UNITED STATES
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 October 3, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number 1-5517
SCIENTIFIC-ATLANTA, INC.
(Exact name of Registrant as specified in its charter)
Georgia | 58-0612397 | |
(State or other jurisdiction of
| (I.R.S. Employer Identification Number) |
5030 Sugarloaf Parkway | ||
Lawrenceville, Georgia |
| |
(Address of principal executive offices) | (Zip Code) |
770-236-5000
(Registrant’s telephone number, including area code)
Indicate by checkx mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check markx whether the registrant is an accelerated filer (as defined inby Rule 12b-2 of the Exchange Act). Yes x No ¨
As of February 7,October 31, 2003, Scientific-Atlanta, Inc. had outstanding 152,867,977151,844,960 shares of common stock.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
December 27, 2002 | December 28, 2001 | December 27, 2002 | Decembera 28, 2001 | October 3, 2003 | September 27, 2002 | |||||||||||||||||||
SALES | $ | 352,008 |
| $ | 418,194 |
| $ | 663,563 |
| $ | 828,291 |
| $ | 395,636 | $ | 311,555 | ||||||||
COSTS AND EXPENSES | ||||||||||||||||||||||||
Cost of sales |
| 240,638 |
|
| 278,567 |
|
| 439,469 |
|
| 557,483 |
| 248,378 | 198,831 | ||||||||||
Sales and administrative |
| 48,009 |
|
| 46,392 |
|
| 95,033 |
|
| 91,080 |
| 48,037 | 47,024 | ||||||||||
Research and development |
| 36,808 |
|
| 35,550 |
|
| 76,623 |
|
| 73,197 |
| 35,323 | 39,815 | ||||||||||
Restructuring |
| 2,566 |
|
| 18,737 |
|
| 11,235 |
|
| 18,737 |
| 715 | 8,669 | ||||||||||
Interest expense |
| 247 |
|
| 133 |
|
| 1,097 |
|
| 216 |
| 235 | 850 | ||||||||||
Interest income |
| (5,817 | ) |
| (5,803 | ) |
| (11,682 | ) |
| (11,912 | ) | (3,852 | ) | (5,865 | ) | ||||||||
Other (income) expense, net |
| 6,604 |
|
| (14,955 | ) |
| 12,118 |
|
| (16,312 | ) | 901 | 5,514 | ||||||||||
Total costs and expenses |
| 329,055 |
|
| 358,621 |
|
| 623,893 |
|
| 712,489 |
| 329,737 | 294,838 | ||||||||||
EARNINGS BEFORE INCOME TAXES |
| 22,953 |
|
| 59,573 |
|
| 39,670 |
|
| 115,802 |
| 65,899 | 16,717 | ||||||||||
PROVISION FOR (BENEFIT FROM) INCOME TAXES | ||||||||||||||||||||||||
Current |
| 15,879 |
|
| 22,277 |
|
| 27,203 |
|
| 38,224 |
| 18,373 | 11,324 | ||||||||||
Deferred |
| (8,074 | ) |
| (1,859 | ) |
| (13,695 | ) |
| 1,312 |
| 4,856 | (5,621 | ) | |||||||||
NET EARNINGS | $ | 15,148 |
| $ | 39,155 |
| $ | 26,162 |
| $ | 76,266 |
| $ | 42,670 | $ | 11,014 | ||||||||
EARNINGS PER COMMON SHARE | ||||||||||||||||||||||||
BASIC | $ | 0.10 |
| $ | 0.25 |
| $ | 0.17 |
| $ | 0.49 |
| $ | 0.28 | $ | 0.07 | ||||||||
DILUTED | $ | 0.10 |
| $ | 0.25 |
| $ | 0.17 |
| $ | 0.48 |
| $ | 0.28 | $ | 0.07 | ||||||||
WEIGHTED AVERAGE NUMBER OF | ||||||||||||||||||||||||
BASIC |
| 154,380 |
|
| 156,072 |
|
| 154,754 |
|
| 157,042 |
| 150,961 | 155,128 | ||||||||||
DILUTED |
| 154,754 |
|
| 157,559 |
|
| 155,232 |
|
| 158,738 |
| 153,797 | 155,710 | ||||||||||
DIVIDENDS PER SHARE PAID | $ | 0.01 |
| $ | 0.01 |
| $ | 0.02 |
| $ | 0.02 |
| $ | 0.01 | $ | 0.01 | ||||||||
SEE ACCOMPANYING NOTES
2 of 2044
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
December 27, 2002 | June 28, 2002 | October 3, 2003 | June 27, 2003 | ||||||||||
ASSETS | |||||||||||||
CURRENT ASSETS | |||||||||||||
Cash and cash equivalents | $ | 396,545 | $ | 376,429 |
| $ | 361,630 | $ | 359,780 | ||||
Short-term investments |
| 386,666 |
| 354,848 |
| 664,399 | 588,775 | ||||||
Receivables, less allowance for doubtful accounts of $7,629 at December 27 and $5,723 at June 28 |
| 248,471 |
| 261,149 |
| ||||||||
Receivables, less allowance for doubtful accounts of $3,227 at October 3 | 182,511 | 184,585 | |||||||||||
Inventories |
| 143,671 |
| 217,452 |
| 124,927 | 127,054 | ||||||
Deferred income taxes |
| 55,397 |
| 47,908 |
| 34,171 | 41,874 | ||||||
Other current assets |
| 29,051 |
| 50,608 |
| 21,610 | 21,548 | ||||||
TOTAL CURRENT ASSETS |
| 1,259,801 |
| 1,308,394 |
| 1,389,248 | 1,323,616 | ||||||
PROPERTY, PLANT AND EQUIPMENT, at cost | |||||||||||||
Land and improvements |
| 22,103 |
| 21,943 |
| 22,045 | 22,139 | ||||||
Building and improvements |
| 81,970 |
| 78,464 |
| 82,048 | 83,624 | ||||||
Machinery and equipment |
| 247,477 |
| 241,420 |
| 217,766 | 219,647 | ||||||
| 351,550 |
| 341,827 |
| 321,859 | 325,410 | |||||||
Less—Accumulated depreciation and amortization |
| 138,584 |
| 119,407 |
| ||||||||
Less – Accumulated depreciation and amortization | 130,845 | 127,726 | |||||||||||
| 212,966 |
| 222,420 |
| 191,014 | 197,684 | |||||||
GOODWILL |
| 219,666 |
| 195,645 |
| 235,603 | 235,248 | ||||||
INTANGIBLE ASSETS |
| 54,593 |
| 48,909 |
| 47,967 | 51,028 | ||||||
NON-CURRENT MARKETABLE SECURITIES |
| 7,421 |
| 28,498 |
| 3,566 | 8,367 | ||||||
DEFERRED INCOME TAXES |
| 28,804 |
| 29,861 |
| 38,574 | 38,200 | ||||||
OTHER ASSETS |
| 67,964 |
| 80,900 |
| 67,913 | 64,486 | ||||||
TOTAL ASSETS | $ | 1,851,215 | $ | 1,914,627 |
| $ | 1,973,885 | $ | 1,918,629 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||
CURRENT LIABILITIES | |||||||||||||
Short-term debt and current maturities of long-term debt | $ | 874 | $ | 1,739 |
| ||||||||
Current maturities of long-term debt | $ | 1,441 | $ | 1,455 | |||||||||
Accounts payable |
| 117,363 |
| 170,308 |
| 134,903 | 143,379 | ||||||
Accrued liabilities |
| 118,655 |
| 145,606 |
| 83,718 | 100,876 | ||||||
Deferred revenue | 16,564 | 15,626 | |||||||||||
Income taxes currently payable |
| 15,474 |
| — |
| 6,705 | 12,273 | ||||||
TOTAL CURRENT LIABILITIES |
| 252,366 |
| 317,653 |
| 243,331 | 273,609 | ||||||
LONG-TERM DEBT, LESS CURRENT MATURITIES |
| 8,822 |
| 8,600 |
| 8,419 | 8,567 | ||||||
NON-CURRENT DEFERRED REVENUE | 6,643 | 6,507 | |||||||||||
OTHER LIABILITIES |
| 144,035 |
| 151,583 |
| 135,992 | 148,705 | ||||||
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 27 and at June 28 |
| 82,496 |
| 82,496 |
| ||||||||
Common stock, $0.50 par value, authorized 350,000,000 shares; issued 164,992,376 shares | 82,496 | 82,496 | |||||||||||
Additional paid-in capital |
| 514,240 |
| 530,712 |
| 520,639 | 520,503 | ||||||
Retained earnings |
| 1,056,244 |
| 1,033,168 |
| 1,168,598 | 1,127,441 | ||||||
Accumulated other comprehensive income (loss), net of tax expense (benefit) of $7,053 at December 27 and $(121) at June 28 |
| 11,507 |
| (197 | ) | ||||||||
Accumulated other comprehensive income, net of taxes of $15,640 at October 3 and $13,169 | 25,518 | 21,486 | |||||||||||
| 1,664,487 |
| 1,646,179 |
| 1,797,251 | 1,751,926 | |||||||
Less—Treasury stock, at cost (10,548,571 shares at December 27 and 8,361,862 shares at June 28) |
| 218,495 |
| 209,388 |
| ||||||||
Less –Treasury stock, at cost (13,203,550 shares at October 3 and 15,550,442 shares | 217,751 | 270,685 | |||||||||||
| 1,445,992 |
| 1,436,791 |
| 1,579,500 | 1,481,241 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,851,215 | $ | 1,914,627 |
| $ | 1,973,885 | $ | 1,918,629 | ||||
SEE ACCOMPANYING NOTES
3 of 2044
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended | ||||||||||||||||
Six Months Ended | October 3, 2003 | September 27, 2002 | ||||||||||||||
December 27, 2002 | December 28, 2001 | |||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | $ | 114,442 |
| $ | 173,761 |
| $ | 40,300 | $ | 88,617 | ||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from the settlement of a collar on a warrant to purchase shares of common stock |
| 20,821 |
|
| — |
| ||||||||||
Purchases of short-term investments, net |
| (31,818 | ) |
| (3,718 | ) | (76,900 | ) | (13,064 | ) | ||||||
Purchases of property, plant, and equipment |
| (14,321 | ) |
| (14,784 | ) | (5,147 | ) | (8,677 | ) | ||||||
Acquisition of certain assets of Arris Group |
| (30,000 | ) |
| — |
| ||||||||||
Acquisition of certain assets of ChanneLogics, Inc. |
| (1,600 | ) |
| — |
| ||||||||||
Purchase of PowerTV Shares |
| (4,580 | ) |
| — |
| ||||||||||
Proceeds from sale of an investment |
| 1,763 |
|
| — |
| ||||||||||
Purchase of shares of PowerTV | — | (4,580 | ) | |||||||||||||
Proceeds from the sale of an investment in a marketable security | 6,239 | — | ||||||||||||||
Proceeds from the settlement of a collar on a warrant to purchase shares of common stock | — | 20,821 | ||||||||||||||
Other |
| 6 |
|
| 75 |
| 288 | 1,763 | ||||||||
Net cash used in investing activities |
| (59,729 | ) |
| (18,427 | ) | (75,520 | ) | (3,737 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Issuance of common stock |
| 1,938 |
|
| 2,503 |
| ||||||||||
Issuance of common stock from treasury | 38,863 | 717 | ||||||||||||||
Treasury shares acquired |
| (32,410 | ) |
| (183,993 | ) | — | (32,410 | ) | |||||||
Dividends paid |
| (3,086 | ) |
| (3,123 | ) | (1,513 | ) | (1,541 | ) | ||||||
Principal payments on debt, net |
| (1,039 | ) |
| (91 | ) | ||||||||||
Principal payments on debt | (280 | ) | (700 | ) | ||||||||||||
Net cash used in financing activities |
| (34,597 | ) |
| (184,704 | ) | ||||||||||
Net cash provided by (used in) financing activities | 37,070 | (33,934 | ) | |||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 20,116 |
|
| (29,370 | ) | ||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | 1,850 | 50,946 | ||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 376,429 |
|
| 563,322 |
| 359,780 | 376,429 | ||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 396,545 |
| $ | 533,952 |
| $ | 361,630 | $ | 427,375 | ||||||
SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||||||||||
Cash paid during the period: | ||||||||||||||||
Interest | $ | 1,058 |
| $ | 185 |
| $ | 220 | $ | 831 | ||||||
Income taxes paid (refunded), net | $ | (25,402 | ) | $ | 24,947 |
| $ | 11,023 | $ | (27,442 | ) | |||||
SEE ACCOMPANYING NOTES
4 of 2044
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended | Six Months Ended | Three Months Ended | |||||||||||||||||||||
December 27, 2002 | December 28, 2001 | December 27, 2002 | December 28, 2001 | October 3, 2003 | September 27, 2002 | ||||||||||||||||||
NET EARNINGS | $ | 15,148 | $ | 39,155 |
| $ | 26,162 |
| $ | 76,266 |
| $ | 42,670 | $ | 11,014 | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAX (1) | |||||||||||||||||||||||
Unrealized gains (losses) on marketable securities, net (2) |
| 1,124 |
| 3,142 |
|
| (162 | ) |
| (2,600 | ) | ||||||||||||
Minimum liability adjustments on retirement plans |
| — |
| — |
|
| — |
|
| 62 |
| ||||||||||||
OTHER COMPREHENSIVE INCOME, NET OF TAX(1) | |||||||||||||||||||||||
Unrealized holding gains on short-term investments | 561 | — | |||||||||||||||||||||
Unrealized holding gains (losses) on marketable securities, net of reclassification adjustments | (300 | ) | 968 | ||||||||||||||||||||
Foreign currency translation adjustments |
| 8,324 |
| (958 | ) |
| 6,812 |
|
| 529 |
| 3,882 | (1,512 | ) | |||||||||
Changes in fair value of derivatives |
| 50 |
| 244 |
|
| 884 |
|
| (354 | ) | (111 | ) | 834 | |||||||||
COMPREHENSIVE INCOME | $ | 24,646 | $ | 41,583 |
| $ | 33,696 |
| $ | 73,903 |
| $ | 46,702 | $ | 11,304 | ||||||||
(1)Assumed 38 percent tax in fiscal years 2004 and 2003.
SEE ACCOMPANYING NOTES
5 of 44
NOTES:
(Amounts in thousands, except share and per share data)
5 of 20
A. | The accompanying condensed consolidated financial statements include the accounts of Scientific-Atlanta, Inc. (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 accounting principles generally accepted in the United States 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 |
Amounts in the Consolidated Statements of Financial Position at June 28, 2002 contained in this Form 10-Q were derived from the Consolidated Statements of Financial Position contained in ourScientific-Atlanta’s fiscal year 2002 Annual Reportends on Form 10-K. Certain priorthe Friday closest to June 30 of each year. Fiscal year amounts have been reclassified to conform to2004, which ends on July 2, 2004, will include fifty-three weeks. The first quarter of fiscal year 2004 included fourteen weeks while the currentfirst quarter of fiscal year presentation. Accruals for warranty obligations exceeding one year and the related deferred income taxes have been reclassified to Other Liabilities from Accrued Liabilities.2003 included thirteen weeks.
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 computed as follows:
Quarter Ended December 27, 2002 | Net Earnings | Shares | Per Share Amount | |||||
Basic earnings per common share | $ | 15,148 | 154,380 | $ | 0.10 | |||
Effect of dilutive stock options |
| — | 374 |
| — | |||
Diluted earnings per common share | $ | 15,148 | 154,754 | $ | 0.10 | |||
Quarter Ended December 28, 2001 | Net Earnings | Shares | Per Share Amount | |||||||||||||
In Thousands | ||||||||||||||||
Quarter Ended October 3, 2003 | Net Earnings | Shares | Per Share Amount | |||||||||||||
Basic earnings per common share | $ | 39,155 | 156,072 | $ | 0.25 | $ | 42,670 | 150,961 | $ | 0.28 | ||||||
Effect of dilutive stock options |
| — | 1,487 |
| — | — | 2,836 | — | ||||||||
Diluted earnings per common share | $ | 39,155 | 157,559 | $ | 0.25 | $ | 42,670 | 153,797 | $ | 0.28 | ||||||
In Thousands | ||||||||||||||||
Quarter Ended September 27, 2002 | Net Earnings | Shares | Per Share Amount | |||||||||||||
Basic earnings per common share | $ | 11,014 | 155,128 | $ | 0.07 | |||||||||||
Effect of dilutive stock options | — | 582 | — | |||||||||||||
Diluted earnings per common share | $ | 11,014 | 155,710 | $ | 0.07 | |||||||||||
6 of 2044
Six Months Ended December 27, 2002 | Net Earnings | Shares | Per Share Amount | |||||
Basic earnings per common share | $ | 26,162 | 154,754 | $ | 0.17 | |||
Effect of dilutive stock options |
| — | 478 |
| — | |||
Diluted earnings per common share | $ | 26,162 | 155,232 | $ | 0.17 | |||
Six Months Ended December 28, 2001 | Net Earnings | Shares | Per Share Amount | ||||||
Basic earnings per common share | $ | 76,266 | 157,042 | $ | 0.49 |
| |||
Effect of dilutive stock options |
| — | 1,696 |
| (0.1 | ) | |||
Diluted earnings per common share | $ | 76,266 | 158,738 | $ | 0.48 |
| |||
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:
December 27, 2002 | December 28, 2001 | October 3, 2003 | September 27, 2002 | |||||||||
Number of options outstanding |
| 16,151,386 |
| 12,506,060 | 8,838,318 | 16,351,927 | ||||||
Weighted average exercise price | $ | 40.00 | $ | 46.84 | $ | 53.08 | $ | 40.10 |
C. | We have elected to account for option plans under Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees”, which generally requires compensation costs for fixed awards to be recognized only when the option price differs from the market price at the grant date. Statement of Financial Accounting Standards (SFAS) No. 123 “Accounting for Stock-Based Compensation” and No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” allow a company to follow APB Opinion No. 25 with the following additional disclosure that shows what our net earnings and earnings per share would have been using the fair value compensation model under SFAS No. 123: |
Three Months Ended | |||||||
October 3, 2003 | September 27, 2002 | ||||||
Net earnings as reported | $ | 42,670 | $ | 11,014 | |||
Deduct: Compensation expense, net of tax | 11,477 | 18,085 | |||||
Pro forma net earnings (loss) | $ | 31,193 | $ | (7,071 | ) | ||
Earnings (loss) per share: | |||||||
Basic | |||||||
As reported | $ | 0.28 | $ | 0.07 | |||
Pro forma | $ | 0.21 | $ | (0.05 | ) | ||
Diluted | |||||||
As reported | $ | 0.28 | $ | 0.07 | |||
Pro forma | $ | 0.20 | $ | (0.05 | ) | ||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model which resulted in a weighted average fair value of $20.40 and $8.64 per option for grants in the first quarter of fiscal years 2004 and 2003, respectively. The following weighted-average assumptions were used in the pricing model for grants in the first quarter of fiscal years 2004 and 2003:
Three Months Ended | ||||||||
October 3, 2003 | September 27, 2002 | |||||||
Risk free interest rate | 4.33 | % | 3.33 | % | ||||
Expected term | 5 years | 5 years | ||||||
Volatility | 79 | % | 80 | % | ||||
Expected annual dividends | $ | 0.04 | $ | 0.04 |
D. | Inventories consist of the following: |
October 3, 2003 | June 27, 2003 | |||||
Raw materials and work-in-process | $ | 87,274 | $ | 82,890 | ||
Finished goods | 37,653 | 44,164 | ||||
Total inventory | $ | 124,927 | $ | 127,054 | ||
E. | During the |
During the six months ended December 28, 2001, we purchased 7,925,000 shares7 of our common stock at an aggregate cost of $183,993 pursuant to a stock buyback program announced in March 2000. During the six months ended December 28, 2001, we also acquired 111,682 shares of our common stock from the conversion of the right to receive common stock into the right to receive cash and 55,719 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, 2001.44
F. | Other (income) expense |
Other (income) expense forof $5,514 in the three and six monthsquarter ended December 28, 2001September 27, 2002 included a gain$4,577 of $16,200losses from the appreciationother-than-temporary declines in the market value of marketable securities and investments in privately-held companies and foreign exchange losses of $1,908. These losses were partially offset by a net gain of $2,491 from the settlement of a collar on a warrant to purchase common stock of a public company.and the related warrant. There were no other significant items in other (income) expense forin the three or six monthsquarter ended December 28, 2001.September 27, 2002.
G. |
December 27, 2002 | June 28, 2002 | |||||
Raw materials and work-in-process | $ | 92,843 | $ | 117,938 | ||
Finished goods |
| 50,828 |
| 99,514 | ||
Total inventory | $ | 143,671 | $ | 217,452 | ||
7 of 20
During the first quarter of fiscal year 2003, we acquired a portion of the shares held by the minority shareholders of PowerTV, Inc., a majority-owned subsidiary, for $4,580 of cash. The entire purchase price was recorded as goodwill.
H. | In August 2002, we announced a restructuring of our worldwide operations to align our costs with reduced sales levels. The restructuring included a reduction of our workforce by 400 positions, or approximately 6 percent of our total workforce, |
During the quarter ended October 3, 2003, severance costs of $759 were paid to approximately 40 employees whose positions had been eliminated under the restructuring plan.
The following reconciles the beginning restructuring liability at June 28, 200227, 2003 to the restructuring liability at December 27, 2002:October 3, 2003:
Contractual Obligations Under Cancelled Leases | Severance | Fixed Assets | Other | Total | ||||||||||||||||
Balance at June 28, 2002 | $ | 5,202 |
| $ | 4,553 |
| $ | — |
| $ | — |
| $ | 9,755 |
| |||||
Restructuring provision |
| 414 |
|
| 9,074 |
|
| 377 |
|
| 1,741 |
|
| 11,606 |
| |||||
Charges to the reserve and assets written off |
| (1,029 | ) |
| (10,442 | ) |
| (377 | ) |
| (1,852 | ) |
| (13,700 | ) | |||||
Reserve reversal |
| (371 | ) |
| — |
|
| — |
|
| — |
|
| (371 | ) | |||||
Balance at December 27, 2002 | $ | 4,216 |
| $ | 3,185 |
| $ | — |
| $ | (111 | ) | $ | 7,290 |
| |||||
Contractual Obligations Under Canceled Leases | Severance | Other | Total | |||||||||||||
Balance at June 27, 2003 | $ | 3,309 | $ | 223 | $ | — | $ | 3,532 | ||||||||
Restructuring provision | 17 | 622 | 76 | 715 | ||||||||||||
Charges to the reserve | (585 | ) | (759 | ) | (76 | ) | (1,420 | ) | ||||||||
Balance at October 3, 2003 | $ | 2,741 | $ | 86 | $ | — | $ | 2,827 | ||||||||
8Since the initiation of 20these restructurings, we have incurred expenses of $5,857 from the write-off of fixed assets, $6,625 from contractual obligations under canceled leases, $26,997 from severance and $6,846 from other miscellaneous costs.
I. | We offer warranties of various lengths to our customers depending on the specific product and the terms of the agreements with the customer. Our standard warranties require us to repair or replace defective product returned to us during the warranty period at no cost to the customer. We record an estimate for |
We offer extended warranties on certain products. Revenue from these extended warranty agreements is deferred at the time of the sale and recognized in future periods according to the terms of the warranty agreement. The warranty liability at October 3, 2003 consisted of $14,656 in Accrued liabilities and $20,626 in Other liabilities in the Consolidated Statements of Financial Position.
The following reconciles the beginning warranty liability at June 28, 200227, 2003 to the warranty liability at December 27, 2002:October 3, 2003:
Accrued warranty at June 28, 2002 | $ | 38,742 |
| |||||
Accrued warranty at June 27, 2003 | $ | 36,001 | ||||||
Reductions for payments |
| (11,204 | ) | (4,371 | ) | |||
Additions for warranties issued during the period |
| 9,090 |
| 4,405 | ||||
Other adjustments |
| (286 | ) | (753 | ) | |||
Accrued warranty at December 27, 2002 | $ | 36,342 |
| |||||
Accrued warranty at October 3, 2003 | $ | 35,282 | ||||||
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The following disclosure related to a |
Adelphia Communications Corporation (Adelphia), a significant customer of Scientific-Atlanta, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in June 2002. In the third quarter of fiscal year 2002, during the 90 days prior to such filing by Adelphia, we received payments from Adelphia for goods sold and delivered of approximately $67,000, and we are unable to predict the portion, if any, of this amount which might be the subject of avoidance claims by the Chapter 11 estate of Adelphia in connection with its bankruptcy proceeding.
K. | The Financial Accounting Standards Board (FASB) recently issued Interpretation No. 46 “Consolidation of Variable Interest Entities” and Emerging Issues Task Force (EITF) No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” and ratified the consensus reached by the EITF on Issue 03-5, “Applicability of AICPA Statement 97-2, Software Revenue Recognition to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.” |
Interpretation No. 46 addresses the consolidation by a reporting entity of variable interest entities with certain characteristics. This Interpretation was effective in January 2003 for variable entities created after January 31, 2003 and in the first fiscal year or interim period beginning after June 15, 2003. In October 2003, the FASB issued a FASB Staff Position (FSP) which deferred the effective date for applying the provisions of Interpretation No. 46 for interests in certain variable interest entities or potential variable interest entities created before February 1, 2003 until the end of the first interim period ending after December 15, 2003. This FSP also requires certain disclosures about variable interest entities and potential variable interest entities.
We are still assessing the impact of Interpretation No. 46 on arrangements that we have with certain entities and therefore, are deferring the application of its provisions until the second quarter of fiscal year 2004. We have tentatively identified two entities that might require consolidation as variable interest entities under the provisions of Interpretation No. 46. One entity is a limited liability company, in which we have an equity interest, which licenses certain technology, receives a commission and remits the residual to the intellectual property owners. During the first quarter of fiscal year 2004 and 2003, we made royalty payments of $4,743 and $4,349, respectively, to this company and received royalty payments of $2,337 and $2,910, respectively, from this company. We also recorded our equity in the income of the company of $333 and $325 in the first quarter of fiscal years 2004 and 2003, respectively. Our equity investment in this limited liability company was $0 at October 3, 2003. The unaudited pro forma summary below presentssecond entity, Scientific-Atlanta of Shanghai, Ltd. (SASL), is a partially-owned subsidiary of Scientific-Atlanta that manufactures certain financial information as iftransmission products. During the BarcoNet acquisition had occurred asfirst quarter of fiscal years 2004 and 2003, we purchased $946 and $445, respectively, of transmission products from this subsidiary. We also sold $395 and $249 of components for transmission products to this company during the first quarter of fiscal years 2004 and 2003, respectively. In addition, we recorded income of $107 in the first quarter of fiscal year 2004 and losses of $112 in the first quarter of fiscal year 2003 from our equity in the net earnings and losses of this company. Our equity investment in SASL was $2,098 at October 3, 2003. Based on our initial assessment of the impact of Interpretation No. 46, we believe that our equity investment in each of these entities constitutes our maximum exposure to loss at October 3, 2003 from our involvement with the entity.
EITF No. 00-21 provides guidance on determining units of accounting in a revenue arrangement with multiple deliverables and the allocation of the consideration received from the arrangement. EITF No. 00-21, which was effective for revenue arrangements entered into in the first annual or interim period after June 30, 2001.15, 2003, was adopted in the first quarter of fiscal year 2004. The pro forma resultsadoption of EITF No. 00-21 did not have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been madea significant impact on the recognition of revenue or result in the deferral of a significant amount of revenue in the first dayquarter of our fiscal year. Additionally, these pro forma results are not indicative of future results.year 2004.
Three Months Ended December 28, 2001 | Six Months Ended December 28, 2001 | ||||||
Sales | $ | 439,432 | $ | 870,568 |
| ||
Net earnings from continuing operations |
| 27,336 |
| 56,567 |
| ||
Gain (loss) from discontinued operations |
| 2,694 |
| (34,048 | ) | ||
Net earnings | $ | 30,030 | $ | 22,519 |
| ||
Diluted earnings per share | $ | 0.19 | $ | 0.14 |
| ||
The gain (loss) from discontinued operations resulted fromIn EITF Issue No. 03-5, the discontinuanceEITF concluded that, in an arrangement that includes software that is more than incidental to the products or services as a whole, the software and software-related elements are included in the scope of Internet services activities by BarcoNetSOP 97-2, “Software Revenue Recognition.” EITF Issue No. 03-5, which will be adopted in calendarthe second quarter of fiscal year 2001.2004, was effective for arrangements entered into in the first annual or interim reporting period after August 13, 2003. We are currently assessing the impact of the adoption of this Issue.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Scientific-Atlanta had stockholders’ equity of $1.4$1.6 billion and cash on hand was $396.5$361.6 million at December 27, 2002.October 3, 2003. Cash increased $20.1$1.8 million during the six months ended December 27, 2002.quarter. Cash provided by operating activities for the six monthsquarter ended December 27, 2002October 3, 2003 of $114.4$40.3 million included net earnings of $26.2$42.7 million and reductions of $2.1 million in both accounts receivable and inventory of $10.6 million and $83.2 million, respectively, and a federal income tax refund of $32.0 million related to the write-off of accounts receivable from Adelphia Communications Corporation (Adelphia) resulting from its filing for bankruptcy in June 2002. Net cash provided by operating activities included $38.5 million of non-cash expenses for depreciation and amortization.inventory. These were offset partially by reductions in accounts payable and accrued expensesliabilities aggregating $83.4$23.7 million.
During the six monthsquarter ended December 27, 2002,October 3, 2003, we increased our short-term investments by $76.9 million, acquired machinery and equipment for $5.1 million and received a cash paymentproceeds of $20.8$6.2 million from the settlementsale of a collar on a warrant to purchase sharesmarketable security. We also received $38.9 million from the issuance of common stock of a public company. We also purchased 2,685,200 shares ofunder our commonemployee stock for $32.4 million, increased short-term investments by $31.8 million, acquired certain assets of the Network Technologies business of the Arris Group for $37.5 million, subject to adjustments, for which an initial cash payment of $30.0 million was made, acquired property, plantoption and equipment for $14.3 million and acquired a portion of the minority interest of shareholders of a majority-owned subsidiary, PowerTV, Inc., for $4.6 million. We expect to finalize the purchase price adjustments related to the acquisition of certain assets of the Network Technologies business during the quarter ended March 28, 2003. The Network Technologies business includes analog optics, nodes and radio frequency (RF) electronics products.other benefit plans.
The current ratio of Scientific-Atlanta was 5.0:5.7:1 at December 27, 2002,October 3, 2003, up from 4.1:4.8:1 at June 28, 2002.27, 2003. At December 27, 2002,October 3, 2003, we had debt of $9.7$9.9 million, primarily mortgages on facilities we assumed in connection with the acquisition of BarcoNet NV (BarcoNet) during fiscal year 2002. 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
Sales for the fiscal quarter ended DecemberOctober 3, 2003 were $395.6 million, up $84.1 million or 27 2002percent over the prior year. International sales for the first quarter of fiscal year 2004 were $352.0$81.1 million, down 1614 percent from the comparable quarter of the prior year. Year-over-year international sales were down in all regions except the Europe / Middle East region.
Sales of subscriber products declined 19in the first quarter of fiscal year 2004 increased 42 percent from last year’s secondfirst quarter to $229.0$275.9 million. In the secondfirst quarter of fiscal year 2003,2004, we sold 804940 thousand Explorer® digital set-tops, as compared to 865up from 545 thousand in the prior year, and 291 thousand WebSTAR™ cable modems, up from 101 thousand in the prior year. In support of the on-demand television plans of our customers, we sold approximately 1,700 MultiQAM Modulators (MQAMs) in the quarter, approximately the same quantity as in the prior year. MQAMs are components of a network that can bring video-on-demand and subscription video-on-demand services to digital cable subscribers. During the second quarter of fiscal year 2003, we sold 189 thousand WebSTAR™ cable modems, up from 184 thousand in the prior year.
During the first quarter of fiscallast year, 2003, we shipped Explorerdelivered 60 thousand set-tops and associated headend equipment to Cablevision Systems, Corporation (Cablevision), for which we deferred the recognition of approximately $18 million of sales,revenue, pending the executionconversion of ana binding letter agreement supplementinginto a detailed, definitive contract. We recognized most of the original binding agreement. Duringrevenue related to this transaction in the second quarter of fiscal year 2003, we executed a supplemental agreement with Cablevison which enabled us to recognize approximately $16 million of sales which had been deferred in the first fiscal quarter. Approximately $2 million of the sales deferred in the first fiscal quarter for development, maintenance and support services will be earned over the remaining term of the contract. Sales of products to Cablevision constituted more than 10 percent of our total sales in the quarter ended December 27, 2002.last year.
Sales of transmission products duringof $96.7 million in the secondfirst quarter of fiscal year 20032004 were down slightly from last year due primarily to lower sales of $104.0RF products. Sales of transmission products in the first quarter of last year included $14.2 million declined 12 percent from the prior year. Transmission product sales declined, despite the addition of sales from BarcoNet and $4.4 million of sales related to the termination of a contract with German cable operator ish GmbH & Co. KG (ish), due to weak transmission related spending in most regions of the world.
During the quarter ended December 27, 2002, we reached an agreement with German cable partner ish related to work orders which had been suspended or cancelled during the fourth quarter of fiscal year 2002 and our exposure in accounts receivable and inventory related to ish. As part of this settlement, we received a cash payment of $22.0 million and notes receivable denominated at $19.0 million. During the quarter, we entered into an agreement to sell these notes receivable for $11.5 million, which we expect to consummate in the third quarter of fiscal year 2003. In connection with this transaction, we recorded sales of $4.4 million and termination
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expenses and write-offs of $10.9 million. We also removed from backlog approximately $19 million of orders from ish.
International sales in the second quarter of fiscal year 2003 were $75.2 million, down 4 percent from the prior year, due primarily to lower international sales of transmission products and services. International sales of transmission products and services to Callahan NRW in Germany in the second quarter of fiscal year 2002, which did not recur in the second quarter of fiscal year 2003, and weak transmission-related spending in all international regions of the world more than offset the incremental sales from BarcoNet, which we acquired in January 2002.
Sales for the six months ended December 27, 2002 were $663.6 million, down 20 percent from the prior year. Sales of subscriber products were $423.8 million, down 25 percent from the prior year. We sold approximately 1.3 million digital set-tops during the six months ended December 27, 2002, down from 1.7 million in the comparable period of the prior year. Sales of transmission products were $201.6 million, down 12 percent from the prior year. International sales were $169.3 million, up 5 percent from the prior year, as the addition of international sales generated by BarcoNet more than offset declines in other areas of the business, particularly international sales of other transmission products.KG.
Gross margins were 31.6margin was 37.2 percent of sales, for the three months ended December 27, 2002, 1.81.0 percentage points lower than the comparable quarter of the prior year. The decline was due to the negative impact on gross margins of the settlement with ish discussed above, lower sales volumes, and the higher level of shipments of new set-top models, that currently have lower gross margins than the company average, in the second quarter of fiscal 2003 as compared to the prior year. These more than offset the benefit of cost reductions through procurement and the completion of the transfer of our Atlanta, Georgia manufacturing operations to Juarez, Mexico in the fourth quarter of fiscal year 2002.
Gross margins were 33.8 percent of sales for the six months ended December 27, 2002, 1.1 percentage pointspoint higher than the prior year. The continued benefityear-over-year improvement was due to higher volumes, material cost savings and the benefits realized from previously announced restructurings, partially offset by declines in selling prices of certain products. The average selling price of digital set-tops declined approximately 10 percent in the first quarter of fiscal year 2004 as compared to the first quarter of fiscal year 2003. Although the price of individual models of digital set-tops may decline in the future, the average selling price of digital set-tops will vary based on the mix of models sold during the period. We continue to focus on cost reductions through product design, procurement lowerand manufacturing.
Research and development expenses for the quarter ended October 3, 2003 were $35.3 million, down $4.5 million, or 11 percent, from the prior year. The year-over-year decline was due to higher capitalization of software development costs for warranty and scrapin the first quarter of fiscal year 2004 as compared to the prior year and the completionbenefits realized from previously announced restructurings. Research and development efforts continue to focus on advanced models of the transfer of our Atlanta, Georgia manufacturing operations to Juarez, Mexico more than offset the impact of the settlement with ish, lower volumesdigital set-tops, network software enhancements and price reductions.upgrades, data products, satellite products and transmission products.
Sales and administrative expenses wereof $48.0 million and $95.0in the quarter ended October 3, 2003 increased $1.0 million, for the three and six months ended December 27, 2002, respectively, an increase of approximately 4or 2 percent, over the comparable periods of the prior fiscal year. Selling expenses in the three and six months ended December 27, 2002 were lower than the prior year due to the impact of the restructurings announced in October 2001 and August 2002 and to the lower sales volume which more than offset the addition of BarcoNet’s selling expenses in fiscal year 2003. Administrative expenses in the three and six months ended December 27, 2002Higher incentive accruals, increased year-over-year due to higher amortization expense of intangible assets established with the acquisition of BarcoNet and certain assets of the transmission product lines of Arris International, Inc. in fiscal year 2003 and additional expenses associated with a fourteen-week quarter ended October 3, 2003 compared to a thirteen-week quarter in the additionprior year more than offset the benefits realized from previously announced restructurings and lower bad debt expense in the first quarter of administrativefiscal year 2004 as compared to the prior year. Administrative expenses from BarcoNet, higher professional fees andin the quarter ended September 27, 2002 included $1.6 million of bad debt expense recorded following the bankruptcy filing by Communications Dynamics, Inc., parent of TVC’s parent during the six months ended December 27, 2002.TVC Communications (TVC), a distributor of our products in Latin America.
Research and development expenses for the three and six months ended December 27, 2002 were $36.8 million and $76.6 million, respectively, up approximately 5 percent over the comparable periods10 of the prior fiscal year. The year-over-year increases were due primarily to research and development expenses at BarcoNet, offset in part by expense reductions related to the restructurings discussed below. Research and development efforts continued to focus on the development of applications and enhancements to our interactive broadband networks.44
In August 2002, we announced a restructuring of our worldwide operations to align our costs with reduced sales levels. The restructuring included a reduction of our workforce by 400 positions, or approximately 6 percent of our total workforce, to align our costs with reduced sales levels. The workforce reductionand was substantially completed by December 27, 2002. The positions eliminated were from manufacturing, engineering, marketing, sales, service and administrative functions. The restructuring also included the consolidation of certain office and manufacturing facilities. We expect these actions to reduceIn addition, during the third quarter of fiscal year 2003, we reduced our costs and expensesworkforce by approximately $40 million on120 positions, primarily in sales and other functions within the transmission sector, and reduced our workforce by an annual basis, startingadditional 30 positions in the second halffourth quarter of this fiscal year. As a result of these actions and an earlier restructuring announced in October 2001, weyear 2003. We recorded restructuring charges of $2.6 million and $11.2$0.7 million, primarily for severance, during the three and six monthsquarter ended December 27, 2002, respectively.October 3, 2003, down from $8.7 million in the prior year. We anticipate recording additional restructuring charges related to the August 2002 restructuringin fiscal year 2004 that will total approximately $2 million in the third quarter of fiscal year 2003.$0.2 million.
Interest expense was $1.1$0.2 million forin the six monthsquarter ended December 27, 2002, up $0.9October 3, 2003, down from $0.8 million from the same period ofin the prior fiscal year. The year-over-year increase was dueInterest expense is primarily related to the debt we assumed from BarcoNet as a result of the acquisition.acquisition in fiscal year 2002.
11Interest income of 20$3.9 million in the first quarter of fiscal year 2004 was $2.0 million lower than the prior year. The year-over-year decline was due primarily to an increase in the amortization of premiums paid to acquire certain short-term investments and lower average yields in the first quarter of fiscal year 2004 as compared to the prior year.
Other (income) expense of $0.9 million in the quarter ended October 3, 2003 included charges of $1.8 million from the other-than-temporary decline in investments in privately-held companies and other miscellaneous charges, which more than offset a $1.9 million gain on the sale of a marketable security.
Other (income) expense of $5.5 million for the quarter ended DecemberSeptember 27, 2002 included $6.5$4.6 million of losses from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies. Other (income) expense for the six months ended December 27, 2002 includedcompanies and foreign exchange losses of $11.0 million from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies and $1.9 million from the decline in the cash surrender value of life insurance.million. These losses were partially offset by a net gain of $2.5 million from the settlement of a collar on a warrant to purchase common stock of a public company and the related warrant. There were no other significant items in other (income) expense for the three or six monthsquarter ended DecemberSeptember 27, 2002.
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 of a public company. There were no other significant items in other (income) expense for the three or six months ended December 28, 2001.
Earnings before income taxes were $23.0$65.9 million forin the quarter ended December 27, 2002, down $36.6October 3, 2003, up $49.2 million from the prior yearyear. The year-over-year improvement was due primarily to lowerhigher sales volume, improved gross margins, lower gross margin as a percent of salesrestructuring charges and reduced losses of $6.5 million from other-than-temporary declines in the market value of marketable securities and privately-held investmentscompanies in the first quarter ended December 27, 2002. Restructuring charges in the quarter ended December 27, 2002 were $16.2 million lower than those in the quarter ended December 28, 2001. This decline was offset by a gain of $16.2 million from the appreciation in the market value of a warrantfiscal year 2004 as compared to purchase common stock in the prior year which did not recur in the quarter ended December 27, 2002. The effective income tax rate for both periods was approximately 34 percent. Net income for the quarter ended December 27, 2002 was $15.1 million, down $24.0 million from the prior year.
Earnings before income taxes were $39.7 millionThe effective tax rate for the six months ended December 27, 2002, down $76.1 millionfirst quarter of fiscal year 2004 was 35.2 percent, up from 34.1 percent in the prior yearyear. The increase in the effective tax rate was due primarily to lowerthe diminished impact on the tax rate of research and development credits on higher levels of pretax earnings and an increase in state income taxes.
Net earnings for the quarter ended October 3, 2003 were $42.7 million, compared to $11.0 million in the prior year. The year-over-year improvement was due to higher sales volume, higher administrative expensesimproved gross margins, lower restructuring charges and reduced losses of $11.0 million from other-than-temporary declines in the market value of marketable securities and privately-held investmentscompanies in the six months ended December 27, 2002. Restructuring charges in the six months ended December 27, 2002 were $7.5 million lower than those in the six months ended December 28, 2001. This decline was more than offset by a gainfirst quarter of $16.2 million from the appreciation in the market value of a warrantfiscal year 2004 as compared to purchase common stock in the prior year which did not recur in the six months ended December 27, 2002. The effective income tax rate for both periods was approximately 34 percent. Net income for the six months ended December 27, 2002 was $26.2 million, down $50.1 million from the prior year.
GENERAL
Scientific-Atlanta continued to experience declines in sales this quarter and for the first six months of fiscal year 2003 as compared to the prior year. We believe that our sales and results of operations have been affected by: (1) the low consumer confidence in the United States amid a slow economy and difficult economic and political conditions outside the United States, (2) continued significant declines in capital spending by our customers as credit markets have tightened and customer credit ratings have been lowered, (3) our customers’ competition from satellite providers, and (4) the declining financial condition of several of our customers and distributors. These trends have resulted in the failure of certain of our customers to: (1) pay for product that has shipped, (2) take delivery of orders they have previously placed and (3) raise additional capital to fund the purchase of equipment and services. Adelphia filed for bankruptcy in June 2002. During the first quarter of fiscal year 2003, Communications Dynamics, Inc., parent of TVC Communications (TVC), a distributor of our products in Latin America, filed for bankruptcy. If these trends continue, which we are not able to predict, our sales and results of operations could be adversely affected. We periodically assess the impact of these trends on our cost structure and reduce our costs, including, but not limited to, reductions in our workforce and consolidation of operations, to attempt to align such costs with our sales level.
In addition, our backlog has declined for the last three quarters from $772.5 million at March 29, 2002 to $382.7 million at December 27, 2002. Due to this decline in backlog, we continue to be more dependent on the shipment of product from orders received during the quarter rather than from backlog to generate sales. Our increased dependence on the receipt of orders during each quarter to generate sales during that quarter and our continued limited visibility to the inventory our customers hold limit our ability to predict our sales volume for the quarter until the end of the quarter. In addition, our quarters tend to be back-end loaded with a larger portion of orders being received and sales being recognized for any quarter at or near the end of the quarter.
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Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal year 20022003 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements.consolidated financial statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
General
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to revenue recognition, the adequacy of receivable, inventory and inventorytax reserves, asset impairments and accrued liabilities and other liabilities, principally relating to warranty provisions.provisions and the pension benefit liability.
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Revenue Recognition
Our principal sources of revenues are from sales of digital interactive subscriber systems, broadband transmission networks and content distribution networks. We recognize revenue when (1) there is persuasive evidence of an agreement with the customer, (2) product is shipped and title has passed, (3) the amount due from the customer is fixed and determinable, (4) collectibility is reasonably assured, and (5) we have no significant future performance obligation. At the time of the transaction, we assess whether the amount due from the customer is fixed and determinable and collection of the resulting receivable is reasonably assured. We assess whether the amount due from the customer is fixed and determinable based on the terms of the agreement with the customer, including, but not limited to, the payment terms associated with the transaction. We assess collection based on a number of factors, including past transaction history with the customer and credit-worthiness of the customer. If we determine that collection of an amount due is not reasonably assured, we defer recognition of revenue until collection becomes reasonably assured.
The standard terms and conditions under which we ship allow a customer the right to return product for refund only if the product does not conform to product specifications; the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and notifies us within ten days of receipt. If an agreement contains a non-standard right of return, we defer recognizing revenue until the conditions of the agreement are met. From time to time, our agreements include acceptance clauses. If an agreement includes an acceptance clause, revenue is recorded at the time acceptance is deemed to have occurred.
Certain agreements also include multiple deliverables or elements for products and/or services. We recognize revenue from these agreements based on the relative fair value of acceptance.the products and services. The determination of the fair value of the elements, which is based on a variety of factors including the amount we charge other customers for the products or services, price lists or other relevant information, requires judgment by management. If an undelivered element is essential to the functionality of the delivered element or required under the terms of the contract to be delivered concurrently, we defer the revenue on the delivered element until that undelivered element is delivered.
We adopted Emerging Issues Task Force Issue (EITF) No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” for agreements entered into in the first quarter of fiscal year 2004. Agreements with multiple deliverables are reviewed and the deliverables are separated into units of accounting under the provisions of EITF No. 00-21. The total consideration received is allocated over the relative fair value of the units of accounting. As indicated above, the determination of fair value requires judgment by management. Revenue is recognized as the elements are delivered, assuming all the other conditions for recognition of revenue discussed in the preceding paragraphs have been met.
For certain products where software is more than an incidental component of the hardware, we recognize software license revenue under Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue Recognition, with Respect to Certain Transactions” (“SOP 98-9”). Software revenue recognition rules are very complex. Although we follow very specific and detailed guidelines in measuring revenue, the application of those guidelines requires judgment including whether the software is more than an incidental component of the hardware and whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence of fair value exists for any undelivered elements.
Allowance for Doubtful Accounts
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, as in the case of the bankruptcies of Adelphia Communications Corporation and the parent of TVC, or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results. Generally, we do not require collateral or other security to support accounts receivable.
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Inventory Reserves
We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. In addition, our industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory on hand. Recently, the rate at which we introduce new products has accelerated, which also may result in an increase in the amount of obsolete inventory on hand. Any significant, unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and operating results.
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Non-Current Marketable Securities
Non-current marketable securities consist of investments in common stock, primarily technology companies, and warrants of publicly traded companies and a collar on a warrant and are stated at market value. (The collar on the warrant held at June 28, 2002 was settled during the first quarter of fiscal year 2003.) We have market risks associated with the volatility in the value of our non-current marketable securities. All investments in common stock are classified as “available for sale” under the provisions of SFAS No. 115, and thus, changes in the fair value of these securities are not included in our Consolidated Statements of Earnings until realized. Unrealized holding gains and losses are included, net of taxes, in accumulated other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary are included in other (income) expense. We periodically evaluate the carrying value of our investments in common stock to determine if declines in fair value are other-than-temporary. This evaluation requires judgment and is based on several factors including the market price of the security generally over the preceding six months, analysts’ reports on the security, the performance of the stock market index of the security and the overall economic environment. Unrealized gains and losses on the warrants and collar are included in otherOther (income) expense.
During the six months ended December 27, 2002, we recorded losses of $6.8 million from the other-than-temporary decline in value of marketable securities. No such losses were recorded during the six months ended December 28, 2001. At December 27, 2002, we had unrealized holding gains on marketable securities, net of tax, of $54 thousand.
Investments in Privately-Held Companies
Investments in privately-held companies consist primarily of securities of emerging technology companies for which readily determinable fair values are not available. These investments are carried at cost and are evaluated periodically to determine if declines in fair value are other-than-temporary. This evaluation requires judgment and is based on several factors including recent private offerings by the company, the performance of the stock market index of similar publicly traded securities and the overall economic environment. Declines in value judged to be other-than-temporary are included in other (income) expense. During the six months ended December 27, 2002, we recorded losses of $4.2 million from the other-than-temporary decline in value of investments in privately held companies. No such losses were recorded during the six months ended December 28, 2001. Investments in privately-held companies areof $7.9 million and $8.6 million were included in Other assets in the Consolidated Statements of Financial Position.Position at October 3, 2003 and June 27, 2003, respectively.
Warranty Costs
We offer warranties of various lengths to our customers depending on the specific product and the terms of the agreements with the customer. Our standard warranties require us to repair or replace defective product returned to us during the warranty period at no cost to the customer. We record an estimate for warranty related costs based on our actual historical failure rates and repair costs at the time of sale. We repair products in our manufacturing facilities as well asand also outsource warranty repairs. Historical failure rates and repair costs are reviewed and the estimated warranty liability is adjusted, if required, quarterly. Expenses related to unusual product warranty problems and product defects are recorded in the period the problem is identified. A significant increase in product failure rates, in the costs to repair our products or in the amount of warranty repairs outsourced could have a significant impact on our operating results. For certain purchased products, such as cable modems and hard drives, included in our set-tops, we provide the same warranty coverage to our customers as the supplier of the products provides to us. Failure of the supplier to honor its warranty commitment to us could also have a significant impact on our operating results. The warranty liability was $35.3 million and $36.0 million at October 3, 2003 and June 27, 2003, respectively.
Pension Assumptions
The pension benefit liability and the related effects on our operating results are calculated using actuarial models. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and / or liability measurement. We evaluate these assumptions annually. Other assumptions involve demographic factors such as retirement, mortality, rate of compensation increase and turnover. These assumptions are also evaluated annually and are updated to reflect our experience. The discount rate is required to represent the market rate for high-quality fixed income investments. We reduced our discount rate from 7.50 percent at June 28, 2002 to 6.50 percent at June 27, 2003 to reflect market interest conditions. To determine the expected long-term rate of return on pension plan assets, we consider the historical and expected returns on the plan assets, as well as the current and expected allocation of the plan assets. We assumed that long-term returns on our pension plan assets would be 8.00 percent in fiscal year 2004 and 10.00 percent in fiscal year 2003. The changes in these assumptions will increase our pension expense by approximately $1.9 million in fiscal year 2004.
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Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The actual results could have a significant impact on our operating results.
Goodwill Impairment
We perform an annual goodwill impairment test to identify potential impairment by comparing the fair value of the reporting unit with its net book value, including goodwill. Estimates of fair value are determined using discounted cash flows and market comparisons. We perform internal valuation analyses and consider other market information that is publicly available. These analyses use significant estimates and assumptions, including projected future cash flows (including timing), discount rates reflecting the risk inherent in future cash flows, determination of appropriate comparables and the determination of whether a premium or discount should be applied to comparables. These estimates and assumptions are reviewed and updated annually based on actual results and future projections. Changes in these estimates and assumptions may result in a determination that goodwill is impaired and could have a significant impact on our operating results.
Stock-Based Compensation
We have adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” but elected to continue to account for stock-based compensation using the intrinsic method prescribed in APB Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee must pay to acquire the stock.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently issued Interpretation No. 46 “Consolidation of Variable Interest Entities” and Emerging Issues Task Force (EITF) No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” and ratified the consensus reached by the EITF on Issue 03-5, “Applicability of AICPA Statement 97-2, Software Revenue Recognition to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.”
Interpretation No. 46 addresses the consolidation by a reporting entity of variable interest entities with certain characteristics. This Interpretation was effective in January 2003 for variable entities created after January 31, 2003 and in the first fiscal year or interim period beginning after June 15, 2003. In October 2003, the FASB issued a FASB Staff Position (FSP) which deferred the effective date for applying the provisions of Interpretation No. 46 for interests in certain variable interest entities or potential variable interest entities created before February 1, 2003 until the end of the first interim period ending after December 15, 2003. This FSP also requires certain disclosures about variable interest entities and potential variable interest entities.
We are still assessing the impact of Interpretation No. 46 on arrangements that we have with certain entities and therefore, are deferring the application of its provisions until the second quarter of fiscal year 2004. We have tentatively identified two entities that might require consolidation as variable interest entities under the provisions of Interpretation No. 46. One entity is a limited liability company, in which we have an equity interest, which licenses certain technology, receives a commission and remits the residual to the intellectual property owners. During the first quarter of fiscal year 2004 and 2003, we made royalty payments of $4.7 million and $4.3 million, respectively, to this company and received royalty payments of $2.3 million and $2.9 million, respectively, from this company. We also recorded our equity in the income of the company of $0.3 million in the first quarter of fiscal year 2004 and 2003. Our equity investment in this limited liability company was $0 at October 3, 2003. The second entity, Scientific-Atlanta of Shanghai, Ltd., is a partially-owned subsidiary of Scientific-Atlanta that manufactures certain transmission products. During the first quarter of fiscal years 2004 and 2003, we purchased $0.9 million and $0.4 million, respectively, of transmission products from this subsidiary. We also sold $0.4 million and $0.2 million of components for transmission products to this company during the first quarter of fiscal years 2004 and 2003, respectively. In addition, we recorded income of $0.1 million in the first quarter of fiscal year 2004 and losses of $0.1 million in the first quarter of fiscal year 2003 from our equity in the net earnings and losses of this company. Our equity investment in SASL was $2.1 million at October 3, 2003. Based on our initial assessment of the impact of Interpretation No. 46, we believe that our equity investment in each of these entities constitutes our maximum exposure to loss at October 3, 2003 from our involvement with the entity.
EITF No. 00-21 provides guidance on determining units of accounting in a revenue arrangement with multiple deliverables and the allocation of the consideration received from the arrangement. EITF No. 00-21, which was effective for revenue arrangements entered into in the first annual or interim period after June 15, 2003, was adopted in the first quarter of fiscal year 2004. The adoption of EITF No. 00-21 did not have a significant impact on the recognition of revenue or result in the deferral of a significant amount of revenue in the first quarter of fiscal year 2004.
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In EITF Issue No. 03-5, the EITF concluded that, in an arrangement that includes software that is more than incidental to the products or services as a whole, the software and software-related elements are included in the scope of SOP 97-2, “Software Revenue Recognition.” EITF Issue No. 03-5, which will be adopted in the second quarter of fiscal year 2004, was effective for arrangements entered into in the first annual or interim reporting period after August 13, 2003. We are currently assessing the impact of the adoption of this Issue.
Off-Balance Sheet Financing
In July 1997, we entered into a long-term operating lease arrangement, which provided $36.0 million to finance the construction of the initial phase of our consolidated office site in Gwinnett County, Georgia, which was completed in the third quarter of fiscal year 1999. The initial occupancy term is seven years and expires in July 2004. Three five-year extensions of the lease term are available to Scientific-Atlanta. Lease payments equal the interest on the $36.0 million at a fixed rate of 6.51 percent per annum. A final lease payment of $36.0 million is due at the termination of the lease. We can also purchase the buildings financed with this arrangement at any time for $36.0 million. The lessor is a non-bank, general-purpose corporation owned by a financial institution that has engaged in many types of transactions with parties other than Scientific-Atlanta and activities other than lease transactions. Scientific-Atlanta has no ownership interest in the lessor or the financial institution.
The lease qualifies as an operating lease under Statement of Financial Accounting Standards No. 13 “Accounting for Leases”, as amended. We believe that the provisions of Interpretation No. 46 “Consolidation of Variable Interest Entities” do not apply to this arrangement. Accordingly, the assets, liabilities, results of operations and cash flows of the lessor have not been included in the consolidated financial statements of Scientific-Atlanta.
After the completion of the initial phase of our consolidated office site, all facility expansions were financed with existing cash balances and cash generated from operations.
Scientific-Atlanta has no other off-balance sheet financing arrangements.
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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 99.1 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 99.1 is hereby incorporated by reference into Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Scientific-Atlanta, the Scientific-Atlanta logo and Explorer are registered trademarks of Scientific-Atlanta, Inc.
WebSTAR is a trademark of Scientific-Atlanta, Inc. PowerTV is a registered trademark of PowerTV, Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK15 of 44
(Amounts
ITEM | 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
(Amounts in thousands)
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 forecasted
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transactions, firm commitments and assets denominated in currencies other than the U.S. dollar. These contracts, which qualify as cash flow hedges, are designated as hedging instruments at inception, 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.
The effectiveness of the hedge is based on a high correlation between the changes in its value and the value of the underlying hedged item. Any ineffectiveness is recorded through earningsearnings.
In the fourth quarter of fiscal year 2002, ish GmbH & Co. KG (ish), a customer in Germany, suspended or canceled a number of orders issued to the Cable upgrade Consortium, of which we were a member and through which we furnished our products and services. A significant portion of these orders was denominated in Euros, and we had forward contracts to sell approximately 33,220 Euros at June 28, 2002, which were designated as cash flow hedges. During fiscal year 2003, we reached a settlement with ish. As a result of the settlement, we no longer needed the forward contracts. We settled a portion of these contracts and recorded charges of $1,937 for ineffectiveness in Other (income) expense in the first quarter of fiscal year 2003. We also recorded charges of $102 for ineffectiveness of other (income) expense.forward contracts in the first quarter of fiscal year 2003. There were no such charges for ineffectiveness recorded duringin the first six monthsquarter of fiscal years 2003 or 2002. year 2004.
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.
Firmly committed purchase exposure and related hedging instruments at December 27, 2002October 3, 2003 were as follows:
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Firmly committed purchase contracts |
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Notional amount of forward contracts |
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Average contract amount (Foreign currency/United States dollar) |
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At December 27, 2002,October 3, 2003, we had unrealized losses of $133,$36, net of tax benefitbenefits of $81,$22, related to these derivatives, which were included in accumulated other comprehensive income. Scientific-Atlanta has no derivative exposure beyond the first quarter of fiscal year 2004.2005.
Unrealized gains and losses on foreign exchange forward contracts which do not meet the criteria for hedge accounting in accumulated other comprehensive income are recognized in otherOther (income) expense. WeDuring the quarter ended October 3, 2003, we recorded losses of $2,174 during the six months ended December 27, 2002 and gains of $35 during the six months ended December 28, 2001$468 related to these contracts. No such gains or losses were recorded in the first quarter of fiscal year 2003. At October 3, 2003, we had forward contracts to sell 3,890 Euros which did not meet the criteria for hedge accounting in accumulated other comprehensive income. These contracts hedged our exposure on Euro-based receivables.
We have market risks associated with the volatility in the value of our non-current marketable securities, which consist of investments in common stock, primarily technology companies, and warrants of publicly traded companies and a collar on a warrant and are stated at market value. All investments in common stock are classified as “available for sale” under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and thus, changes in the fair value of these securities are not included in our Consolidated Statements of Earnings until realized. Unrealized holding gains and losses are included, net of taxes, in accumulated other comprehensive income. We recorded after-tax, unrealized holding losses of $162$300 and $2,600gains of $968 in the first six monthsquarter of fiscal years 20032004 and 2002,2003, respectively. Realized gains and losses and declines in value judged to be other-than-temporary are included in otherOther (income) expense. We recorded lossesa realized gain of $6,818$1,907 on the sale of a non-current marketable security in the first six monthsquarter of fiscal year 2004. No such gains or losses were recorded in the first quarter of fiscal year 2003. We recorded losses of $3,868 in the first quarter of fiscal year 2003 from the other-than-temporary decline in the market value of a marketable securities.security. No such gains, losses or declines in value were recorded in the first six monthsquarter of fiscal year 2002.2004.
Scientific-Atlanta holds warrants to purchase common stock that are recorded at fair value. We also entered into a collar with put and call options which was designed to limit our exposure to fluctuations in the fair value of one of the warrants. The warrants, and the collar, which are included in Non-current marketable securities in the Consolidated Statements of Financial Position, were valued using the Black-Scholes pricing model. Fluctuations in the volatility of the market price of the common stock for which we hold a warrant, risk freerisk-free rate of return and expiration date of the warrant impact the valuation. During the first six monthsquarter of fiscal year 2004, we recorded unrealized losses of $12 related to the decline in the fair value of warrants in Other (income) expense.
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During the first quarter of fiscal year 2003, we recorded unrealized losses of $632$856 related to the decline in the fair value of the warrants and a realized gain of $2,491 from the settlement of thea collar and related warrant to purchase common stock in a public company in otherOther (income) expense. No such gains or losses were recorded in the first six months of fiscal year 2002.
We also have market risks associated with the volatility of our investments in privately-held companies, which consist primarily of securities of emerging technology companies. These investments are carried at cost and are evaluated periodically to determine if declines in fair value are other-than-temporary. Declines in value judged to be other-than-temporary are included in otherOther (income) expense. We recorded losses of $4,224$1,831 and $709 in the first six monthsquarter of fiscal yearyears 2004 and 2003, respectively, from other-than-temporary declines in the fair value of our investments in privately-held companies. During the first six months of fiscal year 2002, we recorded a gain of $16,200 from the appreciation in the market value of a warrant to purchase common stock of a public company.
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ITEM 4. CONTROLS AND PROCEDURES
ITEM | 4.CONTROLS AND PROCEDURES |
Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman of the Board, President and Chief Executive Officer, James F. McDonald, and our Senior Vice President, Chief Financial Officer and Treasurer, Wallace G. Haislip,Julian W. Eidson, of the effectiveness of the design and operation of ourScientific-Atlanta’s disclosure controls and procedures pursuant to(as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chairmanof 1934, as amended), as of the Board, President andend of the fiscal quarter covered by this report. Based on such evaluation, Scientific-Atlanta’s Chief Executive Officer and Senior Vice President, Chief Financial Officer and Treasurerhave concluded that, ouras of the end of such period, Scientific-Atlanta’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely alerting them to materialbasis, information relating to the company (including its consolidated subsidiaries) required to be includeddisclosed by Scientific-Atlanta in our periodic SEC filings. There have been no significant changes in internal controlsthe reports that it files or in other factors that could significantly affect these controls subsequent tosubmits under the date Messrs. McDonald and Haislip completed their evaluation.Exchange Act.
16There have not been any changes in Scientific-Atlanta’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of 20the Exchange Act) that occurred during the first quarter of fiscal year 2004 that has materially affected, or is reasonably likely to materially affect, Scientific-Atlanta’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. | Legal Proceedings |
Item 1. Legal Proceedings
In connection with the lawsuitOn April 23, 1999, we filed by usa patent infringement action against Gemstar-TV GuideGemstar International Group, Ltd. and Gemstar Development Corp. in U.S. District Court in Atlanta, Georgia. On July 23, 1999, we filed a patent infringement action against StarSight Telecast, Inc. on December 3, 1998 and described(StarSight), a subsidiary of Gemstar International Group, Ltd., in our Annual Report on Form 10-K for the year ended June 28, 2002, the U.S. District Court in AtlantaAtlanta. These suits allege that Gemstar and StarSight infringe three Scientific-Atlanta patents, U.S. Patent Nos. 4,885,775, 4,991,011, and 5,477,262, relating to interactive program guides, and seeks damages and injunctive relief. On September 25, 2003, a Special Master appointed by the Court issued a “Markman Order”his Report and Recommendation on October 25, 2002 interpretingclaims construction. The parties have filed with the claims of the so-called Reiter ‘578 patent and Hallenbeck ‘211 and ‘357 patents. We filed motions for summary judgment of non-infringementCourt their respective reasons as to why the ReiterCourt should or should not adopt the Special Master’s Report and Hallenbeck patents. Gemstar agreed that, based on the interpretations set forth in the Markman Order, our accused products do not infringe the ‘211 patent. A hearing on the remaining patents will be held in February. The District Court in Atlanta also issued an Order on November 1, 2002 granting our Motion for Summary Judgment of non-infringement of the Levine ‘815 and ‘272 patents as to our analog set-top products.Recommendation.
In connection with the securities class action litigation filed in July 2001 and described in our Annual Report on Form 10-K for the year ended June 28, 2002, the U.S. District Court for the Northern District of Georgia denied on December 23, 2003 our motion to dismiss the consolidated complaint filed by the lead counsel. Scientific-Atlanta and the individual defendants have filed a motion requesting the Court to certify the denial for appeal to the 11th Circuit Court of Appeals, or, in the alternative, to re-consider its decision.
On January 3, 2003, a purported class action alleging violations of the Employee Retirement Income Security Act (ERISA) was also filed in the U.S. District Court for the Northern District of Georgia. The action was brought against us and several of our officers and directors alleging breaches of fiduciary obligations to participants in Scientific-Atlanta’s 401(k) plan and is based on substantially the same factual allegations as the class action described above.
In January 2003, Scientific-Atlanta received a subpoena from the U.S. Department of Justice in the Eastern District of Missouri regarding the production of documents in connection with our marketing support arrangement with Charter Communications. We are cooperating in that investigation.
During the second quarter of fiscal year 2003, we resigned from the Creditors’ Committee in the Adelphia bankruptcy proceeding.
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:
Votes for | Withhold Authority | |||
David W. Dorman | 121,947,286 | 7,060,450 | ||
William E. Kassling | 122,783,135 | 6,224,601 | ||
Mylle Bell Mangum | 126,140,329 | 2,867,407 |
James I. Cash, Jr., James F. McDonald, Terence F. McGuirk, David J. McLaughlin, James V. Napier and Sam Nunn continue as directors. Marion H. Antonini retired from the Board of Directors when his term of office expired on November 7, 2002.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits. |
Exhibit No. | Description | |
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31.1 |
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31.2 | Certifications of Chief Financial | |
32.1 | Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of | |
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99.1 | Cautionary Statements |
(b) No reports on Form 8-K were filed during the quarter ended December 27, 2002.
(b) | During the first quarter of fiscal year 2004, we filed one Current Report on Form 8-K dated July 17, 2003 with respect to Item 12 - Results of Operations and Financial Condition. |
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: |
| By: | /s/ | |||||
Julian W. Eidson | ||||||||
Senior Vice President, | ||||||||
Chief Financial Officer and Treasurer | ||||||||
(Principal Financial Officer and duly authorized signatory of the Registrant) |
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Certification of Chief Executive Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James F. McDonald, the Chief Executive Officer of Scientific-Atlanta, Inc., certify that:
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Certification of Chief Financial Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Wallace G. Haislip, the Chief Financial Officer of Scientific-Atlanta, Inc., certify that:
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