in 1996 as compared to 1995.
OTHER INCOME of $1.5 million in 1997 included a gain of $5.6 million from the
sale of land and a building in San Diego County, California not required for
current operations, the results of foreign currency transactions and
partnership activities and net gains from rental income and other
miscellaneous items. During the quarter ended March 28, 1997, the Company
decided to dispose of two business units, microwave and mobile, because
these businesses were not aligned with the Company's core business
strategies. The Company recorded a charge of $5.5 million during the quarter
ended March 28, 1997 to adjust the carrying amount of the net assets held
for sale to net realizable value and to provide for estimated
indemnifications to the purchaser, severance, closing costs and other
miscellaneous expenses related to the sale. During the ordinary course of
business, the Company encounters certain risks and uncertainties related to
the satisfactory performance under contracts which it evaluates periodically
and provides reserves, if appropriate. The estimated loss on the sale of
these businesses was computed on the basis that
20
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
the Company would sell the businesses at an amount that would allow the
purchaser, with reasonable assurance, to complete the contracts at a
reasonable margin. The Company believes that it will complete the sale of
these two business units during fiscal 1998.
Other expense in 1996 included a charge of $28.7 million, related to an
arbitration panel's decision in a proceeding with StarSight Telecast, Inc.
(StarSight), for damages, legal and arbitration expenses and other
expenses, including incremental costs to independently develop an
electronic program guide.
In July 1996, an arbitration panel awarded StarSight $15 million in
damages, plus legal and arbitration expenses, and issued a three year
limited-term injunction on the future sales of interactive electronic
program guides contained in set-tops. The panel determined the Company
violated the terms of a 1992 license and technical assistance agreement
between the Company and StarSight. In April 1997, the Company and StarSight
entered into a License and Settlement Agreement which resolved all
outstanding disputes and provided for the cross-licensing of technologies.
Other income was $1.6 million in 1995. Other income included rental income,
royalty income, net gains from partnership activities and other
miscellaneous items. There were no significant items in other income and
other expense during 1995.
THE PROVISION FOR INCOME TAXES was 32 percent of pre-tax earnings in 1997,
1996 and 1995. Details of the provision for income taxes are discussed in
Note 10.
GAIN ON SALE OF DISCONTINUED OPERATIONS was $3.4 million in 1997 compared to
losses of $13.2 million in 1996. Losses in 1996 included losses from
discontinued operations of $1.0 million, net of a tax benefit of $0.5
million, and a one-time, after-tax charge of $12.2 million, net of a tax
benefit of $5.7 million, for the estimated loss on the sale of discontinued
operations which was recorded in the quarter ended September 29, 1995.
During the quarter ended September 29, 1995, the Company decided to
discontinue its defense-related businesses in San Diego, California.
The estimated loss on the sale of discontinued operations included losses
of the operations through the expected date of sale, reserves to adjust the
carrying amount of the net assets held for sale to net realizable value and
losses on a subcontract. The Company had performed work as a subcontractor
under a subcontract which included options for additional products. The
Company believed that some of these options had not been validly exercised.
The Company had been negotiating with the prime contractor to increase the
pricing on the unexercised options to provide a reasonable margin and
believed these negotiations would be successful. At the time the Company
decided to discontinue the defense-related businesses, the negotiations had
deteriorated significantly. The estimated loss on the disposition was
computed on the basis that the Company would give a buyer a subcontract to
complete the options at an amount that would provide a reasonable margin.
No accounting recognition was given to the Company's claim against the
prime contractor due to its uncertain outcome.
In July 1996, the Company completed negotiations with the prime contractor
to settle issues related to the pricing of the unexercised options. On
August 14, 1996, the Company completed the sale of its defense-related
businesses to Global Associates, Ltd. (Global) for cash of $13.2 million
and secured and unsecured notes aggregating approximately $5.0 million. The
net realizable value of the assets of the defense-related businesses and
the settlement with the prime contractor were more favorable than the
Company had anticipated when it decided to exit these businesses;
accordingly, the Company recognized a pre-tax gain of $5.0 million from
these transactions in the first quarter of 1997. Losses from the defense-
related businesses while they were accounted for as discontinued operations
of $2.5 million, net of a tax benefit of $1.2 million, approximated the
amount included in
21
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
the $12.2 million one-time after-tax charge for the estimated loss on the
sale of discontinued operations. At June 27, 1997, the Company had a
reserve of approximately $7.5 million for potential sales price
adjustments, indemnifications provided to Global, legal, severance and
other miscellaneous expenses related to the sale and the settlement with
the prime contractor.
NET EARNINGS of $64.0 million, which included an after-tax gain of $3.4
million from the sale of discontinued operations, compared to a net loss of
$6.0 million in 1996. The net loss in 1996 included after-tax charges of
$9.9 million for purchased in-process technology, $19.5 million for
damages, legal and arbitration expenses and $13.2 million from discontinued
operations.
EARNINGS PER SHARE of $0.82 compares with a loss per share of $0.08 in 1996
and earnings per share of $0.83 in 1995. Shares outstanding and share
equivalents increased slightly to 78.2 million in 1997 from 76.7 million in
1996 and 76.2 million in 1995.
22
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data) 1997 1996 1995
- ------------------------------------------------------------------------------
SALES $1,168,245 $1,047,901 $1,118,057
- ------------------------------------------------------------------------------
COSTS AND EXPENSES
- ------------------------------------------------------------------------------
Cost of sales 809,081 761,876 802,216
Sales and administrative 160,613 138,362 140,082
Research and development 114,344 95,299 82,378
Purchased in-process technology -- 14,583 --
Interest expense 484 672 775
Interest income (3,943) (1,818) (2,837)
Other (income) expense, net (1,513) 28,374 (1,566)
- ------------------------------------------------------------------------------
1,079,066 1,037,348 1,021,048
- ------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 89,179 10,553 97,009
- ------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 28,537 3,377 31,042
- ------------------------------------------------------------------------------
EARNINGS BEFORE DISCONTINUED OPERATIONS 60,642 7,176 65,967
- ------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS, NET OF
TAX -- (1,038) (2,427)
- ------------------------------------------------------------------------------
GAIN (LOSS) ON SALE OF DISCONTINUED
OPERATIONS, NET OF TAX 3,400 (12,172) --
- ------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 64,042 $ (6,034) $ 63,540
- ------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
- ------------------------------------------------------------------------------
Primary
Before discontinued operations $ 0.78 $ 0.09 $ 0.86
Discontinued operations 0.04 (0.17) (0.03)
- ------------------------------------------------------------------------------
Net earnings (loss) $ 0.82 $ (0.08) $ 0.83
- ------------------------------------------------------------------------------
Fully diluted $ 0.82 $ (0.08) $ 0.83
- ------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON EQUIVALENT SHARES OUTSTANDING
- ------------------------------------------------------------------------------
Primary 78,198 76,666 76,194
- ------------------------------------------------------------------------------
Fully diluted 78,383 76,666 76,194
- ------------------------------------------------------------------------------
See accompanying notes.
23
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF CASH FLOWS
The Statement of Cash Flows summarizes the main sources of Scientific-Atlanta's
cash and its uses. These flows of cash provided or used are summarized by
the Company's operating activities, investing activities and financing
activities.
CASH AND CASH EQUIVALENTS at the end of 1997 were $107.1 million, up $86.2
million from the end of 1996 due to improved earnings, working capital
management, and proceeds from the sale of discontinued operations and the
sale of land and a building not required for current operations.
The Company has a $300 million senior credit facility available that
provides for unsecured borrowings up to $150 million which expire May 1998
and up to $150 million which expire May 2000. There were no outstanding
borrowings under this facility at June 27, 1997 or June 28, 1996. The
Company believes that funds generated from operations, existing cash
balances and its available senior credit facility will be sufficient to
support growth and planned expansion of manufacturing capacity.
During the first quarter of fiscal 1998, the Company secured a $38.0
million commitment under a long-term operating lease for the consolidation
of certain operations and future expansion. The initial lease term will be
seven years with the option to extend the lease for an additional fifteen
years in five year increments.
CASH PROVIDED BY OPERATING ACTIVITIES was $125.1 million for 1997, compared to
$44.1 million for 1996. Cash provided by earnings, accounts receivable
collections and reductions in inventory levels was partially offset by
decreases in payables and other liabilities and increases in other assets.
See Management's Discussion of the Statement of Financial Position for
details of this performance.
In 1996, cash provided by earnings and decreases in inventories was
partially offset by increases in accounts receivable and decreases in
payables.
In 1995, cash provided by improved earnings and increases in payables was
partially offset by increases in inventories and accounts receivable.
CASH USED BY INVESTING ACTIVITIES of $35.9 million included expenditures for
equipment, the expansion of manufacturing capacity, primarily in Juarez,
Mexico, the acquisition of Arcodan and other investing activities. Sources
of cash from investing activities included proceeds from the sale of
defense-related businesses discontinued in 1996 and the sale of land and a
building not required for current operations. See Note 2 for additional
discussion of investing activities.
In 1996, cash used by investing activities included expenditures for
equipment, expansion of manufacturing capacity, the purchase of land for
future expansion, the acquisition of ATx and other investing activities.
In 1995, cash used by investing activities of $65.4 million included
expenditures of $63.8 million for equipment and expansion of manufacturing
capacity, including the construction of a manufacturing facility in Juarez,
Mexico.
CASH USED BY FINANCING ACTIVITIES was $3.0 million in 1997. Financing
activities included dividend payments of $4.6 million, the repurchase of
225,000 shares of the Company's common stock for $3.0 million and net debt
payments of $2.0 million. The issuance of stock pursuant to stock option and
employee benefit plans generated cash of $6.6 million.
The repurchase of 1,010,000 shares of the Company's common stock for $12.4
million and dividend payments of $4.6 million exceeded cash generated from
the issuance of stock of $4.3 million in 1996.
The issuance of stock generated $8.2 million in 1995. Cash used by
financing activities included a $5.1 million reduction of working capital
borrowings by foreign subsidiaries and dividend payments of $4.6 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 the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company'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.
PowerVu and 8600x are trademarks of Scientific-Atlanta, Inc. Explorer is a
registered name of Scientific-Atlanta, Inc.
24
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES:
- ---------------------
NET EARNINGS FROM CONTINUING OPERATIONS $ 60,642 $ 7,176 $ 65,967
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 43,151 36,597 28,328
Purchased in-process technology -- 14,583 --
Compensation related to stock benefit plans 6,600 6,193 6,051
Provision for losses on accounts receivable 391 324 343
(Gain) loss on sale of property, plant and
equipment (4,965) (2,123) 625
(Earnings) losses of partnerships (393) 103 386
Changes in operating assets and liabilities:
Receivables 20,028 (21,810) (43,618)
Inventories 11,371 29,370 (117,156)
Deferred income taxes 17,686 (15,308) (353)
Accounts payable and accrued liabilities (7,676) (27,546) 81,862
Other assets (10,690) (4,900) 2,928
Other liabilities (10,144) 21,450 (1,021)
Net effect of exchange rate fluctuations (899) 35 (208)
-------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 125,102 44,144 24,134
-------- -------- ---------
INVESTING ACTIVITIES:
- ---------------------
Purchases of property, plant and equipment (53,076) (60,812) (63,798)
Acquisition of businesses, net of cash
acquired (11,237) (24,336) --
Payment for businesses purchased -- (1,721) (1,634)
Purchase of land held for resale -- (5,085) --
Proceeds from the sale of property, plant and
equipment 13,183 2,358 510
Proceeds from the sale of discontinued
operations 18,858 -- --
(Increase) decrease in net assets of
discontinued operations (2,264) 1,505 (1,110)
Proceeds from the sale of investments 500 -- 4,214
Other investments (1,875) (2,600) (3,560)
-------- -------- ---------
NET CASH USED BY INVESTING ACTIVITIES (35,911) (90,691) (65,378)
-------- -------- ---------
FINANCING ACTIVITIES:
- ---------------------
Net short-term borrowings (payments) (1,600) 214 (5,101)
Principal payments on long-term debt (400) (373) (315)
Dividends paid (4,640) (4,600) (4,578)
Issuance of stock 6,635 4,336 8,162
Treasury shares acquired (2,973) (12,411) --
-------- -------- ---------
NET CASH USED BY FINANCING ACTIVITIES (2,978) (12,834) (1,832)
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 86,213 (59,381) (43,076)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,930 80,311 123,387
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $107,143 $ 20,930 $ 80,311
======== ======== =========
See accompanying notes.
25
SELECTED FINANCIAL DATA
(Dollars in Thousands,
Except Per Share Data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------
SALES $1,168,245 $1,047,901 $1,118,057 $755,923 $666,033
- ------------------------------------------------------------------------------------
Cost of Sales 809,081 761,876 802,216 525,955 484,887
Sales and
Administrative Expense 160,613 138,362 140,082 107,233 103,143
Research and
Development Expense 114,344 95,299 82,378 58,542 55,283
Purchased In-Process
Technology -- 14,583 -- -- --
Interest Expense 484 672 775 1,066 933
Interest Income (3,943) (1,818) (2,837) (3,151) (2,925)
Other (Income) Expense,
Net (1,513) 28,374 (1,566) 17,449 (686)
- ------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME
TAXES, DISCONTINUED
OPERATIONS AND
ACCOUNTING CHANGES 89,179 10,553 97,009 48,829 25,398
- ------------------------------------------------------------------------------------
PROVISION FOR INCOME
TAXES 28,537 3,377 31,042 15,624 6,349
- ------------------------------------------------------------------------------------
EARNINGS BEFORE
DISCONTINUED OPERATIONS
AND ACCOUNTING CHANGES 60,642 7,176 65,967 33,205 19,049
- ------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM
DISCONTINUED OPERATIONS
NET OF TAX 3,400 (13,210) (2,427) 1,817 5,625
- ------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES -- -- -- -- (4,700)
- ------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 64,042 $ (6,034) $ 63,540 $ 35,022 $ 19,974
- ------------------------------------------------------------------------------------
PRIMARY EARNINGS PER
SHARE BEFORE
DISCONTINUED OPERATIONS
AND ACCOUNTING CHANGES $ 0.78 $ 0.09 $ 0.86 $ 0.44 $ 0.25
- ------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS)
PER SHARE $ 0.82 $ (0.08) $ 0.83 $ 0.46 $ 0.27
- ------------------------------------------------------------------------------------
CASH DIVIDENDS PAID PER
SHARE $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.05 5/6
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
WORKING CAPITAL $ 347,340 $ 301,054 $ 339,665 302,771 $280,616
- ------------------------------------------------------------------------------------
TOTAL ASSETS $ 823,615 $ 763,322 $ 785,264 $640,219 $524,210
- ------------------------------------------------------------------------------------
Short-Term Debt and
Current Maturities $ 842 $ 1,600 $ 1,386 $ 6,487 $ 5,962
Long-Term Debt 1,810 400 773 1,088 1,398
Stockholders' Equity 532,650 463,652 474,189 395,646 352,890
- ------------------------------------------------------------------------------------
TOTAL CAPITAL INVESTED $ 535,302 $ 465,652 $ 476,348 $403,221 $360,250
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
SALES PER EMPLOYEE $ 207 $ 240 $ 265 $ 224 $ 220
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
GROSS MARGIN % TO SALES 30.7% 27.3% 28.2% 30.4% 27.2%
- ------------------------------------------------------------------------------------
RETURN ON SALES BEFORE
DISCONTINUED OPERATIONS
AND ACCOUNTING CHANGES 5.2% 0.7% 5.9% 4.4% 2.9%
- ------------------------------------------------------------------------------------
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY 13.0% (1.3)% 14.7% 9.5% 6.1%
- ------------------------------------------------------------------------------------
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------
BUSINESS
Scientific-Atlanta, Inc. (the "Company") provides its customers with the
products and services they need to develop the advanced terrestrial and
satellite networks that deliver entertainment, information and communications.
The Company's products connect information generators with information users
via broadband terrestrial and satellite networks, and include applications for
the converging cable, telephone, and data networks.
The Company operates primarily in one business segment, Communications,
providing satellite and terrestrial based networks to a range of customers and
applications, and providing network management and systems integration to add
value to those networks. This segment represents over 90 percent of
consolidated sales, operating profit and identifiable assets.
The Company's products are sold primarily through its own sales personnel who
work out of offices in Atlanta and other metropolitan areas in the United
States and around the world. Certain products are also marketed in the United
States through independent sales representatives and independent distributors.
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 purchased by the Company are standard electronic
components, such as custom integrated circuits, wire, circuit boards,
transistors, capacitors and resistors, all of which are produced by a number
of manufacturers. Matsushita Electronic Components Co., Ltd. manufactures set-
top terminals for the Company and is a primary supplier of those terminals.
Cablevision is a primary supplier of taps for the Company. The Company also
purchases aluminum and steel, including castings and semi-fabricated items
produced by a variety of sources. The Company considers its sources of supply
to be adequate and is not dependent upon any single supplier, except for
Matsushita Electronic Components Co., Ltd. and Cablevision, for any
significant portion of the materials used in the products it manufactures or
the products it sells.
FISCAL YEAR-END
The Company's fiscal year ends on the Friday closest to June 30 of each year.
Fiscal year ends are as follows:
1997: June 27, 1997
1996: June 28, 1996
1995: June 30, 1995
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company 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 revenue 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,
compensation, claims, litigation and taxes.
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 stockholders' equity and excluded from net
earnings. Foreign currency transaction gains and losses are included in cost
of sales and other income.
FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange forward contracts to hedge certain
firm commitments and assets denominated in currencies other than the U.S.
dollar, primarily Japanese yen. These contracts are
27
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 the Company to inventory pricing or asset devaluation risk and the
related contract must reduce that exposure and be designated by the Company as
a hedge. Gains and losses on foreign exchange forward contracts, including cost
of the contracts, are deferred and recognized in income in the same period as
the hedged transactions. The Company's foreign exchange forward contracts do
not subject the Company's 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. The Company does not enter into
any foreign exchange forward contracts for speculative trading purposes. If a
foreign exchange forward contract did not meet the criteria for hedges, the
Company would recognize unrealized gains and losses as they occur.
METHOD OF RECORDING CONTRACT PROFITS
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. These
receivables from commercial customers and government agencies were $22,515 at
June 27, 1997 and $45,543 at June 28, 1996. 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 sales,
estimated economic life and changes in software and hardware technologies.
During 1997, the Company capitalized $2,022 of software development costs.
Capitalization will cease when the product is available for general release to
customers. Software development costs were not material and, therefore, were
not capitalized in 1996 or 1995.
The Company periodically allocates 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 inventoried. At June 27, 1997 the Company had capitalized $5,502 of such
non-recurring engineering costs. There were no material non-recurring
engineering costs capitalized at June 28, 1996 or June 30, 1995.
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
The Company 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
Earnings per share were computed based on the weighted average number of shares
of common stock outstanding and equivalent shares derived from dilutive stock
options.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Cash at June 28, 1996 included $470 held in escrow as a contingent
payment for an acquisition. See Note 2.
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
28
components in various stages of assembly as presented in the following table:
1997 1996
-------- --------
Raw Materials and
Work-In-Process $136,699 $131,762
Finished Goods 72,871 84,005
-------- --------
Total Inventory $209,570 $215,767
======== ========
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets of businesses acquired is amortized on a straight-
line basis over seventeen years. The Company periodically evaluates the
carrying values assigned to costs in excess of net assets acquired and other
intangible assets.
FINANCIAL PRESENTATION
Certain prior year amounts have been restated to reflect the discontinuance in
1996 of defense related businesses. See Note 5.
2. INVESTMENTS AND ACQUISITIONS
- -----------------------------------
On February 28, 1997, the Company acquired 100 percent of the outstanding stock
of Arcodan A/S (Arcodan) for $15,000 in cash. Arcodan is a Danish manufacturer
of advanced analog and digital headend systems, opto-electronics and RF
distribution equipment. The acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair value at the date of acquisition. The purchase price has been
allocated to the assets and liabilities acquired, including $5,781 to costs in
excess of net assets acquired.
During fiscal 1997, the Company also acquired minority interests in various
companies for an aggregate cost of $1,133.
On June 28, 1996, the Company acquired 100 percent of the outstanding stock of
ATx Telecom Systems, Inc. (ATx) for $24,336 in cash and a contingent payment of
$152 due June 28, 1997. ATx is a supplier of fiber optic products for hybrid
fiber/coax networks. The acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair value at the date of acquisition. The purchase price of $24,336
has been allocated to the assets and liabilities acquired. Approximately
$14,583 of the total purchase price represented the value of ATx's in-process
technology. Since technological feasibility had not yet been achieved and there
was no alternative future use for the technology being developed, the amounts
allocated to the in-process technology were expensed concurrent with the
purchase.
During 1996, the Company also acquired a minority interest in Wink
Communications, Inc. (Wink), an enabling software developer, for $2,400. The
Company invested an additional $500 in Wink during fiscal 1997.
During 1994 the Company entered into partnership agreements in connection with
the formation of two joint ventures, Comunicaciones Broadband and Scientific-
Atlanta of Shanghai, Ltd., and invested a total of $5,240 in the partnerships.
During 1995 the Company invested an additional $2,410 in these partnerships and
disposed of its investment in Comunicaciones Broadband for a loss of $197 which
was included in other (income) expense. The Company's equity in the earnings
(losses) of the partnerships was $361, $21 and ($296) in 1997, 1996 and 1995,
respectively.
3. SALES
- -----------------------------------
Sales to Time Warner, Inc. and affiliates were 11 percent of total sales in
1997 and 13 percent of total sales in 1995. Sales to any one customer were less
than 10 percent of total sales in 1996. Export sales accounted for 37 percent
of total sales in 1997, 36 percent in 1996 and 34 percent in 1995. Sales to
Europe were 16 percent, 12 percent and 16 percent of total sales in 1997, 1996
and 1995, respectively. Sales of set-top terminals constituted approximately 30
percent of the Company's total sales in 1997, and approximately 27 percent and
26 percent of such sales in 1996 and 1995, respectively. Sales of RF (radio
frequency) products were approximately 19 percent of the Company's total sales
in 1997, and approximately 21 percent and 17 percent of such sales in 1996 and
1995, respectively. Foreign subsidiary sales were not material for any of the
three fiscal years presented.
4. OTHER (INCOME) EXPENSE
- -----------------------------------
Other income of $1.5 million in 1997 included a gain of $5.6 million from the
sale of land and a building in San Diego County, California not required for
current operations, the results of foreign
29
currency transactions and partnership activities, and net gains from rental
income and other miscellaneous items. During the quarter ended March 28, 1997,
the Company decided to dispose of two business units, microwave and mobile,
because these businesses were not aligned with the Company's core business
strategies. The Company recorded a charge of $5.5 million during the quarter
ended March 28, 1997 to adjust the carrying amount of the net assets held for
sale to net realizable value and to provide for estimated indemnifications to
the purchaser, severance, closing costs and other miscellaneous expenses
related to the sale. During the ordinary course of business, the Company
encounters certain risks and uncertainties related to the satisfactory
performance under contracts which it evaluates periodically and provides
reserves, if appropriate. The estimated loss on the sale of these businesses
was computed on the basis that the Company would sell the businesses at an
amount that would allow the purchaser, with reasonable assurance, to complete
the contracts at a reasonable margin. The Company believes that it will
complete the sale of these two business units during fiscal 1998.
Other expense in 1996 included a charge of $28,700 related to an arbitration
panel's decision in a proceeding with StarSight Telecast, Inc. (StarSight), for
damages, legal and arbitration expenses and other expenses, including
incremental costs to independently develop an electronic program guide.
In July 1996, an arbitration panel awarded StarSight $15,000 in damages, plus
legal and arbitration expenses, and issued a three year limited-term injunction
on the future sales of interactive electronic program guides contained in set-
tops. The panel determined the Company violated the terms of a 1992 license and
technical assistance agreement between the Company and StarSight.
In April 1997, the Company and StarSight entered into a License and Settlement
Agreement which resolved all outstanding disputes and provided for the cross-
licensing of technologies.
Other income of $1,566 in 1995 included rental income, royalty income, net
gains from partnership activities and other miscellaneous items. There were no
significant items in other income and other expense during 1995.
5. DISCONTINUED OPERATIONS
- -----------------------------------
During the quarter ended September 29, 1995, the Company decided to discontinue
its defense-related businesses in San Diego, California because these
businesses were not aligned with the Company's core business strategies. A one-
time charge of $12,172, net of a tax benefit of $5,728 for the estimated loss
on the sale of discontinued operations was recorded in the quarter ended
September 29, 1995.
The estimated loss on the sale of discontinued operations included losses of
the operations through the expected date of sale, reserves to adjust the
carrying amount of the net assets held for sale to net realizable value and
losses on a subcontract. The Company had performed work as a subcontractor
under a subcontract which included options for additional products. The Company
believed that some of these options had not been validly exercised. The Company
had been negotiating with the prime contractor to increase the pricing on the
unexercised options to provide a reasonable margin and believed these
negotiations would be successful. At the time the Company decided to
discontinue the defense related businesses, the negotiations had deteriorated
significantly. The estimated loss on the disposition was computed on the basis
that the Company would give a buyer a subcontract to complete the options at an
amount that would provide a reasonable margin. No accounting recognition was
given to the Company's claim against the prime contractor due to its uncertain
outcome.
In July 1996, the Company completed negotiations with the prime contractor to
settle issues related to the pricing of the unexercised options. On August 14,
1996, the Company completed the sale of its defense-related businesses to
Global Associates, Ltd. (Global) for cash of $13,274 and secured and unsecured
notes aggregating approximately $5,000. The net realizable value of the assets
of the defense-related businesses and the settlement with the prime contractor
were more favorable than the Company had anticipated when it decided to exit
these businesses; accordingly the Company recognized a pre-tax gain of $5,000
from these transactions in the first quarter of 1997. Losses from the defense-
related businesses while they were accounted for as discontinued operations of
$2,482, net of a tax
30
benefit of $1,168, approximated the amount included in the $12,172 one-time
after-tax charge for the estimated loss on the sale of discontinued operations.
At June 27, 1997, the Company had a reserve of approximately $7,500 for
potential sales price adjustments, indemnifications provided to Global, legal,
severance and other miscellaneous expenses related to the sale and the
settlement with the prime contractor.
Sales and losses from discontinued operations were as follows:
1997 1996 1995
------ ------- -------
Sales $1,920 $25,780 $28,445
Losses from discontinued operations, net of tax $ (817) $(2,744) $(2,427)
Tax benefit $ 385 $ 1,291 $ 1,141
The net assets of the discontinued operations which include inventory, accounts
receivable, machinery and equipment, accounts payable, and accrued expenses
were included in other current assets in the Consolidated Statement of
Financial Position at June 28, 1996.
6. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------
Fiscal Quarters
------------------------------------------
1997 First Second Third Fourth
- ------------------------ -------- -------- -------- --------
Sales $261,664 $282,184 $301,741 $322,656
Gross margin 78,770 85,337 94,292 100,765
Gross margin % 30.1% 30.2% 31.2% 31.2%
Net earnings 14,211(1) 13,752 16,461(2) 19,618
Earnings per share 0.18(1) 0.18 0.21 0.25
Stock prices
High 16.250 18.250 19.125 23.000
Low 12.000 13.375 15.000 14.625
Dividends paid per share 0.015 0.015 0.015 0.015
- --------
(1) Includes a gain of $3,400 ($0.04 per share) from the sale of discontinued
operations.
(2) Includes a gain of $3,733 ($0.05) from the sale of land and a building in
San Diego County, California not required for current operations and
charges of $3,758 ($0.05) related to the Company's decision to dispose of
two business units. See Note 4.
Fiscal Quarters
-----------------------------------------
1996 First Second Third Fourth
- ------------------------- -------- -------- -------- --------
Sales $242,193 $261,100 $271,883 $272,725
Gross margin 61,077 67,717 75,210 82,021
Gross margin % 25.2% 25.9% 27.7% 30.1%
Net earnings (loss) (9,124)(1) 6,601 11,525 (15,036)(2)
Earnings (loss) per share (0.12)(1) 0.09 0.15 (0.20)(2)
Stock prices
High 23.250 16.750 19.250 19.875
Low 16.875 11.500 13.375 14.625
Dividends paid per share 0.015 0.015 0.015 0.015
- --------
(1) Includes charges of $13,210 ($0.17 per share) for the discontinuance of
defense-related businesses.
(2) Includes charges of $19,516 ($0.25 per share) to settle an arbitration
proceeding and related costs and $9,916 ($0.14 per share) to write off
purchased in-process technology in connection with the acquisition of ATx.
7. INDEBTEDNESS
- -----------------------------------
Credit Facility:
At June 27, 1997, the Company had a $300,000 senior credit facility that
provides for unsecured borrowings up to $150,000 which expire May 9, 1998 and
up to $150,000 which expire May 10, 2000. There were no borrowings outstanding
under this facility at June 27, 1997 or June 28, 1996. 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 consisted of:
1997 1996
------ ----
6 1/4% - 10% capitalized leases, payable in varying installments
ranging from $200 to $250 through 2001 $1,202 $650
Other debt at 7.8% - 8.4% in varying installments ranging from $11
to $508 through 2001 1,450 --
------ ----
2,652 650
Less-Current maturities 842 250
------ ----
$1,810 $400
====== ====
31
Long-term debt at June 27, 1997 had scheduled maturities as follows: $842 --
1998; $813 -- 1999; $517 -- 2000; $315 -- 2001 and $165 -- 2002.
At June 27, 1997, property, plant and equipment costing approximately $4,154
were pledged as collateral on long-term debt.
Foreign short-term debt was $1,350 at the end of 1996. There was no foreign
short-term debt at June 27, 1997. The average interest rates for foreign short-
term debt during fiscal 1997 and fiscal 1996 were 10.1 percent and 10.9
percent, respectively.
Total interest paid was $430, $680, and $811 in 1997, 1996, and 1995,
respectively.
8. ACCRUED LIABILITIES
- -----------------------------------
Accrued liabilities consisted of:
1997 1996
-------- --------
Compensation $ 29,004 $ 24,294
Arbitration and related costs 100 25,383
Warranty and service 14,281 15,852
Customer down payments 5,346 9,282
Taxes, excluding income taxes 5,829 8,236
Other 57,177 44,499
-------- --------
$111,737 $127,546
======== ========
9. OTHER LIABILITIES
- -----------------------------------
Other liabilities consisted of:
1997 1996
------- -------
Retirement $24,679 $23,645
Compensation 9,363 8,247
Other 5,352 5,461
------- -------
$39,394 $37,353
======= =======
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:
1997 1996 1995
------- ------- -------
Statutory federal tax rate $31,213 $ 3,693 $33,953
State income taxes, net of federal tax benefit 1,127 (901) 3,430
Tax reserves 2,020 1,689 1
Research and development tax credit (6,394) -- (2,852)
Export incentives (2,808) (1,233) (1,370)
Foreign earnings taxed at different rates 2,859 (5) (193)
Other, net 520 134 (1,927)
------- ------- -------
$28,537 $ 3,377 $31,042
======= ======= =======
Income tax provision (benefit) includes the following:
1997 1996 1995
-------- -------- -------
Current tax provision (benefit)
Federal $(10,420) $ 10,974 $22,588
State (544) 273 5,436
Foreign 17,559 10,187 1,138
-------- -------- -------
6,595 21,434 29,162
-------- -------- -------
Deferred tax provision (benefit)
Federal 19,647 (16,300) (389)
State 2,277 (1,659) (195)
Foreign 18 (98) 2,464
-------- -------- -------
21,942 (18,057) 1,880
-------- -------- -------
Total provision for income taxes $ 28,537 $ 3,377 $31,042
======== ======== =======
Total income taxes paid include settlement payments for federal, state and
foreign audit adjustments. The total income taxes paid were $22,686, $5,394 and
$28,937 in 1997, 1996, and 1995, respectively. During 1997, the Company
completed an audit of its federal income tax returns for the years 1990 through
1993. The settlement payment from the audit did not have a significant impact
on the consolidated financial statements.
32
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1997 1996
------- -------
Current deferred tax assets
Expenses not currently deductible $17,750 $33,593
Inventory valuation 8,744 12,108
Warranty reserves 3,253 3,632
Bad debt reserves 1,286 1,353
Other 290 293
------- -------
Current deferred tax assets $31,323 $50,979
======= =======
Noncurrent deferred tax assets
Postretirement and postemployment benefits $10,981 $10,477
Tax credit/loss carryforwards -- 267
Expenses not currently deductible 3,469 2,707
------- -------
Noncurrent deferred tax assets 14,450 13,451
Noncurrent deferred tax liabilities
Depreciation and amortization (4,634) (4,322)
Capitalized software (708) --
------- -------
Net noncurrent deferred tax asset $ 9,108 $ 9,129
======= =======
Valuation allowances for current deferred tax assets and noncurrent deferred
tax assets were not required in 1997 or 1996.
The net noncurrent deferred tax asset is included in Other Assets at June 27,
1997 and June 28, 1996.
In 1997, 1996, and 1995, earnings before income taxes included $35,658,
$33,745, and $8,571 respectively, of earnings generated by the Company's
foreign operations.
11. RETIREMENT AND BENEFIT PLANS
- -----------------------------------
The Company has a defined benefit pension plan covering substantially all of
its domestic employees. The benefits are based upon the employees' years of
service, age and compensation.
The Company's funding policy is to contribute annually the amount expensed each
year consistent with the requirements of the federal tax law to the extent that
such costs are currently deductible.
The following table sets forth the plan's funded status and amounts recognized
in the Company'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:
1997 1996
-------- --------
Accumulated benefit obligation
Vested portion $ 65,507 $ 55,252
Nonvested portion 4,258 2,274
-------- --------
69,765 57,526
Excess of projected benefit obligation over accumulated
benefit obligation 9,426 17,215
-------- --------
Projected benefit obligation 79,191 74,741
Plan assets at fair value (74,457) (75,155)
-------- --------
Projected benefit obligation in excess of (less than) plan
assets 4,734 (414)
Unrecognized prior service costs 316 351
Unrecognized (loss) gain (2,794) 528
Unrecognized net asset from initial application of SFAS 87 6,371 7,025
Fourth quarter contribution (891) (279)
-------- --------
Accrued pension cost $ 7,736 $ 7,211
======== ========
Discount rate 7.75% 7.75%
Rate of increase in future compensation 5.0% 4.5%
Expected long-term rate of return on assets 10.0% 10.0%
Plan assets are invested in listed stocks, bonds and short-term monetary
investments.
The Company's net pension expense was $4,091 in 1997, $3,325 in 1996, and
$2,483 in 1995.
The components of pension expense are as follows:
1997 1996 1995
------- -------- -------
Service cost of benefits earned $ 6,105 $ 5,169 $ 4,059
Interest cost 5,330 5,128 4,826
Actual return on plan assets (6,396) (12,532) (4,821)
Net amortization and deferral (948) 5,560 (1,581)
------- -------- -------
Net periodic pension cost $ 4,091 $ 3,325 $ 2,483
======= ======== =======
33
The Company has unfunded defined benefit retirement plans for certain key
officers and non-employee directors. Accrued pension cost for these plans was
$8,658 at June 27, 1997 and $6,842 at June 28, 1996. Retirement expense for
these plans was $1,872, $1,366 and $1,223 in 1997, 1996, and 1995,
respectively.
In addition to providing pension benefits, the Company has contributory plans
that provide certain health care and life insurance benefits to eligible
retired employees.
The following table sets forth the plan's funded status and amounts recognized
in the Company's Consolidated Statement of Financial Position at year-end,
using March 31 as a measurement date for all actuarial calculations of
liability values:
1997 1996
------- -------
Accumulated postretirement benefit obligation
Retirees $ 8,764 $ 9,069
Fully eligible active participants 203 181
Other active participants 331 293
------- -------
9,298 9,543
Unrecognized net gain 1,040 978
Fourth quarter claims payments (250) (220)
------- -------
Accrued postretirement benefit cost $10,088 $10,301
======= =======
The components of postretirement benefit expense are as follows:
1997 1996
---- ----
Service cost of benefits earned $ 45 $ 39
Interest cost 704 719
Net amortization and deferral (24) (26)
---- ----
Postretirement benefit expense $725 $732
==== ====
Significant actuarial assumptions are as follows:
1997 1996
----- -----
Annual rate of increase in per capita cost
Pre-Medicare 11.25% 11.25%
Annual decline 0.75% 0.75%
Final rate of increase 6.00% 6.00%
Post-Medicare 9.50% 9.50%
Annual decline 0.50% 0.50%
Final rate of increase 6.00% 6.00%
Impact of one percentage point in health care cost trend rate
on
Accumulated postretirement benefit obligation 7.6% 7.6%
Interest cost component of benefits 11.2% 11.2%
Discount rate used to measure accumulated postretirement
benefit obligation 7.75% 7.75%
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. The fair value of foreign
currency forward contracts is based on quoted market prices.
1997 1996
------------------ -----------------
CARRYING/ Carrying/
CONTRACT FAIR Contract Fair
AMOUNT VALUE Amount Value
--------- -------- --------- -------
Cash and cash equivalents $107,143 $107,143 $20,930 $20,930
Foreign currency forward contracts
Sell $ 1,196 $ 1,087 $ 7,999 $ 8,152
Buy $ 58,984 $ 59,981 $61,700 $59,245
34
13. RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company had sales of $3,591, $2,728 and $3,384 to Scientific-Atlanta of
Shanghai, Ltd. (SASL) in 1997, 1996 and 1995, respectively. The Company
purchased $2,496 of inventory from SASL in 1997. There were no such purchases
in 1996 or 1995. The Company had a net receivable from SASL of $1,024 at June
27, 1997 and $760 at June 28, 1996. Related party transactions were at prices
and terms equivalent to those available to and transacted with unrelated
parties.
14. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
- -----------------------------------
Rental expense under operating lease agreements for facilities and equipment
for 1997, 1996 and 1995 was $17,462, $15,347 and $10,696, respectively. The
Company pays taxes, insurance, and maintenance costs with respect to most
leased items. Remaining operating lease terms, including renewals, range up to
thirteen years. Future minimum payments at June 27, 1997, under operating
leases were $52,012. Payments under these leases for the next five years are as
follows: 1998 -- $13,466; 1999 -- $10,707; 2000 -- $8,431; 2001 -- $5,496;
2002 -- $3,864.
During the first quarter of fiscal 1998, the Company secured a $38.0 million
commitment under a long-term operating lease for the consolidation of certain
operations and future expansion. The initial lease term will be seven years
with the option to extend the lease for an additional fifteen years in five
year increments.
The Company has 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 the Company.
The Company is also committed under certain purchase agreements which are
intended to benefit future periods.
The Company is 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 the Company's financial position or
results of operations.
15. COMMON STOCK AND RELATED MATTERS
- -----------------------------------
The Company purchased 225,000 shares of its common stock at an aggregate cost
of $2,973 during fiscal 1997, and 1,010,000 shares at an aggregate cost of
$12,411 during 1996.
The Company has non-qualified and incentive stock option plans to provide key
employees and directors with an increased incentive to work for the success of
the Company. 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.
The Company accounts for the stock purchase and stock option plans under APB
Opinion No. 25, which requires compensation costs to be recognized only when
the option price differs from the market price at the grant date. Statement of
Financial Accounting Standards (SFAS) No. 123 allows a company to follow APB
Opinion No. 25 with the following additional disclosure that shows what the
Company's net income (loss) and earnings (loss) per share would have been using
the compensation model under SFAS No. 123:
1997 1996
------- --------
Net income (loss) As reported $64,042 $ (6,034)
Pro forma $57,761 $(12,455)
Earnings (loss) per share:
Primary As reported $ 0.82 $ (0.08)
Pro forma $ 0.74 $ (0.16)
Fully diluted As reported $ 0.82 $ (0.08)
Pro forma $ 0.74 $ (0.16)
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 1997 and 1996, respectively:
1997 1996
------- -------
Risk free interest rate 6.35% 6.32%
Expected term 5 YEARS 5 years
Expected forfeiture rate 1% 1%
Volatility 44% 44%
Expected annual dividends $0.06 $0.06
35
The following information pertains to options on the Company's common stock for
the years ended June 27, 1997, June 28, 1996 and June 30, 1995:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
1997
- ----
Outstanding, beginning of year 5,469,550 $15.213
Granted 1,663,000 $15.530
Cancelled (300,903) $19.934
Exercised (513,569) $10.423
---------
Outstanding, end of year 6,318,078 $15.469
=========
1996
- ----
Outstanding, beginning of year 4,946,199 $13.157
Granted 1,315,050 $20.732
Cancelled (309,270) $18.620
Exercised (482,429) $ 6.803
---------
Outstanding, end of year 5,469,550 $15.213
=========
1995
- ----
Outstanding, beginning of year 4,482,052 $18.942
Granted 1,624,189 $21.400
Cancelled (202,979) $13.648
Exercised (957,063) $ 7.271
---------
Outstanding, end of year 4,946,199 $13.157
=========
The following information pertains to options on the Company's common stock at
June 27, 1997:
Options Outstanding
---------------------------------
Weighted Weighted
Average Average
Range of Remaining Life Exercise
Eercise Pricesx Shares in Years Price
- --------------- --------- -------------- --------
$ 3.250 - $10.000 1,506,456 4.2 $ 6.490
$11.333 - $16.750 1,891,052 7.9 $14,669
$17.000 - $22.125 2,920,570 8.0 $20.658
---------
6,318,078 7.1 $15.469
=========
Options Exercisable
------------------------
Weighted
Range of Average
Eercise Pricesx Shares Exercise Price
- --------------- --------- --------------
$ 3.250 - $10.000 1,506,456 $ 6.490
$11.333 - $16.750 995,207 $14.826
$17.000 - $22.125 1,560,278 $21.049
---------
4,061,941 $14.149
=========
At June 27, 1997, an additional 1,724,432 were reserved under employee and
director stock option plans.
The Company has an employee stock purchase plan whereby the Company provides
certain purchase benefits for participating employees. At June 27, 1997,
475,251 shares were reserved for issuance to employees under the plan.
The Company has a 401(k) plan whereby the Company matches eligible employee
contributions in Company stock, subject to certain limitations. The Company's
expense to match contributions was $6,075, $5,644, and $4,940, in 1997, 1996
and 1995, respectively. At June 27, 1997, 332,039 shares were reserved for
issuance to employees under the plan.
The Company has a stock plan for non-employee directors which provides for 500
shares of common stock of the Company to be granted to each director annually
and which allows directors to elect to receive all or a portion of his or her
quarterly compensation from the Company in the form of shares of common stock
of the Company. At June 27, 1997, 92,000 shares were reserved for issuance to
non-employee directors under the plan.
The Company issues restricted stock awards to certain officers and key
employees under a long-term incentive plan. Compensation expense for restricted
stock awards was $845, $470, and $1,102, in 1997, 1996, and 1995, respectively.
At June 27, 1997, 1,741,184 shares were reserved for issuance under this plan.
At June 27, 1997, a total of 4,272,906 shares of authorized stock were reserved
for the above purposes.
The Company adopted a Rights Plan effective upon expiration of its 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. For shares
issued after such dividend, a Right attaches to each share of common stock
issued. The 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 group (i) acquires beneficial
ownership of 15 percent or more of the Company's common stock, (ii) makes a
tender offer to acquire 15 percent or more of the Company'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
36
exercise price, common stock of the Company having a value equal to twice the
exercise price. If the Company engages in a merger or other business
combination in which the Company 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
preceeding sentences, the Company is required by the Rights Plan to reserve
sufficient shares of its common stock to permit the exercise in full of all
outstanding Rights. At June 27, 1997, no shares of common stock were reserved
for this purpose. The Rights may be redeemed by the Company 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 the Company'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 conection with adoption of the new Rights Plan, the Board of Directors
designated 350,000 shares of Series A Junior Participating Preferred Stock from
the Company's 50,000,000 authorized shares of preferred stock for issuance
under for 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 the
Company's common stock. At June 27, 1997, there were 77,882 shares of preferred
stock reserved for this purpose.
16. EARNINGS PER SHARE
- -----------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement 128
"Earnings Per Share" superseding Accounting Principles Board Opinion No. 15,
"Earnings Per Share". The Company plans to adopt SFAS No. 128 in fiscal 1998.
Earnings per share computed under the provisions of SFAS No. 128 were
approximately the same as those computed under Opinion No. 15 for fiscal 1993
through 1997.
37
17. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- -------------------------------------
(In Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
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 77,256 76,950 75,495
Issuance of a 2-for-1 stock split effected in
the form of a stock dividend -- -- 97
Issuance of shares under employee benefit plans 612 219 1,179
Issuance of restricted shares 127 87 179
-------- -------- --------
Shares issued at end of year 77,995 77,256 76,950
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $163,143 $160,206 $141,179
Issuance of shares under employee benefit plans 7,137 1,245 13,048
Tax benefit from employees' stock plans 1,664 1,876 4,966
Issuance of restricted shares to employees 4,743 572 3,825
Unearned compensation - restricted shares (4,830) (756) (2,812)
-------- -------- --------
Balance at end of year $171,857 $163,143 $160,206
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year $264,206 $274,840 $215,926
Net earnings (loss) 64,042 (6,034) 63,540
Issuance of a 2-for-1 stock split effected in
the form of a stock dividend -- -- (48)
Cash dividends ($0.06 per share) (4,640) (4,600) (4,578)
-------- -------- --------
Balance at end of year $323,608 $264,206 $274,840
======== ======== ========
ACCUMULATED TRANSLATION ADJUSTMENTS
Balance at beginning of year $ 740 $ 668 $ 794
Foreign currency translation adjustments (926) 72 (126)
-------- -------- --------
Balance at end of year $ (186) $ 740 $ 668
======== ======== ========
TREASURY STOCK
Balance at beginning of year $ 3,065 $ -- $ --
Treasury shares acquired 2,973 12,411 --
Issuance of shares under employee benefit plans (4,411) (9,346) --
-------- -------- --------
Balance at end of year $ 1,627 $ 3,065 $ --
======== ======== ========
38
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997
(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(1) Deductions(2) period
----------- ---------- ------------------ ----------------- ------------- ----------
Deducted on the balance
sheet from asset to
which it applies:
June 27, 1997 --
Allowance for
doubtful accounts $3,826 $391 $186 $(201) $4,202
====== ==== ==== ===== ======
June 28, 1996 --
Allowance for
doubtful accounts $3,823 $324 $100 $(421) $3,826
====== ==== ==== ===== ======
June 30, 1995 --
Allowance for
doubtful accounts $3,839 $343 $ 69 $(428) $3,823
====== ==== ==== ===== ======
Notes:
(1) Represents recoveries on accounts previously written off, $186 acquired
with the purchases of Arcodan A/S in fiscal 1997 and $100 acquired with the
purchase of ATx Telecom Systems, Inc. in fiscal 1996.
(2) Amounts represent uncollectible accounts written off and $86 transferred to
net assets held for sale in fiscal 1996.
39
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 19,
- ------------------------------------ 1997
James F. McDonald --------------
President and Chief Executive Date
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 19,
- ------------------------------------ 1997
James F. McDonald --------------
President and Chief Executive Officer Date
and Director
(Principal Executive Officer)
/s/ Harvey A. Wagner September 19,
- ------------------------------------ 1997
Harvey A. Wagner --------------
Senior Vice President-- Date
Finance,
Chief Financial Officer and
Treasurer (Principal
Financial Officer)
/s/ Julian W. Eidson September 19,
- ------------------------------------ 1997
Julian W. Eidson --------------
Vice President and Controller Date
(Principal Accounting
Officer)
/s/ Marion H. Antonini September 19,
- ------------------------------------ 1997
Marion H. Antonini, Director --------------
Date
/s/ William E. Kassling September 19,
- ------------------------------------ 1997
William E. Kassling, Director --------------
Date
/s/ Wilbur Branch King September 19,
- ------------------------------------ 1997
Wilbur Branch King, Director --------------
Date
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
40
/s/ Mylle Bell Mangum September 19,
- ------------------------------------- 1997
Mylle Bell Mangum, Director --------------
Date
/s/ Alonzo L. McDonald September 19,
- ------------------------------------- 1997
Alonzo L. McDonald, Director --------------
Date
/s/ David J. McLaughlin September 19,
- ------------------------------------- 1997
David J. McLaughlin, Director --------------
Date
/s/ James V. Napier September 19,
- ------------------------------------- 1997
James V. Napier, Director --------------
Date
/s/ Sam Nunn September 19,
- ------------------------------------- 1997
Sam Nunn, Director --------------
Date
/s/ Sidney Topol September 19,
- ------------------------------------- 1997
Sidney Topol, Director --------------
Date
41