-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LhXaigE7QJKLQvkOe6bLtI5Li3H+i2FNMgOS8W3iui/hyiqD7OQHful9ERQvb/32 JI/dczLxUxn2GDx+pBN4KQ== 0000931763-02-000299.txt : 20020414 0000931763-02-000299.hdr.sgml : 20020414 ACCESSION NUMBER: 0000931763-02-000299 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011228 FILED AS OF DATE: 20020211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC ATLANTA INC CENTRAL INDEX KEY: 0000087777 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 580612397 STATE OF INCORPORATION: GA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05517 FILM NUMBER: 02533557 BUSINESS ADDRESS: STREET 1: 5030 SUGARLOAF PARKWAY CITY: LAWRENCEVILLE STATE: GA ZIP: 30044 BUSINESS PHONE: 7709035000 MAIL ADDRESS: STREET 1: 5030 SUGARLOAF PARKWAY CITY: LAWRENCEVILLE STATE: GA ZIP: 30044 FORMER COMPANY: FORMER CONFORMED NAME: SCIENTIFIC ASSOCIATES INC DATE OF NAME CHANGE: 19671024 10-Q 1 d10q.txt QUARTERLY FINANCIAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 28, 2001 ----------------------------------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ___________________ Commission file number 1-5517 SCIENTIFIC-ATLANTA, INC. (Exact name of Registrant as specified in its charter) Georgia 58-0612397 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5030 Sugarloaf Parkway 30042-5447 Lawrenceville, Georgia (Zip Code) (Address of principal executive offices) 770-236-5000 (Registrant's telephone number, including area code) 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_____ ------ As of January 25, 2002, Scientific-Atlanta, Inc. had outstanding 156,432,136 shares of common stock. PART I - FINANCIAL INFORMATION SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Six Months Ended ---------------------------------- ---------------------------------- December 28, December 29, December 28, December 29, 2001 2000 2001 2000 ---------------- --------------- --------------- --------------- SALES $ 418,194 $ 631,430 $ 828,291 $ 1,228,670 --------- ---------- ---------- ----------- COSTS AND EXPENSES Cost of sales 278,567 436,984 557,483 857,075 Sales and administrative 46,392 57,170 91,080 108,409 Research and development 35,550 38,600 73,197 73,309 Restructuring 18,737 - 18,737 - Interest expense 133 87 216 194 Interest income (5,803) (10,350) (11,912) (19,343) Other (income) expense, net (14,955) 1,663 (16,312) (74,727) --------- ---------- ---------- ----------- Total costs and expenses 358,621 524,154 712,489 944,917 --------- ---------- ---------- ----------- EARNINGS BEFORE INCOME TAXES 59,573 107,276 115,802 283,753 PROVISION (BENEFIT) FOR INCOME TAXES Current 22,277 44,368 38,224 109,595 Deferred (1,859) (7,894) 1,312 (9,927) --------- ---------- ---------- ------------ NET EARNINGS $ 39,155 $ 70,802 $ 76,266 $ 184,085 ========= ========== ========== =========== EARNINGS PER COMMON SHARE BASIC $ 0.25 $ 0.44 $ 0.49 $ 1.15 ========= ========== ========== =========== DILUTED $ 0.25 $ 0.42 $ 0.48 $ 1.09 ========= ========== ========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 156,072 161,167 157,042 160,731 ========= ========== ========== =========== DILUTED 157,559 167,247 158,738 168,115 ========= ========== ========== =========== DIVIDENDS PER SHARE PAID $ 0.01 $ 0.01 $ 0.02 $ 0.02 ========= ========== ========== ===========
SEE ACCOMPANYING NOTES 2 of 12 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
In Thousands -------------------------------------- December 28, June 29, 2001 2001 ---------------- ---------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 533,952 $ 563,322 Short-term investments 194,719 191,001 Receivables, less allowance for doubtful accounts of $5,458,000 at December 28 and $5,982,000 at June 29 389,118 502,289 Inventories 184,782 201,762 Deferred income taxes 55,280 57,195 Other current assets 27,597 33,165 --------- --------- TOTAL CURRENT ASSETS 1,385,448 1,548,734 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 22,266 22,218 Building and improvements 68,993 67,946 Machinery and equipment 249,308 246,385 --------- --------- 340,567 336,549 Less - Accumulated depreciation and amortization 126,812 108,934 --------- --------- 213,755 227,615 --------- --------- GOODWILL 58,066 58,063 --------- --------- INTANGIBLE ASSETS 32,873 35,790 --------- --------- NON-CURRENT MARKETABLE SECURITIES 29,515 17,159 --------- --------- DEFERRED INCOME TAXES 25,699 26,732 --------- --------- OTHER ASSETS 95,338 88,735 --------- --------- TOTAL ASSETS $1,840,694 $2,002,828 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $ - $ 91 Accounts payable 165,199 223,990 Accrued liabilities 140,558 164,991 Income taxes currently payable 13,859 5,051 --------- --------- TOTAL CURRENT LIABILITIES 319,616 394,123 --------- --------- OTHER LIABILITIES 124,483 99,766 --------- --------- STOCKHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares; - - no shares issued Common stock, $0.50 par value, authorized 350,000,000 shares; issued 164,992,376 shares at December 28 and 164,899,158 shares at June 29 82,496 82,450 Additional paid-in capital 548,392 545,602 Retained earnings 1,008,181 935,038 Accumulated other comprehensive income, net of taxes of $5,172,000 at December 28 and $3,723,000 at June 29 (8,438) (6,075) --------- --------- 1,630,631 1,557,015 Less - Treasury stock, at cost (8,667,770 shares at December 28 and 859,339 shares at June 29) 234,036 48,076 --------- --------- 1,396,595 1,508,939 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,840,694 $2,002,828 ========= =========
SEE ACCOMPANYING NOTES 3 of 12 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months Ended ----------------------------------- December 28, December 29, 2001 2000 --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 173,761 $ 22,492 --------- ------- INVESTING ACTIVITIES: Proceeds from the sale of investments - 84,158 Purchases of short-term investments, net (3,718) (73,737) Purchases of property, plant, and equipment (14,784) (66,831) Investments - (9,000) Acquisition of business - (2,529) Other 75 62 --------- ------- Net cash used by investing activities (18,427) (67,877) --------- ------- FINANCING ACTIVITIES: Issuance of common stock 2,503 33,858 Treasury shares acquired (183,993) - Dividends paid (3,123) (3,219) Principal payments on debt (91) (190) --------- ------- Net cash provided (used) by financing activities (184,704) 30,449 --------- ------- DECREASE IN CASH AND CASH EQUIVALENTS (29,370) (14,936) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 563,322 462,496 --------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 533,952 $ 447,560 ========= ======= SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the period: Interest $ 185 $ 164 ========= ======= Income taxes, net $ 24,947 $ 26,551 ========= ======= Non-cash investing activities: Net assets of business acquired for subsidiary stock: Fair value of assets, including goodwill $ - $ 32,184 Liabilities assumed $ - $ 17,191
SEE ACCOMPANYING NOTES 4 of 12 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED)
Three Months Ended Six Months Ended ------------------ ---------------- December 28, December 29, December 28, December 29, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ NET EARNINGS $ 39,155 $ 70,802 $ 76,266 $ 184,085 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX/(1)/ Unrealized gains (losses) on marketable securities, net of reclassification adjustments of $0 in the three and six months ended December 28, 2001, $0 in the three months ended December 29, 2000 and $65,791 in the six months ended December 29, 2000 3,142 (80,368) (2,600) (195,847) Minimum liability adjustments on retirement plans - - 62 (416) Foreign currency translation adjustments (958) 809 529 (230) Changes in fair value of derivatives 244 - (354) - ------------ ----------- ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 41,583 $ (8,757) $ 73,903 $ (12,408) ============ =========== ============ ============
/(1)/ Assumed 38 percent tax in fiscal years 2002 and 2001. SEE ACCOMPANYING NOTES 5 of 12 NOTES: (Amounts in thousands, except share data). A. The accompanying consolidated financial statements include the accounts of Scientific-Atlanta and all subsidiaries after elimination of all material intercompany accounts and transactions. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our fiscal year 2001 Annual Report on Form 10-K. The financial information presented in the accompanying statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods indicated. All such adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation. B. Basic earnings per share were computed based on the weighted average number of shares of common stock outstanding. Diluted earnings per share were computed based on the weighted average number of outstanding common shares and potentially dilutive shares. Basic and diluted earnings per share are as follows:
Three Months Ended December 28, 2001 Three Months Ended December 29, 2000 --------------------------------------- ------------------------------------------ Net Per Share Net Per Share Earnings Shares Amount Earnings Shares Amount -------- ------ ------ -------- ------ ------ Basic earnings per common share: Net earnings $ 39,155 156,072 $ 0.25 $ 70,802 161,167 $ 0.44 Diluted earnings per common share: Net earnings $ 39,155 157,559 $ 0.25 $ 70,802 167,247 $ 0.42 -------- ------- ------- --------- ------- ------- Effect of dilutive stock options $ - 1,487 $ - $ - 6,080 $ (0.02) ======== ======= ======= ========= ======= ======= Six Months Ended December 28, 2001 Six Months Ended December 29, 2000 --------------------------------------- ------------------------------------------ Net Per Share Net Per Share Earnings Shares Amount Earnings Shares Amount -------- ------ ------ -------- ------ ------ Basic earnings per common share: Net earnings $ 76,266 157,042 $ 0.49 $ 184,085 160,731 $ 1.15 Diluted earnings per common share: Net earnings $ 76,266 158,738 $ 0.48 $ 184,085 168,115 $ 1.09 -------- ------- ------- --------- ------- ------- Effect of dilutive stock options $ - 1,696 $ (0.1) $ - 7,384 $ (0.06) ======== ======= ======= ========= ======= =======
The following information pertains to options to purchase shares of common stock which were not included in the computation of diluted earnings per common share because the option's exercise price was greater than the average market price of the common shares and inclusion of the options in the earnings per share calculation would have been anti-dilutive: December 28, December 29, 2001 2000 ------------ ------------ Number of options outstanding 12,506,060 2,018,399 Weighted average exercise price $ 46.84 $ 63.57 6 of 12
C. Inventories consist of the following: December 28, June 29, 2001 2001 ------------ ---------- Raw materials and work-in-process $ 104,014 $ 144,270 Finished goods 80,768 57,492 ---------- ---------- Total inventory $ 184,782 $ 201,762 ========== ==========
D. During the six months ended December 28, 2001, we purchased 7,925,000 shares of our common stock at an aggregate cost of $183,993 pursuant to a stock buyback program announced in March 2000. In July 2001, we announced a buyback program for the purchase of up to 8,000,000 additional shares of our common stock. We plan to use the shares repurchased for issuance under our employee stock option plans and other benefit plans. We acquired 111,682 shares and 138,188 shares of our common stock from the deferral and conversion to cash of the payment of restricted stock that vested during the six months ended December 28, 2001 and December 29, 2000, respectively. In addition, we acquired 55,719 shares and 42,770 shares of our common stock from the payment in stock rather than cash by employees of tax withholding on restricted stock that vested during the six months ended December 28, 2001 and December 29, 2000, respectively. E. Other (income) expense for the quarter and six months ended December 28, 2001 included a gain of $16,200 from the appreciation in the market value of a warrant to purchase common stock. Other (income) expense for the six months ended December 29, 2000 included a gain of $78,757 from the sale of a portion of our investment in Bookham Technology plc, a UK-based developer and supplier of optical components. This gain was partially offset by other miscellaneous expenses. There were no significant items in other (income) expense for the quarter ended December 29, 2000. F. In July 2000, PowerTV, Inc., a majority-owned subsidiary of Scientific-Atlanta, acquired 100 percent of the outstanding stock of PRASARA Technologies, Inc. for shares of PowerTV common stock and $2,609 in cash. The acquisition was accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities were recorded at their estimated fair value at the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed including $14,643 of goodwill and $17,065 of other intangibles. G. Scientific-Atlanta adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" in the first quarter of fiscal year 2002. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization. In the three and six months ended December 29, 2000, goodwill amortization expense, net of tax, was $657 and $1,293, respectively. The impact of goodwill amortization on basic and diluted earnings per share follows:
Three Months Ended Six Months Ended December 28, December 29, December 28, December 29, 2001 2000 2001 2000 ----------- ------------ ------------ ------------ Reported net earnings $ 39,155 $ 70,802 $ 76,266 $ 184,085 Add: Goodwill amortization -- 657 -- 1,293 ----------- ------------ ------------ ------------ Adjusted net earnings $ 39,155 $ 71,459 $ 76,266 $ 185,378 =========== ============ ============ ============ Basic earnings per share: Reported net earnings $ 0.25 $ 0.44 $ 0.49 $ 1.15 Goodwill amortization -- -- -- 0.01 ---------- ------------ ------------ ------------ Adjusted net earnings $ 0.25 $ 0.44 $ 0.49 $ 1.16 ========== ============ ============ ============ Diluted earnings per share Reported net earnings $ 0.25 $ 0.42 $ 0.48 $ 1.09 Goodwill amortization -- 0.01 -- 0.01 ---------- ------------ ------------ ------------ Adjusted net earnings $ 0.25 $ 0.43 $ 0.48 $ 1.10 ========== ============ ============ ============
This statement also established a new method of testing goodwill for impairment. The results of our assessment did not result in any charges to operations for impairment of goodwill. 7 of 12 H. In October 2001, we announced a restructuring of our worldwide operations in response to the business decline which included a headcount reduction of approximately 750 people and the consolidation of substantially all of our Atlanta, Georgia manufacturing operations into our Juarez, Mexico facility. During the quarter ended December 28, 2001, we recorded restructuring charges of $18,737 which included severance costs of $9,862 for approximately 750 employees, $4,632 for expenses related to contractual obligations under leases to be cancelled, $2,102 for assets to be abandoned and $2,141 of miscellaneous expenses, primarily costs incurred in the quarter related to the transfer of manufacturing operations from Atlanta to Juarez. As of December 28, 2001, severance costs of approximately $2,729 had been paid to approximately 250 employees who had actually been terminated. The remaining 500 employees are primarily associated with manufacturing operations in Atlanta. We expect to complete the restructuring plan, including the closing of the Atlanta manufacturing facility, by the end of the fiscal year. I. On January 3, 2002, Scientific-Atlanta paid $142,518 for 92.4 percent of the outstanding shares of BarcoNet NV, a European manufacturer of transmission and headend products for the cable industry, pursuant to a previously announced tender offer. We acquired an additional 4.1 percent of the outstanding shares for approximately $6,000 from a re-opened tender that will settle on February 12, 2002. These transactions had no effect on our second quarter financial results. We intend to do a squeeze-out to acquire all remaining equity securities. 8 of 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Scientific-Atlanta had stockholders' equity of $1.4 billion and cash on hand was $534.0 million at December 28, 2001. Cash decreased $29.4 million during the six months ended December 28, 2001. The decline was due primarily to the repurchase of 7,925,000 shares of our common stock for $184.0 million, which more than offset the $173.8 million of cash generated by operations. The current ratio of Scientific-Atlanta was 4.3:1 at December 28, 2001, up from 3.9:1 at June 29, 2001. We believe that funds generated from operations, existing cash balances and our available senior credit facility will be sufficient to support operations. On January 3, 2002 Scientific-Atlanta paid cash of $142.5 million for 92.4 percent of the outstanding shares of BarcoNet NV, a European manufacturer of transmission and headend products for the cable industry throughout Europe and Asia. We acquired an additional 4.1 percent of the outstanding shares for approximately $6.0 million from a re-opened tender that will settle on February 12, 2002. These transactions had no effect on our second quarter financial results. We intend to do a squeeze-out to acquire all remaining equity securities. RESULTS OF OPERATIONS - --------------------- Scientific-Atlanta experienced declines in sales this quarter and for the first six months of fiscal year 2002 as compared to the prior year. These declines are attributable to lower unit sales volume of both subscriber and transmission products and lower average selling prices for digital set-tops. The number of digital set-tops shipped declined for both the second fiscal quarter and for the six months over comparable periods last year. Sales of digital set-tops depend in large part on the number of new net digital subscribers added by our customers. We believe the reduced sales levels were due, in large part, to the economic recession in the U.S. and other parts of the world and the resulting decline in capital spending by MSOs. A number of MSOs in Europe have publicly reported financial difficulties, which may adversely affect our potential for sales to these customers. Over the last six months, overall set-top pricing has declined approximately 10 percent. We believe these declines will continue in the future for our lower end models. Recently introduced high definition television set-tops and our Explorer(R) 4100 set-tops with integrated DOCSIS cable modems and Explorer 8000 set-tops which contain integrated hard drives and single user interfaces for personal video recording capabilities, which will both be introduced in the fourth fiscal quarter, will sell for higher per unit prices and may favorably impact the average sales price for digital set-tops. Sales for the quarter ended December 28, 2001 were $418.2 million, down 34 percent from the prior year, but up slightly over the preceding quarter. Sales of subscriber products were $282.8 million, down 33 percent from the prior year. We shipped approximately 865 thousand Explorer digital set-tops during the second quarter of fiscal 2002, down from 1.1 million in the prior year. In support of the on-demand television plans of our customers, we shipped 1,686 MultiQAM Modulators (MQAMs) in the quarter, up 75 percent over the prior year. MQAMS are capable of bringing video on demand and subscription video on demand services to digital cable subscribers. Scientific-Atlanta also shipped approximately 184 thousand cable modems during the quarter. Sales of transmission products were $117.8 million in the second quarter, down 36 percent from the prior year. International sales of transmission products increased 10 percent in the second quarter over the same quarter last year primarily from sales of products and services to Callahan NRW in Germany. Total international sales were 19 percent of total sales in the second quarter, as compared to 14 percent of total sales in the prior year. Sales for the six months ended December 28, 2001 were $828.3 million, down 33 percent from the prior year. Sales of subscriber products were $561.5 million, down 31 percent from the prior year. We shipped approximately 1.7 million digital set-tops during the six months ended December 28, 2001, down from over 2.1 million in the comparable period of the prior year. Sales of transmission products were $228.1 million, down 38 percent from the prior year. International sales were 20 percent of total sales in the six months ended December 28, 2001, up from 16 percent of total sales in the six months ended December 29, 2000. 9 of 12 Gross margins were 33.4 percent and 32.7 percent of sales for the three and six months ended December 28, 2001, 2.6 percentage points and 2.5 percentage points, respectively, higher than the comparable periods of the prior year. The continued benefit of cost reductions through product design, procurement and manufacturing more than offset the impact of lower volumes and price reductions in the quarter and six months ended December 28, 2001 as compared to the prior year. Research and development costs were $35.6 million in the quarter ended December 28, 2001, down 8 percent from the prior year due to the previously announced worldwide restructuring and expense reduction efforts. Research and development costs were $73.2 million for the six months ended December 28, 2001, flat as compared to the prior year. Research and development efforts during the year continued to focus on the development of applications and enhancements to our interactive broadband networks. Scientific-Atlanta continues to invest in research and development programs to support existing products as well as future potential products and services for our customer base. Selling and administrative expenses were $46.4 million and $91.1 million for the three and six months ended December 28, 2001, respectively, down 19 percent and 16 percent, respectively, from the comparable periods of the prior year. Reduced incentives due to our lower profitability, restructuring and expense reduction efforts and the elimination of amortization expense for goodwill resulted in lower selling and administrative expenses in the three and six months ended December 28, 2001. These reductions were offset partially by higher professional fees related to previously disclosed litigation. Scientific-Atlanta adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" in the first quarter of fiscal year 2002. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization. In the quarter and six months ended December 29, 2000, goodwill amortization expense was $0.7 million and $1.3 million, respectively. SFAS No. 142 also requires an impairment test of goodwill upon adoption. The results of our assessment did not result in any charges to operations for impairment of goodwill. In October 2001, we announced a restructuring of our worldwide operations in response to the business decline which included a headcount reduction of approximately 750 people and the consolidation of substantially all of our Atlanta, Georgia manufacturing operations into our Juarez, Mexico facility. During the quarter ended December 28, 2001, we recorded restructuring charges of $18.7 million which included severance costs of $9.9 million for approximately 750 employees, $4.6 million for expenses related to contractual obligations under leases to be cancelled, $2.1 million for assets to be abandoned and $2.1 million of miscellaneous expenses, primarily costs incurred in the quarter related to the transfer of manufacturing operations from Atlanta to Juarez. As of December 28, 2001, severance costs of approximately $2.8 million had been paid to approximately 250 employees who had actually been terminated. The remaining 500 employees are primarily associated with manufacturing operations in Atlanta. We expect to complete the restructuring plan, including the closing of the Atlanta manufacturing facility, by the end of the fiscal year. We anticipate that the restructuring will reduce costs and expenses by approximately $59.0 million on an annual basis, starting in the third quarter of fiscal year 2002. We also expect to record additional charges of approximately $9.0 million related to the restructuring plan in the second half of the fiscal year. Other (income) expense for the three and six months ended December 28, 2001 included a gain of $16.2 million from the appreciation in the market value of a warrant to purchase common stock. Other (income) expense for the six months ended December 29, 2000 included a gain of $78.8 million from the sale of a portion of our investment in Bookham Technology plc. This gain was partially offset by other miscellaneous expenses. There were no significant items in other (income) expense for the quarter ended December 29, 2000. Earnings before income taxes were $59.6 million and $115.8 million for the three and six months ended December 28, 2001, respectively, down $47.7 million and $168.0 million, respectively, from the comparable periods of the prior year. Lower volume of sales in the three and six months ended December 28, 2001 as compared to the prior year and charges related to our worldwide restructuring plan were the primary drivers in the year-over-year declines. These declines were partially offset by lower operating expenses and improved gross margin rates in fiscal year 2002. In the three months ended December 28, 2001, we also recorded a gain of $16.3 million from the appreciation in the market value of an investment. 10 of 12 Scientific-Atlanta's effective income tax rate was 34 percent for the three and six months ended December 28, 2001, unchanged from the quarter ended December 29, 2001 but down one percentage point from the six months ended December 29, 2000. The higher rate in fiscal year 2000 was due to the impact on the tax rate from research and development credits which was diminished with the higher levels of pretax earnings, as well as taxes to be paid on the gains from the sale of investments. Net earnings for the three and six months ended December 28, 2001 were $39.2 million and $76.3 million, respectively, compared to $70.8 million and $184.1 million in the comparable periods of the prior year. The year-over-year declines were driven primarily by lower volume of sales and charges in the three and six months ended December 28, 2001 related to our worldwide restructuring. Any statements in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not statements about historical facts are forward-looking statements. Such forward-looking statements are based upon current expectations but involve risks and uncertainties. Investors are referred to the Cautionary Statements contained in Exhibit 99 to this Form 10-Q for a description of the various risks and uncertainties that could cause Scientific-Atlanta's actual results and experience to differ materially from the anticipated results or other expectations expressed in Scientific-Atlanta's forward-looking statements. Such Exhibit 99 is hereby incorporated by reference into Management's Discussion and Analysis of Financial Condition and Results of Operations. Explorer is a registered trademark of Scientific-Atlanta, Inc. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------- ----------------------------------------------------------- (In thousands, except per dollar amounts) We are exposed to market risks from changes in foreign exchange rates and have a process to monitor and manage these risks. Scientific-Atlanta enters into foreign exchange forward contracts to hedge certain firm commitments and assets denominated in currencies other than the U.S. dollar. These contracts are for periods consistent with the exposure being hedged and generally have maturities of one year or less. Contracts are recorded at fair value. Changes in the fair value of derivatives are recorded in other comprehensive income until the underlying transaction affects earnings. Any ineffectiveness is recorded through earnings. Our foreign exchange forward contracts do not significantly subject our results of operations to risk due to exchange rate fluctuations because gains and losses on these contracts generally offset losses and gains on the exposure being hedged. Unrealized gains and losses on foreign exchange forward contracts, which do not meet the criteria for a hedge, are recognized in other (income) expense. During the quarter ended December 28, 2001, we entered into forward contracts to purchase 188,500 Euros related to the acquisition of BarcoNet and recorded realized and unrealized gains of $490 and $35, respectively. At December 28, 2001, we had one of these contracts for 15,000 Euros at a rate of 0.88 to the U.S. dollar remaining which will be settled in the third quarter of fiscal 2002. Scientific-Atlanta holds a warrant to purchase common stock that is recorded at fair value. We also entered into a collar with put and call options which is designed to limit our exposure to fluctuations in the fair value of the warrant. During the three and six months ended December 28, 2001, we recorded unrealized gains of $16,311 from the appreciation in the fair value of the warrant and collar in other (income) expense. Firmly committed purchase (sales) exposure and related hedging instruments at December 28, 2001 are as follows:
Canadian Euros Dollars ------------ ----------- Firmly committed purchase (sales) contracts (27,540) 23,446 Notional amount of forward exchange contracts (26,858) 17,200 Average contract amount (Foreign currency/United States dollar) 0.90 1.56
Scientific-Atlanta has no derivative exposure beyond the third quarter of fiscal year 2003. 11 of 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings. - ------- On December 3 through December 20, 2001, a hearing was held before an Administrative Law Judge in the International Trade Commission action described in Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001. An initial determination from the Judge is expected on or before March 21, 2002. The initial determination will be subject to review by the International Trade Commission, which in turn will issue a final determination on or before June 21, 2002. Item 4. Submission of Matters to a Vote of Security Holders. - ------- The following information is furnished with respect to matters submitted to a vote of security holders through the solicitation of proxies: (a) The matters described below were submitted to a vote of security holders at the Annual Meeting of Shareholders held on November 7, 2001. (b) Election of directors:
Votes For Withhold Authority ----------- ------------------ James I. Cash, Jr 130,847,648 1,364,188 David W. Dorman 130,990,986 1,220,850 James F. McDonald 130,968,040 1,243,796 Terence F. McGuirk 130,929,420 1,282,416
Marion H. Antonini, William E. Kassling, Mylle Bell Mangum, David J. McLaughlin, James V. Napier and Sam Nunn continue as directors (c)(i) Ratification of the selection of Arthur Andersen LLP as independent auditors for fiscal year ending June 28, 2002 Votes For Votes Against Abstain ------------------- ------------- --------------- 128,635,097 2,852,600 724,139 Item 6. Exhibits and Reports on Form 8-K. - ------- (c) Exhibits. Exhibit No. Description ----------- ----------- 99 Cautionary Statements (d) No reports on Form 8-K were filed during the quarter ended December 28, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SCIENTIFIC-ATLANTA, INC. ------------------------ (Registrant) Date: February 11, 2002 By: /s/ Wallace G. Haislip -------------------- -------------------------------------- Wallace G. Haislip Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and duly authorized signatory of the Registrant) 12 of 12 EX-99 3 dex99.txt CAUTIONARY STATEMENTS EXHIBIT 99 CAUTIONARY STATEMENTS General From time to time, Scientific-Atlanta may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. In fact, this Form 10-Q (or any other periodic reporting documents required by the Exchange Act) may contain forward-looking statements reflecting our current views concerning potential future events or developments. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. These Cautionary Statements are being made pursuant to the provisions of the Private Securities Litigation Reform Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. In order to comply with the terms of the "safe harbor," we caution investors that any forward-looking statements made by us are not guarantees of future performance and that a variety of factors, including those discussed below, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties which may affect the operations, performance, development and results of our business and some of which are described in more detail below include, but are not limited to, the following: . uncertainties relating to economic conditions (including the growth of the cable industry); . uncertainties relating to customer plans and commitments; . changes in customer order patterns; . changes in the ownership and/or management of our major customers and their competitors; . our dependence on the cable television industry and cable television spending; . development and timing of the introduction of software applications for the Explorer network; . insufficient, excess or obsolete inventory; . the pricing and availability of equipment, materials and inventories; . performance issues with key suppliers and subcontractors; . the entry of new, well-capitalized competitors into our markets; . delays in development, manufacture, and/or deployment of new products, including digital set-top products and the software applications to be used on such digital set-top products; . delays in testing of new products; . technological developments; . signal security; . uncertainties relating to the development and ownership of intellectual property; . uncertainties relating to the ability of Scientific-Atlanta and other companies to enforce their intellectual property rights; . regulatory uncertainties; . uncertainties inherent in international operations and foreign currency fluctuations; . worldwide political stability and economic growth; . uncertainties relating to the impact of the terrorist events of September 11, 2001 and the resulting hostilities in Afghanistan; . governmental export and import policies, and global trade policies; . uncertainties related to the regulation of the Internet; and . the impact of a major earthquake on our operations. The words "may," "will," "should," "continue," "future," "potential," "believe," "expect," "anticipate," "project," "plan," "intend," "seek," "estimate" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Factors That May Affect Future Performance Dependence on Key Customers. Although the domestic cable television industry is comprised of thousands of cable systems, a small number of large cable television multiple systems operators (MSOs) own a large portion of the cable television systems and account for a significant portion of the capital expenditures made by cable television system operators. Historically, a significant majority of our sales have been to relatively few customers. Sales of products to AOL Time Warner, Inc. and its affiliates were 22 percent, 23 percent and 16 percent of our total sales in fiscal years 2001, 2000 and 1999, respectively. Sales of products to Charter Communications, Inc. and its affiliates were 20 percent, 14 percent and 7 percent of sales in fiscal years 2001, 2000 and 1999, respectively. Sales of products to Adelphia and its affiliates were 18 percent, 2 percent and 2 percent of sales in fiscal years 2001, 2000 and 1999, respectively. Sales of products to AT&T and its affiliates were 2 percent, 10 percent and 16 percent of our total sales in fiscal years 2001, 2000 and 1999, respectively. The loss of business from a significant MSO could have a material adverse effect on our business. Dependence on Principal Product Line. Sales of our Explorer digital set-tops constituted approximately 57 percent, 34 percent and 15 percent of our total sales in fiscal years 2001, 2000 and 1999, respectively. We expect that sales of our Explorer set-tops will continue to account for a significant portion of our revenues for the foreseeable future. As a result, our financial performance will depend in significant part on continued market acceptance of the Explorer digital set-tops and the growth of the digital interactive television application market. Sales of Explorer digital set-tops depend in large part on the number of new "net digital subscriber additions" added by our customers. "Net digital subscriber additions" in any period is the number of new digital subscribers added in that period less the number of previous digital subscribers who discontinued that service in the same period. The number of net digital subscriber additions is usually published quarterly by each MSO. We are unable to predict future rates of net digital subscriber additions. This rate is dependent on a number of factors, including economic conditions, the effectiveness of the marketing efforts and programs of our customers, and the other factors set forth in the following paragraph. Declines in the net digital subscriber addition rates could have an adverse effect on our results. In addition, we have limited visibility to the inventories that the MSOs may have accumulated. A reduction in the MSO net digital subscriber addition rates could mean that these inventories will not be utilized as quickly as would otherwise be the case. Digital interactive television is a relatively new business, and therefore there are many characteristics of this business that are not yet fully known. These characteristics include sensitivity to the economy, consumer demand for various types of interactive applications, the proper pricing levels and models for various applications, the likely level of penetration of digital services into the subscriber base, the likely number of digital set-tops per household, the customer churn rate to be expected, the extent to which digital cable interactive services will successfully compete against direct-to-home satellite services, international demand for the products and the extent to which demand will be seasonal. A declining economy may adversely affect consumer purchases of new digital services, and thus purchases of our digital products by the MSOs, even if it does not impact monthly MSO subscription revenues. Each of these business characteristics may have a material impact on the sales of our products. Dependence on the General Business and Economic Condition of the Cable Television Industry and Cable Television Capital Spending. The majority of our revenues come from sales of systems and equipment to the cable television industry. Demand for these products depends primarily on capital spending by cable television system operators for constructing, rebuilding or upgrading their systems. The amount of this capital spending, and, therefore, our sales and profitability, may be affected by a variety of factors, including general political and economic conditions in the United States and abroad, including but not limited to the results of the terrorist events of September 11, 2001, the continuing trend of cable system consolidation within the industry, the financial condition of domestic cable television system operators and their access to financing, competition from direct-to-home satellite, wireless television providers and telephone companies offering video programming, technological developments that impact the deployment of equipment and new legislation and regulations affecting the equipment used by cable television system operators and their customers. There can be no assurance that cable television capital spending will increase from historical levels or that existing levels of cable television capital spending will be maintained. International. We have and expect to continue to make significant sales to customers outside the United States. International sales constituted 15 percent, 21 percent and 22 percent of our total sales for fiscal years 2001, 2000 and 1999, respectively. Substantially all of these sales were export sales. As a result, our revenues are subject to the impact of political and economic conditions in various geographic regions. In addition, a portion of our product manufacturing is located outside the United States, and we are in the process of consolidating substantially all of our Atlanta, Georgia manufacturing operations into our Juarez, Mexico facility. We have also acquired BarcoNet NV, which has extensive operations in Europe and Asia Pacific regions. Accordingly, our future results could be adversely affected by a variety of factors, including foreign currency fluctuations, changes in a specific country's or region's political conditions or changes or continued weakness in economic conditions, trade protection measures, import or export licensing requirements, the overlap of different tax structures and unexpected changes in regulatory requirements. Rapid Changes in Technology. The markets for our products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and evolving methods of building and operating networks. The success of our existing and future products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of new products, differentiation of new products from those of our competitors and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner and achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive. New Product Introductions. Our future operating results may be adversely affected if we are unable to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability on a timely basis. The process of developing our new high technology products is inherently complex and uncertain. We have in the past experienced delays in product development and introduction, and there can be no assurance that we will not experience further delays in connection with our current product development or future development activities. Competition. Our products compete with those of a substantial number of foreign and domestic companies, some with greater resources, financial or otherwise, than us, and the rapid technological changes occurring in our markets are expected to lead to the entry of new competitors. Our ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in our ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in our ability to expand and remain competitive. The changing competitive environment for our broadband products may be a primary factor that may influence our future operations, structure and profitability. Changes in the industry may include the commoditization of set-tops and the entry of retail competitors into our markets. We have licensed two other manufacturers to produce set-tops compatible with our set-tops and digital networks and these licensees may offer set-tops at prices lower than our prices. Commoditization of our products and sales of set-tops by licensees may produce lower margins from such products. Certain of the retail competitors who may enter into our markets may have greater resources than us. Reliance on Suppliers. Our growth and ability to meet customer demands also depend in part on our ability to obtain timely deliveries of parts from our suppliers. Certain components of our products are presently available only from a single source or limited sources. A reduction or interruption in supply or a significant increase in the price of one or more components could adversely affect our business, operating results and financial condition and could materially damage customer relationships. From time to time, we experience shortages of certain electronic components from our suppliers. These shortages could have a material effect on our operations. Industry Consolidation and Acquisitions. There has been a recent trend toward industry consolidation. Our major competitor, General Instrument Corporation, was acquired by Motorola, Inc., and a significant customer, Time Warner Inc., was acquired by America Online, Inc. On December 19, 2001, AT&T and Comcast Corporation announced that they had approved a definitive agreement to combine AT&T Broadband with Comcast. We believe that this trend toward industry consolidation may continue as companies attempt to strengthen or hold their market positions in an evolving industry. These consolidations could adversely affect our sales and results of operations. In addition, our industry is highly competitive, and as such, our growth is dependent upon market growth and our ability to enhance our existing products and services. Accordingly, one of the ways we may address the need to enhance products and services is through acquisitions of other companies. The acquisition of BarcoNet may involve numerous risks, including the following: difficulties in integration of the operations, technologies and products of the acquired companies; the risk of diverting management's attention from normal daily operations of the business; and the potential loss of key employees of the acquired company. Failure to manage growth effectively and successfully integrate acquisitions made by us could materially harm our business and operating results. Intellectual Property. We generally rely upon patent, copyright, trademark and trade secret laws to establish and maintain our proprietary rights in our technology and products. However, there can be no assurance that any of our proprietary rights will not be challenged, invalidated or circumvented, or that any such rights will provide significant competitive advantage. Third parties have claimed, and may claim, that we have infringed their current, or future, intellectual property rights. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements, any of which could seriously harm our business, financial condition and results of operations. There can be no assurance that such royalty or licensing agreements, if required, would be available on terms acceptable to us, if at all. Additionally, there can be no assurance that we will prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. In the event an intellectual property claim against us was successful and we could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, our business, financial condition and results of operations would be seriously harmed. Even if we prevail in litigation, the expense of litigation could be significant and could seriously harm our business, financial condition and results of operation. Securities Litigation. The trading price of our common stock may be volatile. The stock market in general, and the market for technology companies in particular, has, from time to time, experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance. The trading price of our common stock could be affected by a number of factors, including: changes in expectations of our future financial performance; changes in securities analysts' estimates (or the failure to meet such estimates); announcements of technological innovations; customer relationship developments; conditions affecting our targeted markets in general; and quarterly fluctuations in our revenue and financial results. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. On July 24, 2001, a purported class action alleging violations of the federal securities laws by us and certain of our officers was filed in the United States District Court for the Northern District of Georgia. Since then, several actions with similar allegations have been filed. Such litigation may be expensive and may divert management's attention. -----END PRIVACY-ENHANCED MESSAGE-----