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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 26, 1998
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 or organization) Number)
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 2, 1998, was approximately $1,566,894,335.
As of September 2, 1998, the Registrant had outstanding 79,451,799 shares of
common stock.
Documents Incorporated By Reference:
Specified portions of the Proxy Statement for the Registrant's 1998 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 for advanced communications networks which deliver
voice, data and video. 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 communications networks to a range of customers for
a variety of applications and providing network management and systems
integration for 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, analog and digital set-tops, 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, opto-electronic transmitters and
amplifiers, taps, and passives, which transmit signals via coaxial cable or
fiber optics from the cable operator to the end-user customer. 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 18% of
the Company's total sales for fiscal 1998, and approximately 19% and 21% of
such sales in fiscal years 1997 and 1996, respectively. The Company previously
announced that it planned to have production quantities of the new Prisma(TM)
Digital Transport product, an opto-electronics product, available in the first
quarter of fiscal 1999, but the availability of such production quantities is
expected to be delayed until the second quarter of fiscal 1999.
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 fiber optics from headend systems to subscribers and set-top terminals
that enable television sets to receive all channels transmitted by system
operators.
The Company's set-tops include units which are addressable from the
headend system so as to permit control of channel authorizations, including
authorizations for pay-per-view events, impulse ordering and automatic
recording of billing information at the cable operator's central facility, and
menu-driven volume controllable units. Sales of set-tops constituted
approximately 34% of the Company's total sales for fiscal year 1998, and
approximately 30% and 27% of such sales in each of fiscal years 1997 and 1996,
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
Explorer(R) 2000 digital set-tops will enable subscribers to access new
services such as e-mail over television, video-on-demand, Web browsing,
Internet Protocol (IP) telephony, various types of electronic-commerce, and
more. For Explorer 2000 digital set-tops to be enabled to provide the above-
described services, the set-tops must be utilized in an advanced, interactive,
two-way, digital cable network, which the Company sells.
1
The Company's products, both analog and digital, are being utilized by
the Company's traditional cable operator customers to upgrade their networks
to provide new services and by the telephone companies 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-based 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, 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 use by television broadcasters and cable
operators. The Company's digital video compression products utilize the open
architecture MPEG-2 technology adopted by an international standards group, of
which the Company is a founding member. MPEG-2 digital equipment allows
headend, set-top and consumer electronics products and systems to operate
together across networks and in the home.
The Company's satellite products and systems include tracking and
telemetry equipment, earth observation satellite ground stations, 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's long experience with advanced satellite
tracking technologies has enabled it to offer a range of gateways, network
management centers, transceivers and services for the emerging low earth
orbiting (LEO) satellite communications markets. In addition, the Company has
coupled LEO satellite communications with other wireless and terrestrial
networks to offer two-way interactive solutions to the electric utility
industry for load control and energy management.
See the Consolidated Financial Statements included in this Form 10-K
for the Company's annual sales, annual profits and total assets.
OTHER PRODUCTS AND SERVICES.
The Company has consolidated most of its service functions into a
single 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, in addition to providing systems
integration, installation, and professional services. In April 1998, the
Company announced the creation of a partially-owned subsidiary, Advanced
Broadband System Services, Inc., which will provide a wide range of services
to the cable industry, including turnkey installation services for customers
such as Tele-Communications Inc. ("TCI").
MARKETING AND SALES
The Company's products are sold primarily through its own sales
personnel who work out of offices in metropolitan Atlanta and other
metropolitan areas in the United States. Certain products are also marketed in
the United States through independent sales representatives and independent
distributors. In addition to direct sales by the Company, 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.
2
The Company's international sales constituted 32% of the Company's
total sales for fiscal year 1998 and 37% and 36% of total sales in fiscal
years 1997 and 1996, respectively. Substantially all of these sales were
export sales. Foreign subsidiary sales were not material for any of these
three fiscal years. See Note 3 of the Notes to Consolidated Financial
Statements included in this Form 10-K. Sales to Europe were 14% of total sales
in fiscal 1998 and were 16% and 12% of total sales in fiscal 1997 and 1996,
respectively.
Sales to Time Warner, Inc. and its affiliates were 11% of the
Company's total sales in fiscal 1998 and were 11% of total sales in fiscal
1997. Sales to MediaOne and its affiliates were 11% of the Company's total
sales in fiscal 1998 and were less than 10% of total sales in fiscal 1997. No
customer (or group of customers under common control) accounted for more than
10% of the Company's revenues 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 26, 1998, and June 27, 1997, was $486,144,000 and
$483,463,000, respectively.
The Company believes that approximately 90% of the backlog existing at
June 26, 1998, 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 related to its present technology. Expenditures in fiscal 1998,
1997 and 1996 were principally for development of commercial digital cable
products and satellite network products. In fiscal 1998, 1997 and 1996, the
Company's research and development expenses were approximately $111,546,000,
$114,344,000, and $95,299,000, respectively.
The Company holds patents with respect to certain of its products and
actively seeks to obtain patent protection 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 analog set-tops and taps and passives hardware for the CATV industry
are manufactured primarily 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 launched the production of its
3
Explorer 2000 set-top in the Juarez, Mexico facility. As announced in August
1998, the Company, during the second fiscal quarter of 1999, is increasing its
manufacturing capacity in Juarez, Mexico for the Explorer 2000 digital
interactive set-top. Also, as the Company announced in June 1998, during the
second quarter of fiscal 1999, it is transferring the RF amplifier product
line to the Juarez, Mexico manufacturing facility from the Norcross, Georgia
manufacturing facility. The transfer is expected to enable the Company to
remain cost competitive in the markets for RF amplifiers. In the same June
1998 announcement, the Company disclosed its decisions to move (i) its cable
headend manufacturing operation from its Vancouver, British Columbia facility
to its Norcross, Georgia manufacturing facility, and (ii) its satellite
services Network Operations Center (including the related research and
development facility) from Melbourne, Florida to Norcross, Georgia.
MATERIALS AND SUPPLIES
The materials and supplies purchased by the Company are standard
electronic components, such as integrated circuits, wire, circuit boards,
transistors, capacitors and resistors, all of which are produced by a number
of manufacturers. Matsushita Electronic Components Co., Ltd. and its
affiliates manufacture analog set-tops for the Company and are a primary
supplier of those set-tops. Cablevision Electronics Co., Ltd and Zinwell
Corporation, Taiwanese companies, are primary suppliers 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's primary
supplier of die castings for its RF distribution products is Premiere Die
Casting, Inc. Additionally, Motorola, Inc., Broadcom Corporation and SGS-
Thomson Microelectronics, Inc. are three of the Company's primary suppliers of
a variety of semi-conductor products, which are used as components in an array
of the Company's products, including its set-tops. 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
affiliates), Cablevision Electronics Co., Ltd., Zinwell Corporation, Premiere
Die Casting, Inc., Motorola, Inc., Broadcom Corporation and SGS-Thomson
Microelectronics, Inc., for any significant portion of the materials used in
the products it manufactures or for the products it sells.
EMPLOYEES
The Company employed approximately 5,736 regular full-time and part-
time employees and approximately 467 additional workers employed through
temporary employment agencies on June 26, 1998. The Company believes its
employee relations are satisfactory.
COMPETITION
The businesses in which the Company is engaged are highly competitive.
The Company competes with companies which 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, product features,
product performance, 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 1998 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 offices and manufacturing
facilities in metropolitan Atlanta, Georgia; Naperville, Illinois and Juarez,
Mexico, which comprise six sites containing a total of approximately 672,000
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 possible future antenna test
range expansion, and (iii) approximately 282 acres of land in Gwinnett County,
Georgia, held for development of and expansion of a consolidated office site
for the Company. The first phase of this consolidated office site is underway;
a 300,000 square foot engineering and office facility is under construction at
this consolidated office site and is expected to be ready for occupancy in the
third quarter of fiscal 1999. 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; Phoenix, Arizona; El Paso, Texas; Sonderborg, Denmark; Toronto,
Ontario; Vancouver, British Columbia; Melbourne, Florida; Frankfurt, Germany;
and Manchester, United Kingdom, and the Company leases sales and service
offices in 28 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 26, 1998.
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 58 1993 President and Chief Executive
Officer
Conrad Wredberg, Jr. 57 1995 Senior Vice President and Chairman
of Corporate Operating Committee
Dwight B. Duke 46 1997 Senior Vice President; President,
Transmission Network Systems; Member
of Corporate Operating Committee
William E. Eason, Jr. 55 1993 Senior Vice President, General
Counsel and Corporate Secretary
H. Allen Ecker 62 1979 Senior Vice President; President,
Subscriber Networks; Chief Technical
Officer; Member of Corporate
Operating Committee
Larry L. Enterline 45 1997 Senior Vice President, Worldwide
Sales and Services
Wallace G. Haislip 49 1998 Senior Vice President-Finance, Chief
Financial Officer and Treasurer
Brian C. Koenig 51 1988 Senior Vice President, Human
Resources
John H. Levergood 64 1992 Senior Vice President
Raymond D. Lucas 60 1989 Senior Vice President; President,
Satellite Communication Systems;
Member of Corporate Operating
Committee
Stephen K. Necessary 42 1998 Vice President, Marketing
Julian W. Eidson 58 1978 Vice President and Controller;
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. 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 Corporate Operating Committee. Mr. Wredberg
served as President of American Microsystem, Inc., a supplier of semi-
conductors, from 1985 until 1995.
Mr. Duke was elected Senior Vice President of the Company on April 27,
1998. From June 19, 1996 to April 27, 1998, he served as a Vice President of
the Company. Prior to June 19, 1996, Mr. Duke was employed by the Company in a
variety of management positions for more than five years.
Mr. Eason was a partner at Paul, Hastings, Janofsky & Walker from 1989
to 1998. He became "Of Counsel" to the Firm in 1998. He has been Corporate
Secretary of the Company since August 1993, and became
6
Senior Vice President and General Counsel in February 1994. Paul, Hastings,
Janofsky & Walker performs legal services for the Company. Mr. Eason does not
receive a salary from the Firm and has no interest in the Firm's earnings and
profits.
Mr. Enterline was elected Senior Vice President, Worldwide Sales and
Services 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. Haislip was elected to the position of Senior Vice President-
Finance, Chief Financial Officer and Treasurer on April 27, 1998. Prior to
April 27, 1998, Mr. Haislip was employed by the Company in a variety of
management positions for more than five years.
Mr. Necessary was elected to the position of Vice President, Marketing
on April 23, 1998. From October 1995 until April 1998, Mr. Necessary held a
variety of management positions in the Company. Prior to joining the Company,
Mr. Necessary served as President of ANTEC's Products Group from February 1991
to October 1995.
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 2, 1998, was 6,606.
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 1998, the Company paid 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 1998 and 1997 is included in Note 7 of the Notes
to Financial Statements included in this Report.
ITEM 6.SELECTED FINANCIAL DATA
Selected Financial Data is set forth on page 28 of this Report.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion of Consolidated Statement of Financial
Position, of Consolidated Statement of Earnings, and of Consolidated Statement
of Cash Flows are set forth on pages 13 and 14, 17 through 24, and 26 of this
Report, respectively.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the information required for this Item 7A, see Note 1 of the Notes
to Consolidated Financial Statements included in this Form 10-K.
7
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 11 through 42 of this
Report. See Part IV, Item 14 for an index of the statements, notes and
schedule.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10-13 (except for the information set forth at the end of Part I with
respect to Executive Officers of the Company) is incorporated by reference
from the Company's definitive proxy statement for the Company's 1998 Annual
Meeting of shareholders, which is expected to be filed pursuant to Regulation
14A within 120 days after the end of the Company's 1998 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 11 through 41 of this Report.
Report of Independent Public Accountants.
Consolidated Statement of Financial Position as of June 26, 1998
and June 27, 1997.
Consolidated Statement of Earnings for each of the three years in
the period ended June 26, 1998.
Consolidated Statement of Cash Flows for each of the three years
in the period ended June 26, 1998.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule:
Page
----
Schedule II Valuation and Qualifying Accounts for Each of the
Three Years in the Period ended June 26, 1998. 42
All other Schedules called for under Regulation S-X are not
submitted because they are not applicable or not required or
because the required information is not material or is
included in the financial statements or notes thereto.
(b)Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
8
(c)Exhibits:
(3) (a) The Composite Statement of Amended and Restated Articles of
Incorporation of the Company is incorporated by reference to the
Company's report on Form 10-K for the fiscal year ended June 27,
1997.
(b) The By-laws of the Company, as amended, are incorporated by
reference to the Company's report on Form 10-Q for the fiscal
quarter ended December 26, 1997.
(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) 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) Form of Severance Protection Agreement between the
Company and Certain Officers and Key Employees.*
(b) 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.
(c) The following amendments to the Credit Agreement described in
item (b) 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.
(d) 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.*
(ii) Scientific-Atlanta, Inc. 1992 Employee Stock Option Plan,
as amended and restated.*
(e) 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.*
(f) 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.*
(g) The following amendment to the Credit Agreement described in item
(b) 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.
9
(h) The following material contracts or amendments to material
contracts are incorporated by reference to the Company's report
on Form 10-K for the fiscal year ended June 27, 1997:
(i) Letter Amendment, dated as of April 23, 1997, to the
Credit Agreement described in item (b) above.
(ii) Credit and Investment Agreement, dated as of July 30,
1997, among the Company, Wachovia Capital Markets, Inc.,
Wachovia Bank, N.A., as agent, and the lenders
signatories thereto.
(iii) Lease Agreement, dated as of July 30, 1997, between
Wachovia Capital Markets, Inc. and the Company.
(iv) 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.
(vi) Scientific-Atlanta, Inc. Non-Employee Directors Stock
Option Plan, as amended.*
(vii) Scientific-Atlanta, Inc. 1981 Incentive Stock Option
Plan, as amended.*
(viii) 1985 Scientific-Atlanta Executive Deferred Compensation
Plan, as amended.*
(ix) Scientific-Atlanta, Inc. 1978 Non-Qualified Stock Option
Plan for Key Employees, as amended.*
(i) Deferred Compensation Plan for Non-Employee Directors of
Scientific-Atlanta, Inc., as amended and restated, is
incorporated by reference to the Company's report on Form 10-Q
for the fiscal quarter ended December 26, 1997.*
(j) Scientific-Atlanta, Inc. Stock Plan for Non-Employee Directors,
as amended and restated.*
(k) Scientific-Atlanta Executive Deferred Compensation Plan, as
amended.*
(l) Scientific-Atlanta, Inc. Senior Officer Annual Incentive Plan, as
amended and restated.*
(m) Scientific-Atlanta, Inc. Annual Incentive Plan for Key Employees,
as amended and restated.*
(n) Scientific-Atlanta, Inc. Restoration Retirement Plan, as
amended.*
(o) Letter Amendment, dated as of April 24, 1998, to the Credit
Agreement described in item (b) above.
(p) 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.
10
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 26, 1998 and June 27, 1997 and the related consolidated statements
of earnings and cash flows for each of the three years in the period ended June
26, 1998 appearing on pages 15, 25, and 27, respectively. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with 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 26, 1998 and June 27, 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended June 26, 1998 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
Atlanta, Georgia
August 4, 1998
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 26, 1998
is effective in providing reasonable assurance that its published annual and
interim financial statements are free of material misstatement.
As part of their audit of our financial statements, Arthur Andersen LLP
considered certain elements of our system of internal controls in determining
their audit procedures for the purpose of expressing an opinion on the
financial statements.
The audit committee of the board of directors is composed solely of
outside directors and is responsible for recommending to the board the
independent public accountants to be retained for the year, subject to
stockholder approval. The audit committee meets three times each year to review
with management the Company's system of internal accounting controls, audit
plans and results, accounting principles and practices, and the annual
financial statements.
/s/ James F. McDonald /s/ Wallace G. Haislip
- --------------------------------- --------------------------------
James F. McDonald Wallace G. Haislip
President and Chief Executive Officer Senior Vice President - Finance
Chief Financial Officer and Treasurer
11
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12
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Scientific-Atlanta had stockholders' equity of $632.0 million and cash and cash
equivalents of $175.4 million at June 26, 1998. The current ratio of 2.8:1
at June 26, 1998 compared to 2.4:1 at June 27, 1997.
CASH AND CASH EQUIVALENTS at the end of 1998 were $175.4 million, up $68.2
million over last year. Cash generated from earnings, reductions in
inventory levels, the sale of two businesses and the issuance of stock
exceeded expenditures for equipment, expansion of manufacturing capacity and
increases in accounts receivable days sales outstanding in the fourth
quarter of fiscal 1998 as compared to the prior year. Ending working
capital, excluding cash and marketable securities, was $186.5 million, or
15.8 percent of sales, as compared to $240.2 million or 20.6 percent of
sales in the prior year.
MARKETABLE SECURITIES of $95.9 million consist of investments in common stock
and are reported at market value. During fiscal 1998, the Company recorded a
net unrealized gain on $93.8 million in other income from the adjustment of
these investments from cost to the market value.
Recently, equity markets throughout the world have experienced significant
volatility. Marketable securities with a market value of $95.9 million at
June 26, 1998 have increased in value to $101.0 million at September 14,
1998. Management is not currently able to estimate the amount to be
realized from the ultimate sale of these marketable securities.
RECEIVABLES were $254.4 million at year-end, compared to $238.2 million at the
prior fiscal year-end. Average days sales outstanding were 75 in fiscal
1998, approximately the same as the prior year. The allowance for doubtful
accounts of $10.1 million increased $5.9 million due to a one-time provision
of $5.9 million for receivables from customers in the Asia Pacific region
which is currently experiencing currency and other economic crises.
INVENTORY turnover was 4.3 times in 1998, compared to 4.1 in the prior year.
The improvement in inventory turnover was due to lower average inventory
balances in 1998 as compared to 1997 reflecting management's effort to
improve working capital by reducing inventory levels. In addition, the
Company recorded a one-time provision of $26.4 million related to the
restructuring and consolidation of certain satellite business units and
worldwide manufacturing operations. See Management's Discussion of
Consolidated Statement of Earnings.
CURRENT DEFERRED INCOME TAXES decreased $13.3 million due to mark-to-market net
gain on marketable securities which is not taxable until the gain is
realized which was partially offset by increases in non-deductible reserves.
OTHER CURRENT ASSETS of $13.1 million include prepaid taxes, other than income
taxes, license fees, land held for sale, prepaid software maintenance fees
and other miscellaneous prepaid expenses.
NET PROPERTY, PLANT AND EQUIPMENT decreased $6.4 million in 1998 due primarily
to the sale of the interdiction and microwave businesses and disposals
related to the restructuring and consolidation of worldwide manufacturing
operations. Capital additions of $40.6 million included expenditures for
equipment, and expansion of manufacturing capacity, primarily in Juarez,
Mexico.
COST IN EXCESS OF NET ASSETS ACQUIRED decreased $2.4 million in 1998, from the
amortization of the cost of businesses acquired in prior years and the
write-off of costs associated with purchased technology in the satellite
businesses which will no longer be utilized as a result of the restructuring
and consolidation of certain satellite business units in fiscal 1998. See
Management's Discussion of Consolidated Statement of Earnings.
OTHER ASSETS, which include license fees, investments, intellectual property,
capitalized software development costs, cash surrender
13
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(CONTINUED)
value of company-owned life insurance and various prepaid expenses,
increased $6.0 million in 1998 due primarily to capitalized software
development costs and additional investments. See Notes 1 and 2.
TOTAL BORROWINGS at year-end amounted to $1.7 million, $0.9 million lower than
the prior year. The borrowings include industrial development bonds and
financing for equipment. Details of borrowings are shown in Note 8.
ACCOUNTS PAYABLE were $103.6 million at year-end, down from $123.7 million
last year. The decrease reflects lower inventory levels at the end of
fiscal 1998 as compared to the prior year. Days in accounts payable of 48
in fiscal 1998 was approximately the same as fiscal 1997.
ACCRUED LIABILITIES of $139.0 million include accruals for restructuring and
consolidation of manufacturing operations, compensation, warranty and
service, customer down-payments, royalties and taxes, excluding income
taxes. The increase in the accruals is due primarily to provisions relating
to restructuring and the consolidation of manufacturing operations and
certain satellite business units and other one-time charges. See
Management's Discussion of Consolidated Statement of Earnings and Notes 4
and 9 for additional information.
OTHER LIABILITIES of $48.5 million are comprised of deferred compensation,
retirement plans, postretirement benefit plans, postemployment benefits and
other miscellaneous accruals. See Note 10 for details.
STOCKHOLDERS' EQUITY was $632.0 million at the end of 1998, up $99.3 million
over the prior year. Net earnings of $80.8 million and $30.7 million from
the issuance of common stock pursuant to employee benefit plans were
partially offset by dividend payments of $4.7 million and the repurchase of
500,000 shares of the Company's stock for $7.5 million. See Note 19 for
details.
14
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
In Thousands
------------------
1998 1997
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $175,392 $107,143
Marketable securities 95,947 --
Receivables, less allowance for doubtful accounts of
$10,052,000 in 1998 and $4,202,000 in 1997 254,419 238,179
Inventories 159,545 209,570
Deferred income taxes 18,062 31,323
Other current assets 13,133 10,886
-------- --------
TOTAL CURRENT ASSETS 716,498 597,101
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, AT COST
Land and improvements 20,621 19,854
Buildings and improvements 37,316 32,229
Machinery and equipment 193,894 206,760
-------- --------
251,831 258,843
Less - accumulated depreciation and amortization 91,804 92,423
-------- --------
160,027 166,420
-------- --------
COST IN EXCESS OF NET ASSETS ACQUIRED 8,825 11,263
-------- --------
OTHER ASSETS 54,792 48,831
-------- --------
TOTAL ASSETS $940,142 $823,615
======== ========
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 726 $ 842
Accounts payable 103,629 123,675
Accrued liabilities 139,011 111,737
Income taxes currently payable 15,302 13,507
-------- --------
TOTAL CURRENT LIABILITIES 258,668 249,761
-------- --------
LONG-TERM DEBT, less current maturities 983 1,810
-------- --------
OTHER LIABILITIES 48,495 39,394
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
STOCKHOLDERS' EQUITY
Preferred stock, authorized 50,000,000 shares; no
shares issued -- --
Common stock, $0.50 par value, authorized 350,000,000
shares, issued 79,207,004 shares in 1998 and
77,995,475 shares in 1997 39,604 38,998
Additional paid-in capital 195,446 171,857
Retained earnings 399,678 323,608
Accumulated translation adjustments (204) (186)
-------- --------
634,524 534,277
Less - Treasury stock, at cost (122,418 shares in 1998
and 113,000 shares in 1997) 2,528 1,627
-------- --------
631,996 532,650
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $940,142 $823,615
======== ========
- -------------------------------------------------------------------------------
See accompanying notes.
15
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16
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, particularly the
development, deployment, production and qualification of the Company's
interactive digital networks at customer sites in North America, and
continued its expansion into international markets.
EARNINGS FROM CONTINUING OPERATIONS in 1998 were $80.8 million, or $1.02 per
share as compared to $60.6 million, or $0.78 per share, in 1997. The
Company's 1998 results contain several significant and non-recurring items.
First, during the fourth quarter of 1998, the Company announced that it
would implement a restructuring and consolidation of worldwide
manufacturing operations to achieve reduced costs, improved efficiencies
and better customer service. Production of the RF (radio frequency)
amplifier is expected to be transferred from Norcross, Georgia to the
Company's high volume, low cost manufacturing facility in Juarez, Mexico by
October 1998. The Norcross manufacturing facility is expected to focus on
medium-to-low-volume products requiring close engineering support. The
production of cable headend equipment is planned to be consolidated in
Norcross from Vancouver, British Columbia. This move is designed to improve
efficiency and to more effectively manage the transition of analog to
digital headend products. The Melbourne, Florida satellite services Network
Operations Center (NOC) and research and development facility is scheduled
to be relocated to Norcross. The Company's European headquarters has been
moved from London, England to Frankfurt, Germany to better address market
opportunities in continental Europe. The Far East regional headquarters
have been transferred from Hong Kong to Singapore. The Company's Satellite
Networks and Communications and Tracking Systems business units are being
combined to capitalize on the combined resources provided by concentrated
capabilities in networks, research and development, marketing and sales,
and customer program management and services. As a result of the above, the
Company recorded $76.2 million of restructuring and other one-time pre-tax
charges in the fourth quarter of fiscal 1998. These charges include the
impairment of assets, such as excess inventory related to the consolidation
of manufacturing operations and the discontinuance of certain product
models, costs to relocate production and the NOC, losses on contracts,
costs to abandon facilities, charges to establish an allowance for doubtful
accounts receivable from customers in the Asia Pacific region which is
currently experiencing currency and other economic crises and environmental
issues. The Company charged $33.6 million to cost of sales, $5.9 million to
selling and administrative expenses, $23.4 million to restructuring expense
and $13.3 million to other expense. The Company also recorded a one-time
pre-tax gain of $94.0 million to adjust its investment in Broadcom
Corporation to market value. Net earnings excluding these one-time special
items were $68.5 million, or $0.87 per share. 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.
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 $1,181.4 million increased slightly over the prior year. Higher
domestic sales volume of subscriber products, particularly advanced analog
set-tops, and of transmission products, were offset by significant declines
in sales to customers in the Asia Pacific and Europe regions. The weak
Asian economy continued to negatively impact bookings and sales, and the
Company does not anticipate that these conditions will improve
significantly in the near term. Europe was impacted by a slow down in the
U.K. In addition, a large customer in Europe decided to re-evaluate its
cable strategy, which had the impact of halting orders. Sales in 1998 of
satellite systems also declined as compared to 1997.
17
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
During the fourth quarter of fiscal 1998, the Company began the rollout of
advanced two-way digital cable systems which are real-time, interactive
digital networks capable of advanced services such as video-on-demand,
e-mail and Internet browsing, once such services are available. The Company
plans to double the production capacity of its Explorer(R) 2000 digital
set-tops in Juarez to one million units annually beginning in October 1998.
The Company anticipates that sales of the Company's new digital products
will have some negative impact on sales of analog set-tops.
Sales of set-tops constituted approximately 34 percent of the Company's
total sales in 1998, and approximately 30 percent and 27 percent of such
sales in 1997 and 1996, respectively. Sales of RF products were
approximately 18 percent of the Company's total sales in 1998, and
approximately 19 percent and 21 percent of such sales in 1997 and 1996,
respectively. International sales were 32 percent of total sales in 1998,
as compared to 37 percent and 36 percent of such sales in 1997 and 1996,
respectively.
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 PowerVu(TM)
digital video systems. Sales volume of video game adapters declined as
compared to the prior year.
COST OF SALES as a percent of sales increased 2.7 percentage points in 1998.
Cost of sales in 1998 included one-time charges of $33.6 million for excess
inventory related to the consolidation of manufacturing operations, the
combination of the Satellite Networks and Communications and Tracking
Systems business units, the discontinuance of certain models of products,
estimated losses on a contract and other miscellaneous charges related to
the restructuring and consolidation of worldwide manufacturing operations.
Excluding these charges, cost of sales as a percent of sales decreased 0.1
percentage point from 1997. The improvement of 0.1 percentage point
reflects the continuing benefit from manufacturing in Juarez, negotiated
procurement savings and improved yen exchange rates offset in part by lower
volume of sales in the Asia Pacific region, which generally have higher
margins than some other geographic regions, and margin decreases in
distribution equipment from market pressures.
Cost of sales as a percent of sales in 1997 decreased 3.4 percentage points
from 1996. Improved margins reflect the impact of internal programs to
improve quality and reduce cost, the ramp-up of the Juarez 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 lower margins
than some of the Company's other products.
The materials and supplies purchased by the Company are standard electronic
components, such as integrated circuits, wire, circuit boards, transistors,
capacitors and resistors, all of which are produced by a number of
manufacturers. Matsushita Electronic Components Co., Ltd. and its
affiliates manufacture analog set-tops for the Company and are a primary
supplier of those set-tops. Cablevision Electronics Co., Ltd. and Zinwell
Corporation, Taiwanese companies, are primary suppliers 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's
primary supplier of die castings for its RF distribution products is
Premiere Die Casting, Inc. Additionally, Motorola, Inc., Broadcom
Corporation and SGS-Thomson Microelectronics, Inc. are three of the
Company's primary suppliers of a variety of semi-conductor products, which
are used as components in an array of the Company's products, including its
set-tops. The
18
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
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 affiliates), Cablevision Electronics Co., Ltd., Zinwell
Corporation, Premiere Die Casting, Inc., Motorola, Inc., Broadcom
Corporation and SGS-Thomson Microelectronics, Inc., for any significant
portion of the materials used in the products it manufactures or for 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. See Note 1.
SALES AND ADMINISTRATIVE EXPENSES of $165.6 million in 1998 were $5.0 million
higher than 1997. Sales and administrative expenses in 1998 include a one-
time charge of $5.9 million to establish an allowance for doubtful accounts
receivables from customers in the Asia Pacific region which is currently
experiencing currency and other economic crises. Excluding this one-time
charge, expenses were flat as compared to the prior year and remained at
approximately 14 percent of sales. The Company is continuing to invest in
opportunities to expand into international markets and introduce new
products.
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 Latin American
region, and to support the introduction of 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. ATx was merged
into the Company on June 26, 1998.
RESEARCH AND DEVELOPMENT EXPENSES were $111.5 million in 1998. Research and
development efforts in 1998 were focused on the development of two-way,
real-time interactive digital networks and set-tops and related software and
the Prisma(TM) Digital Transport product and enhancements to the 8600x set-
tops to include features such as e-mail over television and Web browsing.
The Company previously announced that it planned to have production
quantities of the Prisma Digital Transport product available in the first
quarter of fiscal 1999, but the availability of such production quantities
will be delayed until the second quarter of fiscal 1999. The Company
continues to invest in research and development programs to support existing
products and new product initiatives.
Certain software development costs are capitalized when incurred and are
reported at the lower of unamortized cost or net realizable value.
Capitalization of software development costs begins upon the establishment
of technological feasibility. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software
development costs requires considerable judgment by management with respect
to certain external factors, including, but not limited to, anticipated
future revenues, estimated economic life and changes in software and
hardware technologies.
The Company capitalized $2.2 million and $2.0 million of software
development costs in 1998 and 1997, respectively. Capitalization will cease
when the products are available for general release to customers. Software
development costs were not material and, therefore, were not capitalized in
1996.
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,
19
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
the related costs have been capitalized as inventory. At June 26, 1998 and
June 27, 1997, the Company had capitalized $11.2 million and $6.0 million,
respectively, of such non-recurring engineering costs. During 1998, the
Company recognized revenue on certain of these orders and, accordingly,
charged $1.3 million to cost of sales. No such revenue was recognized in
1997. There were no material non-recurring engineering costs capitalized at
June 28, 1996.
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 $114.0 million in 1997 increased $19.0
million over 1996, reflecting the Company's investment in research and
development programs to support existing products and new product
initiatives such as high speed cable data modems, cable telephony products,
interactive set-tops and home automation products for the utility industry.
In fiscal 1998, the Company discontinued its research and development
efforts related to cable telephony products and a stand alone two-way RF
modem because the markets for cable telephony products and two-way stand
alone modems had not developed as quickly as the Company previously
anticipated. A two-way modem solution is currently included in one of the
Company's digital set-top product offerings.
RESTRUCTURING CHARGES of $23.4 million were recorded in the fourth quarter of
fiscal 1998. The charges include $10.2 million and $3.2 million for fixed
assets to be abandoned and expenses related to the cancellation of leases,
respectively, as a result of the consolidation of operations, $5.2 million
for severance and out placement costs, and $4.8 million for the impairment
of certain assets and other miscellaneous expenses.
PURCHASED IN-PROCESS TECHNOLOGY was $14.6 million in 1996. In connection with
the acquisition of ATx 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.
INTEREST EXPENSE was $0.5 million, $0.5 million, and $0.7 million in 1998,
1997, and 1996, respectively. The year-to-year decrease in 1997 as compared
to 1996 reflects lower average working capital borrowings by foreign
subsidiaries.
INTEREST INCOME was $6.0 million, an increase of $2.0 million over the prior
year, reflecting higher average cash balances in fiscal 1998.
OTHER INCOME of $79.9 million in 1998 included a $93.8 million net gain from
the mark-to-market adjustment of marketable securities of which $94.0
million related to the Company's investment in Broadcom Corporation, a $9.1
million gain from the sale of certain assets of the interdiction business,
a loss of $9.0 million from the discontinuance of research and development
efforts related to the Company's CoAxiom(R) telephony products, $6.2
million for estimated losses on the resale of used equipment, $5.5 million
for expenses and the potential settlement of environmental issues and other
miscellaneous items.
During the quarter ended March 27, 1998, the Company sold the inventory,
manufacturing assets and intellectual property of the interdiction business
to Blonder Tongue Laboratories, Inc. (Blonder Tongue) for $19.0 million in
cash, Blonder Tongue stock valued at $1.0 million and an option to acquire
additional shares of Blonder Tongue stock. The Company recorded a pre-tax
gain of $9.1 million related to this sale. At June 26, 1998, the Company
had a reserve of approximately $5.5 million for research and development
commitments, transition services, potential post-closing sales price
adjustments and other miscellaneous expenses related to the sale.
20
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
During fiscal 1997, the Company, with consent of its product development
partner, Siemens, decided to decrease its research and development efforts
related to CoAxiom telephony products because the markets for these
products had not developed as quickly as the company previously
anticipated. During the quarter ended March 27, 1998, the Company decided
to discontinue its efforts to develop CoAxiom systems and recorded a pre-
tax charge of approximately $9.0 million. The charge included reserves for
the disposal of inventory and fixed assets which were associated with the
development of CoAxiom systems, research and development costs incurred
during fiscal 1998 and other miscellaneous expenses. Although the Company
discontinued development of CoAxiom telephony products, the Company will
continue to develop applications and technology for telephony on cable
using IP telephony which will be used in the Company's networks and
Explorer 2000 digital interactive set-tops.
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 and recorded a charge
of $5.5 million 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. Accordingly, the estimated loss on the sale of
the microwave and mobile 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.
During the quarter ended December 26, 1997, the Company sold the majority
of the net assets of the microwave business unit for $8.1 million of cash.
No gain or loss was recognized on the transaction.
After recording the $5.5 million charge discussed above, at June 26, 1998,
the Company had a remaining reserve of approximately $4.8 million to adjust
the carrying amount of the net assets of the mobile business unit, which
has been discontinued, and to provide for estimated indemnifications to the
purchaser of the microwave business unit, potential losses on contracts of
the microwave business which were retained by the Company, severance,
closing costs and other miscellaneous expenses related to the sale of the
microwave business unit.
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.
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 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.
THE PROVISION FOR INCOME TAXES was 30 percent of pre-tax earnings in 1998 and
32 percent of pre-tax earnings in 1997 and 1996. The lower effective income
tax rate in fiscal 1998 as compared to fiscal 1997 and 1996, is due to
benefits from the Company's foreign sales corporation (FSC) and a decrease
in foreign earnings taxed at a higher rate. Details of the provision for
income taxes are discussed in Note 11.
GAIN ON SALE OF DISCONTINUED OPERATIONS was $3.4 million in 1997 compared to
losses of
21
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
$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, when the
Company decided to discontinue its defense-related businesses in San Diego,
California. Details of the discontinued operations are discussed in Note 6.
NET EARNINGS of $80.8 million in 1998 included after-tax restructuring and
other one-time charges of $53.4 million and an after-tax net gain of $65.6
million from the mark-to-market adjustment of marketable securities.
In 1997, 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 $1.02 in 1998 compares with earnings per share of $0.82
in 1997 and with a loss per share of $0.08 in 1996. Diluted shares
outstanding increased slightly to 80.0 million in 1998 from 78.4 million in
1997 and 76.7 million in 1996.
YEAR 2000 issues are being addressed by the Company. The Company, like most
other major companies, is currently addressing a universal problem commonly
referred to as "Year 2000 Compliance," which relates to the ability of
computer programs and systems to properly recognize and process date
sensitive information before and after January 1, 2000. The following
discussion is based on information currently available to the Company.
The Company has analyzed and continues to analyze its internal information
technology ("IT") systems ("IT systems") to identify any computer programs
that are not Year 2000 compliant and implement any changes required to make
such systems Year 2000 compliant. The Company believes that its critical IT
systems currently are capable of functioning without substantial Year 2000
Compliance problems. Of the non-critical, but important, IT systems that
are not currently Year 2000 Compliant, the Company believes such IT systems
will be Year 2000 capable in a time frame that will avoid any material
adverse effect on the Company. Also, the Company does not believe that the
expenditures related to replacing or upgrading any of its IT systems to
make them Year 2000 compliant will have a material adverse effect on the
financial condition of the Company. The Company has identified only two IT
systems (E-mail and electronic calendar) that must be replaced due to Year
2000 concerns, and the Company already had plans to replace these IT system
with one system providing increased functionality.
The Company has evaluated its critical equipment and critical systems that
contain embedded software, such as microcontrollers ("Non-IT systems"), and
the Company believes that all of its critical Non-IT systems are capable of
functioning without substantial Year 2000 Compliance problems.
The Company plans to test its IT systems and Non-IT systems, commencing in
the first calendar quarter of 1999.
Certain products currently sold by the Company contain computer programs
that perform date functions or date calculations. The Company has evaluated
most of its products and is continuing to evaluate its other products, and,
based on its investigation to date, the Company believes that the products
it currently sells (except the System Manager product currently being sold
with the recently-developed System Release 4.5 software) are Year 2000
compliant, provided that they have been upgraded to include all recommended
engineering changes. However, the Company's products are often used by its
customers in systems that contain third party products or products supplied
by the
22
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
Company in prior years, such as the System Manager products. Therefore,
even though the Company's current products may be Year 2000 compliant, the
failure of such third party products or historical Company-supplied
products to be Year 2000 compliant, or to properly interface with the
Company's current products, may result in a system failure. Certain
products that the Company no longer offers for sale are not Year 2000
compliant, and the Company has no plans to upgrade them. However, the
Company does have a plan for helping its customers upgrade their System
Manager products and related components to System Release 4.6 software
which is currently in the final stages of development. Such System Release
4.6 software is expected to remedy the Year 2000 problems of System Manager
products historically sold by the Company to its customers. Because some
customers may be using obsolete versions of the System Manager products,
they may also need to purchase equipment to solve their Year 2000 problems.
A customer's failure to upgrade its System Manager products to System
Release 4.6 software may result in such customer having critical Year 2000
problems. Under certain limited circumstances, the Company may incur
expense to remedy such customer's critical Year 2000 failure.
The Company is investigating each of its significant vendors, suppliers,
financial service organizations, service providers and customers to confirm
that the Company's operations will not be materially adversely affected by
the failure of any such third party to have Year 2000 compliant computer
programs. Regardless of the responses that the Company receives from such
third parties, the Company is establishing contingency plans to reduce the
Company's exposure resulting from the non-compliance of third parties.
First, the Company plans to build inventories of critical and/or important
components prior to January 1, 2000, and thereby decrease the Company's
dependence on suppliers that are not Year 2000 compliant. Second, the
Company plans to send hard copies of "Schedules of Ordered Products and
Delivery Dates" to its major customers, commencing in the third calendar
quarter of 1999. Such Schedules should enable customers to accept ordered
products after January 1, 2000, even if their internal computer systems are
not operating properly.
The Company estimates that, through August 31, 1998, it has spent $200,000
to remediate Year 2000 issues in its IT systems, and the Company estimates
that it will spend an additional $500,000 to remediate Year 2000 issues in
its IT systems. Additionally, the Company is accelerating into fiscal 1999
the planned replacement of its E-mail software and electronic calendar
software because such software has Year 2000 problems. The cost of the
replacement software, including installation and training related thereto,
is estimated to be $1.8 million. For the development and deployment of
System Release 4.6 software to remedy Year 2000 problems of System Manager
products sold by the Company, the Company has spent, through August 30,
1998, $1,238,000 and estimates it will spend an additional $1,729,000 to
complete such software development and deployment. All of such expenditures
are included in the budgets of the various departments of the Company
tasked with various aspects of the Year 2000 project. No IT projects have
been deferred due to IT's Year 2000 efforts.
The Company has approached the Year 2000 project in phases. Phase I of the
project involved identification of all software used or sold by the
Company, identification of all significant vendors, and establishment of a
senior management committee (composed of the General Counsel, the Chief
Financial Officer and the Chairman of the Corporate Operating Committee) to
oversee the project. Phase I was completed in the second calendar quarter
of 1998. Phase II of the project involves (a) evaluation of each
significant vendor and evaluation of major customers through letters and
questionnaires (b) communication with customers concerning any products
currently or recently sold by the Company that have Year 2000 issues, and
(c) evaluating the Company's most reasonably likely worst case Year 2000
23
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
scenarios and contingency planning related thereto. Phase II is in process
and many of the tasks described in subparagraphs (b) and (c) above have
been completed; Phase II is expected to be completed in the fourth calendar
quarter of 1998. Phase III involves testing of the Company's IT systems and
Non-IT systems to confirm Year 2000 compliance and/or discover any
overlooked Year 2000 problems. Phase III should be completed in the first
calendar quarter of 1999. Last, Phase IV involves implementation of the
Company's contingency plans. Such plans are expected to be implemented in
the third calendar quarter of 1999.
The Company does not currently believe that any of the foregoing will have
a material adverse effect on its financial condition or its results of
operations. However, the process of evaluating the Company's products and
third party products and systems is ongoing. Although not expected,
failures of critical suppliers, critical customers, critical IT systems,
critical Non-IT systems, or products sold by the Company (including any
delay in the deployment of System Releases 4.5 and 4.6) could have a
material adverse effect on the Company's financial condition or results of
operations. As widely publicized, Year 2000 Compliance has many issues and
aspects, not all of which the Company is able to accurately forecast or
predict. There is no way to assure that Year 2000 Compliance will not have
adverse effects on the Company, some of which could be material.
Many of the Company's statements related to Year 2000 are forward-looking
statements and actual results could differ materially from those
anticipated above. The Company is relying on the investigations and
statements of many employees, consultants and third parties in making the
above forward-looking statements and such investigations or statements may
not be accurate. For further risks and uncertainties related to these
forward-looking statements, see Exhibit 99 to this Form 10-K.
24
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data) 1998 1997 1996
- ------------------------------------------------------------------------------
SALES $1,181,404 $1,168,245 $1,047,901
- ------------------------------------------------------------------------------
COSTS AND EXPENSES
- ------------------------------------------------------------------------------
Cost of sales 850,738 809,081 761,876
Sales and administrative 165,639 160,613 138,362
Research and development 111,546 114,344 95,299
Restructuring 23,412 -- --
Purchased in-process technology -- -- 14,583
Interest expense 476 484 672
Interest income (5,963) (3,943) (1,818)
Other (income) expense, net (79,863) (1,513) 28,374
- ------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 1,065,985 1,079,066 1,037,348
- ------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 115,419 89,179 10,553
- ------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 34,626 28,537 3,377
- ------------------------------------------------------------------------------
EARNINGS BEFORE DISCONTINUED OPERATIONS 80,793 60,642 7,176
- ------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS, NET OF
TAX -- -- (1,038)
- ------------------------------------------------------------------------------
GAIN (LOSS) ON SALE OF DISCONTINUED
OPERATIONS, NET OF TAX -- 3,400 (12,172)
- ------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 80,793 $ 64,042 $ (6,034)
- ------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE BEFORE
DISCONTINUED OPERATIONS
- ------------------------------------------------------------------------------
Basic $ 1.03 $ 0.78 $ 0.09
Diluted $ 1.02 $ 0.78 $ 0.09
- ------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
- ------------------------------------------------------------------------------
Basic 78,692 78,198 76,666
- ------------------------------------------------------------------------------
Diluted 80,003 78,383 76,666
- ------------------------------------------------------------------------------
See accompanying notes.
25
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 1998 were $175.4 million, up $68.2
million from the end of 1997 due to improved earnings, working capital
management, and proceeds from the sale of the interdiction and microwave
businesses and the issuance of common stock.
The Company has a $300 million senior credit facility available that
provides for unsecured borrowings up to $150 million which expires May 1999
and up to $150 million which expires May 2003. There were no outstanding
borrowings under this facility at June 26, 1998 or June 27, 1997. 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 15 years
in 5 year increments.
CASH PROVIDED BY OPERATING ACTIVITIES was $80.3 million for 1998, compared to
$125.1 million for 1997. Cash provided by earnings and reductions in
inventory levels were offset partially by increases in accounts receivable
as compared to the prior year. See Management's Discussion of the Statement
of Financial Position for details of this performance.
In 1997, 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.
CASH USED BY INVESTING ACTIVITIES of $14.8 million in 1998 included
expenditures for equipment, expansion of manufacturing capacity, primarily
in Juarez, Mexico, and other investing activities. Sources of cash included
proceeds from the sales of the interdiction and microwave businesses. See
Note 2 for additional discussion of investing activities.
Cash used by investing activities in 1997 included expenditures for
equipment, the expansion of manufacturing capacity, 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.
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.
CASH PROVIDED BY FINANCING ACTIVITIES was $2.8 million in 1998. Financing
activities included the repurchase of 500,000 shares of the Company's
common stock for $7.5 million, dividend payments of $4.7 million and net
debt payments of $0.9 million. The Company reissues these shares under the
Company's stock option plans, 401(k) plan, employee stock purchase plan and
other stock-based employee compensation arrangements. The issuance of stock
pursuant to these plans generated cash of $16.0 million.
Financing activities in 1997 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.
----------------
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, Prisma and 8600/x/ are trademarks of Scientific-Atlanta, Inc. CoAxiom
and Explorer are registered trademarks of Scientific-Atlanta, Inc. All other
brands and trademarks are the marks of their respective owners.
26
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
- ---------------------
NET EARNINGS FROM CONTINUING OPERATIONS $ 80,793 $ 60,642 $ 7,176
Adjustments to reconcile net earnings from
continuing operations to net cash provided
by operating activities:
Unrealized gains on marketable securities,
net (93,764) -- --
Depreciation and amortization 48,260 43,151 36,597
Purchased in-process technology -- -- 14,583
Compensation related to stock benefit plans 9,680 6,600 6,193
Provision for losses on accounts receivable 6,231 391 324
(Gain) loss on sale of property, plant and
equipment 4,297 (4,965) (2,123)
Gain on sale of business (6,356) -- --
(Earnings) losses of partnerships 20 (393) 103
Changes in operating assets and liabilities:
Receivables (27,748) 20,028 (21,810)
Inventories 42,753 11,371 29,370
Deferred income taxes 13,261 17,686 (15,308)
Accounts payable and accrued liabilities 3,124 (7,676) (27,546)
Other assets (14,228) (10,690) (4,900)
Other liabilities 13,891 (10,144) 21,450
Net effect of exchange rate fluctuations 50 (899) 35
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,264 125,102 44,144
-------- -------- --------
INVESTING ACTIVITIES:
- ---------------------
Purchases of property, plant and equipment (40,643) (53,076) (60,812)
Acquisition of businesses, net of cash
acquired -- (11,237) (24,336)
Payment for businesses purchased -- -- (1,721)
Purchase of land held for resale -- -- (5,085)
Proceeds from the sale of property, plant and
equipment 308 13,183 2,358
Proceeds from the sale of businesses 27,059 -- --
Proceeds from the sale of discontinued
operations -- 18,858 --
(Increase) decrease in net assets of
discontinued operations -- (2,264) 1,505
Proceeds from the sale of investments -- 500 --
Other investments (1,564) (1,875) (2,600)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (14,840) (35,911) (90,691)
-------- -------- --------
FINANCING ACTIVITIES:
- ---------------------
Net short-term borrowings (payments) -- (1,600) 214
Principal payments on long-term debt (943) (400) (373)
Dividends paid (4,723) (4,640) (4,600)
Issuance of stock 16,002 6,635 4,336
Treasury shares acquired (7,511) (2,973) (12,411)
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 2,825 (2,978) (12,834)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 68,249 86,213 (59,381)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 107,143 20,930 80,311
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $175,392 $107,143 $ 20,930
======== ======== ========
See accompanying notes.
27
SELECTED FINANCIAL DATA
(Dollars in Thousands,
Except Per Share Data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------
SALES $1,181,404 $1,168,245 $1,047,901 $1,118,057 $755,923
- -----------------------------------------------------------------------------------
Cost of Sales 850,738 809,081 761,876 802,216 525,955
Sales and
Administrative Expense 165,639 160,613 138,362 140,082 107,233
Research and
Development Expense 111,546 114,344 95,299 82,378 58,542
Restructuring Expense 23,412 -- -- -- --
Purchased In-Process
Technology -- -- 14,583 -- --
Interest Expense 476 484 672 775 1,066
Interest Income (5,963) (3,943) (1,818) (2,837) (3,151)
Other (Income) Expense,
Net (79,863) (1,513) 28,374 (1,566) 17,449
- -----------------------------------------------------------------------------------
EARNINGS BEFORE INCOME
TAXES AND DISCONTINUED
OPERATIONS 115,419 89,179 10,553 97,009 48,829
- -----------------------------------------------------------------------------------
PROVISION FOR INCOME
TAXES 34,626 28,537 3,377 31,042 15,624
- -----------------------------------------------------------------------------------
EARNINGS BEFORE
DISCONTINUED OPERATIONS 80,793 60,642 7,176 65,967 33,205
- -----------------------------------------------------------------------------------
EARNINGS (LOSS) FROM
DISCONTINUED
OPERATIONS, NET OF TAX -- 3,400 (13,210) (2,427) 1,817
- -----------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 80,793 $ 64,042 $ (6,034) $ 63,540 $ 35,022
- -----------------------------------------------------------------------------------
DILUTED EARNINGS PER
SHARE BEFORE
DISCONTINUED OPERATIONS $ 1.02 $ 0.78 $ 0.09 $ 0.86 $ 0.44
- -----------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS)
PER SHARE $ 1.02 $ 0.82 $ (0.08) $ 0.83 $ 0.46
- -----------------------------------------------------------------------------------
CASH DIVIDENDS PAID PER
SHARE $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
WORKING CAPITAL $ 457,830 $ 347,340 $ 301,054 $ 339,665 $302,771
- -----------------------------------------------------------------------------------
TOTAL ASSETS $ 940,142 $ 823,615 $ 763,322 $ 785,264 $640,219
- -----------------------------------------------------------------------------------
Short-Term Debt and
Current Maturities $ 726 $ 842 $ 1,600 $ 1,386 $ 6,487
Long-Term Debt 983 1,810 400 773 1,088
Stockholders' Equity 631,996 532,650 463,652 474,189 395,646
- -----------------------------------------------------------------------------------
TOTAL CAPITAL INVESTED $ 633,705 $ 535,302 $ 465,652 $ 476,348 $403,221
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
GROSS MARGIN % TO SALES 28.0% 30.7% 27.3% 28.2% 30.4%
- -----------------------------------------------------------------------------------
RETURN ON SALES BEFORE
DISCONTINUED OPERATIONS 6.8% 5.2% 0.7% 5.9% 4.4%
- -----------------------------------------------------------------------------------
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY 13.9% 13.0% (1.3)% 14.7% 9.5%
- -----------------------------------------------------------------------------------
EFFECTIVE TAX RATE 30% 32% 32% 32% 32%
- -----------------------------------------------------------------------------------
28
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 communications
networks that deliver voice, data and video. 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 communications networks to a range of customers for a variety of
applications, and providing network management and systems integration for
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 Norcross and other metropolitan areas in the United
States. Certain products are also marketed in the United States through
independent sales representatives and distributors. In addition to direct
sales by the Company, 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 integrated circuits, wire, circuit boards, transistors,
capacitors and resistors, all of which are produced by a number of
manufacturers. Matsushita Electronic Components Co., Ltd. and its affiliates
manufacture analog set-tops for the Company and are a primary supplier of
those set-tops. Cablevision Electronics Co., Ltd. and Zinwell Corporation,
Taiwanese companies, are primary suppliers 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's primary
supplier of die castings for its RF distribution products is Premiere Die
Casting, Inc. Additionally, Motorola, Inc., Broadcom Corporation and SGS-
Thomson Microelectronics, Inc. are three of the Company's primary suppliers of
a variety of semi-conductor products, which are used as components in an array
of the Company's products, including its set-tops. 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
affiliates), Cablevision Electronics Co., Ltd., Zinwell Corporation, Premiere
Die Casting, Inc., Motorola, Inc., Broadcom Corporation and SGS-Thomson
Microelectronics, Inc., for any significant portion of the materials used in
the products it manufactures or for 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:
1998: June 26, 1998
1997: June 27, 1997
1996: June 28, 1996
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 revenues and expenses during
the reporting periods. Actual results could differ from those estimates. The
estimates made by management primarily relate to receivable and inventory
reserves, estimated costs to complete long-term contracts and certain accrued
liabilities, principally relating to warranty and service provisions and
restructuring reserves, compensation, claims, litigation and taxes.
FOREIGN CURRENCY TRANSLATION
The financial statements of certain foreign operations are translated into
U.S. dollars at current
29
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 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 a hedge, the Company
would recognize unrealized gains and losses as they occur.
Firmly committed purchase exposure and related derivative contracts for fiscal
1999 are as follows:
JAPANESE CANADIAN
YEN DOLLAR
--------- --------
Firmly committed purchased contracts 8,609,000 5,130
Notional amount of forward contracts 5,510,000 5,130
Average contract amount (Foreign currency/United States
dollar) 128.84 1.44
The Company has no derivative exposure beyond fiscal 1999.
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. The
receivables from commercial customers and government agencies were $9,138 at
June 26, 1998 and $22,515 at June 27, 1997. It is anticipated that
substantially all such amounts will be collected within one year.
RESEARCH AND DEVELOPMENT EXPENDITURES
Certain software development costs are capitalized when incurred and are
reported at the lower of unamortized cost or net realizable value.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
The Company capitalized $2,181 and $2,022 of software development costs in 1998
and 1997, respectively. Capitalization will cease when the products are
available for general release to customers. Software development costs were not
material and, therefore, were not capitalized in 1996.
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 26, 1998 and June 27, 1997, the Company had
capitalized $11,188 and $6,047 of such non-recurring engineering costs. During
1998, the Company recognized revenue on certain of these orders and,
accordingly, charged $1,341 to cost of sales. No such revenue was recognized in
1997. There were no material non-recurring engineering costs capitalized at
June 28, 1996.
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
30
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
Basic earnings per share were computed based on the weighted average number of
shares of common stock outstanding. Diluted earnings per share were computed
based on the weighted average number of diluted shares of common stock
outstanding.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
MARKETABLE SECURITIES
Marketable securities consist of investments in common stock and are stated at
market value. All marketable securities are defined as trading securities under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115
and unrealized holding gains and losses are reflected in earnings.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost includes materials, direct labor, and manufacturing overhead. Market is
defined principally as net realizable value. Inventories include purchased and
manufactured components in various stages of assembly as presented in the
following table:
1998 1997
-------- --------
Raw Materials and
Work-In-Process $113,703 $136,699
Finished Goods 45,842 72,871
-------- --------
Total Inventory $159,545 $209,570
======== ========
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 6.
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 acquired and liabilities assumed, including $5,781 to
cost in excess of net assets acquired.
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 subsequent payment of
$152. ATx was 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 acquired and liabilities assumed. 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.
3. SALES
- --------------------------------------------------------------------------------
Sales to Time Warner, Inc. and affiliates and MediaOne and affiliates were each
11 percent of total sales in 1998. Sales to Time Warner, Inc. and affiliates
were 11 percent of total sales in 1997. Sales to any one customer were less
than 10 percent
31
of total sales in 1996. Export sales accounted for 32 percent of total sales in
1998, 37 percent in 1997 and 36 percent in 1996. Sales to Europe were 14
percent, 16 percent and 12 percent of total sales in 1998, 1997 and 1996,
respectively. Sales of set-top terminals constituted approximately 34 percent
of the Company's total sales in 1998, and approximately 30 percent and 27
percent of such sales in 1997 and 1996, respectively. Sales of RF (radio
frequency) products were approximately 18 percent of the Company's total sales
in 1998, and approximately 19 percent and 21 percent of such sales in 1997 and
1996, respectively. Foreign subsidiary sales were not material for any of the
three fiscal years presented.
4. RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
During 1998, the Company announced that it would implement a restructuring and
consolidation of worldwide manufacturing operations for reduced cost, improved
efficiency and better customer service. Production of the RF amplifier is
expected to be transferred from Norcross, Georgia to the Company's high volume,
low cost manufacturing facility in Juarez, Mexico by October 1998. The Norcross
manufacturing facility is expected to focus on medium-to-low-volume products
requiring close engineering support. The production of cable headend equipment
is planned to be consolidated in Norcross from Vancouver, British Columbia.
This move is designed to improve efficiency and more effectively manage the
transition of analog to digital headend products. The Melbourne, Florida
satellite services Network Operations Center (NOC) and research and development
facility is scheduled to be relocated to Norcross. The Company's European
headquarters have been moved from London, England to Frankfurt, Germany to
better address market opportunities in continental Europe. The Far East
regional headquarters have been transferred from Hong Kong to Singapore. The
Company's Satellite Networks and Communications and Tracking Systems business
units are being combined to capitalize on the combined resources provided by
concentrated capabilities in networks, research and development, marketing and
sales, and customer program management and services.
The Company recorded restructuring charges of $23,412 which included $10,217
and $3,200 for assets to be abandoned and expenses related to the cancellation
of leases, respectively, as a result of the consolidation of operations, $5,173
for severance and outplacement costs for approximately 500 employees primarily
in manufacturing positions and $4,822 for the impairment of certain assets and
other miscellaneous expenses. The Company expects to complete the restructuring
and consolidation of operations within one year.
5. OTHER (INCOME) EXPENSE
- --------------------------------------------------------------------------------
Other income of $79,863 in 1998 included a gain of $94,000 from the adjustment
of the Company's investment in Broadcom Corporation to market value, a gain of
$9,080 from the sale of certain assets of the interdiction business, a loss of
$9,000 from the discontinuance of research and development efforts related to
the Company's CoAxiom telephony products, a loss of $6,250 for estimated losses
on the resale of equipment the Company is contractually obligated to supply,
$5,500 for expenses and the potential settlement of environmental issues and
other miscellaneous items.
During 1998, the Company sold the inventory, manufacturing assets and
intellectual property of the interdiction business to Blonder Tongue
Laboratories, Inc. (Blonder Tongue) for $19,000 in cash, Blonder Tongue stock
valued at $1,000 and an option to acquire additional shares of Blonder Tongue
stock, and the Company recorded a pre-tax gain of $9,080. At June 26, 1998, the
Company had a reserve of approximately $5,500 for research and development
commitments, transition services, potential post-closing sales price
adjustments and other miscellaneous expenses related to the sale.
During fiscal 1997 the Company decided to decrease its research and development
efforts related to CoAxiom telephony products because the markets for these
products had not developed as quickly as the Company previously anticipated.
During fiscal 1998, the Company decided to discontinue its efforts to develop
CoAxiom systems and recorded a pre-tax charge of approximately $9,000. The
charge included reserves for the disposal of inventory and fixed assets which
were associated with the development of CoAxiom systems, research and
development costs incurred during fiscal 1998 and other miscellaneous expenses.
Although the Company discontinued development of CoAxiom telephony products,
the Company will continue to
32
develop applications and technology for telephony on cable using IP (Internet
protocol) telephony which will be used in the Company's networks and Explorer
2000 digital interactive set-tops.
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
$5,526 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. Accordingly, the estimated loss on the sale
of the microwave and mobile 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.
During 1998, the Company sold the majority of the net assets of the microwave
business unit for $8,059 of cash. No gain or loss was recognized on the
transaction.
At June 26, 1998, the Company had a reserve of approximately $4,800 to adjust
the carrying amount of the net assets of the mobile business unit, which has
been discontinued, and to provide for estimated indemnifications to the
purchaser of the microwave business unit, potential losses on contracts of the
microwave business which were retained by the Company, severance, closing costs
and other miscellaneous expenses related to the sale of the microwave business
unit.
Other income of $1,513 in 1997 included a gain 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.
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 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.
6. 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.
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 settlement of issues
related to the pricing of the unexercised options with a 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 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 26, 1998, the Company had a reserve of
approximately $7,100 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.
Global is currently in default under its promissory notes to the Company and
under promissory notes to Global's senior lenders and, in January 1998, filed a
voluntary petition for a Chapter 11 reorganization in the United States
Bankruptcy Court. Whether Global will successfully reorganize in this
bankruptcy
33
proceeding is not known at this time. If a satisfactory resolution of the
situation is not reached, the company believes it has adequate reserves to
cover any potential losses related to Global's default on the promissory notes
and related to any contracts of the defense-related businesses from which the
Company has not been released.
Sales and losses (previously accrued) from discontinued operations were as
follows:
1997 1996
------ -------
Sales $1,920 $25,780
Losses from discontinued operations, net of tax $ (817) $(2,744)
Tax benefit $ 385 $ 1,291
7. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------------------
Fiscal Quarters
----------------------------------------
1998 First Second Third Fourth
- ------------------------ -------- -------- -------- --------
Sales $294,501 $294,524 $288,714 $303,665
Gross margin 90,228 86,017 91,272 63,149(2)
Gross margin % 30.6% 29.2% 31.6% 20.8%(2)
Net earnings 16,485 14,832 17,137(1) 32.339(3)
Diluted earnings per
share 0.21 0.19 0.22(1) 0.40(3)
Stock prices
High 23.8750 23.6250 20.6250 25.2500
Low 20.5000 16.5000 14.5625 18.1875
Dividends paid per share 0.015 0.015 0.015 0.015
- --------
(1) Includes a gain of $6,356 from the sale of certain assets of the
interdiction business and a charge of $6,300 from the discontinuance of
research and development efforts related to CoAxiom products.
(2) Includes charges of $33,591 for excess inventory related to the
consolidation of manufacturing operations, the combination of Satellite
Networks and Communications and Tracking Systems business units, the
discontinuance of certain models of products, estimated losses on a
contract and other miscellaneous charges related to the restructuring and
consolidation of worldwide manufacturing.
(3) Includes pre-tax charges of $23,514 for the items discussed in (2), and
after-tax restructuring charges of $16,388, bad debt expense of $4,126
related to receivables from customers in the Asia Pacific region,
provision for loss on the resale of used equipment of $4,375 and $4,200
for environmental issues, and a one-time gain of $65,800 from the mark-to-
market adjustment of an investment.
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
Diluted earnings per
share 0.18(1) 0.18 0.21 0.25
Stock prices
High 16.250 18.250 19.125 23.0000
Low 12.000 13.375 15.000 14.6250
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 per share) 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 per share) related to the
Company's decision to dispose of two business units. See Note 5.
8. INDEBTEDNESS
- -------------------------------------------------------------------------------
At June 26, 1998, the Company had a $300,000 senior credit facility that
provides for unsecured borrowings up to $150,000 which expire May 7, 1999 and
up to $150,000 which expire May 11, 2003. There were no borrowings outstanding
under this facility at June 26, 1998 or June 27, 1997. 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:
1998 1997
------ ------
6 1/4% - 10% capitalized leases, payable in varying installments
ranging from $200 to $250 through 2001 $ 800 $1,202
Other debt at 7.8% - 8.4% in varying installments ranging from
$11 to $508 through 2001 909 1,450
------ ------
1,709 2,652
Less-Current maturities 726 842
------ ------
$ 983 $1,810
====== ======
34
Long-term debt at June 26, 1998 had scheduled maturities as follows: $726 --
1999; $448 -- 2000; $418 -- 2001 and $117 -- 2002.
Total interest paid was $407, $430 and $680, in 1998, 1997, and 1996,
respectively.
9. ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Accrued liabilities consisted of:
1998 1997
-------- --------
Compensation $ 25,490 $ 29,004
Restructuring reserves 17,667 --
Warranty and service 12,002 14,281
Customer down payments 3,460 5,346
Taxes, other than income taxes 13,810 5,829
Other 66,582 57,277
-------- --------
$139,011 $111,737
======== ========
10. OTHER LIABILITIES
- --------------------------------------------------------------------------------
Other liabilities consisted of:
1998 1997
------- -------
Retirement $29,034 $24,679
Compensation 11,486 9,363
Other 7,975 5,352
------- -------
$48,495 $39,394
======= =======
11. 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:
1998 1997 1996
------- ------- ------
Statutory federal tax rate $40,396 $31,213 $3,693
State income taxes, net of federal tax benefit 1,274 1,127 (901)
Tax reserves (464) 2,020 1,689
Research and development tax credit (5,542) (6,394) --
Export incentives (1,328) (2,808) (1,233)
Foreign earnings taxed at different rates 80 2,859 (5)
Other, net 210 520 134
------- ------- ------
$34,626 $28,537 $3,377
======= ======= ======
Income tax provision (benefit) includes the following:
1998 1997 1996
------- -------- --------
Current tax provision (benefit)
Federal $ 7,306 $(10,420) $ 10,974
State 251 (544) 273
Foreign 18,783 17,559 10,187
------- -------- --------
26,340 6,595 21,434
------- -------- --------
Deferred tax provision (benefit)
Federal 9,602 19,647 (16,300)
State 1,709 2,277 (1,659)
Foreign (3,025) 18 (98)
------- -------- --------
8,286 21,942 (18,057)
------- -------- --------
Total provision for income taxes $34,626 $ 28,537 $ 3,377
======= ======== ========
Total income taxes paid include settlement payments for federal, state and
foreign audit adjustments. The total income taxes paid were $19,134, $22,686
and $5,394 in 1998, 1997, and 1996, 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.
35
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1998 1997
-------- -------
Current deferred tax assets
Expenses not currently deductible $ 33,610 $17,750
Inventory valuation 16,922 8,744
Warranty reserves 2,953 3,253
Receivables valuation 1,820 1,286
Other 263 290
-------- -------
Current deferred tax assets 55,568 31,323
======== =======
Current deferred tax liabilities
Unrealized gain on investments (37,506) --
-------- -------
Net current deferred tax asset $ 18,062 $31,323
======== =======
Noncurrent deferred tax assets
Postretirement and postemployment benefits $ 14,124 $10,981
Expenses not currently deductible 3,352 3,469
-------- -------
Noncurrent deferred tax assets 17,476 14,450
Noncurrent deferred tax liabilities
Depreciation and amortization (1,922) (4,634)
Capitalized software (1,471) (708)
-------- -------
Net noncurrent deferred tax asset $ 14,083 $ 9,108
======== =======
Valuation allowances for current deferred tax assets and noncurrent deferred
tax assets were not required in 1998 or 1997.
The net noncurrent deferred tax asset is included in Other Assets at June 26,
1998 and June 27, 1997.
In 1998, 1997, and 1996, earnings before income taxes included $42,375, $35,658
and $33,745, respectively, of earnings by the Company's foreign operations.
12. 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 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:
1998 1997
-------- --------
Accumulated benefit obligation
Vested portion $ 64,797 $ 65,507
Nonvested portion 5,153 4,258
-------- --------
69,950 69,765
Excess of projected benefit obligation over accumulated
benefit obligation 13,886 9,426
-------- --------
Projected benefit obligation 83,836 79,191
Plan assets at fair value (94,102) (74,457)
-------- --------
Projected benefit obligation in excess of (less than) plan
assets (10,266) 4,734
Unrecognized prior service costs 282 316
Unrecognized (loss) gain 11,313 (2,794)
Unrecognized net asset from initial application of SFAS 87 5,715 6,371
Fourth quarter contribution -- (891)
-------- --------
Accrued pension cost $ 7,044 $ 7,736
======== ========
Discount rate 7.25% 7.75%
Rate of increase in future compensation 5.0% 5.0%
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.
36
The Company's net pension expense was $4,233 in 1998, $4,091 in 1997 and $3,325
in 1996. The components of pension expense are as follows:
1998 1997 1996
-------- ------- --------
Service cost of benefits earned $ 6,172 $ 6,105 $ 5,169
Interest cost 5,739 5,330 5,128
Actual return on plan assets (23,460) (6,396) (12,532)
Net amortization and deferral 15,782 (948) 5,560
-------- ------- --------
Net periodic pension cost $ 4,233 $ 4,091 $ 3,325
======== ======= ========
The Company has unfunded defined benefit retirement plans for certain key
officers and non-employee directors. Accrued pension cost for these plans was
$11,074 at June 26, 1998 and $11,605 at June 27, 1997. Retirement expense for
these plans was $2,649, $2,193 and $1,700 in 1998, 1997, and 1996,
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 plans' 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:
1998 1997
------- -------
Accumulated postretirement benefit obligation
Retirees $ 7,640 $ 8,764
Fully eligible active participants 292 203
Other active participants 252 331
------- -------
8,184 9,298
Unrecognized net gain 1,989 1,040
Fourth quarter claims payments (171) (250)
------- -------
Accrued postretirement benefit cost $10,002 $10,088
======= =======
The components of postretirement benefit expense are as follows:
1998 1997
---- ----
Service cost of benefits earned $ 46 $ 45
Interest cost 663 704
Net amortization and deferral (51) (24)
---- ----
Postretirement benefit expense $658 $725
==== ====
Significant actuarial assumptions are as follows:
1998 1997
------ ------
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 post retirement benefit obligation 8.6% 7.6%
Interest cost component of benefits 8.9% 11.2%
Discount rate used to measure accumulated post-retirement
benefit obligation 7.25% 7.75%
13. 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.
1998 1997
------------------ ------------------
CARRYING/ CARRYING/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- --------- --------
Cash and cash equivalents $175,392 $175,392 $107,143 $107,143
Marketable securities $ 95,947 $ 95,947 $ -- $ --
Foreign currency forward contracts
Sell $ 335 $ 333 $ 1,196 $ 1,087
Buy $ 46,318 $ 43,273 $ 58,984 $ 59,981
37
14. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Company had sales of $2,289, $3,591 and $2,728 to Scientific-Atlanta of
Shanghai, Ltd. (SASL) in 1998, 1997 and 1996, respectively. The Company
purchased $4,043 and $2,496 of inventory from SASL in 1998 and 1997,
respectively. There were no such purchases in 1996. The Company had a net
receivable from SASL of $563 at June 26, 1998 and $1,024 at June 27, 1997.
Related party transactions were at prices and terms equivalent to those
available to and transacted with unrelated parties. SASL is a partially-owned
subsidiary of the Company.
15. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
- --------------------------------------------------------------------------------
Rental expense under operating lease agreements for facilities and equipment
for 1998, 1997 and 1996 was $23,262, $17,462 and $15,347, respectively. The
Company pays taxes, insurance, and maintenance costs with respect to most
leased items. Remaining operating lease terms, including renewals, range up to
eight years. Future minimum payments at June 26, 1998, under operating leases
were $49,676. Payments under these leases for the next five years are as
follows: 1999 -- $14,392; 2000 -- $10,356; 2001 -- $7,709; 2002 -- $5,936; and
2003 -- $4,604.
During the first quarter of fiscal 1998, the Company secured a $38,000
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 15 years in 5 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.
16. COMMON STOCK AND RELATED MATTERS
- --------------------------------------------------------------------------------
The Company purchased 500,000 shares of its common stock at an aggregate cost
of $7,511 during fiscal 1998, 225,000 shares 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. 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:
1998 1997 1996
------- ------- --------
Net income (loss) As reported $80,793 $64,042 $ (6,034)
Pro forma $71,947 $57,761 $(12,455)
Earnings (loss) per share:
Basic As reported $ 1.03 $ 0.82 $ (0.08)
Pro forma $ 0.91 $ 0.74 $ (0.16)
Diluted As reported $ 1.02 $ 0.82 $ (0.08)
Pro forma $ 0.90 $ 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.
38
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 1998, 1997 and 1996, respectively:
1998 1997 1996
------- ------- -------
Risk free interest rate 6.01% 6.35% 6.32%
Expected term 5 years 5 years 5 years
Expected forfeiture rate 1% 1% 1%
Volatility 45% 44% 44%
Expected annual dividends $0.06 $0.06 $0.06
The following information pertains to options on the Company's common stock for
the years ended June 26, 1998, June 27, 1997 and June 28, 1996:
Weighted
Number Average
of Shares Exercise Price
---------- --------------
1998
Outstanding, beginning of year 6,318,078 $15.469
Granted 1,895,525 $22.011
Canceled (459,276) $19.761
Exercised (1,231,318) $12.019
----------
Outstanding, end of year 6,523,009 $17.763
==========
1997
Outstanding, beginning of year 5,469,550 $15.213
Granted 1,663,000 $15.530
Canceled (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
Canceled (309,270) $18.620
Exercised (482,429) $ 6.803
----------
Outstanding, end of year 5,469,550 $15.213
==========
The following information pertains to options on the Company's common stock at
June 26, 1998:
Options Outstanding
----------------------------
Weighted
Average Weighted
Remaining Average
Range of Life Exercise
Exercise Prices Shares in Years Price
--------------- --------- --------- --------
$ 3.250 - $10.000 922,648 2.5 $ 6.678
$11.333 - $16.938 1,475,415 7.2 $14.735
$17.000 - $23.682 4,124,946 8.3 $21.352
---------
6,523,009 7.1 $17.780
=========
Options Exercisable
----------------------------
Weighted
Range of Average
Exercise Prices Shares Exercise Price
--------------- --------- --------------
$ 3.250 - $10.000 922,648 $ 6.68
$11.333 - $16.938 1,061,933 $14.84
$17.000 - $23.682 2,362,202 $21.22
---------
4,346,783 $16.58
=========
At June 26, 1998, an additional 825,533 shares 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 26, 1998, no
shares were reserved for issuance to employees under the plan. In August 1998,
the Board of Directors approved a new employee stock purchase plan to replace
the existing plan. Under the new plan, 1,000,000 shares were reserved for
issuance to employees.
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 $6,450, $6,075 and $5,644, in 1998, 1997,
and 1996, respectively. At June 26, 1998, no shares were reserved for issuance
to employees under the plan. On August 20, 1998, the Board of Directors
reserved 3,000,000 shares for this 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,
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, and which also provides for a retirement award of 1,500 shares
of common stock of the Company. At June 26, 1998, 84,000 shares were reserved
for issuance to non-employee directors under the plan.
The Company issues restricted stock awards and non-qualified stock option
grants to certain officers and key employees under a long-term incentive plan.
Compensation expense for restricted stock awards was $2,670, $845, and $470, in
1998, 1997, and 1996, respectively. At June 26, 1998, 1,047,444 shares were
reserved for issuance under this plan.
39
At June 26, 1998, a total of 1,956,977 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 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 preceding 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 26,1998 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 connection 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 26, 1998, there were 79,085 shares of preferred
stock reserved for this purpose.
17. 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 adopted 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 1994 through 1997.
Basic and diluted earnings per share for the last three fiscal years follows:
1998 1997 1996
----- ----- ------
Basic
Before discontinued operations $1.03 $0.78 $ 0.09
Discontinued operations -- $0.04 $(0.17)
----- ----- ------
Net earnings (loss) $1.03 $0.82 $(0.08)
===== ===== ======
Diluted
Before discontinued operations $1.02 $0.78 $ 0.09
Discontinued operations -- $0.04 $(0.17)
----- ----- ------
Net earnings (loss) $1.02 $0.82 $(0.08)
===== ===== ======
18. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement 133
"Accounting for Derivative Instruments and Hedging Activities" which the
Company plans to adopt in fiscal 2000. Management is still assessing the impact
of the adoption of this statement. Currently, management does not believe the
adoption of this statement will have a material impact on the Company's results
of operations or financial condition.
40
19. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
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 77,995 77,256 76,950
Issuance of shares under employee benefit plans 1,095 612 219
Issuance of restricted shares 117 127 87
-------- -------- --------
Shares issued at end of year 79,207 77,995 77,256
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $171,857 $163,143 $160,206
Issuance of shares under employee benefit plans 14,042 7,137 1,245
Tax benefit from employees' stock plans 5,719 1,664 1,876
Issuance of restricted shares to employees 3,843 4,743 572
Unearned compensation - restricted shares (15) (4,830) (756)
-------- -------- --------
Balance at end of year $195,446 $171,857 $163,143
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year $323,608 $264,206 $274,840
Net earnings (loss) 80,793 64,042 (6,034)
Cash dividends ($0.06 per share) (4,723) (4,640) (4,600)
-------- -------- --------
Balance at end of year $399,678 $323,608 $264,206
======== ======== ========
ACCUMULATED TRANSLATION ADJUSTMENTS
Balance at beginning of year $ (186) $ 740 $ 668
Foreign currency translation adjustments (18) (926) 72
-------- -------- --------
Balance at end of year $ (204) $ (186) $ 740
======== ======== ========
TREASURY STOCK
Balance at beginning of year $ 1,627 $ 3,065 $ --
Treasury shares acquired 7,511 2,973 12,411
Issuance of shares under employee benefit plans (6,610) (4,411) (9,346)
-------- -------- --------
Balance at end of year $ 2,528 $ 1,627 $ 3,065
======== ======== ========
41
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 26, 1998
(In Thousands)
Col. A Col. B Col. C Col. D Col. E
------ ---------- --------------------------------- ---------- ----------
Additions
Balance at --------------------------------- Balance at
beginning Charged to Charged to end of
Description of period costs and expenses other accounts Deductions period
----------- ---------- ------------------ -------------- ---------- ----------
Deducted on the balance
sheet from asset to
which it applies:
June 26, 1998 --
Allowance for
doubtful accounts $4,202 $ 6,231(1) $ 2(2) $ (383)(3) $10,052
====== ======= ===== ======= =======
June 27, 1997(4) --
Allowance for
doubtful accounts $3,826 $ 391 $ 186(2) $ (201)(3) $ 4,202
====== ======= ===== ======= =======
June 28, 1996(4) --
Allowance for
doubtful accounts $3,823 $ 324 $ 100(2) $ (421)(3) $ 3,826
====== ======= ===== ======= =======
June 28, 1996 --
Restructuring
Reserves $ -- $23,412 $ -- $(5,745)(5) $17,667
====== ======= ===== ======= =======
Notes:
(1) Includes charges of $5,895 for receivables from customers in the Asia
Pacific region which is currently experiencing currency and other economic
crises.
(2) 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.
(3) Amounts represent uncollectible accounts written off and $86 transferred to
net assets held for sale in fiscal 1996.
(4) There were no restructuring reserves in fiscal 1997 or fiscal 1996.
(5) Utilization of restructuring reserves for severance, assets abandoned and
other miscellaneous expenses related to the restructuring.
42
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 18,
- ------------------------------------- 1998
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 18,
- ------------------------------------- 1998
James F. McDonald --------------
President and Chief Executive Officer Date
and Director
(Principal Executive Officer)
/s/ Wallace G. Haislip September 18,
- ------------------------------------- 1998
Wallace G. Haislip --------------
Senior Vice President--Finance Date
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Julian W. Eidson September 18,
- ------------------------------------- 1998
Julian W. Eidson --------------
Vice President and Controller Date
(Principal Accounting Officer)
/s/ Marion H. Antonini September 18,
- ------------------------------------- 1998
Marion H. Antonini, Director --------------
Date
/s/ David W. Dorman September 18,
- ------------------------------------- 1998
David W. Dorman, Director --------------
Date
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
43
/s/ William E. Kassling September 18,
- ------------------------------------- 1998
William E. Kassling, Director --------------
Date
/s/ Wilbur Branch King September 18,
- ------------------------------------- 1998
Wilbur Branch King, Director --------------
Date
/s/ Mylle Bell Mangum September 18,
- ------------------------------------- 1998
Mylle Bell Mangum, Director --------------
Date
/s/ Alonzo L. McDonald September 18,
- ------------------------------------- 1998
Alonzo L. McDonald, Director --------------
Date
/s/ David J. McLaughlin September 18,
- ------------------------------------- 1998
David J. McLaughlin --------------
Date
/s/ James V. Napier September 18,
- ------------------------------------- 1998
James V. Napier --------------
Date
/s/ Sam Nunn September 18,
- ------------------------------------- 1998
Sam Nunn, Director --------------
Date
44