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