ITEM 1. BUSINESS
GENERAL
Scientific-Atlanta, Inc. (the "Company") designs, manufactures and markets a variety of standard and proprietary commercial electronic signal generating and receiving equipment. The Company's products connect information generators with information users via broadband terrestrial and satellite networks, and include applications for the converging cable, telephone, and data networks.
The Company operates primarily in one business segment, Communications, providing satellite and terrestrial based networks to a range of customers and applications, and providing network management and systems integration to add value to those networks. This segment represents over 90 percent of consolidated sales, operating profit and identifiable assets.
The Company has evolved from a manufacturer of electronic test equipment for antennas and electronics for the cable industry to a producer of a wide variety of products for terrestrial and satellite communications networks, including digital video, voice and data communications products. The Company's products include receivers, transmitters, distribution amplifiers, modulators, demodulators, signal encoders and decoders, controllers, signal processors, set-top (home communications) terminals, digital audio terminals, fiber optic distribution equipment, and satellite earth station antennas. These products, and integrated systems and networks using these and other products, are sold to CATV system operators, telephone companies, communications carriers, communications network operators, and multi-facility business organizations which use communications satellites for intracompany communications. Sales are also made to independent system integrators, distributors and dealers who resell the products to some of the above types of customers.
The Company sells modulators, demodulators and signal processors for video and audio receiving stations (often referred to as "headend" systems), products for distributing communications signals by coaxial cable and fiber optics from headend systems to subscribers, set-top terminals that enable television sets to receive all channels transmitted by system operators, and interdiction equipment which enables connections, disconnections and changes in service to be made from the headend. The Company's set-top terminals include units which are addressable from the headend system so as to permit control of channel authorizations, including authorizations for pay-per-view events, impulse ordering and automatic recording of billing information at the cable operator's central facility, and menu-driven volume controllable units. The Company manufactures equipment for transmitting compact-disc quality music programming via satellite and cable media.
Sales of set-top terminals constituted approximately 25% of the Company's total sales for fiscal year 1995, and approximately 21% and 18% of such sales in each of the fiscal years 1994 and 1993, respectively. Proprietary software used in the terminals, as well as system manager software at the headend system, was developed by the Company and is updated from time to time. The Company's new digital home communications terminals will enable subscribers to access new services such as advanced pay-per-view ordering of special events and movies, fully interactive home shopping services, electronic program guides and more.
The Company's products, both analog and digital, are being utilized by the Company's traditional cable operator customers to upgrade their networks to provide new services and by the Regional Bell Operating Companies to build new video, voice and data networks. They are also utilized by electric utilities in load management systems which monitor and control power usage and monitor power outages.
The Company's satellite earth stations receive and transmit signals for video, voice and data and are utilized in satellite-band telephone, data and television distribution networks. Some of these earth stations are part of national and international communications systems which communicate by means of a satellite with earth stations in other countries or with other earth stations in the same national network. Earth stations in these systems may be connected with local telephone, teletype, television or other terrestrial communications networks. The Company's earth stations, signal
encoders and decoders, packet switches and controllers are also used in private business networks for the exchange of audio, video and data via satellite among various office, manufacturing and sales facilities and for the delivery of television programming to hotels, motels and apartment complexes. The Company's data communications product offerings include private interactive data systems using VSAT (very small aperture terminal) technology.
The Company designs, manufactures and sells digital video compression communications products for direct satellite broadcast and cable television systems and digital storage and retrieval products for applications such as ad insertion for television broadcasters and cable operators. The Company's compression products utilize the open architecture MPEG-2 technology developed by an international standards group. MPEG-2 digital equipment allows cable, telephone, computer and consumer electronics products and systems to operate together across networks and in the home.
The Company's satellite products and systems include tracking and telemetry equipment, earth observation satellite ground stations, shipboard and command telephony and facsimile communications products and intercept systems. The Company produces telemetry instruments, radar platforms, special receivers, special measurement devices and other equipment used to track aircraft, missiles, satellites and other moving objects and to communicate with and receive and record various measurements and other data from the object.
The Company develops services and applications which can be utilized by its customers on their terrestrial and satellite-based networks. Applications recently introduced include a system which enables power companies to detect power failures automatically, telephony capability over cable networks, interactive systems for video conferencing, retail banking and distance learning and interactive video games.
OTHER PRODUCTS AND SERVICES
The Company produces advanced products and systems that measure, analyze or control processes associated with acoustics, signal analysis and machinery diagnostics. Their applications range from sonars and anti-submarine warfare analysis tools to vibration and acoustic analyzers used to measure jet engine vibration, helicopter rotor wing trim and balance and non-intrusive medical testing. Products include acoustic systems, machinery diagnostic systems, signal processors and trainers and are used in engineering design, structural evolution, acoustic and electronic testing and turbine engine balancing.
The Company's microwave instrumentation systems are used to design and manufacture antennas for communication and radar systems. Products include pattern recorders, receivers, positioners and various display units, which measure, record and display various characteristics of antennas such as signal pattern, gain, phase, amplitude and frequency.
STATUS OF THE 8600X HOME COMMUNICATIONS TERMINAL
The Company's rollout of the 8600x home communications terminal was delayed in fiscal 1995 as a result of the continued development of headend software requested by a customer to maximize the functionality of the 8600x terminals. Such software has been fully developed, and the Company does not anticipate any further delays in this rollout.
MARKETING AND SALES
The Company's products are sold primarily through its own sales personnel who work out of offices in Atlanta and other metropolitan areas in the United States. Certain products are also marketed in the United States through independent sales representatives and distributors. Sales in foreign countries are made through wholly-owned subsidiaries and branch offices, as well as through independent distributors and sales representatives. The Company's management personnel are also actively involved in marketing and sales activities.
The Company's sales to various units of the United States Government constituted 11% of the Company's sales for fiscal year 1993. Such sales were less than 10% during fiscal years 1995 and 1994.
The Company's sales to customers in foreign countries constituted 33% of the Company's total sales for fiscal years 1995 and 1994 and 26% of total sales in fiscal year 1993. Substantially all of these sales were export sales. Foreign subsidiary sales were not material for any of these fiscal years. Sales to no one geographic area constituted 10% or more of the Company's total sales during those years.
Approximately 12% of the Company's total sales for fiscal year 1995 were made to Time Warner, Inc. and its affiliates, with such sales being comprised of products to be used in the cable industry.
BACKLOG
The Company's backlog consists of unfilled customer orders believed to be firm and long-term contracts which have not been completed. The Company's backlog as of June 30, 1995, and July 1, 1994, was $457,455,000 and $405,860,000, respectively.
The Company believes that approximately 90% of the backlog existing at June 30, 1995 will be shipped within the succeeding fiscal year. The Company includes in its backlog with respect to long-term contracts only amounts representing orders currently released for production. The amount contained in backlog for any contract or order may not be the total amount of the contract or order. The amount of the Company's backlog at any time does not reflect expected revenues for any fiscal period.
PRODUCT RESEARCH AND DEVELOPMENT AND PATENTS
The Company conducts an active research and development program to strengthen and broaden its existing products and systems and to develop new products and systems. The Company's development strategy is to identify products and systems which are, or are expected to be, needed by substantial numbers of customers in the Company's markets and to allocate a greater share of its research and development resources to areas with the highest potential for future benefits to the Company. In addition, the Company develops specific applications related to its present technology. Expenditures in fiscal 1995, 1994 and 1993 were principally for development of commercial cable and telephone digital products, satellite network products and interactive data communications products. In fiscal 1995, 1994 and 1993, the Company's research and development expenses were approximately $83,316,000, $60,417,000 and $60,161,000, respectively.
The Company holds patents with respect to certain of its products and actively seeks to obtain patent protection for significant inventions and developments.
MANUFACTURING
The Company develops, designs, fabricates, manufactures, assembles or acquires its products. Manufacturing operations range from complete assembly of a particular product by one individual or small group of individuals to semi-automated assembly lines for volume production. Because many of the Company's products include precision electronic components requiring close tolerances, the Company maintains rigorous and exacting test and inspection procedures designed to prevent production errors, and also constantly reviews its overall production techniques to enhance productivity and reliability. The Company's set-top terminals and certain pole-line hardware for the CATV industry are manufactured by contract vendors with high-quality, high-volume production facilities. In addition to such manufacturing by contract vendors, the Company commenced its own manufacturing of set-top terminals in fiscal year 1995 in its new Juarez, Mexico facility.
MATERIALS AND SUPPLIES
The materials and supplies purchased by the Company are standard electronic components, such as custom integrated circuits, wire, circuit boards, transistors, capacitors and resistors, all of which are produced by a number of manufacturers. The principal supplier of the Company's set-top terminals is Matsushita Electronic Components Co., Ltd. The Company also purchases aluminum and steel, including castings and semi-fabricated items produced by a variety of sources. The Company considers its sources of supply to be adequate and is not dependent upon any single supplier, except for Matsushita Electronic Components Co., Ltd., for any significant portion of the materials used in the products it manufactures.
EMPLOYEES
The Company had approximately 4,700 employees (approximately 700 of which were employed through temporary employment agencies) on June 30, 1995. The Company believes its employee relations are satisfactory.
COMPETITION
The businesses in which the Company is engaged are highly competitive. The Company competes with companies which have substantially greater resources and a larger number of products, as well as with smaller specialized companies. Some of the Company's customers are in businesses closely related to the production of such products and are, therefore, potential competitors of the Company. The Company believes that its ability to compete successfully results from its marketing strategy, engineering skills, ability to provide quality products at competitive prices and broad coverage by its sales personnel.
INDUSTRY REGULATORY UNCERTAINTY AND RESTRUCTURING
Federal, state and local regulatory uncertainty was a dominant feature of the communications industry during fiscal 1995, and such uncertainty is expected to continue for all or a portion of fiscal 1996. During 1995, the House and the Senate passed differing telecommunications reform bills aimed at deregulating and removing barriers to competition in the telecommunications industry. It is not known when (or whether) the Senate and House bills will be reconciled and passed by both houses of Congress and signed by President Clinton.
Several states passed legislation designed to deregulate their telecommunications industries and several regional telephone companies challenged in court existing laws and regulations that prohibit or limit their entry into cable service.
Most of the regional Bell operating companies filed applications under Section 214 of the Federal Communications Act for the construction and operation of video delivery systems called "video dialtone networks." Some of these applications were granted, some delayed or denied and some withdrawn. In at least one case, a regional telephone company chose to proceed with a cable television franchise without filing an application under Section 214 in apparent contradiction of FCC regulations.
As the regional telephone companies sought entry into the video delivery industry during fiscal 1995, the cable industry itself was changing through consolidation, merger, acquisition and exchanges of local cable systems. Regional telephone companies also acquired cable companies outside of their regions. At the same time that telephone companies were attempting to develop or acquire video networks, some of the traditional cable operators began efforts to provide telephony on their networks.
Uncertainty and change were also prevalent with respect to sources for content for video entertainment networks. Some content providers formed alliances or joint ventures with other content and network providers, including cable companies and telephone companies. Proposed acquisitions of two of the major broadcast networks (ABC and CBS) were announced.
Overall, the telecommunications industry was characterized during fiscal 1995 by a changing yet uncertain regulatory climate, the beginning of competition between cable companies and telephone companies, consolidation of
cable franchise territories, and uncertainty in the source of program content. These factors caused a degree of uncertainty in the demand for the Company's products. It is not possible to predict the impact of these factors on future orders and sales volumes.
ITEM 2.

ITEM 2. PROPERTIES
The Company owns office and manufacturing facilities in metropolitan Atlanta, Georgia, San Diego, California, and Juarez, Mexico, which comprise five sites containing a total of approximately 561,800 square feet.
The Company also owns approximately 130 acres of land in Gwinnett County, Georgia, where antenna test ranges and a hub station used in providing interactive data communications services are located, and 219 acres of land in Walton County, Georgia, held for future antenna test range expansion. The Company presently owns one building and leases two buildings in San Diego County, California, all of which are not required for present operations and are under lease or sublease to other tenants.
Additional major manufacturing facilities containing an aggregate of approximately 437,200 square feet are leased by the Company at the following locations under leases expiring (including renewal options) from 1996 to 2015:
The Company also leases office and warehouse space in several buildings in the Atlanta, Georgia, San Jose, California, and Tempe, Arizona areas and leases sales and service offices in 24 U.S. and foreign cities.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which may or could have a material adverse impact on the Company or its operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended June 30, 1995.
EXECUTIVE OFFICERS OF THE COMPANY
The following persons are the executive officers of the Company:
Each executive officer is elected annually and serves at the pleasure of the Board of Directors.
Mr. McDonald was elected President and Chief Executive Officer of the Company effective July 15, 1993. He was a general partner of J. H. Whitney & Company, a private investment firm, from 1991 until his employment by the Company. From 1989 to 1991 he was President and Chief Executive Officer of Prime Computer, Inc., a supplier of CAD/CAM software and computer systems. Prior to that time he was President and Chief Operating Officer of Gould, Inc., a computer and electronics company (1984 to 1989) and held a variety of positions with IBM Corporation (1963 to 1984).
Mr. Eason has been a partner at Paul, Hastings, Janofsky & Walker since 1989. He has been Secretary of the Company since August, 1993, and became Senior Vice President and General Counsel in February, 1994. Paul, Hastings, Janofsky & Walker performs legal services for the Company. Mr. Eason receives a fixed salary from the Firm for work which he performs for clients of the Firm other than the Company, but has no interest in the Firm's earnings and profits.
Mr. Koenig was elected Senior Vice President, Human Resources in 1995. Prior to that time he served as Vice President, Human Resources for more than five years.
Mr. Levergood re-joined the Company in December 1992. He had previously been employed by the Company in various managerial positions (most recently as Chief Operating Officer) until December 1989. From January through June, 1990, he was President and Chief Operating Officer of Dowden Communications, an operator of cable television systems. He was an independent communications consultant from June, 1990 until he re-joined the Company in 1992.
Mr. Simpson was President and Chief Executive Officer of Mead Data Central, Inc., an electronic publisher, from June, 1982 through November, 1992. From December, 1992 until joining the Company in October, 1993, he was President of Infobyte, Inc., a consulting firm.
Mr. Wagner was Vice President-Finance and Chief Financial Officer of Computervision Corporation, a supplier of CAD/CAM/CAE software and services from September, 1989 until he joined the Company in June, 1994.
Mr. Enterline has been employed by the Company in a variety of positions since 1989. He was elected Vice President in February, 1995.
Mr. McIntyre was elected Vice President in February, 1995. He has been employed by the Company since 1991. Prior to his employment with the Company, Mr. McIntyre was employed by Augat, Inc., a computer components supplier, as Vice President and General Manager of its Interconnection Products Division, from 1988 to 1991.
Mr. Wredberg joined the Company in 1995 and was elected to the position of Vice President in May, 1995. Mr. Wredberg served as President of American Microsystem, Inc., a supplier of semiconductors, from 1985 until 1995.
All other executive officers have been employed by the Company in the same or similar capacities for more than five years. There are no family relationships among the executive officers.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED MATTERS
The Common Stock of the Company is traded on the New York Stock Exchange (symbol SFA). The approximate number of holders of record of the Company's Common Stock at September 8, 1995, was 6,256.
It has been the policy of the Company to retain a substantial portion of its earnings to finance the expansion of its business. In 1976 the Company commenced payment of quarterly cash dividends and intends to consider the continued payment of dividends on a regular basis; however, the declaration of dividends is discretionary with the Board of Directors, and there is no assurance regarding the payment of future dividends by the Company.
Information as to the high and low stock prices and dividends paid for each quarter of fiscal years 1995 and 1994 is included in Note 5 of the Notes to Financial Statements included in this Report.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data is set forth on page 20 of this Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion of Consolidated Statement of Financial Position, Consolidated Statement of Earnings, and Consolidated Statement of Cash Flows are set forth on pages 12, 14, 15 and 18 of this Report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and notes thereto, the schedule containing certain supporting information and the report of independent public accountants are set forth on pages 11 through 29 of this Report. See Part IV, Item 14 for an index of the statements, notes and schedule.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10-13 (except for the information set forth at the end of Part I with respect to Executive Officers of the Company) is incorporated by reference from the Company's definitive proxy statement for the Company's 1995 Annual Meeting of shareholders, which is expected to be filed pursuant to Regulation 14A within 120 days after the end of the Company's 1995 fiscal year.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) The consolidated financial statements listed below are included on pages 11 through 28 of this Report.
Report of Independent Public Accountants
Consolidated Statement of Financial Position as of June 30, 1995 and July 1, 1994
Consolidated Statement of Earnings for each of the three years in the period ended June 30, 1995
Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
All other Schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the financial statements or notes thereto.
(3) Exhibits:
(3) (a) The following is incorporated by reference to the registrant's report on Form 10-K for its fiscal year ended June 29, 1990:
(i) Amended and Restated Articles of Incorporation, as amended.
(b) The following is incorporated by reference to the registrant's report on form 10-K for its fiscal year ended July 1, 1994:
(i) By-laws of registrant, as amended.
(10) MATERIAL CONTRACTS -
(a) The following material contract is incorporated by reference to the registrant's report on Form 10-Q for its fiscal quarter ended March 31, 1987:
(i) Agreement pertaining to the compensation of Sidney Topol.*
(b) The following material contract is incorporated by reference to the registrant's report on Form 10-Q for its fiscal quarter ended December 29, 1989:
(i) Scientific-Atlanta, Inc. Non-Employee Directors Stock Option Plan. *
(c) The following material contracts are incorporated by reference to the registrant's report on Form 10-K for the fiscal year ended June 26, 1992:
(i) Scientific-Atlanta, Inc. 1981 Incentive Stock Option Plan, as amended.*
(ii) 1985 Executive Deferred Compensation Plan of Scientific-Atlanta, Inc., as amended.*
(iii) Scientific-Atlanta, Inc. Annual Incentive Plan for Key Executives, as amended.*
(iv) Scientific-Atlanta, Inc. Long Term Incentive Compensation Plan, as amended.*
(v) Scientific-Atlanta, Inc. 1978 Non-Qualified Stock Option Plan for Key Employees, as amended.*
(d) The following material contract is incorporated by reference to the registrant's report on Form 10-K for the fiscal year ended July 2, 1993:
(i) Scientific-Atlanta, Inc. 1992 Employee Stock Option Plan.*
(e) The following material contracts are incorporated by reference to the registrant's report on Form 10-K for the fiscal year ended July 1, 1994:
(i) Scientific-Atlanta, Inc. Supplemental Executive Retirement Plan. *
(ii) 1994 Scientific-Atlanta, Inc. Executive Deferred Compensation Plan.*
(iii) Form of Severance Protection Agreement between the Registrant and Certain Officers and Key Employees.*
(iv) Scientific-Atlanta, Inc. Retirement Plan for Non-Employee Directors, as amended.*
(f) The following material contract is incorporated by reference to the exhibit filed with the registrant's proxy statement filed on October 3, 1994, as amended by the revised cover page thereto incorporated by reference to the registrant's report on Form 10-Q for the fiscal quarter ended December 31, 1994:
(i) Scientific-Atlanta, Inc. Long-Term Incentive Plan, adopted by the shareholders on November 11, 1994.*
(g) Credit Agreement, dated May 11, 1995, by and between the Company and NationsBank of Georgia, National Association, for itself and as agent for other banks participating in the credit facility.
(11) Computation of Earnings Per Share of Common Stock
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
___________________
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Scientific-Atlanta, Inc.:
We have audited the accompanying consolidated statement of financial position of Scientific-Atlanta, Inc. (a Georgia corporation) and subsidiaries as of June 30, 1995 and July 1, 1994 and the related consolidated statements of earnings and cash flows for each of the three years in the period ended June 30, 1995 appearing on pages 13, 17 and 19, respectively. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Scientific-Atlanta, Inc. and subsidiaries as of June 30, 1995 and July 1, 1994 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles.
As explained in Notes 9 and 10 to the financial statements, effective June 27, 1992, the Company changed its method of accounting for income taxes, postretirement and postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule listed in Item 14(a)(2) of this Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Atlanta, Georgia ARTHUR ANDERSEN LLP August 4, 1995
REPORT OF MANAGEMENT
The management of Scientific-Atlanta, Inc. (the Company) has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The statements, which include amounts that are based on management's best estimates and judgments, have been prepared in conformity with generally accepted accounting principles and are free of material misstatement. Management also prepared the other information in the Form 10-K and is responsible for its accuracy and consistency with the financial statements.
The Company maintains a system of internal control over the preparation of its published annual and interim financial statements. It should be recognized that even an effective internal control system, no matter how well designed, can provide only reasonable assurance with respect to the preparation of reliable financial statements; further, because of changes in conditions, internal control system effectiveness may vary over time.
Management assessed the Company's system of internal control in relation to criteria for effective internal control over the preparation of its published annual and interim financial statements. Based on its assessment, it is management's opinion that its system of internal control as of June 30, 1995 is effective in providing reasonable assurance that its published annual and interim financial statements are free of material misstatement.
As part of their audit of our financial statements, Arthur Andersen LLP considered certain elements of our system of internal controls in determining their audit procedures for the purpose of expressing an opinion on the financial statements.
The audit committee of the board of directors is composed solely of outside directors and is responsible for recommending to the board the independent public accountants to be retained for the year, subject to stockholder approval. The audit committee meets three times each year to review with management the Company's system of internal accounting controls, audit plans and results, accounting principles and practices, and the annual financial statements.
/s/ James F. McDonald /s/ Harvey A. Wagner ------------------------------------- ------------------------------------- James F. McDonald Harvey A. Wagner President and Chief Executive Officer Senior Vice President Chief Financial Officer and Treasurer
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Scientific-Atlanta had stockholders' equity of $474.2 million and cash on hand of $80.3 million at June 30, 1995. The current ratio of 2.2:1 at June 30, 1995 compared to 2.5:1 at July 1, 1994. Cash on hand and cash generated from earnings was used to fund working capital requirements and for capital expenditures.
CASH AND CASH EQUIVALENTS at the end of 1995 were $80.3 million, down from $123.4 million last year. Cash decreased as expenditures for inventories, equipment and expansion of manufacturing capacity exceeded cash generated from earnings. Ending working capital, excluding cash, was $259.4 million, or 22.6 percent of sales, as compared to 22.1 percent in the prior year.
RECEIVABLES were $243.4 million at year-end, compared to $206.1 million at the prior fiscal year-end. The increase reflects the sales growth in 1995. Average days sales outstanding decreased to 71 for 1995 from 74 for 1994. The allowance for doubtful accounts as a percent of gross receivables declined in 1995 due to a lower level of delinquent balances and write-offs.
INVENTORY TURNOVER was 4.2 times in 1995, compared to 4.4 in the prior year. Inventories of $257.4 million at year-end were $120.6 million higher than at the end of the prior year, reflecting the higher production and sales levels in 1995 and delays in the shipments of certain home communications terminals.
CURRENT DEFERRED INCOME TAXES increased $0.4 million due to increases in nondeductible reserves.
OTHER CURRENT ASSETS, which include prepaid insurance, deposits, royalties, license fees and other miscellaneous prepaid expenses, decreased $4.8 million due primarily to lower deposits and royalties.
NET PROPERTY, PLANT AND EQUIPMENT increased by $38.8 million in 1995 as capital spending exceeded depreciation and disposals. Capital additions of $64.8 million included expenditures for equipment and expansion of manufacturing capacity including the construction of a manufacturing facility in Juarez, Mexico.
COST IN EXCESS OF NET ASSETS ACQUIRED decreased in 1995, reflecting amortization of goodwill.
OTHER ASSETS, which include license fees, investments, noncurrent deferred tax charges, intellectual property, various prepaid expenses and cash surrender value of company-owned life insurance, decreased $3.4 million in 1995 due primarily to lower prepaid license fees. See Note 2.
TOTAL BORROWINGS at year-end amounted to $2.2 million, down $5.4 million from the prior year. The borrowings include industrial development bonds and working capital loans for foreign subsidiaries. Working capital borrowings by foreign subsidiaries were reduced $5.1 million during 1995. Details of borrowings are shown in Note 6.
In May 1995 the Company established a $300 million senior credit facility consisting of a $150 million one-year facility and a $150 million five-year facility to be available for general corporate purposes. There were no borrowings under this facility at June 30, 1995. The facility will be used to supplement funds generated internally to support the growth of the Company.
ACCOUNTS PAYABLE were $148.3 million at year-end, up from $82.3 million last year. The increase reflects higher production and inventory levels and an increase to 43 days in accounts payable from 33 in 1994.
ACCRUED LIABILITIES of $113.9 million include accruals for compensation, warranty and service, customer down-payments and taxes, excluding income taxes. Higher accruals for compensation and retirement benefits and other miscellaneous accruals were the principal factors in the year-to-year increase. See Note 7 for details.
OTHER LIABILITIES of $34.6 million are comprised of deferred compensation, postretirement benefit plans, postemployment benefits and other miscellaneous accruals. See Note 8 for details.
STOCKHOLDERS' EQUITY was $474.2 million at the end of 1995, up $78.5 million from the prior year. Net earnings of $63.5 million and the issuance of stock grants and stock pursuant to stock option plans of $19.7 million were partially offset by dividends of $4.6 million and a decrease in accumulated translation adjustments. See Note 15 for details of changes in stockholders' equity.
RETURN ON AVERAGE STOCKHOLDERS' EQUITY for 1995 was 14.7 percent, up from 9.5 percent the prior year, reflecting improved earnings performance.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
See accompanying notes
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS
The Consolidated Statement of Earnings summarizes Scientific-Atlanta's operating performance over the last three years, during which time the company has accelerated development of new products and expanded into international markets.
EARNINGS IN 1995 WERE UP $28.5 MILLION OVER 1994.
Higher sales volume was the primary factor in the year-to-year increase.
Earnings in 1994 were up $15.0 million over 1993. Higher sales volume and improved margins were the primary factors in the increase.
The Company's fiscal year is comprised of fifty-two or fifty-three weeks, ending on the Friday nearest to June 30 each year. Fiscal years 1995 and 1994 included fifty-two weeks while fiscal year 1993 included fifty-three weeks. The effect on the results of operations of the inclusion of fifty-two weeks in 1995 and 1994 versus fifty-three weeks in 1993 was not material.
SALES INCREASED 41 PERCENT OVER 1994. Strong growth in sales volume of transmission and addressable converter products and Sega game adapters and deliveries of equipment to Orbit Communications Company for its direct to home satellite services contributed to the year-to-year increase in sales. Sales of instrumentation products continue to be adversely affected by spending reductions in the defense industry. International sales were 33 percent of total sales in 1995.
Sales in 1994 increased 11 percent over 1993. Continued strong sales volume growth in cable television distribution equipment and addressable home communications terminals (converters) and significant improvement in sales of network systems were offset partially by reduced sales due to completion of the PrimeStar television contract, lower digital audio sales and sales of defense related products. International sales increased to 33 percent of total sales in 1994, up from 26 percent in the prior year. Higher sales of cable equipment and network systems contributed to the growth in international sales.
COST OF SALES AS A PERCENT OF SALES INCREASED 2.2 PERCENTAGE POINTS OVER 1994. Gains from cost improvements in satellite networks and increased volumes in transmission and addressable converter products were offset by unfavorable exchange rate changes in Japanese yen, production startup costs, product mix and cost overuns on defense contracts. The Company believes that gross margins may be negatively impacted in future periods by planned expansion of manufacturing capacity and the continued increase in sales of addressable converter products and Sega adapters which have lower margins than some of the Company's other products. Continued strength of the yen would also adversely affect gross margins.
Certain material purchases are denominated in Japanese yen and, accordingly, the purchase price in U.S. dollars is subject to change based on exchange rate fluctuations. Currently, the Company has forward exchange contracts to purchase yen to hedge its exposure on purchase commitments for a period of twelve months.
Cost of sales as a percent of sales decreased 2.2 percentage points in 1994. Favorable mix change was the primary factor in the year-to-year improvement. Manufacturing efficiencies, higher margins on addressable converter products and improved program management also contributed to the improved margins.
SALES AND ADMINISTRATIVE EXPENSE INCREASED 26 PERCENT OVER THE PRIOR YEAR. Increased expenses reflect costs associated with ongoing investments to support expansion into international markets, the introduction of new products and a build-up in the infrastructure of the Company to handle the growth the Company is experiencing. Sales and administrative expenses as a percent of sales declined to 13 percent in 1995 from 14 percent in 1994.
Sales and administrative expense increased 3 percent in 1994. Increases in sales and marketing costs associated with expansion into international markets and the introduction of new products were offset slightly by administrative costs which declined 2 percent, primarily due to lower professional fees.
RESEARCH AND DEVELOPMENT EXPENSES INCREASED $22.9 MILLION OVER THE PRIOR YEAR. Increased research and development activity, particularly development of digital products, was the primary factor in the year-to-year increase. Product development activity is expected to continue near current levels.
Research and development expenses of $60.4 million in 1994 were up slightly over the prior year. Accelerated research and development activity, particularly development of digital products, was offset by declines in defense related products and the
reallocation of engineering resources from research and development efforts to specific customer orders. The revenue from these orders was recognized in 1995, and, accordingly the related costs were inventoried at July 1, 1994.
INTEREST EXPENSE WAS $0.8 MILLION IN 1995 AND $1.1 MILLION IN 1994. The decrease reflects lower average working capital borrowings by foreign subsidiaries.
INTEREST INCOME WAS $2.8 MILLION IN 1995 AND $3.2 MILLION IN 1994. The decrease in interest income reflects lower average cash balances.
OTHER INCOME WAS $1.5 MILLION IN 1995. Other income included rental income, royalty income, net gains from partnership activities and other miscellaneous items. There were no significant items in other income and other expense during 1995.
Other expense of $17.4 million in 1994 included a $17.5 million charge to settle securities class action litigation, losses of $1.0 million from partnership activities and net gains from other miscellaneous items of $1.1 million.
The securities class action suit, which was filed in 1988, related to events which occurred during the early 1980's principally as a result of the difficulties experienced by the Company in the production and delivery of a new product. The Company firmly believes it fully complied with the law in this matter and that the suit was without merit. The litigation was settled in 1994 in the best interest of the Company's shareholders to avoid protracted and costly legal proceedings and eliminate the uncertainty of a jury trial.
THE PROVISION FOR INCOME TAXES WAS 32 PERCENT OF PRE-TAX EARNINGS IN 1995, UNCHANGED FROM THE PRIOR YEAR. The provision for income taxes was 25 percent of pre-tax earnings in 1993. The lower provision in 1993 reflects interest income on tax-exempt investments and benefits from international tax planning. Details of the provision for income taxes are discussed in Note 9.
ACCOUNTING CHANGES RESULTED IN A CHARGE OF $4.7 MILLION TO EARNINGS IN 1993. Effective as of the first quarter of fiscal 1993, the Company adopted the provisions of SFAS No. 106 "Postretirement Benefits", SFAS No. 112 "Postemployment Benefits" and SFAS No. 109 "Accounting for Income Taxes". The adoption of these standards did not have a significant impact on income from operations and is not expected to significantly impact earnings in subsequent years. See Notes 9 and 10.
EARNINGS PER SHARE OF $0.83 IN 1995 INCREASED $0.37 AFTER AN INCREASE OF $0.19 IN 1994. Shares outstanding and share equivalents decreased slightly to 76.2 million in 1995 from 76.6 million in 1994.
(THIS PAGE INTENTIONALLY LEFT BLANK.)
CONSOLIDATED STATEMENT OF EARNINGS
See accompanying notes.
MANAGEMENT'S DISCUSSION OF CONSOLIDATED STATEMENT OF CASH FLOWS
The Statement of Cash Flows summarizes the main sources of Scientific-Atlanta's cash and its uses. These flows of cash provided or used are summarized by the Company's operating activities, investing activities and financing activities.
Cash on hand at the end of 1995 was $80.3 million. Cash on hand and cash generated from earnings were used for capital expenditures and to fund working capital requirements.
In May 1995 the Company established a $300 million senior credit facility consisting of a $150 million one-year facility and a $150 million five-year facility to be available for general corporate purposes. There were no borrowings under this facility at June 30, 1995. The facility will be used to supplement funds generated internally to support the growth of the Company.
CASH PROVIDED BY OPERATING ACTIVITIES was $24.0 million for 1995, compared to $48.5 million for 1994. In 1995 and 1994 cash provided by improved earnings and increases in payables was partially offset by increases in inventories and accounts receivable. See Management's Discussion of the Statement of Financial Position for details of this performance.
CASH USED BY INVESTING ACTIVITIES of $65.3 million during 1995 included expenditures of $64.8 million for equipment and expansion of manufacturing capacity, including the construction of a manufacturing facility in Juarez, Mexico. In 1994, cash used by investing activities included $34.9 million for purchases of plant and equipment and $5.2 million for investments in partnerships. Expenditures focused on increased capacity and productivity improvements. Cash provided by investing activities included $11.2 million from the sale of ICT shares.
CASH USED BY FINANCING ACTIVITIES WAS $1.8 MILLION IN 1995. The issuance of stock pursuant to stock option and employee benefit plans generated $8.2 million. Cash used by financing activities included a $5.1 million reduction of working capital borrowings by foreign subsidiaries and dividend payments of $4.6 million.
Cash provided by financing activities was $0.8 million in 1994. The issuance of stock pursuant to stock option and employee benefit plans and increases in short-term borrowings generated $5.0 million and $0.5 million, respectively, of cash during the year.
CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes.
SELECTED FINANCIAL DATA
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END The Company's fiscal year ends on the Friday closest to June 30 of each year. Fiscal year ends are as follows: 1995: June 30, 1995 1994: July 1, 1994 1993: July 2, 1993
Fiscal 1993 includes fifty-three weeks.
CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries after elimination of all material intercompany accounts and transactions.
FOREIGN CURRENCY TRANSLATION The financial statements of certain foreign operations are translated into U.S. dollars at current exchange rates. Resulting translation adjustments are accumulated as a component of stockholders' equity and excluded from net earnings. Foreign currency transaction gains and losses are included in cost of sales and other income. Such gains and losses were not material during the periods being reported.
METHOD OF RECORDING CONTRACT PROFITS Revenues from progress-billed contracts are primarily recorded using the percentage-of-completion method based on contract costs incurred to date. Losses, if any, are recorded when determinable. Costs incurred and accrued profits not billed on these contracts are included in receivables. These receivables from commercial customers and government agencies were $32,738 at June 30, 1995, and $17,628 at July 1, 1994. It is anticipated that substantially all such amounts will be collected within one year.
DEPRECIATION, MAINTENANCE AND REPAIRS Depreciation is provided using principally the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. The cost and accumulated depreciation of property retired or otherwise disposed of are removed from the respective accounts, and the gains or losses thereon are included in the consolidated statement of earnings.
WARRANTY COSTS The Company accrues warranty costs at the time of sale. Expenses related to unusual product warranty problems and product defects are recorded in the period the problem is identified.
EARNINGS PER SHARE Earnings per share in 1995 was computed based on the weighted average number of shares of common stock outstanding. Earnings per share in 1994 and 1993 were computed based on the weighted average number of shares of common stock outstanding and equivalent shares derived from dilutive stock options.
CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Cost includes materials, direct labor, and manufacturing overhead. Market is defined principally as net realizable value. Inventories include purchased and manufactured components in various stages of assembly as presented in the following table:
1995 1994 -------- -------- Raw Materials and Work-In-Process $142,418 $ 94,890 Finished Goods 115,009 41,923 -------- -------- Total Inventory $257,427 $136,813 ======== ========
COST IN EXCESS OF NET ASSETS ACQUIRED Cost in excess of net assets of businesses acquired is amortized on a straight-line basis over seventeen years.
FINANCIAL PRESENTATION Certain prior year amounts have been reclassified to conform with the current year presentation. All per share amounts have been restated to reflect the 2-for-1 stock split effected as a dividend issued in October 1994 and the 3-for-2 stock split effected as a dividend issued in December 1992.
2. INVESTMENTS AND ACQUISITION
During 1994 the Company entered into partnership agreements in connection with the formation of two joint ventures, Comunicaciones Broadband and Scientific-Atlanta of Shanghai, Ltd., and invested a total of $5,240 in the partnerships. During 1995 the Company invested an additional $2,410 in these partnerships and disposed of its investment in Comunicaciones Broadband for a loss of $0.2 which was included in other (income) expense. The Company's equity in the losses of these partnerships was $296 and $345 in 1995 and 1994, respectively.
In February 1993 the Company acquired certain net assets of Nexus Engineering Corp. for $6,314 cash and obligations of $4,398 in a purchase transaction. The pro forma effect on operations for prior periods and the effect on 1993 were immaterial.
During 1994, the Company disposed of its investment in International Cablecasting Technologies, Inc., for a loss of $549 which was included in other (income) expense.
3. SALES AND BUSINESS SEGMENT INFORMATION
Sales to Time Warner, Inc. and affiliates were 12 percent of total sales in 1995. Sales were not material to any one customer in 1994. Sales to the United States government were 12 percent of total sales in 1993. Export sales accounted for 33 percent of total sales in 1995 and 1994 and 26 percent of total sales in 1993. Foreign subsidiary sales were not material for any of the three fiscal years presented, nor were they material to any one geographic location.
The Company operates primarily in one business segment, Communications, providing satellite and terrestial based networks to a range of customers and applications and network management and systems integration to add value to those networks.
4. OTHER (INCOME) EXPENSE
Other income of $1,524 in 1995 included rental income, royalty income, net gains from partnership activities and other miscellaneous items. There were no significant items in other income and other expense during 1995.
Other expense of $17,416 in 1994 included a $17,500 charge to settle securities class action litigation, losses of $992 from partnership activities and net gains from other miscellaneous items of $1,076.
The securities class action suit, which was filed in 1988, related to events which occurred during the early 1980's principally as a result of the difficulties experienced by the Company in the production and delivery of a new product. The Company firmly believes it fully complied with the law in this matter and that the suit was without merit. The litigation was settled in 1994 in the best interest of the Company's shareholders to avoid protracted and costly legal proceedings and eliminate the uncertainty of a jury trial.
Other income of $694 in 1993 included royalty income, rental income and other miscellaneous items of $1,656 and losses from foreign currency transactions of $962.
5. QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) Includes charge of $11,900 ($0.15 per share) to settle securities class action litigation.
6. INDEBTEDNESS
Credit Facility:
At June 30, 1995, the Company had a $300,000 senior credit facility that provides for unsecured borrowings up to $150,000 which expire May 10, 1996 and $150,000 which expire May 10, 2000. There were no borrowings under this facility at June 30, 1995. Interest on borrowings under this facility are at varying rates and fluctuate based on market rates. Facility fees based on the average daily aggregate amount of the facility commitments are payable quarterly.
Long-term debt consisted of:
Long-term debt at June 30, 1995 had scheduled maturities as follows: 1996--$315; 1997--$321; 1998--$252; 1999--$200.
At June 30, 1995, property, plant and equipment costing approximately $5,925 were pledged as collateral on long-term debt.
Foreign short-term debt was $ 1,071 and $6,177 at the end of 1995 and 1994, respectively. The average interest rates for foreign short-term debt at June 30, 1995 and July 1, 1994 were 9.2 percent and 8.3 percent, respectively.
Total interest paid was $811, $1,071, and $831 in 1995, 1994, and 1993, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities consisted of:
8. OTHER LIABILITIES
Other liabilities consisted of:
9. INCOME TAXES
The Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", effective the first quarter of fiscal 1993. The statement requires that deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. The cumulative effect of this change increased net income by $3,856.
The tax provision differs from the amount resulting from multiplying earnings before income taxes by the statutory federal income tax rate as follows:
Income tax provision (benefit) includes the following:
Total income taxes paid include settlement payments for federal, state and foreign audit adjustments. The total income taxes paid were $28,937, $1,551, and $3,464 in 1995, 1994, and 1993, respectively.
The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
Valuation allowances for current deferred tax assets and noncurrent deferred tax assets were not required in 1995 or 1994.
The net noncurrent deferred tax asset is included in Other Assets at June 30, 1995 and July 1, 1994.
In 1995, 1994, and 1993, earnings before income taxes included $8,571, $2,641, and $83, respectively, of earnings generated by the Company's foreign operations.
10. RETIREMENT AND BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of its domestic employees. The benefits are based upon the employees' years of service and compensation.
The Company's funding policy is to contribute annually the amount expensed each year consistent with the requirements of federal law to the extent that such costs are currently deductible.
The following table sets forth the plan's funded status, amounts recognized in the Company's Consolidated Statement of Financial Position at year-end, using March 31 as a measurement date for all actuarial calculations of asset and liability values and significant actuarial assumptions:
Plan assets are invested in listed stocks, bonds and short-term monetary investments.
The Company's net pension expense was $2,483 in 1995, $2,709 in 1994, and $2,686 in 1993.
The components of pension expense are as follows:
The Company has unfunded defined benefit retirement plans for certain key officers and non-employee directors. Accrued pension cost for these plans was $5,521 at June 30, 1995 and $4,338 at July 1, 1994. Retirement expense for these plans was $1,223, $906, and $156 in 1995, 1994, and 1993, respectively.
In addition to providing pension benefits, the Company has contributory plans that provide certain health care and life insurance benefits to eligible retired employees.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective the first quarter of fiscal 1993. This statement requires the accrual of the cost of providing postretirement benefits, including medical and life insurance coverage, during the active service period of the employee. The Company elected to immediately recognize the accumulated liability, measured as of April 1, 1992. This resulted in a one-time charge of $6,696, net of a deferred tax benefit of $4,104.
The following table sets forth the plan's funded status and amounts recognized in the Company's Consolidated Statement of Financial Position at year-end, using March 31 as a measurement date for all actuarial calculations of liability values:
The components of postretirement benefit expense are as follows:
Significant actuarial assumptions are as follows:
The Company also adopted SFAS No. 112, "Employers Accounting for Postemployment Benefits" effective the first quarter of 1993. This statement requires the accrual method of accounting for benefits to former or inactive employees after employment but before retirement. Postemployment benefits include disability benefits, severence benefits, and continuation of health care benefits. A one-time charge of $1,860, net of a deferred tax benefit of $1,140, related to the adoption of SFAS No. 112 was recognized effective June 27, 1992. The effect of this change on 1993 operating results, after recording the one time charge, was not material.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of foreign currency contracts is based on quoted market prices.
The Company enters into foreign exchange forward contracts to hedge certain firm commitments and assets denominated in currencies other than the U.S. dollar, primarily Japanese yen. These contracts are for periods consistent with the exposure being hedged and generally have maturities of one year or less. Gains and losses on foreign exchange forward contracts are deferred and recognized in income in the same period as the hedged transactions. The Company's foreign exchange forward contracts do not subject the Company's results of operations to risk due to exchange rate fluctuations because gains and losses on these contracts generally offset losses and gains on the exposure being hedged. The Company does not enter into any foreign exchange forward contracts for speculative trading purposes.
12. RELATED PARTY TRANSACTIONS
During 1995 the Company had sales of $3,384 to Scientific-Atlanta of Shanghai, Ltd. and a net receivable of $420 at June 30, 1995.
During 1994 the Company had sales of $12,127 to Comunicaciones Broadband and Scientific-Atlanta of Shanghai, Ltd. and had a net receivable of $4,774 from these partnerships at July 1, 1994.
13. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Rental expense under operating lease agreements for facilities and equipment for 1995, 1994 and 1993 was $10,696, $9,303, and $7,983, respectively. The Company pays taxes, insurance, and maintenance costs with respect to most leased items. Remaining operating lease terms, including renewals, range up to twenty years. Future minimum payments at June 30, 1995, under operating leases were $38,796. Payments under these leases for the next five years are as follows: 1996-- $11,144; 1997-- $7,639; 1998-- $4,952; 1999-- $3,367; 2000-- $3,066.
The Company has agreements with certain officers which include certain benefits in the event of termination of the officers' employment as a result of a change in control of the Company.
The Company is also committed under certain purchase agreements which are intended to benefit future periods.
The Company is a party to various legal proceedings arising in the ordinary course of business. In management's opinion, the outcome of these proceedings will not have a material adverse effect on the Company's financial position or results of operations.
14. COMMON STOCK AND RELATED MATTERS
In October 1994, the Company issued a 2-for-1 stock split effected in the form of a 100 percent stock dividend. This stock split was accounted for as of July 1, 1994, by a transfer from retained earnings to common stock in the amount of the par value of stock outstanding at July 1, 1994. In December 1992, the Company issued a 3-for-2 stock split effected in the form of a 50 percent stock dividend. The stock split has been accounted for by a transfer from retained earnings to common stock in the amount of the par value of the additional stock issued. All per share amounts and options have been restated to reflect the stock splits.
The following information pertains to options on the Company's common stock for the years ended June 30, 1995, July 1, 1994 and July 2, 1993:
At June 30, 1995, an additional 2,285,212 shares were reserved under employee and director stock option plans.
The Company has an employee stock purchase plan whereby the Company provides certain purchase benefits for participating employees. At June 30, 1995, 628,171 shares were reserved for issuance to employees under the plan.
The Company has a 401(k) plan whereby the Company matches eligible employee contributions in Company stock, subject to certain limitations. The Company's expense to match contributions was $4,940, $3,373 and $1,487 in 1995, 1994 and 1993, respectively. At June 30, 1995, 1,012,994 shares were reserved for issuance to employees under the plan.
The Company issues restricted stock awards to certain officers and key employees. Compensation expense for restricted stock awards was $1,102 in 1995 and $1,232 in 1994.
In April 1987 the Company adopted a Shareholder Rights Plan (which was amended in August 1988 and May 1994) and pursuant thereto declared a dividend of one Common Stock Purchase Right ("Right") for each outstanding share of common stock. For shares issued after such dividend, a right attaches to each share of common stock issued. The Rights will become exercisable if a person or group (an "Acquiring Shareholder") (i) holds 10 percent or more of the Company's common stock and is determined by the Board of Directors to be an "adverse person" as defined by the Plan, or (ii) acquires or makes a tender offer to acquire 15 percent of the Company's common stock. Either such event is referred to as the "Distribution Date". If a person acquires 15 percent of the Company's common stock or is determined by the Board of Directors to be an "adverse person" or, after the "Distribution Date" the Company is merged with any entity, each Right will entitle the holder thereof, other than the Acquiring Shareholder, to purchase $33 worth of the Company's or the surviving corporation's common stock, as the case may be, based on the Company's market price at the time, for $16.67.
The Rights may be redeemed by the Company at a price of $.0167 per Right until the expiration of the rights or 10 days after any party acquires 15 percent of more of the Company's common stock. Rights are exercisable until the Company's right of redemption discussed above has expired. The Rights have no voting power and, until exercised, no dilutive effect on earnings per share. If not previously redeemed, the Rights will expire on April 13, 1997. At June 30, 1995, 127,583,148 shares were reserved for Common Stock Purchase Rights. At June 30, 1995, a total of 131,509,525 shares of authorized stock were reserved for the above purposes.
15. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995 (In Thousands)
Notes:
(1) Represents recoveries on accounts previously written off, and in fiscal 1993, the $167 acquired with purchase of Nexus Engineering Corp.
(2) Amounts represent uncollectible accounts written off.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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)


Item 1: Description of Business
TASA PRODUCTS LIMITED (hereinafter call the "Partnership"), is a Washington State limited partnership organized as of June 19, 1980 for the purpose of acquiring the rights in a group of related electronic products and developing these products further to a point where they could be commercially produced and marketed. The Partnership conducts no other business. Michel E. Maes and James R. Steffey are General Partners, and may remain as General Partners for the life of the Partnership unless removed pursuant to the Partnership Agreement. The sale of the Limited Partnership Interests in the Partnership were made pursuant to Registration Statement No. 2-68566 filed with the Securities and Exchange Commission and declared effective on November 7, 1980. The purchasers of said Limited Partnership Interests for Phases 1, 2, 3, 4, 5 and 6 of the Partnership are the Limited Partners of the Partnership as of December 31, 1981.
The Partnership's business is more fully described under the caption "Projects of the Partnership" in the Prospectus forming a part of the Registration Statement described above (hereinafter called the "Prospectus"), which, except for the balance sheet and report of accountants contained herein, is incorporated herein by this reference for all purposes.
The Partnership has no employees. The partnership originally licensed the manufacture and sale of its products to Communications Research Corporation, (CRC), a subsidiary of Energy Sciences Corporation, (ESC). The Partnership subsequently has licensed LINC Technology Corporation, an affiliate of the General Partners, as more fully described in Item 7 below. TASA's principal products currently being sold by LINC are the Data Over Voice Encoder, (DOVE), and Line Carrier Modem, (LCM).
Item 2:

Item 2: Properties
The Partnership does not have any principal plants or physical properties.
Item 3:

Item 3: Legal Proceedings
The staff of the Securities and Exchange Commission's Division of Enforcement recommended to the Commission that it authorize the staff to file a civil injunctive action against Energy Sciences Corporation, Michel E. Maes, James R. Steffey, and the Partnership to require timely filing of reports with the commission. Such an injunction was entered on June 25, 1986. All subsequent reports have been timely filed.
On April 29, 1986, TASA Products Limited and Energy Sciences Corporation filed petitions for reorganization under Chapter 11 of the Bankruptcy Laws. The Petitions were filed in the United States Bankruptcy Court for the Western District of Washington, at Seattle, as Case No.'s 86-02993- Wll and 86-02994-Wll.
Energy Sciences Corporation was dismissed from Chapter 11 on May 13, 1988. ESC had financial dealings and intercompany transactions with the partnership. The assets of ESC, which included amounts owed by the partnership to ESC and the license rights to manufacture and market the partnership's products granted by the partnership to a subsidiary of ESC, were foreclosed upon by the sole secured creditor of ESC, the law firm of Murphy, Elgot & Moore, but the full effect on the partnership has not yet been determined. (See item 7 below).
On October 16, 1989 the United States Bankruptcy Court ordered that the partnership's Chapter 11 be converted to a Chapter 7. Mr. Ronald Brown of Leach, Brown & Andersen, Seattle Washington, was appointed trustee. On May 11, 1990, the General Partners of the partnership filed an ammended motion to dismiss the Chapter 7. This motion was granted and the partnership is no longer in bankruptcy..
Item 4:

Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5:

Item 5: Market Price of and Dividends on the Registrant's Common Equity Related Security Holder Matters
(a) There is no market for the Securities of the Registrant.
(b) There are 588 investor limited partners as of December 31, 1995.
(c) The partnership does not pay dividends. Royalties, based on a percentage of gross sales of the partnership products, if any, made by a licensee of the partnership's products are to be distributed to the partners, less reserves and payments for partnership operating, maintenance and reporting expenses as determined by the General Partners. Under terms of the present license agreement in place, royalties were owed on amounts collected by the licensee on sales made after September 1991 to be accrued and paid in the following accounting quarter starting with the first quarter of 1992. See Item 7 below.
Item 6:

Item 6: Selected Financial Data
TASA Products Limited is a Limited Partnership and the partners hold partnership interests rather than stock. A summary of financial activity for 1995 is a follows:
Royalty Revenues $ 0.00 Other Revenues 0.00 Loss from Continuing Operations (Reporting Expenses) ($ 0.00) Net Income per Partnership Unit 0.00
Total Assets $ 0.00 Long Term Obligations $2,384,819.00
Royalty Payments to Partners per Unit 0.00
Item 7:

Item 7: Management's Discussion and Analysis of the Financial Condition and Results of Operation
The partnership owns the proprietary rights to certain products which are licensed to LINC Technology Corporation as described more fully below. The partnership conducts no operations itself and its revenues will be solely from royalty income. Under the terms of a new license now in effect, no sales were subject to royalties in 1995. Tax, Securities and Exchange Commission, and Partnership Reporting expenses were not charged to the partnership in 1995. There has been no change in the net assets.
When ESC's bankruptcy was dismissed in May 1988, all remaining assets were repossesed by the sole secured creditor of ESC, Murphy, Elgot & Moore, represented by Mr. Thomas Murphy. These assets are primarily amounts owed to ESC by the partnerships and the rights to produce electronics products at CRC. The General Partners began discussions with Mr. Murphy, (who was also counsel for ESC and the partnerships), on plans to recommercialize the electronic products. They were joined by Mr. Keith Nichols, who had purchased a portion of the electronics inventory from CRC when ESC was still in Chapter 11. After conducting preliminary market research and reaching a basic understanding with Mr. Murphy, a new company was formed in September 1988, called LINC Technology Corporation. The company is owned, at present, by Messrs. Maes, Steffey, and Nichols in the amount of 19% each; Mr. Murphy owns 10% and the balance of 33% is owned by outside investors. Mr. Nichols left the company in 1991 and is no longer an active participant, but remains a stockholder. LINC was formed, and was initially privately financed with $49,000 of cash, plus donated time, to pursue a variety of opportunities in electronics and data communications. LINC believes that a market remains for the partnership's products. Continued emphasis is on LCM and DOVE.
The Partnership made only one attempt to negotiate a license for its products following the dissolution of Energy Sciences Corporation and its subsidiary, Communications Research Corporation (the initial licensee), in 1988. A non-affiliated company had been formed in 1987 called CRC, Inc., of which Mr. Keith Nichols was a co-founder and partner. (As described above, Mr. Nichols was subsequently a co-founder of LINC Technology Corporation in 1988, along with Mr. Steffey and Mr. Maes, general partners of the partnership). CRC, Inc. purchased inventory of the partnership's products in 1987 from the Energy Sciences Corporation Trustee. Because there are no patents or trade secrets covering any of the partnerships products, the owners of CRC, Inc. felt no responsibility to pay royalties to the partnership (and had no legal obligation to do so) when the issue was discussed with them. It was felt that this would be the case with any outside third party the general partners might approach. When Mr. Nichols expressed a desire to pursue the market more aggressively than CRC, Inc. was doing, Mr. Steffey and Mr. Maes proposed the formation of LINC Technology Corporation with the understanding that LINC would pay royalties on partnership products in the future. LINC was formed and Mr. Nichols subsequently sold the inventory of partnership products he owned personally to LINC for ultimate resale to outside customers. The royalty arrangement arrived at between the partnership and LINC was modeled after one negotiated with New Detonics Manufacturing Corporation (NDMC) for a group of affiliated partnerships, as part of the sale of assets of another Energy Sciences Corporation subsidiary, Detonics Manufacturing Corporation to NDMC. That royalty arrangement called for 4% royalties and a four year deferment.
The license entered into between the partnerships and LINC calls for a royalty building to 5% of gross sales to be paid to each partnership on sales, if any, of its own products (compared to the prior formula with CRC which ranged from 10% down to 6%). Royalties are paid on amounts actually collected by LINC from sales of partnership products and calculated and accrued in the following quarterly accounting period. The details of the royalty arrangement are as follows: Initial royalties of 1% are payable on collected invoices for sales starting in September 1990, followed by 2% in September 1991 and 5% per year starting in September 1992 and thereafter. The royalty is divided between partnerships in the case of joint ownership of product rights. TASA receives 45% of the 5% royalty from sales of DOVE and 90% of the 5% from sales of LCM. In 1995, a new royalty agreement was put into effect in order to reduce administrative expenses. Under the new plan, no royalties will accrue to the partnership until a total of $300,000.00 of sales on products licensed to LINC Technology Corporation have been generated and collected. At that point, a lump sum royalty payment of $15,000.00 will be paid to the patrnership group of TASA Products Limited (the Partnership), Energy Sciences Limited Partnership, Telemetric Controls Limited Partnership, and Communications Link Limited Partnership. After such payment, again no royalty will accrue or be owed until another $300,000.00 in sales has occured, after which a second lump sum of $15,000.00 is due, and so forth. LINC Technology Corporation will be responsible for periodic mailings to the partnership at its expense. Bases on IRS regulations, no partnership 1065 tax returns and K-1s will have to be filed or issued until the royalty accrues.
LINC Technology Corporation's address is 6855 176th Ave NE, #252, and telephone 206-882-2206. LINC Technology Corporation also uses the DBA of DATA-LINC Group.
As previously reported, one remaining item from the dismissal of Energy Sciences Corporation's bankruptcy is the residual amount owed to ESC by the partnership, and now to the law firm of Murphy & Elgot. The general partners expect to settle the matter by the payment to Murphy & Elgot of a small percentage of the partnership's overall royalty cash flow.
The partnership's ultimate success is dependant on LINC's ability to generate sales and to obtain capital, which can not be assured, and remains difficult. Total sales at LINC in 1995 were still a modest $249,000.00 compared to $155,000.00 for 1994 and $125,000.00 for 1993. Only about $60,000.00 of LINCs sales were on products licensed from the partnership.
Since 1991, new product development work was been undertaken at Linc and other affiliates, including independent R&D efforts by the general partners personally, which created some products that interface with and complement the products owned by the partnership and could enhance sales of the partnership's products in the future. Sales for calender 1996 can not be predicted but are expected to remain modest. LINC has limited working capital and is not able to do advertising. LINC relies on Manufacturers Representatives to generate most of its sales leads. Production is self funded through inventory turnover. LINC's major marketing effort remains on industrial data communications
Item 8:

Item 8: Financial Statements and Supplementary Data
(a) Unaudited financial statements, submitted in accordance with Reg. 210.3-11 of Regulation S-X, are attached as Exhibit 1 and are herein incorporated by reference.
Item 9:

Item 9: Disagreements on Accounting and Financial Disclosure Matters
TASA has no independent accountant at present.
PART III
Item 10:

Item 10: Directors and Executive Officers of the Registrant
The Partnership has no directors or officers. Management of the Partnership is vested in the General Partners. The name of each present General Partner of the Partnership, the nature of other positions held by him, and his educational background is set forth below.
Michel E. Maes, age 58, graduated from the University of Washington in Physics in 1959. He subsequently did post-graduate work in various phases of physics. He was an engineer of the Boeing Company from 1959 to 1961; an engineer and later Director of Advanced Projects for Rocket Research Corporation, from 1961 to 1966; President of Explosives Corporation of America and Chairman of the Board of Petroleum Technology Corporation, both subsidiaries of Rocket Research Corporation, from 1966 to 1971. Up until December 5, 1986, Mr. Maes served as Chairman of the Board at ESC. Mr. Maes is now President of LINC Technology Corporation.
James R. Steffey, age 59, is a graduate of the University of Washington in Physics, with post-graduate study in plasma physics. He was Director of International Operations at Explosives Corporation of America from 1969 to 1972. From 1972 to 1973 he was a consultant with Stevens and Company, an investment counseling firm. He joined ESC in 1973 and until December 5, 1986, was President and a Director of ESC. Mr. Steffey is now Vice-President of Marketing of LINC Technology Corporation. Mr. Steffey was not closely involved with the technical aspects of the Partnership's activities.
Item 11:

Item 11: Executive Compensation
The Partnership has no directors, officers or employees and thus pays no direct compensation. The General Partners were paid a one-time management fee in 1982. The General Partners and their affiliates received certain compensation as described in the table "Compensation and Fees to General Partners and Affiliates" in the Prospectus which is hereby incorporated by reference.
Item 12:

Item 12: Security Ownership of Certain Beneficial Owners and Management
(a) The only outstanding voting securities of the Limited Partnerships are those Limited Partnership interests owned by the investors or their successors in interest. No single person owns 5% or more.
(b) The General Partners hold no limited partnership interests. However, they have interests in Profits and Losses and Cash Available for Distribution of 5%. The interest in Cash Available for Distribution is subordinated to the Limited Partners' receipt of distributions equal to their capital contributions.
(c) There are no agreements or arrangements known which could affect control of TASA.
Item 13:

Item 13: Certain Relationships and Related Transactions
As described in the prospectus, TASA was a party to several contracts with affiliates of the Limited Partners which resulted in compensation to the General Partners. See "Compensation and Fees to the General Partners and Affiliates" and "Certain Transactions" in the Prospectus, which hereby is incorporated herein by reference. Also see Item 7 above.
PART IV
Item 14:

Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) Documents filed as part of this Annual Report: Unaudited financial statements, filed in accordance with Reg. 210.3-11 of Regulation S-X.
b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) 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.
Registrant: TASA PRODUCTS LIMITED
By: Date:
Michel E. Maes, General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity and on the date indicated.
By: Date:
Michel E. Maes, General Partner
Supplemental Information to be furnished with Reports filed pursuant to Sections 15(d) of the Act by Registrants which have not registered securities pursuant to Section 12 of the Act.
No annual reports or proxy materials have been or will be sent to security holders.
TASA PRODUCTS LIMITED BALANCE SHEET DECEMBER 31, 1995 AND 1994 (UNAUDITED)
12/31/95 12/31/94
ASSETS
Current Assets: Cash $ .00 .00 Royalties Receivable .00 1569.00 __ __
TOTAL CURRENT ASSETS $ 0.00 1569.00
Intangible Assets Less Amortization .00 .00 Receivable from Affiliates Less Allowance .00 .00
TOTAL ASSETS 0.00 1569.00
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities: Accounts Payable $ .00 1569.00 Taxes Payable .00 .00 Reporting Reserve .00 .00
TOTAL CURRENT LIABILITIES .00 1569.00
Payable to Affiliates 109,443.00 109,443.00 Interest Payable 875,376.00 875,376.00 Notes Payable 1,400,000.00 1,400,000.00 __ __
TOTAL LIABILITIES 2,384,819.00 2,386,388.00
Partners' Capital (2,384,819.00) (2,384,819.00) __ __
TOTAL LIABILITIES AND PARTNER'S EQUITY .00 .00
The accompanying notes are an integral part of the financial statements
TASA PRODUCTS LIMITED STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 1995, 1994 & 1993 (UNAUDITED)
12/31/95 12/31/94 12/31/93
Revenue Royalty Revenue $ 0.00 1569.00 2833.00 Other Revenue .00 .00 .00 __ __ _
TOTAL REVENUE 0.00 1569.00 2833.00
Costs and Expenses: Bank Charges .00 .00 .00 Commissions .00 .00 .00 Filing Fee for 10-K .00 250.00 250.00 Operating Expense (Reporting) .00 1319.00 1258.00 Reporting Reserve .00 .00 1325.00 Professional Fees .00 .00 .00 Supplies .00 .00 .00 Taxes .00 .00 .00 __ __ __
TOTAL COSTS AND EXPENSES 0.00 1569.00 2833.00
Net Income (Loss) .00 .00 .00
The accompanying notes are an integral part of the financial statements
TASA PRODUCTS LIMITED STATEMENT OF CASH FLOWS FOR THE YEARS ENDING DECEMBER 31, 1995, 1994, & 1993 (UNAUDITED)
12/31/95 12/31/94 12/31/93
Net Cash From Operating Activities $ .00 .00 .00 Net Cash Used By Investing Actvts. .00 .00 .00 Net Cash From Financing Actvts .00 .00 .00 Net Increase In Cash .00 .00 .00 Cash At Begining of Period .00 .00 .00 Cash At End Of Period .00 .00 .00
TASA PRODUCTS LIMITED STATEMENT OF PARTNERS' CAPITAL FOR THE YEAR ENDING DECEMBER 31, 1995, 1994 & 1993 (UNAUDITED)
12/31/95 12/31/94 12/31/93
Contributions by Partners .00 .00 .00
Capital Withdrawals .00 .00 .00
Syndication Costs .00 .00 .00
Accumulated Surplus (Deficit) (2,384,819.00) (2,384,819.00) (2,384,819.00)
Net Income (Loss) .00 .00 .00
Partners' Capital (Deficit) (2,384,819.00) (2,384,819.00) (2,384,819.00)
The accompanying notes are an integral part of the financial statements
TASA PRODUCTS LIMITED (a Washington State limited partnership) NOTES TO THE FINANCIAL STATEMENTS
1. Partnership Organization and Operations
TASA Products Limited, a Washington State limited partnership ("the partnership"), was formed on June 19, 1980 for the purpose of raising certain capital through the public offering of Limited Partnership interests (4,100 units; $1,000 per unit), and acquiring the rights to and conducting research and development with respect to a group of electronic products. Subsequently, the Partnership commenced limited manufacturing and marketing activities for certain products. The Partnership shall continue for a period of thirty (30) years from the date of organization unless the Partnership is sooner dissolved according to the provisions of the Amended Certificate of Limited Partnership and Agreement. The Partnership has two general partners and limited partners comprised of certain investor groups.
Research and development was completed and sales of products began. For admission to the Partnership, an investor was assigned to a group (one group is associated with each phase), based on the timing of receipt of the contribution. Sale of all of the 4,100 limited partnership units was completed in 1981. The units of the Partnership are nonassessable.
Partners' Capital
Initial contributions aggregating $4,100,00 were made by the Limited Partners. The General Partners have not and will not make any capital contributions. Partners share in income or loss of the partnership as set forth below.
Allocation of Income, Loss and Cash Distributions
The loss attributable to the research and development efforts of each phase was allocated to the partners included in such phase as follows:
Limited Partners, pro rata 98% General Partners 2%
All income and/or loss attributable to the operations after the research and development program has been completed, including revenues derived from the sale or other disposition of any rights or interest, shall be allocated as follows:
Limited Partners, all groups, pro rata 98% General Partners 2%
The Limited Partners shall receive one hundred percent of the cash available for distribution, until such time as the Limited Partners
1. Partnership Organization and Operations, continued
have received in distribution an amount equal to the cumulative capital contributions received from Limited Partners.
After the Limited Partners have received cash distributions in an amount equal to the cumulative capital contributions received from Limited Partners, the General Partners will receive one hundred percent of the cash available for distribution, until such time as the General Partners have received an amount equal to five percent of the cumulative capital contributions received from Limited Partners.
Thereafter, the cash available for distribution shall be allocated as follows:
Limited Partners, all groups, pro rata 95% General Partners 5%
Upon dissolution of the Partnership, proceeds of the liquidation will be applied in accordance with the terms of the Amended Certificate and Agreement of Limited Partnership in the following order of priority:
1) To the payment of liabilities of the Partnership and expenses of liquidation;
2) To the setting up on any reserves which the General Partners may deem reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership, or of the General Partners, arising out of or in connection with the Partnership;
3) To the repayment of the Limited Partners' contributions to the capital of the Partnership, plus an amount equal to six percent of the capital contributions per annum cumulative, less the sum of prior distributions to investors from cash available for distribution;
4) Any balance then remaining shall be apportioned among all the partners as follows:
Limited Partners, pro rata 98% General Partners 2%
Pursuant to the terms of the Partnership Agreement, the General Partners are not required to contribute to the Partnership any deficit in their capital accounts which exist after application of proceeds of liquidation as set forth above.
The Partnership filed for Bankruptcy protection under Chapter 11 in April 1986. The Chapter 11 was converted to a Chapter 7 by the Bankruptcy Court in October 1989 and then the Bankruptcy was dismissed in June 1990. The dismissal did not involve any discharge of the Partnership's
1. Partnership Organization and Operations, continued
obligations, some of which were accrued property taxes in the amount of under $1,000. These were paid by the General Partners and are now included in the Amounts Payable To Affiliates.
2. Significant Accounting Policies
Basis of Reporting
The records of the Partnership are maintained using the accrual method of accounting. A substantial portion of the transactions of the Limited Partnership have been, and will continue to be, with the entities affiliated with the General Partners.
Inventories
The partnership has no inventories.
Property and Equipment
The partnership has no tangable properties.
Other Assets
The partnership has no tangable assets.
Offering Costs
Offering costs, including sale commissions to brokers for sales of limited partnership interests were charged directly to the respective partners' capital account.
Income Taxes
The Partnership is not a tax-paying entity. No provision is made in these financial statements for federal and state income taxes.
Research and Development Expenses
Research and development costs paid or accrued under terms of a contract with an affiliated company were charged to expense in the period in which the obligation was incurred.
Net Loss Attributable to Limited Partners Units
The net loss attributable to each $1,000 limited partnership unit represents the loss for the period allocated to limited partners divided by the number of partnership units outstanding at the end of the period. The net loss allocated to specific individual units will vary from the amount shown depending on the group to which a limited partner has been assigned.
3. Notes and Accrued Interest Payable to an Affiliated Company
At December 31, 1980, the Partnership executed a promissory note under the terms of a research and development contract. The note in the amount of $1,148,000 bears interest at the rate of eight and one-half percent compounded annually. Upon completion of the Partnership funding in 1981, an additional note of $252,000 with the same terms was executed. The principal and accrued interest was to be paid in full no later than December 31, 1986, and are collateralized by a pledge of certain rights to inventions held by the Partnership. The date for repayment could be extended at the request of the Partnership to December 31, 1993, provided the Partnership has made payments toward the principal and the accrued interest by December 31, 1986. After December 31, 1990, interest shall be at a rate of ten percent compounded annually. Failure of the Partnership to complete payment in full of the entire contract price plus interest on or before December 31, 1986 or such other date if the payment period is extended gives the affiliate the right to foreclose the pledge of the Partnership's ownership interest in the rights to inventions referred to above. In the event the Partnership assigns, licenses or sells its rights to the inventions to any other party, the affiliate retains an interest in any royalties or income from such assignment, license or sale until such time as the note is paid in full.
Due to the filing of Chapter 11 by the Partnership's affiliate, and by the Partnership, and due to the cessation of commercial activity relating to the Partnership's products, all accrual of interest and right of foreclosure was suspended for the years beyond 1987. The Chapter 11 proceeding of the Partnership's affiliate was dismissed on May 13, 1988. As of March 28, 1995, no final settlement has been reached with the sole secured creditor of the Partnership's affiliate regarding the debt owed by the Partnership.
4. Transactions with Related Parties
A substantial portion of the transactions of the Partnership have been, and are anticipated in the future to be, with the General Partners and their affiliates. Significant transactions with these parties are summarized in the following paragraph.
Management fees to the General Partners of $18,500 and $84,000 (2.5% of the limited partners' contributions), were incurred in 1981 and 1980, respectively. The fees represent compensation to the General Partners for organization of the Partnership and for expense incurred in connection with the offering of the limited partnership units. The fees were allocated to organization and offering costs.
An affiliate of the General Partners entered into a fixed price research and development contract with the Partnership. The affiliate received $756,000 (cash of $504,00 and a promissory note in the amount of $252,000), and $3,444,000 (cash of $2,296,000 and a promissory note in the amount of $1,148,000), in 1981 and 1980, respectively, as payment for conducting all present and future research and development of the Partnership. The affiliate's costs for performing the research and development activities included certain general and administrative and overhead costs allocated by its parent company, an affiliate of the General Partners.
Prior to transferring product rights under the licensing agreement, the Partnership can manufacture and market any products developed. In 1982, the Partnership elected to do so and entered into a manufacturing and marketing agreement whereby the Partnership reimbursed the affiliate for all costs incurred in the manufacturing and marketing activities. In addition, the affiliate would receive 40% of net profits (as defined in the agreement), derived from the manufacture and sale of the products produced under this agreement. Substantially all operating costs of this affiliate have been allocated to the Partnership under this agreement.
The Partnership has been charged for certain general and administrative services provided by other affiliates of the General Partners. The General Partners have and will provide management, research and development and other technical services to affiliates which provide services to the Partnership. The General Partners are and will be compensated by the affiliated companies for such services.
A new license agreement has been entered into by the Partnership with a newly created entity, which, as with the prior license, the General Partners are part owners, officers and directors. The General Partners have received and are expected to receive compensation in the future from this entity.
5. Commitments and Contingencies
The Partnership has entered into agreements with several individuals to obtain title to inventions and designs relating to the electronic products the Partnership is developing. Pursuant to the terms of the agreements, the individuals are entitled to royalties received by the Partnership under licensing agreements associated with the products.
The Partnership has entered into a licensing agreement with an affiliate of the General Partners providing manufacturing and marketing services under which the licensee has, upon transfer of the product rights, the exclusive right to manufacture, use and sell any products successfully developed by the Partnership. The terms of the agreement extend throughout the life of the Partnership. In return for granting this license, the Partnership shall receive royalties from the licensee as set forth in the licensing agreement for its own products. The details of the royalty arrangement are as follows: Initial royalties of 1% are payable on collected invoices for sales starting in September 1990, followed by 2% in September 1991 and 5% per year starting in September 1992 and thereafter. (Accounting is done in the quarter following the quarter in which the sales receipts occur). The royalty is divided between partnerships in the case of joint ownership of rights. TASA receives 45% of the 5% royalty from sales of DOVE and 90% of the 5% from sales of LCM.