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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 28, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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 Number)
incorporation or organization)
ONE TECHNOLOGY PARKWAY, SOUTH 30092-2967
NORCROSS, GEORGIA (Zip Code)
(Address of principal executive offices)
770-903-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York Stock Exchange
$0.50 per share
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 / /
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant at September 9, 1996, was approximately $984,628,706.
As of September 9, 1996, the registrant had outstanding 77,167,705 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Specified portions of the Proxy Statement for the registrant's 1996 Annual
Meeting of Shareholders are incorporated by reference to the extent indicated in
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Scientific-Atlanta, Inc. (the "Company") provides its customers with the
products and services they need to develop the advanced terrestrial and
satellite networks which deliver entertainment, information and communications.
The Company's products connect information generators with information users via
broadband terrestrial and satellite networks, and include applications for the
converging cable, telephone, and data networks.
The Company operates primarily in one business segment, communications,
providing satellite-based and terrestrial-based networks to a range of customers
in a variety of applications, and providing network management and systems
integration to add value to those networks. This segment represents over 90
percent of consolidated sales, operating profit and identifiable assets.
The Company has evolved from a manufacturer of electronic test equipment
for antennas and electronics for the cable industry to a producer of a wide
variety of products for terrestrial and satellite communications networks,
including digital video, voice and data communications products. The Company's
products include receivers, transmitters, distribution amplifiers, modulators,
demodulators, signal encoders and decoders, controllers, optical amplifiers,
source lasers, set-top (home communications) terminals, digital audio terminals,
digital video compression and transmission equipment, fiber optic distribution
equipment, and satellite earth station antennas. These products, and integrated
systems and networks using these and other products, are sold to CATV system
operators, telephone companies, communications carriers, communications network
operators, utility companies and multi-facility business organizations which use
communications satellites for intracompany communications. Sales are also made
to independent system integrators, distributors and dealers who resell the
products to some of the above types of customers.
The Company sells transmission products, including RF 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 telephony, video and data over the same network, with a reverse path
for customers to communicate back to the operator. Sales of RF (radio frequency)
distribution products constituted approximately 21% of the Company's total sales
for fiscal 1996, and approximately 17% and 20% of such sales in each of the
fiscal years 1995 and 1994, respectively.
On June 28, 1996, the Company acquired ATx Telecom Systems, Inc. ("ATx")
from Amoco Technology Company in a strategic move to enhance the Company's
global position in various 1550 nanometer fiber optic technologies, including
Erbium Doped Fiber Amplifiers (EDFAs). The acquisition of ATx reflects the
Company's strategic commitment to maintaining its leadership role in the rapidly
growing opto-electronic market with a full range of fiber optic technology. By
adding ATx's EDFA research and development, manufacturing and marketing to its
current RF and fiber optic product family, the Company can offer additional,
cost-effective platforms today as well as provide enhanced capabilities for Wave
Division Multiplexing (WDM), Dense Wave Division Multiplexing (DWDM) and other
optical technologies once they become economically feasible for the market. WDM
technology allows two or more different laser signals to be transmitted
simultaneously on the same optical fiber, thereby expanding the data
transmission capacity of the fiber.
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, set-top terminals that enable
television sets to receive all channels transmitted by system operators, and
interdiction equipment which enables connections, disconnections and changes in
service to be made from the headend. The Company's set-top terminals include
units which are addressable from the headend system so as to permit control of
channel authorizations, including authorizations for pay-per-view events,
impulse ordering and automatic recording of billing information at the cable
operator's central facility, and menu-driven volume controllable units.
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Sales of set-top terminals constituted approximately 27% of the Company's
total sales for fiscal year 1996, and approximately 26% and 23% of such sales in
each of the fiscal years 1995 and 1994, respectively. Proprietary software used
in the terminals, as well as system manager software at the headend system or at
the transmission level, was developed by the Company and is updated from time to
time. The Company's new digital home communications terminals, currently being
used in customer trials, will enable subscribers to access new services such as
advanced pay-per-view ordering of special events and movies, fully interactive
home shopping services, electronic program guides and more. See "Item 3. Legal
Proceedings" for a discussion of an arbitration award relating to the Company's
set-top terminals.
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 Regional Bell Operating 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-band telephone, data and
television distribution networks. Some of these earth stations are part of
national and international communications systems which communicate by means of
a satellite with earth stations in other countries or with other earth stations
in the same national network. Earth stations in these systems may be connected
with local telephone, teletype, television or other terrestrial communications
networks. The Company's earth stations, signal encoders and decoders, packet
switches and controllers are also used in private business networks for the
exchange of audio, video and data via satellite among various office,
manufacturing and sales facilities and for the delivery of television
programming to hotels, motels and apartment complexes. The Company's data
communications product offerings include private interactive data systems using
VSAT (very small aperture terminal) technology.
The Company designs, manufactures and sells digital video compression
communications products for direct satellite broadcast and cable television
systems and digital storage and retrieval products for applications such as ad
insertion for television broadcasters and cable operators. The Company's
compression products utilize the open architecture MPEG-2 technology developed
by an international standards group. MPEG-2 digital equipment allows cable,
telephone, computer and consumer electronics products and systems to operate
together across networks and in the home.
The Company's satellite products and systems include tracking and
telemetry equipment, earth observation satellite ground stations, shipboard and
command telephony and facsimile communications products and intercept systems.
The Company produces telemetry instruments, radar platforms, special receivers,
special measurement devices and other equipment used to track aircraft,
missiles, satellites and other moving objects and to communicate with and
receive and record various measurements and other data from the object.
The Company develops services and applications which can be utilized by
its customers on their terrestrial-based and satellite-based networks. Such
applications include (i) a system which enables power companies to detect power
failures automatically, (ii) telephony capability over cable networks, (iii)
interactive systems for video conferencing, (iv) transmittal of information over
cable networks via modem, and (v) interactive video games.
OTHER PRODUCTS AND SERVICES
The Company's microwave instrumentation systems are used to design and
manufacture antennas for communication and radar systems. Products include
pattern recorders, receivers, positioners and various display units, which
measure, record and display various characteristics of antennas such as signal
pattern, gain, phase, amplitude and frequency.
The Company has consolidated its service functions into a service
organization, with its goal being to ensure effective post-sale service for
customers using its products, whether such products are under warranty or no
longer under warranty. This service organization offers a variety of maintenance
and service contracts to companies using products manufactured or sold by the
Company.
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MARKETING AND SALES
The Company's products are sold primarily through its own sales personnel
who work out of offices in Atlanta and other metropolitan areas in the United
States. Certain products are also marketed in the United States through
independent sales representatives and distributors. Sales in foreign countries
are made through wholly-owned subsidiaries and branch offices, as well as
through independent distributors and independent sales representatives. The
Company's management personnel are also actively involved in marketing and sales
activities.
The Company's sales to various units of the United States Government were
less than 10% of the Company's sales during fiscal years 1996, 1995 and 1994.
The Company's international sales constituted 36% of the Company's total
sales for fiscal year 1996 and 34% and 35% of total sales in fiscal years 1995
and 1994, respectively. Substantially all of these sales were export sales.
Foreign subsidiary sales were not material for any of these fiscal years. See
Note 3 of the Notes to Financial Statements included in this Report. Sales to
Europe were 12% of total sales in fiscal 1996 and were 16% and 14% of total
sales in fiscal 1995 and 1994, respectively. The increase in sales to customers
located in Europe and other international markets may be the result of actual or
anticipated deregulation of telecommunications markets.
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 28, 1996, and June 30, 1995, was $378,582,000 and
$457,455,000, respectively.
The Company believes that approximately 90% of the backlog existing at
June 28, 1996, 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 1996,
1995 and 1994 were principally for development of commercial cable and telephone
digital products, satellite network products, CoAxiom cable telephony products
and interactive data communications products. In fiscal 1996, 1995 and 1994, the
Company's research and development expenses were approximately $95,299,000,
$82,378,000, and $58,542,000 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
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reliability. The Company's set-top terminals and certain pole-line hardware for
the CATV industry are manufactured by contract vendors with high-quality,
high-volume production facilities. In addition to such manufacturing by contract
vendors, the Company commenced shipment of set-top terminals in fiscal year 1996
from its new Juarez, Mexico manufacturing facility.
MATERIALS AND SUPPLIES
The materials and supplies purchased by the Company are standard
electronic components, custom integrated circuits, wire, circuit boards,
transistors, capacitors and resistors, all of which are produced by a number of
manufacturers. Matsushita Electronic Components Co., Ltd. manufactures set-top
terminals for the Company and is a primary supplier of those terminals.
Cablevision is a primary supplier of taps for the Company. The Company also
purchases aluminum and steel, including castings and semi-fabricated items
produced by a variety of sources. The Company considers its sources of supply to
be adequate and is not dependent upon any single supplier, except for Matsushita
Electronic Components Co., Ltd. and Cablevision, for any significant portion of
the materials used in the products it manufactures or for any significant
portion of the products it sells.
EMPLOYEES
The Company had approximately 4,837 employees (approximately 664 of which
were employed through temporary employment agencies) on June 28, 1996. 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, ability to provide
post-purchase services, ability to provide quality products at competitive
prices and broad coverage by its sales personnel.
ITEM 2. PROPERTIES
The Company owns and uses in its operations office and manufacturing
facilities in metropolitan Atlanta, Georgia; Chicago, Illinois and Juarez,
Mexico, which comprise five sites containing a total of approximately 497,700
square feet.
The Company also owns (i) approximately 130 acres of land in Gwinnett
County, Georgia, where antenna test ranges and a hub station used in providing
interactive data communications services are located, (ii) approximately 219
acres of land in Walton County, Georgia, held for future antenna test range
expansion, and (iii) approximately 280 acres of land in Gwinnett County,
Georgia, held for future development of and expansion of a consolidated campus
for the Company. The Company presently owns one building and leases two
buildings in San Diego County, California, none of which are required for
present operations and all are under lease or sublease to other tenants.
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Additional major manufacturing facilities containing an aggregate of
approximately 342,700 square feet are leased by the Company at the following
locations under leases expiring (including renewal options) from 1998 to 2015:
LOCATION APPROXIMATE FOOTAGE
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Norcross, Georgia 301,700
Vancouver, British Columbia 25,000
Toronto, Ontario 16,000
The Company also leases laboratory, office and warehouse space in several
buildings in the metropolitan areas of Atlanta, Georgia; Cupertino, California;
Tempe, Arizona; Toronto, Ontario; Vancouver, British Columbia; Melbourne,
Florida; El Paso, Texas; and Manchester, United Kingdom, and the Company leases
sales and service offices in 24 U.S. 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.
In July 1996, a California arbitration panel ordered the Company to pay
StarSight Telecast, Inc. ("StarSight") $15 million in damages, plus legal and
arbitration expenses, and issued a three-year limited-term injunction on the
future sale of interactive electronic program guides contained in set-tops. The
panel determined that the Company violated the terms of a 1992 license and
technical assistance agreement between the Company and StarSight. Under the
terms of the injunction, the Company is permitted (i) to continue to ship its
existing electronic program guides to fill orders to which it has committed in
signed agreements with existing customers and (ii) to ship any electronic
program guides acquired from a third party or developed after the date of the
arbitration award by the Company, in accordance with the arbitration ruling. The
Company is currently challenging in federal court the $10 million punitive
damages portion of the arbitration award. The Company has also commenced
independent development of new electronic program guides in accordance with the
provisions of the arbitration award.
The arbitration panel's award does not affect a patent infringement suit
filed by the Company in February, 1996 against StarSight. In that suit, the
Company alleges that the StarSight CB1500 receiver infringes at least three of
the Company's patents. The suit seeks damages and an injunction against
continued infringement.
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 28, 1996.
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EXECUTIVE OFFICERS OF THE COMPANY
The following persons are the executive officers of the Company:
Executive
Name Age Officer Since Present Office
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James F. McDonald 56 1993 President and
Chief Executive Officer
John E. Breyer 61 1989 Senior Vice President
William E. Eason, Jr. 53 1993 Senior Vice President,
General Counsel and
Corporate Secretary
H. Allen Ecker 60 1979 Senior Vice President,
Technical Operations
Chief Technical Officer
Brian C. Koenig 49 1988 Senior Vice President,
Human Resources
John H. Levergood 62 1992 Senior Vice President,
Corporate Operating Committee
Raymond D. Lucas 58 1989 Senior Vice President,
Strategic Operations
Chief Strategic Officer
Robert C. McIntyre 45 1995 Senior Vice President,
Corporate Operating Committee
Jack W. Simpson, Sr. 54 1993 Senior Vice President,
Corporate Operating Committee
Harvey A. Wagner 55 1994 Senior Vice President,
Chief Financial Officer and Treasurer
Corporate Operating Committee
Conrad Wredberg, Jr. 55 1995 Senior Vice President,
Corporate Operating Committee
Julian W. Eidson 57 1978 Vice President and Controller
Each executive officer is elected annually and serves at the pleasure of
the Board of Directors. Each executive officer, except Mr. Eidson, serves on the
Corporate Management Committee of the Company.
Mr. McDonald was elected President and Chief Executive Officer of the
Company effective July 15, 1993. He was a general partner of J. H. Whitney &
Company, a private investment firm, from 1991 until his employment by the
Company. From 1989 to 1991 he was President and Chief Executive Officer of Prime
Computer, Inc., a supplier of CAD/CAM software and computer systems. Prior to
that time he was President and Chief Operating Officer of Gould, Inc., a
computer and electronics company (1984 to 1989) and held a variety of positions
with IBM Corporation (1963 to 1984).
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Mr. Eason has been a partner at Paul, Hastings, Janofsky & Walker since
1989. He has been Secretary of the Company since August, 1993, and became Senior
Vice President and General Counsel in February, 1994. Paul, Hastings, Janofsky &
Walker performs legal services for the Company. Mr. Eason receives a fixed
salary from the Firm for work which he performs for clients of the Firm other
than the Company, but has no interest in the Firm's earnings and profits.
Mr. Koenig was elected Senior Vice President, Human Resources in 1995.
Prior to that time he served as Vice President, Human Resources for more than
five years.
Mr. Levergood re-joined the Company in December 1992 as a Senior Vice
President. He had previously been employed by the Company in various managerial
positions (most recently as Chief Operating Officer) until December 1989. From
January through June, 1990, he was President and Chief Operating Officer of
Dowden Communications, an operator of cable television systems. He was an
independent communications consultant from June, 1990 until he re-joined the
Company in 1992.
Mr. McIntyre was elected as a Senior Vice President in November, 1995. He
has been employed by the Company since 1991, and from February, 1995 until
November, 1995, he served as a Vice President of the Company. Prior to his
employment with the Company, Mr. McIntyre was employed by Augat, Inc., a
computer components supplier, as Vice President and General Manager of its
Interconnection Products Division, from 1988 to 1991.
Mr. Simpson was President and Chief Executive Officer of Mead Data
Central, Inc., an electronic publisher, from June, 1982 through November, 1992.
From December, 1992 until joining the Company in October, 1993, he was President
of Infobyte, Inc., a consulting firm. Since joining the Company, he has held his
current position.
Mr. Wagner was Vice President-Finance and Chief Financial Officer of
Computervision Corporation, a supplier of CAD/CAM/CAE software and services from
September, 1989 until he joined the Company in his current position in June,
1994.
Mr. Wredberg joined the Company in 1995 and was elected to the position
of Vice President in May, 1995. In November, 1995, Mr. Wredberg was elected as a
Senior Vice President of the Company. Mr. Wredberg served as President of
American Microsystem, Inc., a supplier of semiconductors, from 1985 until 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 9, 1996, was 6,802.
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 1996 and 1995, the Company paid out a $.015 dividend each quarter.
Information as to the high and low stock prices and dividends paid for
each quarter of fiscal years 1996 and 1995 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 22 of this Report.
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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 14, 16 through 18, and 20 of this Report,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and notes thereto,
the schedule containing certain supporting information and the report of
independent public accountants are set forth on pages 13 through 33 of this
Report. See Part IV, Item 14 for an index of the statements, notes and
schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10 through 13 (except for the information set forth at the end of Part I
with respect to Executive Officers of the Company) is incorporated by reference
from the Company's definitive proxy statement for the Company's 1996 Annual
Meeting of Shareholders, which is expected to be filed pursuant to Regulation
14A within 120 days after the end of the Company's 1996 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) The consolidated financial statements listed below are included on
pages 13 through 32 of this Report.
Report of Independent Public Accountants
Consolidated Statement of Financial Position as of June 28,
1996 and June 30, 1995
Consolidated Statement of Earnings for each of the three
years in the period ended June 28, 1996
Consolidated Statement of Cash Flows for each of the three
years in the period ended June 28, 1996
Notes to Consolidated Financial Statements
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(2) Financial Statement Schedule:
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Schedule II Valuation and Qualifying Accounts for Each
of the Three Years in the Period ended June
28, 1996 33
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.
(3) Exhibits:
(3) (a) The following is incorporated by reference to the
registrant's report on Form 10-K for its fiscal year
ended June 29, 1990:
(i) Amended and Restated Articles of
Incorporation, as amended.
(b) The following is incorporated by reference to the
registrant's report on Form 10-K for its fiscal year
ended July 1, 1994:
(i) By-laws of registrant, as amended.
(10) Material Contracts:
(a) The following material contract is incorporated by
reference to the registrant's report on Form 10-Q for
its fiscal quarter ended March 31, 1987:
(i) Agreement pertaining to the
compensation of Sidney Topol.*
(b) The following material contract is incorporated by
reference to the registrant's report on Form 10-Q for
its fiscal quarter ended December 29, 1989:
(i) Scientific-Atlanta, Inc. Non-Employee
Directors Stock Option Plan.*
(c) The following material contracts are incorporated by
reference to the registrant's report on Form 10-K for
the fiscal year ended June 26, 1992:
(i) Scientific-Atlanta, Inc. 1981 Incentive
Stock Option Plan, as amended.*
(ii) 1985 Executive Deferred Compensation
Plan of Scientific-Atlanta, Inc., as
amended.*
(iii) Scientific-Atlanta, Inc. Annual
Incentive Plan for Key Executives, as
amended.*
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(iv) Scientific-Atlanta, Inc. 1978
Non-Qualified Stock Option Plan for
Key Employees, as amended.*
(d) The following material contract is incorporated by
reference to the registrant's report on Form 10-K for
the fiscal year ended July 2, 1993:
(i) Scientific-Atlanta, Inc. 1992 Employee
Stock Option Plan.*
(e) The following material contracts are incorporated by
reference to the registrant's report on Form 10-K for
the fiscal year ended July 1, 1994:
(i) Scientific-Atlanta, Inc. Supplemental
Executive Retirement Plan.*
(ii) 1994 Scientific-Atlanta, Inc.
Executive Deferred Compensation Plan.*
(iii) Form of Severance Protection
Agreement between the Registrant and
Certain Officers and Key Employees.*
(f) The following material contract is incorporated by
reference to the exhibit filed with the registrant's
proxy statement filed on October 3, 1994, as amended
by the revised cover page thereto incorporated by
reference to the registrant's report on Form 10-Q for
the fiscal quarter ended December 31, 1994:
(i) Scientific-Atlanta, Inc. Long-Term
Incentive Plan, adopted by the
shareholders on November 11, 1994.*
(g) The following material contract is incorporated by
reference to the registrant'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.
(h) The following material contract is incorporated by
reference to registrant's Form S-8 Registration
Statement, filed on November 8, 1995:
(i) Stock Plan for Non-Employee Directors.*
(i) The following material contracts and amendment to a
material contract are incorporated by reference to
the registrant's report on Form 10-Q for its fiscal
quarter ended December 29, 1995:
(i) Amended and Restated
Scientific-Atlanta, Inc. Retirement
Plan for Non-Employee Directors.*
(ii) Amended and Restated Deferred
Compensation Plan for Non-Employee
Directors of Scientific-Atlanta, Inc.*
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(iii) Amendment Number One to the
Non-Employee Directors Stock Option
Plan.*
(j) First Amendment, dated as of December 29, 1995, to
the Credit Agreement which is incorporated by
reference as Exhibit 10(g).
(k) Letter Amendment, dated as of April 5, 1996, to the
Credit Agreement which is incorporated by reference
as Exhibit 10(g).
(l) Second Amendment, dated as of June 28, 1996, to the
Credit Agreement which is incorporated by reference
as Exhibit 10(g).
(11) Computation of Earnings Per Share of Common Stock
(21) List of Significant Subsidiaries
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule (for SEC use only)
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* Indicates management contract or compensatory plan or arrangement.
(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.
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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 28, 1996 and June 30, 1995 and the related consolidated statements of
earnings and cash flows for each of the three years in the period ended June 28,
1996 appearing on pages 15, 19 and 21, 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 28, 1996 and June 30, 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended June 28, 1996 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.
Atlanta, Georgia ARTHUR ANDERSEN LLP
August 5, 1996 (except with respect to the
matter discussed in Note 6, as to
which the date is August 14, 1996)
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 28, 1996 is
effective in providing reasonable assurance that its published annual and
interim financial statements are free of material misstatement.
As part of their audit of our financial statements, Arthur Andersen LLP
considered certain elements of our system of internal controls in determining
their audit procedures for the purpose of expressing an opinion on the financial
statements.
The audit committee of the board of directors is composed solely of
outside directors and is responsible for recommending to the board the
independent public accountants to be retained for the year, subject to
stockholder approval. The audit committee meets three times each year to review
with management the Company's system of internal accounting controls, audit
plans and results, accounting principles and practices, and the annual financial
statements.
/s/ James F. McDonald /s/ Harvey A. Wagner
James F. McDonald Harvey A. Wagner
President and Chief Executive Officer Senior Vice President
Chief Financial Officer and Treasurer
13
15
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Scientific-Atlanta had stockholders' equity of $463.7 million and cash on hand
of $20.9 million at June 28, 1996. The current ratio of 2.1:1 at June 28,
1996 compared to 2.2:1 at June 30, 1995.
CASH AND CASH EQUIVALENTS at the end of 1996 were $20.9 million, down from $80.3
million last year. Cash decreased as expenditures for equipment, expansion
of manufacturing capacity, the acquisition of ATx Telecom Systems, Inc.
(ATx) and the repurchase of 1,010,000 shares of the Company's common stock
exceeded cash generated from earnings. Ending working capital, excluding
cash, was $280.1 million, or 26.7 percent of sales, as compared to $259.4
million or 23.2 percent of sales in the prior year.
RECEIVABLES were $252.9 million at year-end, compared to $243.4 million at the
prior fiscal year-end. Average days sales outstanding increased from 71 for
1995 to 79 for 1996 due to slightly lower sales and higher average
receivable balances in 1996 as compared to 1995. The allowance for doubtful
accounts as a percent of gross receivables was 1.5 percent in 1996,
unchanged from the prior year.
INVENTORY TURNOVER was 3.1 times in 1996, compared to 4.2 in the prior year. The
decline was due primarily to higher average inventory balances in 1996 as
compared to 1995. Inventories of $215.8 million at year-end were $41.7
million lower than at the end of the prior year, reflecting management's
efforts to reduce inventory levels and shipments of certain set-tops in 1996
which had been delayed at the end of fiscal 1995.
CURRENT DEFERRED INCOME TAXES increased $22.7 million due to increases in
nondeductible reserves, including a reserve of $25.4 million for the amount
and related costs of an arbitration award recorded in 1996.
OTHER CURRENT ASSETS, which include assets held for sale, prepaid insurance,
deposits, royalties, license fees and other miscellaneous prepaid expenses,
increased $16.5 million due primarily to the net assets held for sale of the
defense-related businesses discontinued in 1996 (see Note 5 for details) and
the purchase of land held for resale.
NET PROPERTY, PLANT AND EQUIPMENT increased by $26.0 million in 1996 as capital
spending exceeded depreciation and disposals. Capital additions of $60.8
million included expenditures for equipment, expansion of manufacturing
capacity and the purchase of land for future expansion.
COST IN EXCESS OF NET ASSETS ACQUIRED decreased in 1996, reflecting amortization
of goodwill.
OTHER ASSETS, which include license fees, investments, noncurrent deferred tax
charges, intellectual property, various prepaid expenses and cash surrender
value of company-owned life insurance, increased $5.2 million in 1996 due
primarily to investments and increases in non-current deferred tax assets
related to non-deductible expenses. See Notes 2 and 11.
TOTAL BORROWINGS at year-end amounted to $2.0 million, down $0.2 million from
the prior year. The borrowings include industrial development bonds and
working capital loans for foreign subsidiaries. Working capital borrowings
by foreign subsidiaries increased $0.3 million during 1996. Details of
borrowings are shown in Note 8.
The Company has a $300 million senior credit facility that provides for
unsecured borrowings up to $150 million which expire May 1997 and up to $150
million which expire May 2000. There were no outstanding borrowings under
this facility at June 28, 1996 or June 30, 1995. The facility will be used
to supplement funds generated internally to support the growth of the
Company.
ACCOUNTS PAYABLE were $106.5 million at year-end, down from $148.3 million last
year. The decrease reflects lower production and inventory levels. Days in
accounts payable increased to 56 in 1996 from 43 in 1995.
ACCRUED LIABILITIES of $127.5 million include accruals for the resolution of
litigation and related costs, compensation, warranty and service, customer
down-payments and taxes, excluding income taxes. Accruals for the resolution
of litigation and related costs were offset partially by lower accruals for
compensation. See Note 9 for details.
OTHER LIABILITIES of $37.4 million are comprised of deferred compensation,
postretirement benefit plans, postemployment benefits and other
miscellaneous accruals. See Note 10 for details.
STOCKHOLDERS' EQUITY was $463.7 million at the end of 1996, down $10.5 million
from the prior year. A net loss of $6.0 million, the repurchase of 1,010,000
shares of the Company's stock for $12.4 million and dividend payments of
$4.6 million were partially offset by $12.5 million from the issuance of
stock pursuant to employee benefit plans. See Note 17 for details of changes
in stockholders' equity.
14
16
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
In Thousands
--------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,930 $ 80,311
Receivables, less allowance for doubtful accounts of
$3,826,000 in 1996 and $3,823,000 in 1995 252,882 243,420
Inventories 215,767 257,427
Deferred income taxes 50,979 28,271
Other current assets 22,413 5,950
-------- --------
TOTAL CURRENT ASSETS 562,971 615,379
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, AT COST
Land and improvements 18,173 7,005
Buildings and improvements 38,628 36,847
Machinery and equipment 162,073 145,301
-------- --------
218,874 189,153
Less - Accumulated depreciation and amortization 68,275 64,539
-------- --------
150,599 124,614
-------- --------
COST IN EXCESS OF NET ASSETS ACQUIRED 6,191 6,940
-------- --------
OTHER ASSETS 43,561 38,331
-------- --------
TOTAL ASSETS $763,322 $785,264
======== ========
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current maturities of long-term debt $ 1,600 $ 1,386
Accounts payable 106,542 148,260
Accrued liabilities 127,546 113,947
Income taxes currently payable 26,229 12,121
-------- --------
TOTAL CURRENT LIABILITIES 261,917 275,714
-------- --------
LONG-TERM DEBT, less current maturities 400 773
-------- --------
OTHER LIABILITIES 37,353 34,588
-------- --------
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 77,255,528 shares in 1996 and 76,950,029 shares in 1995 38,628 38,475
Additional paid-in capital 163,143 160,206
Retained earnings 264,206 274,840
Accumulated translation adjustments 740 668
-------- --------
466,717 474,189
Less - Treasury stock, at cost (265,640 shares) 3,065 --
-------- --------
463,652 474,189
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $763,322 $785,264
======== ========
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
15
17
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS
The Consolidated Statement of Earnings summarizes Scientific-Atlanta's operating
performance over the last three years, during which time the Company has
accelerated development of new products and expanded into international
markets.
EARNINGS FROM CONTINUING OPERATIONS in 1996 were $7.2 million, down from $66.0
million in 1995. One-time after-tax charges of $19.5 million for the
resolution of an arbitration proceeding and related costs and $9.9 million
for the write-off of purchased in-process technology were the primary
factors in the year-to-year decline. Lower sales volume and higher research
and development expenses also contributed to the lower earnings in 1996 as
compared to the prior year.
Earnings from continuing operations in 1995 were up $32.8 million over 1994.
Higher sales volume was the primary factor in the year-to-year increase.
SALES of $1,047.9 million in 1996 were 6 percent lower than the prior year.
Lower sales volumes of video game adapters and analog set-tops more than
offset increases in sales of distribution equipment and satellite systems,
excluding sales to Orbit Communications Company (Orbit). Sales of satellite
systems in 1996 included sales of $4.5 million to Orbit for its direct to
home satellite services, $78.3 million lower than the prior year due to
substantial completion of deliveries in 1995. Sales of set-tops constituted
approximately 27 percent of the Company's total sales in 1996, and
approximately 26 percent and 23 percent of such sales in 1995 and 1994,
respectively. Sales of RF (radio frequency) products were approximately 21
percent of the Company's total sales in 1996, and approximately 17 percent
and 20 percent of such sales in 1995 and 1994, respectively. International
sales were 36 percent of total sales in 1996 as compared to 34 percent in
the prior year.
Sales in 1996 were negatively impacted by reduced levels of orders from
domestic cable operators and telephone companies. The Company believes that
the capital spending in telecommunications markets has been affected as
cable television operators and telephone companies develop strategies to
take advantage of provisions in the recently enacted Telecommunications Act
of 1996, and by the fact that many of the products service providers wish to
use in advanced communications networks are still under development and not
commercially available.
Sales in 1995 increased 48 percent over 1994. Strong growth in sales volume
of transmission products and addressable set-tops and Sega game adapters and
deliveries of equipment to Orbit Communications Company for its direct to
home satellite services contributed to the year-to-year increase in sales.
COST OF SALES as a percent of sales increased 0.9 percentage points over 1995.
Unfavorable exchange rates in Japanese yen and costs associated with planned
expansion of manufacturing capacity offset cost reductions. During the
fourth quarter of 1996, the Company began shipments of set-tops assembled at
its recently completed manufacturing facility in Juarez, Mexico. The Company
believes that it will be able to manufacture certain products at its new
high-quality, high volume facility in Juarez, Mexico and expanded facilities
in Atlanta, Georgia at costs competitive with those currently charged by
contract vendors.
The materials and supplies purchased by the Company are standard electronic
components, such as custom integrated circuits, wire, circuit boards,
transistors, capacitors and resistors, all of which are produced by a number
of manufacturers. Matsushita Electronic Components Co., Ltd. manufactures
set-top terminals for the Company and is a primary supplier of those
terminals. Cablevision is a primary supplier of taps for the Company. The
Company also purchases aluminum and steel, including castings and
semi-fabricated items produced by a variety of sources. The Company
considers its sources of supply to be adequate and is not dependent upon any
single supplier, except for Matsushita Electronic Components, Ltd. and
Cablevision, for any significant portion of the materials used in the
products it manufactures or the products it sells.
Certain material purchases are denominated in Japanese yen and, accordingly,
the purchase price in U.S. dollars is subject to change based on exchange
rate fluctuations. Currently, the Company has forward exchange contracts to
purchase yen to hedge a portion of its exposure on purchase commitments for
a period of twelve months.
Cost of sales as a percent of sales in 1995 increased 2.2 percentage points
over 1994. Gains from cost improvements in satellite networks and increased
volumes in transmission products and addressable
16
18
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS
set-tops were offset by unfavorable exchange rate changes in Japanese yen,
production startup costs and product mix.
SALES AND ADMINISTRATIVE EXPENSES of $138.4 million in 1996 were slightly lower
than the prior year. Selling expenses were flat reflecting the slightly
lower sales volume in 1996. The Company is continuing to invest in
opportunities to expand into international markets and introduce new
products. Administrative expenses declined slightly in 1996 as the Company
continued efforts to improve internal processes and systems to enhance
quality and the overall cost structure.
Sales and administrative expense in 1995 increased 31 percent over the prior
year reflecting costs associated with ongoing investments to support
expansion into international markets, the introduction of new products and a
build-up in the infrastructure of the Company to handle the growth the
Company experienced. Sales and administrative expenses as a percent of sales
declined to 13 percent in 1995 from 14 percent in 1994.
RESEARCH AND DEVELOPMENT EXPENSES of $95.3 million increased $12.9 million over
1995. Research and development activity increased in most businesses,
particularly in the development of digital products and cable telephony
products. The Company anticipates that spending on research and development
will increase at a slightly lower rate in 1997.
Research and development expenses in 1995 increased $23.8 million over the
prior year. Increased research and development activity, particularly
development of digital products, was the primary factor in the year-to-year
increase.
PURCHASED IN-PROCESS TECHNOLOGY was $14.6 million in 1996. In connection with
the acquisition of ATx Telecom Systems, Inc. (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. ATx is a supplier of Erbium Doped Fiber Amplifiers
(EDFA) fiber optic products for hybrid fiber/coax (HFC) networks. The
acquisition reflects the Company's strategic commitment to maintaining its
role in the rapidly growing opto-electronic market with a full range of
fiberoptic technology.
INTEREST EXPENSE was $0.7 million, $0.8 million, and $1.1 million in 1996, 1995,
and 1994, respectively. The year-to-year decreases reflect lower average
working capital borrowings by foreign subsidiaries.
INTEREST INCOME was $1.8 million, $2.8 million and $3.2 million in 1996, 1995
and 1994, respectively. The year-to-year decreases in interest income
reflect lower average cash balances.
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. The Company is currently challenging in federal court the punitive
damages portion ($10.0 million) of the arbitration award.
In July 1996, an arbitration panel awarded StarSight $15 million in damages,
plus legal and arbitration expenses, and issued a three year limited-term
injunction on the future sales of interactive electronic program guides
contained in set-tops. The panel determined the Company violated the terms
of a 1992 license and technical assistance agreement between the Company and
StarSight.
Under the terms of the injunction, the Company is permitted to continue to
ship its existing guides to fill orders it has committed to in signed
agreements with existing customers and to ship any electronic program guides
acquired from a third party or developed by Scientific-Atlanta in accordance
with the arbitration ruling after the date of the award.
The Company intends to develop one or more new program guides for analog and
digital set-tops and is also exploring the possibility of using third party
guides for its products. The Company's royalty-free license to sell the
StarSight guide also remains in effect. The Company believes that compliance
with the terms of the arbitration award will not have a significant impact
on future revenues or profitability.
The arbitration award does not affect a patent infringement suit filed by
the Company in February 1996 against StarSight. In that suit, the Company
alleges that the StarSight CB1500 receiver infringes at least three of the
Company's patents. The suit seeks damages and an injunction against
continued infringement. The Company intends to vigorously pursue that suit.
17
19
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS
Other income was $1.6 million in 1995. Other income included rental income,
royalty income, net gains from partnership activities and other
miscellaneous items. There were no significant items in other income and
other expense during 1995.
Other expense of $17.4 million in 1994 included a $17.5 million charge to
settle securities class action litigation, losses of $1.0 million from
partnership activities and net gains from other miscellaneous items of $1.1
million.
The securities class action suit, which was filed in 1988, related to events
which occurred during the early 1980's principally as a result of the
difficulties experienced by the Company in the production and delivery of a
new product. The Company firmly believes it fully complied with the law in
this matter and that the suit was without merit.
The litigation was settled in 1994 in the best interest of the Company's
shareholders to avoid protracted and costly legal proceedings and eliminate
the uncertainty of a jury trial.
THE PROVISION FOR INCOME TAXES was 32 percent of pre-tax earnings in 1996, 1995
and 1994. Details of the provision for income taxes are discussed in Note
11.
LOSSES FROM DISCONTINUED OPERATIONS of $13.2 million in 1996 included losses
from discontinued operations of $1.0 million, net of a tax benefit of $0.5
million, and a one-time after-tax charge of $12.2 million, net of a tax
benefit of $5.7 million, for the estimated loss on the sale of discontinued
operations which was recorded in the quarter ended September 29, 1995.
During the quarter ended September 29, 1995, the Company decided to
discontinue its defense-related businesses in San Diego, California because
these businesses were not aligned with the Company's core business
strategies.
The estimated loss on the sale of discontinued operations included losses of
the operations through the expected date of sale, reserves to adjust the
carrying amount of the net assets held for sale to net realizable value and
losses on a subcontract. The Company had performed work as a subcontractor
under a contract which included options for additional products. The Company
believed that some of these options had not been validly exercised. The
Company had been negotiating with the prime contractor to increase the
pricing on the unexercised options to provide a reasonable margin and
believed these negotiations would be successful. At the time the Company
decided to discontinue the defense related businesses, the negotiations had
deteriorated significantly. The estimated loss on the disposition was
computed on the basis that the Company would give a buyer a subcontract to
complete the options at an amount that would provide a reasonable margin. No
accounting recognition was given to the Company's claim against the prime
contractor due to its uncertain outcome.
In July 1996, the Company completed negotiations with the prime contractor
to settle issues related to the pricing of the unexercised options. On
August 14, 1996, the Company completed the sale of its defense-related
businesses to Global Associates, Ltd. (Global) for cash of $13.1 million and
secured and unsecured notes aggregating approximately $5.0 million. The net
realizable value of the assets of the defense-related businesses and the
settlement with the prime contractor were more favorable than the Company
had anticipated when it decided to exit these businesses; accordingly the
Company will recognize a pre-tax gain of approximately $5.0 million from
these transactions in the first quarter of fiscal 1997. Losses from the
defense-related businesses while they were accounted for as discontinued
operations of $2.5 million, net of a tax benefit of $1.2 million,
approximated the amount included in the $12.2 million one-time after-tax
charge for the estimated loss on the sale of discontinued operations. After
recording the pre-tax gain of $5.0 million, the Company will have a reserve
of approximately $8.9 million for potential sales price adjustments,
indemnifications provided to Global, legal, severance and other
miscellaneous expenses related to the sale and the settlement with the prime
contractor.
NET LOSS was $6.0 million in 1996. The net loss 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.
LOSS PER SHARE of $0.08 in 1996 compares with earnings per share of $0.83 in
1995 and $0.46 in 1994. Shares outstanding and share equivalents increased
slightly to 76.7 million in 1996 from 76.2 million in 1995.
18
20
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
SALES $1,047,901 $1,118,057 $755,923
- ------------------------- ---------- ---------- --------
COSTS AND EXPENSES
- --------------------
Cost of sales 761,876 802,216 525,955
Sales and administrative 138,362 140,082 107,233
Research and development 95,299 82,378 58,542
Purchased in-process technology 14,583 -- --
Interest expense 672 775 1,066
Interest income (1,818) (2,837) (3,151)
Other (income) expense, net 28,374 (1,566) 17,449
---------- ---------- --------
1,037,348 1,021,048 707,094
---------- ---------- --------
EARNINGS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 10,553 97,009 48,829
- -------------------------------------------------------------
PROVISION FOR INCOME TAXES 3,377 31,042 15,624
- --------------------------- ---------- ---------- --------
EARNINGS BEFORE DISCONTINUED OPERATIONS 7,176 65,967 33,205
- ------------------------------------------
Earnings (loss) from discontinued operations, net of tax (1,038) (2,427) 1,817
Estimated loss on sale of discontinued operations, net of tax (12,172) -- --
---------- ---------- --------
NET EARNINGS (LOSS) $ (6,034) $ 63,540 $ 35,022
- -------------------- ========== ========== ========
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
- ------------------------------------
Primary
Before discontinued operations $ 0.09 $ 0.86 $ 0.44
Discontinued operations (0.17) (0.03) 0.02
---------- ---------- --------
Net earnings (loss) $ (0.08) $ 0.83 $ 0.46
========== ========== ========
Fully diluted $ (0.08) $ 0.83 $ 0.46
========== ========== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON EQUIVALENT SHARES OUTSTANDING
- ------------------------------------------------
Primary 76,666 76,194 76,638
========== ========== ========
Fully diluted 76,666 76,194 77,105
========== ========== ========
See accompanying notes.
19
21
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 on hand at the end of 1996 was $20.9 million. Cash on hand and cash
generated from earnings were used for capital expenditures, the acquisition
of ATx, the repurchase of 1,010,000 shares of the Company's stock and to
fund working capital requirements.
The Company has a $300 million senior credit facility available that
provides for unsecured borrowings up to $150 million which expire May 1997
and up to $150 million which expire May 2000. There were no outstanding
borrowings under this facility at June 28, 1996 or June 30, 1995. 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.
CASH PROVIDED BY OPERATING ACTIVITIES was $44.1 million for 1996, compared to
$24.1 million for 1995. Cash provided by earnings and decreases in
inventories was partially offset by increases in accounts receivable and
decreases in payables.
In 1995 and 1994 cash provided by improved earnings and increases in
payables was partially offset by increases in inventories and accounts
receivable. See Management's Discussion of the Statement of Financial
Position for details of this performance.
CASH USED BY INVESTING ACTIVITIES of $90.7 million included expenditures for
equipment, expansion of manufacturing capacity, the purchase of land for
future expansion, the acquisition of ATx and other investing activities. See
Note 2 for additional discussion of investing activities.
In 1995, cash used by investing activities of $65.4 million included
expenditures of $63.8 million for equipment and expansion of manufacturing
capacity, including the construction of a manufacturing facility in Juarez,
Mexico.
In 1994, cash used by investing activities included $34.3 million for
purchases of plant and equipment and $5.2 million for investments in
partnerships. Expenditures focused on increased capacity and productivity
improvements. Cash provided by investing activities included $11.2 million
from the sale of an investment. See Note 2.
CASH USED BY FINANCING ACTIVITIES was $12.8 million in 1996. 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 pursuant to stock option and employee benefit plans of $4.3
million.
The issuance of stock pursuant to stock option and employee benefit plans
generated $8.2 million in 1995. Cash used by financing activities included a
$5.1 million reduction of working capital borrowings by foreign subsidiaries
and dividend payments of $4.6 million.
Cash provided by financing activities was $0.8 million in 1994. The issuance
of stock pursuant to stock option and employee benefit plans and increases
in short-term borrowings generated $5.0 million and $0.5 million,
respectively, of cash during 1994.
20
22
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
----------------------------------
NET EARNINGS FROM CONTINUING OPERATIONS $ 7,176 $ 65,967 $ 33,205
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 36,597 28,328 19,544
Purchased in-process technology 14,583 -- --
Compensation related to stock benefit plans 6,193 6,051 4,787
Provision for losses on accounts receivable 324 343 73
(Gain) loss on sale of property, plant and equipment (2,123) 625 824
Losses of partnerships 103 386 475
Changes in operating assets and liabilities:
Receivables (21,810) (43,618) (67,878)
Inventories 29,370 (117,156) (8,372)
Deferred income taxes (15,308) (353) (3,999)
Accounts payable and accrued liabilities (27,546) 81,862 59,726
Other assets (4,900) 2,928 (21,124)
Other liabilities 21,450 (1,021) 21,735
Net effect of exchange rate fluctuations 35 (208) (163)
-------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,144 24,134 38,833
-------- --------- --------
INVESTING ACTIVITIES:
- ----------------------------------
Purchases of property, plant and equipment (60,812) (63,798) (34,335)
Acquisition of business, net of cash acquired (24,336) -- --
Payment for businesses purchased (1,721) (1,634) (1,060)
Purchase of land held for resale (5,085) -- --
Proceeds from the sale of property, plant and equipment 2,358 510 596
Proceeds from the sale of investments -- 4,214 11,174
(Increase) decrease in net assets of discontinued
operations 1,505 (1,110) 9,132
Other investments (2,600) (3,560) (5,240)
-------- --------- --------
NET CASH USED BY INVESTING ACTIVITIES (90,691) (65,378) (19,733)
-------- --------- --------
FINANCING ACTIVITIES:
- ------------------------------------
Net short-term borrowings (payments) 214 (5,101) 520
Principal payments on long-term debt (373) (315) (305)
Dividends paid (4,600) (4,578) (4,497)
Issuance of stock 4,336 8,162 5,033
Treasury shares acquired (12,411) -- --
-------- --------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (12,834) (1,832) 751
-------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (59,381) (43,076) 19,851
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 80,311 123,387 103,536
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,930 $ 80,311 $123,387
======== ========= ========
See accompanying notes.
21
23
SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share
Data) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
SALES $1,047,901 $1,118,057 $755,923 $666,033 $518,790
Cost of Sales 761,876 802,216 525,955 484,887 368,990
Sales and Administrative Expenses 138,362 140,082 107,233 103,143 92,813
Research and Development Expenses 95,299 82,378 58,542 55,283 47,858
Purchased In-Process Technology 14,583 -- -- -- --
Interest Expense 672 775 1,066 933 551
Interest Income (1,818) (2,837) (3,151) (2,925) (4,423)
Other (Income) Expense, Net 28,374 (1,566) 17,449 (686) (314)
EARNINGS BEFORE INCOME TAXES, DISCONTINUED
OPERATIONS AND ACCOUNTING CHANGES 10,553 97,009 48,829 25,398 13,315
PROVISION FOR INCOME TAXES 3,377 31,042 15,624 6,349 3,328
EARNINGS BEFORE DISCONTINUED OPERATIONS AND
ACCOUNTING CHANGES 7,176 65,967 33,205 19,049 9,987
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS
NET OF TAX (13,210) (2,427) 1,817 5,625 6,290
CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- -- -- (4,700) --
NET EARNINGS (LOSS) $ (6,034) $ 63,540 $ 35,022 $ 19,974 $ 16,277
PRIMARY EARNINGS PER SHARE BEFORE
DISCONTINUED OPERATIONS AND ACCOUNTING
CHANGES $ 0.09 $ 0.86 $ 0.44 $ 0.25 $ 0.23
PRIMARY EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.83 $ 0.46 $ 0.27 $ 0.23
CASH DIVIDENDS PAID PER SHARE $ 0.06 $ 0.06 $ 0.06 $0.05 5/6 $0.05 1/3
WORKING CAPITAL $ 301,054 $ 339,665 $302,771 $280,616 $233,691
TOTAL ASSETS $ 763,322 $ 785,264 $640,219 $524,210 $440,913
Short-Term Debt and Current Maturities $ 1,600 $ 1,386 $ 6,487 $ 5,962 $ 4,081
Long-Term Debt 400 773 1,088 1,398 1,704
Stockholders' Equity 463,652 474,189 395,646 352,890 299,725
TOTAL CAPITAL INVESTED $ 465,652 $ 476,348 $403,221 $360,250 $305,510
SALES PER EMPLOYEE $ 240 $ 265 $ 224 $ 220 $ 194
GROSS MARGIN % TO SALES 27.3% 28.2% 30.4% 27.2% 28.9%
RETURN ON SALES BEFORE DISCONTINUED
OPERATIONS AND ACCOUNTING CHANGES 0.7% 5.9% 4.4% 2.9% 1.9%
RETURN ON AVERAGE STOCKHOLDERS' EQUITY (1.3)% 14.7% 9.5% 6.1% 5.7%
22
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NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
BUSINESS
Scientific-Atlanta, Inc. (the "Company") provides its customers with the
products and services they need to develop the advanced terrestrial and
satellite networks that deliver entertainment information and communications.
The Company's products connect information generators with information users via
broadband terrestrial and satellite networks, and include applications for the
converging cable, telephone, and data networks.
The Company operates primarily in one business segment, communications,
providing satellite and terrestrial based networks to a range of customers and
applications, and providing network management and systems integration to add
value to those networks. This segment represents over 90 percent of consolidated
sales, operating profit and identifiable assets.
The Company's products are sold primarily through its own sales personnel who
work out of offices in Atlanta and other metropolitan areas in the United
States. Certain products are also marketed in the United States through
independent sales representatives and distributors. Sales in foreign countries
are made through wholly-owned subsidiaries and branch offices, as well as
through independent distributors and sales representatives.
The materials and supplies purchased by the Company are standard electronic
components, custom integrated circuits, wire, circuit boards, transistors,
capacitors and resistors, all of which are produced by a number of
manufacturers. Matsushita Electronic Components Co., Ltd. manufactures set-top
terminals for the Company and is a primary supplier of those terminals.
Cablevision is a primary supplier of taps for the Company. The Company also
purchases aluminum and steel, including castings and semifabricated items
produced by a variety of sources. The Company considers its sources of supply to
be adequate and is not dependent upon any single supplier, except for Matsushita
Electronic Components Co., Ltd. and Cablevision, for any significant portion of
the materials used in the products it manufactures or the products it sells.
FISCAL YEAR-END
The Company's fiscal year-ends on the Friday closest to June 30 of each year.
Fiscal year-ends are as follows:
1996: June 28, 1996
1995: June 30, 1995
1994: July 1, 1994
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and all subsidiaries after elimination of all material intercompany
accounts and transactions.
USE OF ESTIMATES
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates. The
estimates made by management primarily relate to receivable and inventory
reserves, estimated costs to complete long-term contracts and certain accrued
liabilities, principally relating to warranty and service provisions,
compensation, claims, litigation and taxes.
FOREIGN CURRENCY TRANSLATION
The financial statements of certain foreign operations are translated into U.S.
dollars at current exchange rates. Resulting translation adjustments are
accumulated as a component of stockholders' equity and excluded from net
earnings. Foreign currency transaction gains and losses are included in cost of
sales and other income.
FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange forward contracts to hedge certain firm
commitments and assets denominated in currencies other than the U.S. dollar,
primarily Japanese yen. These contracts are for periods consistent with the
exposure being hedged and generally have maturities of one year or less. 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
23
25
into any foreign exchange forward contracts for speculative trading purposes.
METHOD OF RECORDING CONTRACT PROFITS
Revenues from progress-billed contracts are primarily recorded using the
percentage-of-completion method based on contract costs incurred to date.
Losses, if any, are recorded when determinable. Costs incurred and accrued
profits not billed on these contracts are included in receivables. These
receivables from commercial customers and government agencies were $45,543 at
June 28, 1996 and $32,738 at June 30, 1995. It is anticipated that substantially
all such amounts will be collected within one year.
DEPRECIATION, MAINTENANCE AND REPAIRS
Depreciation is provided using principally the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred. Renewals and betterments are capitalized. The cost and
accumulated depreciation of property retired or otherwise disposed of are
removed from the respective accounts, and the gains or losses thereon are
included in the consolidated statement of earnings.
WARRANTY COSTS
The Company accrues warranty costs at the time of sale. Expenses related to
unusual product warranty problems and product defects are recorded in the period
the problem is identified.
EARNINGS PER SHARE
Earnings per share were computed based on the weighted average number of shares
of common stock outstanding and equivalent shares derived from dilutive stock
options.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Cash at June 28, 1996 includes $470 held in escrow as a contingent
payment for an acquisition. See Note 2.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost includes materials, direct labor, and manufacturing overhead. Market is
defined principally as net realizable value. Inventories include purchased and
manufactured components in various stages of assembly as presented in the
following table:
1996 1995
-------- --------
Raw Materials and
Work-In-Process $131,762 $142,418
Finished Goods 84,005 115,009
-------- --------
Total Inventory $215,767 $257,427
======== ========
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets of businesses acquired is amortized on a
straight-line basis over seventeen years. The Company periodically evaluates the
carrying values assigned to costs in excess of net assets acquired and other
intangible assets.
FINANCIAL PRESENTATION
Certain prior year amounts have been restated to reflect the discontinuance in
1996 of defense related businesses. See Note 5.
2. INVESTMENTS AND ACQUISITION
- ----------------------------------------------------
On June 28, 1996, the Company acquired 100 percent of the outstanding stock of
ATx Telecom Systems, Inc. (ATx) for $24,336 in cash and a contingent payment of
$470 due June 28, 1997. ATx is a supplier of fiber optic products for hybrid
fiber/coax networks.
The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair value at the date
of acquisition. The purchase price of $24,336 has been allocated to the assets
and liabilities acquired. Approximately $14,583 of the total purchase price
represented the value of ATx's in-process technology. Since technological
feasibility had not yet been achieved and there was no alternative future use
for the technology being developed, the amounts allocated to the in-process
technology were expensed concurrent with the purchase.
During 1996, the Company also acquired a minority interest in Wink
Communications, Inc., an enabling software developer, for $2,400.
During 1994 the Company entered into partnership agreements in connection with
the formation of two joint ventures, Comunicaciones Broadband and
Scientific-Atlanta of Shanghai, Ltd., and invested a total of $5,240 in the
partnerships. During 1995 the Company invested an additional $2,410 in these
partnerships and disposed of its investment in Comunicaciones Broadband for a
loss of $197
24
26
which was included in other (income) expense. The Company's equity in the
earnings (losses) of these partnerships was $21, ($296) and ($345) in 1996,
1995, and 1994, respectively.
During 1994, the Company disposed of its investment in International
Cablecasting Technologies, Inc., for a loss of $549 which was included in other
(income) expense.
3. SALES
Sales to Time Warner, Inc. and affiliates were 13 percent of total sales in
1995. Sales to any one customer were less than 10 percent of total sales in 1996
and 1994. Export sales accounted for 36 percent of total sales in 1996, 34
percent in 1995 and 35 percent in 1994. Sales to Europe were 12 percent, 16
percent and 14 percent of total sales in 1996, 1995 and 1994, respectively.
Sales of set-top terminals constituted approximately 27 percent of the Company's
total sales in 1996, and approximately 26 percent and 23 percent of such sales
in 1995 and 1994, respectively. Sales of RF (radio frequency) products were
approximately 21 percent of the Company's total sales in 1996, and approximately
17 percent and 20 percent of such sales in 1995 and 1994, respectively. Foreign
subsidiary sales were not material for any of the three fiscal years presented.
4. OTHER (INCOME) EXPENSES
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. The
Company is currently challenging in federal court the punitive damages portion
($10,000) of the arbitration award.
In July 1996, an arbitration panel awarded StarSight $15,000 in damages, plus
legal and arbitration expenses, and issued a three year limited-term injunction
on the future sales of interactive electronic program guides contained in
set-tops. The panel determined the Company violated the terms of a 1992 license
and technical assistance agreement between the Company and StarSight.
Under the terms of the injunction, the Company is permitted to continue to ship
its existing guides to fill orders it has committed to in signed agreements with
existing customers and to ship any electronic program guides acquired from a
third party or developed by Scientific-Atlanta in accordance with the
arbitration ruling after the date of the award.
The Company intends to develop one or more new program guides for analog and
digital set-tops and is also exploring the possibility of using third party
guides for its products. The Company's royalty-free license to sell the
StarSight guide also remains in effect. The Company believes that compliance
with the terms of the arbitration award will not have a significant impact on
future revenues or profitability.
The arbitration award does not affect a patent infringement suit filed by the
Company in February 1996 against StarSight. In that suit, the Company alleges
that the StarSight CB1500 receiver infringes at least three of the Company's
patents. The suit seeks damages and an injunction against continued
infringement. The Company intends to vigorously pursue that suit.
Other income of $1,566 in 1995 included rental income, royalty income, net gains
from partnership activities and other miscellaneous items. There were no
significant items in other income and other expense during 1995.
Other expense of $17,449 in 1994 included a $17,500 charge to settle securities
class action litigation, losses of $992 from partnership activities and net
gains from other miscellaneous items of $1,043.
The securities class action suit, which was filed in 1988, related to events
which occurred during the early 1980's principally as a result of the
difficulties experienced by the Company in the production and delivery of a new
product. The Company firmly believes it fully complied with the law in this
matter and that the suite was without merit. The litigation was settled in 1994
in the best interest of the Company's shareholders to avoid protracted and
costly legal proceedings and eliminate the uncertainty of a jury trial.
5. DISCONTINUED OPERATIONS
During the quarter ended September 29, 1995, the Company decided to discontinue
its defense-related businesses in San Diego, California because these businesses
were not aligned with the Company's core business strategies. A one-time charge
of $12,172, net of a tax benefit of $5,728, for the estimated loss on the sale
of discontinued operations was recorded in the quarter ended September 29, 1995.
The estimated loss on the sale of discontinued operations included losses of the
operations through the expected date of sale, reserves to adjust the carrying
amount of the net assets held for sale to net realizable value and losses on a
subcontract. The Company had performed work as a subcontractor under a contract
which included options for additional products. The Company believed that some
of these options had not been validly exercised. The Company
25
27
had been negotiating with the prime contractor to increase the pricing on the
unexercised options to provide a reasonable margin and believed these
negotiations would be successful. At the time the Company decided to discontinue
the defense related businesses, the negotiations had deteriorated significantly.
The estimated loss on the disposition was computed on the basis that the Company
would give a buyer a subcontract to complete the options at an amount that would
provide a reasonable margin. No accounting recognition was given to the
Company's claim against the prime contractor due to its uncertain outcome.
Sales and earnings (loss) from discontinued operations were as follows:
1996 1995 1994
------- ------- -------
Sales $25,780 $28,445 $55,660
Earnings (losses) from
discontinued operations,
net of tax $(2,744) $(2,427) $ 1,817
Tax (expense) benefit $ 1,291 $ 1,141 $ (856)
The net assets of the discontinued operations which include inventory, accounts
receivable, machinery and equipment, accounts payable, and accrued expenses are
included in other current assets in the Consolidated Statement of Financial
Position.
6. SUBSEQUENT EVENTS
In July 1996, the Company completed negotiations with the prime contractor to
settle issues related to the pricing of the unexercised options (see Note 5). On
August 14, 1996, the Company completed the sale of its defense-related
businesses to Global Associates, Ltd. (Global) for cash of $13,142 and secured
and unsecured notes aggregating approximately $5,000. The net realizable value
of the assets of the defense-related businesses and the settlement with the
prime contractor were more favorable than the Company had anticipated when it
decided to exit these businesses; accordingly the Company will recognize a
pre-tax gain of approximately $5,000 from these transactions in the first
quarter of fiscal 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. After
recording the pre-tax gain of $5,000, the Company will have a reserve of
approximately $8,900 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.
7. QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal Quarters
-------------------------------------------
1996 First Second Third Fourth
- -------------- -------- -------- -------- --------
Sales $242,193 $261,100 $271,883 $272,725
Gross margin 61,077 67,717 75,210 82,021
Gross margin % 25.2% 25.9% 27.7% 30.1%
Net earnings
(loss) (9,124)(1) 6,601 11,525 (15,036)(2)
Earnings
(loss) per
share (0.12)(1) 0.09 0.15 (0.20)(2)
Stock prices:
High 23.250 16.750 19.250 19.875
Low 16.875 11.500 13.375 14.625
Dividends paid
per share 0.015 0.015 0.015 0.015
- ---------------
(1) Includes charges of $13,210 ($0.17 per share) for the discontinuance of
defense related businesses.
(2) Includes charges of $19,516 ($0.25 per share) to settle an arbitration
proceeding and related costs and $9,916 ($0.14 per share) to write-off
purchased in-process technology in connection with the acquisition of ATx.
Fiscal Quarters
-------------------------------------------
1995 First Second Third Fourth
- -------------- -------- -------- -------- --------
Sales $224,976 $269,690 $309,112 $314,279
Gross margin 67,423 73,810 84,017 90,591
Gross margin % 30.0% 27.4% 27.2% 28.8%
Net earnings 12,013 15,505 17,845 20,604
Earnings per
share 0.16 0.20 0.23 0.27
Stock prices:
High 22.438 22.875 24.875 24.500
Low 16.375 19.125 18.125 18.375
Dividends paid
per share 0.015 0.015 0.015 0.015
8. INDEBTEDNESS
Credit Facility:
At June 28, 1996, the Company had a $300,000 senior credit facility that
provides for unsecured borrowings up to $150,000 which expire May 9, 1997 and up
to $150,000 which expire May 10, 2000. There were no borrowings outstanding
under this facility at June 28, 1996 or June 30, 1995. 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.
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Long-term debt consisted of:
1996 1995
---- ------
6 1/4%-10% capitalized leases, payable
in varying installments ranging from
$200 to $250 through 1999 $650 $ 900
8 1/4% mortgage -- 188
---- ------
1,088
Less-Current maturities 250 315
---- ------
$400 $ 773
==== ======
Long-term debt at June 28, 1996 had scheduled maturities as follows:
1997 -- $250; 1998 -- $200; 1999 -- $200.
At June 28, 1996, property, plant and equipment costing approximately $4,000
were pledged as collateral on long-term debt.
Foreign short-term debt was $1,350 and $1,071 at the end of 1996 and 1995,
respectively. The average interest rates for foreign short-term debt at June 28,
1996 and June 30, 1995 were 10.9 percent and 9.2 percent, respectively.
Total interest paid was $680, $811, and $1,071 in 1996, 1995, and 1994,
respectively.
9. ACCRUED LIABILITIES
Accrued liabilities consisted of:
1996 1995
-------- --------
Compensation.................... $ 24,294 $ 34,747
Arbitration and related costs... 25,383 --
Warranty and service............ 15,852 13,818
Customer down payments.......... 9,282 7,976
Taxes other than income taxes... 8,236 5,613
Other........................... 44,499 51,793
-------- --------
$127,546 $113,947
======== ========
10. OTHER LIABILITIES
Other liabilities consisted of:
1996 1995
------- -------
Retirement........................ $23,645 $22,751
Compensation...................... 8,247 6,285
Other............................. 5,461 5,552
------- -------
$37,353 $34,588
======= =======
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:
1996 1995 1994
------- ------- -------
Statutory federal tax
rate.................... $ 3,693 $33,953 $17,090
State income taxes, net of
federal tax benefit..... (901) 3,430 2,194
Tax reserves.............. 1,689 1 506
Research and development
tax credit.............. -- (2,852) (1,738)
Export incentives......... (1,233) (1,370) (1,096)
Exempt interest income.... (143) (656) (956)
Other, net................ 272 (1,464) (376)
------- ------- -------
$ 3,377 $31,042 $15,624
======= ======= =======
Income tax provision (benefit) includes the following:
1996 1995 1994
-------- ------- -------
Current tax provision
Federal................ $ 10,974 $22,588 $13,906
State.................. 273 5,436 3,719
Foreign................ 10,187 1,138 581
-------- ------- -------
21,434 29,162 18,206
-------- ------- -------
Deferred tax provision
(benefit)
Federal................ (16,300) (389) (1,911)
State.................. (1,659) (195) (263)
Foreign................ (98) 2,464 (408)
-------- ------- -------
(18,057) 1,880 (2,582)
-------- ------- -------
Total provision for
income taxes........... $ 3,377 $31,042 $15,624
======== ======= =======
Total income taxes paid include settlement payments for federal, state and
foreign audit adjustments. The total income taxes paid were $5,394, $28,937 and
$1,551 in 1996, 1995, and 1994, respectively.
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The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1996 1995
------- -------
Current deferred tax assets
Expenses not currently
deductible.................... $33,593 $13,582
Inventory valuation............. 12,108 9,876
Warranty reserves............... 3,632 3,077
Bad debt reserves............... 1,353 1,432
Other........................... 293 304
------- -------
Current deferred tax assets....... $50,979 $28,271
======= =======
Noncurrent deferred tax assets
Postretirement and
postemployment
benefits...................... $10,477 $12,235
Tax credit/loss carryforwards... 267 633
Expenses not currently
deductible.................... 2,707 1,748
------- -------
Noncurrent deferred tax
assets.......................... 13,451 14,616
Noncurrent deferred tax
liabilities
Depreciation and amortization... (4,322) (7,461)
------- -------
Net noncurrent deferred tax
asset........................... $ 9,129 $ 7,155
======= =======
Valuation allowances for current deferred tax assets and noncurrent deferred tax
assets were not required in 1996 or 1995.
The net noncurrent deferred tax asset is included in Other Assets at June 28,
1996 and June 30, 1995.
In 1996, 1995, and 1994, earnings before income taxes included $33,745, $8,571,
and $2,641, respectively, of earnings generated 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
and compensation.
The Company's funding policy is to contribute annually the amount expensed each
year consistent with the requirements of federal law to the extent that such
costs are currently deductible.
The following table sets forth the plan's funded status, 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:
1996 1995
-------- --------
Accumulated benefit obligation
Vested portion $ 55,252 $ 49,723
Nonvested portion 2,274 2,234
-------- --------
57,526 51,957
Effect of projected future
compensation levels 17,215 15,144
-------- --------
Projected benefit
obligation 74,741 67,101
Plan assets at fair value (75,155) (60,381)
-------- --------
Projected benefit obligation in
excess of (less than) plan
assets (414) 6,720
Unrecognized prior service costs 351 384
Unrecognized gain (loss) 528 (2,855)
Unrecognized net asset from
initial application of SFAS 87 7,025 7,681
Fourth quarter
contribution (279) (999)
-------- --------
Accrued pension cost $ 7,211 $ 10,931
======== ========
Discount rate 7.75% 8.0%
Rate of increase in future
compensation 4.5% 4.5%
Expected long-term rate of
return on assets 10.0% 10.0%
Plan assets are invested in listed stocks, bonds and short-term monetary
investments.
The Company's net pension expense was $3,325 in 1996, $2,483 in 1995, and $2,709
in 1994.
The components of pension expense are as follows:
1996 1995 1994
-------- ------- -------
Service cost of benefits
earned $ 5,169 $ 4,059 $ 4,522
Interest cost 5,128 4,826 4,295
Actual return on plan
assets (12,532) (4,821) (2,694)
Net amortization and
deferral 5,560 (1,581) (3,414)
-------- ------- -------
Net periodic pension cost $ 3,325 $ 2,483 $ 2,709
======== ======= =======
The Company has unfunded defined benefit retirement plans for certain key
officers and non-employee directors. Accrued pension cost for these plans was
$6,842 at June 28, 1996 and $5,521 at June 30, 1995. Retirement expense for
these plans was $1,366, $1,223, and $906 in 1996, 1995, and 1994, respectively.
28
30
In addition to providing pension benefits, the Company has contributory plans
that provide certain health care and life insurance benefits to eligible retired
employees.
The following table sets forth the plan's funded status and amounts recognized
in the Company's Consolidated Statement of Financial Position at year-end, using
March 31 as a measurement date for all actuarial calculations of liability
values:
1996 1995
------- -------
Accumulated postretirement benefit
obligation
Retirees $ 9,069 $ 8,876
Fully eligible active
participants 181 177
Other active participants 293 287
------- -------
9,543 9,340
Unrecognized net gain 978 1,200
Fourth quarter claims payments (220) (167)
------- -------
Accrued postretirement benefit
cost $10,301 $10,373
======= =======
The components of postretirement benefit expense are as follows:
1996 1995
---- ----
Service cost of benefits earned $ 39 $ 30
Interest cost 719 740
Net amortization and deferral (26) (11)
---- ----
Postretirement benefit expense $732 $759
==== ====
Significant actuarial assumptions are as follows:
1996 1995
----- -----
Annual rate of increase in per capita
cost
Pre-Medicare 11.25% 11.25%
Annual decline 0.75% 0.75%
Final rate of increase 6.00% 6.00%
Post-Medicare 9.50% 9.50%
Annual decline 0.50% 0.50%
Final rate of increase 6.00% 6.00%
Impact of one percentage point in
health care cost trend rate on
Accumulated postretirement
benefit obligation 7.6% 8.6%
Interest cost component of
benefits 11.2% 9.0%
Discount rate used to measure
accumulated postretirement benefit
obligation 7.75% 8.0%
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
contracts is based on quoted market prices.
1996 1995
--------------------- ----------------------
CARRYING/ Carrying/
CONTRACT FAIR Contract Fair
AMOUNT VALUE Amount Value
--------- -------- --------- ---------
Cash and
cash
equivalents $ 20,930 $ 20,930 $ 80,311 $ 80,311
Foreign
currency
contracts
Sell $ 7,999 $ 8,152 $ 7,185 $ 7,605
Buy $ 61,700 $ 59,245 $ 129,570 $ 127,749
14. RELATED PARTY TRANSACTIONS
During 1996 the Company had sales of $2,728 to Scientific-Atlanta of Shanghai,
Ltd. and a net receivable of $760 at June 28, 1996.
During 1995 the Company had sales of $3,384 to Scientific-Atlanta of Shanghai,
Ltd. and a net receivable of $420 at June 30, 1995.
During 1994 the Company had sales of $12,127 to Comunicaciones Broadband and
Scientific-Atlanta of Shanghai, Ltd. and had a net receivable of $4,774 from
these partnerships at July 1, 1994.
15. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Rental expense under operating lease agreements for facilities and equipment for
1996, 1995 and 1994 was $15,347, $10,696 and $9,303, respectively. The Company
pays taxes, insurance, and maintenance costs with respect to most leased items.
Remaining operating lease terms, including renewals, range up to fourteen years.
Future minimum payments at June 28, 1996, under operating leases were $46,846.
Payments under these leases for the next five years are as follows:
1997 -- $11,460; 1998 -- $9,702; 1999 -- $6,422; 2000 -- $4,657; 2001 -- $3,106.
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.
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