0000950168-01-501077.txt : 20011128 0000950168-01-501077.hdr.sgml : 20011128 ACCESSION NUMBER: 0000950168-01-501077 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010928 FILED AS OF DATE: 20011107 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: 1777384 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 September 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 October 26, 2001, Scientific-Atlanta, Inc. had outstanding 156,273,776 shares of common stock. PART I - FINANCIAL INFORMATION SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended -------------------------------- September 28, September 29, 2001 2000 --------------- -------------- SALES $ 410,097 $ 597,240 --------- --------- COSTS AND EXPENSES Cost of sales 278,916 420,091 Sales and administrative 44,688 51,239 Research and development 37,647 34,709 Interest expense 83 107 Interest income (6,109) (8,993) Other (income) expense, net (1,357) (76,390) --------- --------- Total costs and expenses 353,868 420,763 --------- --------- EARNINGS BEFORE INCOME TAXES 56,229 176,477 PROVISION (BENEFIT) FOR INCOME TAXES Current 15,947 65,227 Deferred 3,171 (2,033) --------- --------- NET EARNINGS $ 37,111 $ 113,283 ========= ========= EARNINGS PER COMMON SHARE BASIC $ 0.23 $ 0.71 ========= ========= DILUTED $ 0.23 $ 0.67 ========= ========= WEIGHTED AVERAGE NUMBER COMMON SHARES OUTSTANDING BASIC 158,013 160,294 ========= ========= DILUTED 159,917 168,983 ========= ========= DIVIDENDS PER SHARE PAID $ 0.01 $ 0.01 ========= ========= SEE ACCOMPANYING NOTES 2 of 11 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
In Thousands ------------------------------------ September 28, June 29, 2001 2001 -------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 373,526 $ 563,322 Short-term investments 217,619 191,001 Receivables, less allowance for doubtful accounts of $5,577,000 at September 28 and $5,982,000 at June 29 414,861 502,289 Inventories 191,782 201,762 Deferred income taxes 55,826 57,195 Other current assets 30,566 33,165 ----------- ----------- TOTAL CURRENT ASSETS 1,284,180 1,548,734 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 22,266 22,218 Building and improvements 68,511 67,946 Machinery and equipment 251,542 246,385 ----------- ----------- 342,319 336,549 Less - Accumulated depreciation and amortization 119,007 108,934 ----------- ----------- 223,312 227,615 ----------- ----------- GOODWILL 58,063 58,063 ----------- ----------- INTANGIBLE ASSETS 34,302 35,790 ----------- ----------- NON-CURRENT MARKETABLE SECURITIES 8,248 17,159 ----------- ----------- DEFERRED INCOME TAXES 29,601 26,732 ----------- ----------- OTHER ASSETS 89,160 88,735 ----------- ----------- TOTAL ASSETS $ 1,726,866 $ 2,002,828 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $ -- $ 91 Accounts payable 142,545 223,990 Accrued liabilities 114,378 164,991 Income taxes currently payable 6,380 5,051 ----------- ----------- TOTAL CURRENT LIABILITIES 263,303 394,123 ----------- ----------- OTHER LIABILITIES 111,593 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 September 28 and 164,899,158 shares at June 29 82,496 82,450 Additional paid-in capital 549,451 545,602 Retained earnings 970,589 935,038 Accumulated other comprehensive income, net of taxes of $6,660,000 at September 28 and $3,723,000 at June 29 (10,866) (6,075) ----------- ----------- 1,591,670 1,557,015 Less-Treasury stock, at cost (8,923,546 shares at September 28 and 859,339 shares at June 29) 239,700 48,076 ----------- ----------- 1,351,970 1,508,939 ----------- ----------- $ 1,726,866 $ 2,002,828 =========== ===========
SEE ACCOMPANYING NOTES 3 of 11 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended ----------------------------------- September 28, September 29, 2001 2000 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 30,058 $ 81,470 -------- --------- INVESTING ACTIVITIES: Proceeds from the sale of investments - 84,158 Purchases of short-term investments (26,618) (32,323) Purchases of property, plant, and equipment (8,330) (30,562) Investments - (5,000) Acquisition of business - (2,529) Other 6 35 --------- --------- Net cash provided (used) by investing activities (34,942) 13,779 --------- --------- FINANCING ACTIVITIES: Issuance of common stock 732 30,818 Treasury shares acquired (183,993) - Dividends paid (1,560) (1,607) Principal payments on debt (91) (169) --------- --------- Net cash provided (used) by financing activities (184,912) 29,042 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (189,796) 124,291 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 563,322 462,496 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 373,526 $ 586,787 ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the period: Interest $ 68 $ 92 --------- --------- Income taxes, net $ 15,489 $ 19,111 ========= ========= 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 11 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED)
Three Months Ended ------------------------------------- September 28, September 29, 2001 2000 ------------- --------------- NET EARNINGS $ 37,111 $ 113,283 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX/(1)/ Unrealized holding gains (losses) on marketable securities, net of reclassification adjustments of $0 and $65,791 in (5,741) (115,480) fiscal years 2002 and 2001, respectively Minimum liability adjustments on retirement plans 60 (416) Foreign currency translation adjustments 1,488 (1,039) Changes in fair value of derivatives (598) - -------- ---------- COMPREHENSIVE INCOME (LOSS) $ 32,320 $ (3,652) ======== ==========
/(1)/ Assumed 38 percent tax in fiscal years 2002 and 2001. SEE ACCOMPANYING NOTES 5 of 11 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:
Net Per Share Quarter Ended September 28, 2001 Earnings Shares Amount ---------------------------------------------- ----------- -------- -------- Basic earnings per common share: Net earnings $ 37,111 158,013 $ 0.23 ========== ======= ======== Diluted earnings per common share: Net earnings $ 37,111 159,917 $ 0.23 ========== ======= ======== Effect of dilutive stock options $ - 1,904 $ - ========== ======= ======== Net Per Share Quarter Ended September 29, 2000 Earnings Shares Amount ---------------------------------------------- ---------- ------- -------- Basic earnings per common share: Net earnings $ 113,283 160,294 $ 0.71 ========== ======= ======== Diluted earnings per common share: Net earnings $ 113,283 168,983 $ 0.67 ========== ======= ======== Effect of dilutive stock options $ - 8,689 $ (0.04) ========== ======= ========
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:
September 28, September 29, 2001 2000 ---------------- ---------------- Number of options outstanding 10,127,977 31,500 Weighted average exercise price $ 52.74 $ 82.38
6 of 11 C. Inventories consist of the following: September 28, June 29, 2001 2001 ------------- --------- Raw materials and work-in-process $ 126,022 $ 144,270 Finished goods 65,760 57,492 ---------- --------- Total inventory $ 191,782 $ 201,762 ========== ========= D. During the quarter ended September 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 136,999 shares of our common stock from the deferral of the payment of restricted stock that vested during the quarters ended September 28, 2001 and September 29, 2000, respectively. In addition, we acquired 55,719 shares and 43,228 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 quarters ended September 28, 2001 and September 29, 2000, respectively. E. Other (income) expense for the quarter ended September 29, 2000 included a gain of $78,757 from the sale of 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 September 28, 2001. 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 quarter ended September 29, 2000, goodwill amortization expense, net of tax, was $657 and had no impact on basic or diluted earnings per share. 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. H. In October 2001, we announced a restructuring of our worldwide operations in response to the business decline. We will reduce our worldwide headcount by approximately 750 people, or approximately 10 percent of our workforce. This reduction includes approximately 500 people in manufacturing functions and approximately 250 people in engineering, marketing, sales, service and administration. We will consolidate substantially all of our Atlanta, Georgia manufacturing operations into our Juarez, Mexico facility. The consolidation will begin immediately and the entire process, including the closing of the Atlanta manufacturing facility, is expected to be completed by the end of the fiscal year. We expect these actions to reduce costs and expenses by approximately $61,000 on an annual basis, beginning in the third fiscal quarter. We also expect to record a one-time, pre-tax charge of approximately $22,000, or $0.09 per share, in our second fiscal quarter, and additional pre-tax charges in the second half of the fiscal year totaling approximately $9,000, or $0.04 per share. 7 of 11 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 $373.5 million at September 28, 2001. Cash decreased $189.8 million during the quarter. The decline was due primarily to the repurchase of 7,925,000 shares of our common stock for $184.0 million and purchases of short-term investments of $26.6 million, which more than offset the $30.1 million of cash generated by operations. The current ratio of Scientific-Atlanta was 4.9:1 at September 28, 2001, up from 3.9:1 at June 29, 2001. At September 28, 2001, we had no debt. We believe that funds generated from operations, existing cash balances and our available senior credit facility will be sufficient to support operations. RESULTS OF OPERATIONS --------------------- Scientific-Atlanta experienced a decline in sales this quarter as compared to the prior year and the fourth quarter of fiscal year 2001. We believe that this decline is attributable to the economic climate, a drop-off in business following the terrorist events of September 11, 2001, and a decline in the rate of net digital subscriber additions by our customers during calendar year 2001. After our earnings release and conference call on July 19, 2001 for our quarter and fiscal year ended June 29, 2001, a number of the large MSOs published their results for that quarter. These results showed that, although the total number of digital subscribers increased during the period, for most of the MSOs the number of net new digital subscribers added declined over the number added in the first calendar quarter. The MSOs first reported declines in the rate of new digital subscribers added after the end of the first quarter of calendar 2001. For those large MSOs that have reported third calendar quarter results as of November 7, 2001, although some have reported decreases, a majority of such MSOs have reported increases in rates of deployments. We are unable to predict future rates of deployment. Although some of these MSOs have previously reaffirmed or increased their previous guidance on the total number of digital subscribers to be added for the entire 2001 calendar year, declines in the deployment rates could have an adverse effect on our results. In addition, we continue to have limited visibility to the inventories that these MSOs may have accumulated. A reduction in the MSO deployment rates could mean that these inventories will not be utilized as quickly as would otherwise be the case. Compounding these factors is the uncertainty in the industry caused by speculation about another wave of MSO consolidation. Sales for the quarter ended September 28, 2001 were $410.1 million, down 31 percent from the prior year. Sales of subscriber products were $278.7 million, down 28 percent from the prior year and 36 percent from the fourth quarter of fiscal year 2001. We shipped 855 thousand Explorer(R) digital set-tops during the first quarter of fiscal 2002, down from 1.0 million last year and 1.3 million from the preceding quarter. Sales of transmission products were $110.4 million, down 41 percent from the prior year and 34 percent from the fourth quarter of fiscal year 2001. International sales were $82.9 million and represented approximately 20 percent of our total sales for the first quarter of fiscal 2002. Gross margins were 32.0 percent, 2.3 percentage points higher than 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 ended September 28, 2001 as compared to the prior year. Research and development costs were $37.6 million, up 8 percent over the prior year, driven primarily by the development of international products and advanced digital set-tops. Research and development efforts in the quarter 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 in the quarter ended September 28, 2001 decreased 13 percent from the prior year. Reduced incentives due to our lower profitability and a reduction in the amortization expense for goodwill resulted in lower administrative expenses. These reductions were offset partially by higher professional fees. Selling expenses were slightly lower in the first quarter of fiscal year 2002 as compared to the prior year. 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 ended September 29, 2000, goodwill amortization expense was $1.0 million and had no impact on basic or diluted earnings per share. 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. 8 of 11 Other (income) expense of $1.4 million for the quarter ended September 28, 2001 did not include any significant items. Other (income) expense for the quarter ended September 29, 2000 included a gain of $78.8 million from the sale of a portion of our investment in Bookham. This gain was partially offset by other miscellaneous expenses. Earnings before income taxes were $56.2 million in the quarter ended September 28, 2001, down $120.2 million from the prior year. Earnings before income taxes for the quarter ended September 29, 2000 included a $78.8 million gain from the sale of a portion our investment in Bookham. The lower volume of sales in the first quarter of fiscal year 2002 drove the balance of the year over year decline. This decline was partially offset by an improved gross margin rate and lower administrative expenses in fiscal year 2002. Scientific-Atlanta's effective income tax rate was 34.0 percent for the quarter ended September 28, 2001, down 1.8 percentage points from the prior year. Our effective income tax rate was 35.8 percent in the prior year, as the impact on the tax rate from research and development credits was diminished with higher levels of pretax earnings, as well as higher taxes paid on the gains from the sale of investments. Net earnings for the quarter ended September 28, 2001 were $37.1 million compared to $113.3 million in the prior year. Lower sales volume in the first quarter of fiscal year 2002 and a gain from the sale of a portion of our investment in Bookham in the first quarter of fiscal year 2001 were the primary factors in the year-over-year decline. In October 2001, we announced a restructuring of our worldwide operations in response to the business decline. We will reduce our worldwide headcount by approximately 750 people, or approximately 10 percent of our workforce. This reduction includes approximately 500 people in manufacturing functions and approximately 250 people in engineering, marketing, sales, service and administration. We will consolidate substantially all of our Atlanta, Georgia manufacturing operations into our Juarez, Mexico facility. The consolidation will begin immediately and the entire process, including the closing of the Atlanta manufacturing facility, is expected to be completed by the end of the fiscal year. We expect these actions to reduce costs and expenses by approximately $61.0 million on an annual basis, beginning in the third fiscal quarter. We also expect to record a one-time, pre-tax charge of approximately $22.0 million, or $0.09 per share, in our second fiscal quarter, and additional pre-tax charges in the second half of the fiscal year totaling approximately $9.0 million, or $0.04 per share. 9 of 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ------------------------------------------------------------------- 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. We do not enter into any foreign exchange forward contracts for speculative trading purposes. If a foreign exchange forward contract did not meet the criteria for a hedge, we would recognize unrealized gains or losses. Firmly committed purchase (sales) exposure and related hedging instruments at September 28, 2001 are as follows:
German Canadian Marks Dollars ----------------- ------------------ (In thousands, except per dollar amounts) Firmly committed purchase (sales) contracts (39,879) 24,366 Notional amount of forward exchange contracts (39,262) 23,000 Average contract amount (Foreign currency/United States dollar) 2.19 1.55
Scientific-Atlanta has no derivative exposure beyond the third quarter of fiscal year 2003. 10 of 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings. ------- On October 29, 2001, the U.S. District Court for the Northern District of Georgia issued an Order interpreting two of the Gemstar Development Corporation patents which Scientific-Atlanta challenged in lawsuits it previously filed against Gemstar. The so-called "Markman Order" was issued after oral argument and briefing of the interpretation issues regarding the '815 and '272 patents. Item 5. Other Information. ------- We are currently selling WebStar(TM) cable modems that are manufactured by a third party. Although we submitted a cable modem based on our silicon technology for certification in wave 19 of CableLabs certification, such modem was not certified due to some software issues that have since been resolved, but no issues with our silicon technology were raised. We have no plans to resubmit this modem for CableLabs certification, because we can satisfy our needs and the needs of our customers with the modem manufactured by our third party supplier. We previously announced that our InView(TM) application would be available in the summer of calendar year 2001. Using the InView application, a cable system can offer a channel that delivers news, sports, weather reports and other information of the day while the consumer continues to watch other programming at the same time. We now expect this application will be available in the first quarter of calendar year 2002. Explorer, is a registered trademark of Scientific-Atlanta, Inc. WebStar and InView are trademarks of Scientific-Atlantic, Inc. Item 6. Exhibits and Reports on Form 8-K. ------- (a) Exhibits. Exhibit No. Description ----------- ----------- 99 Cautionary Statements (b) No reports on Form 8-K were filed during the quarter ended September 28, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Ace 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: November 7, 2001 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) 11 of 11 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; . our dependence on the cable television industry and cable television spending; . development and timing of 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: . 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. After our earnings release and conference call on July 19, 2001 for our quarter and fiscal year ended June 29, 2001, a number of the large MSOs published their results for that quarter. These results showed that, although the total number of digital subscribers increased during the period, for most of the MSOs the number of net new digital subscribers added declined over the number added in the first calendar quarter. The MSOs first reported declines in the rate of new digital subscribers added after the end of the first quarter of calendar 2001. For those large MSOs that have reported third calendar quarter results as of November 7, 2001, although some have reported decreases, a majority of such MSOs have reported increases in rates of deployments. We are unable to predict future rates of deployment. Although some of these MSOs have previously reaffirmed or increased their previous guidance on the total number of digital subscribers to be added for the entire 2001 calendar year, declines in the deployment rates could have an adverse effect on our results. In addition, we continue to have limited visibility to the inventories that these MSOs may have accumulated. A reduction in the MSO deployment 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, 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. Accordingly, our future results could be adversely affected by a variety of factors, including 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 its products or that products and technologies developed by others will not render its 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 its 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. Commoditization of our products would 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 its 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. Recently, we have experienced minor shortages of certain electronic components from our suppliers. These shortages have not had, and are not expected to 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. We believe that this trend toward industry consolidation will continue as companies attempt to strengthen or hold their market positions in an evolving industry. We also believe that uncertainty in the industry caused by speculation about another wave of MSO consolidations may affect our sales. In addition, our industry is highly competitive, and as such, our growth is dependent upon market growth and its ability to enhance its 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. Acquisitions 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 its 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.