-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, JR5Is0JGfm45ZT1pONRi6fwW0AuE5QE5+bauqNz+JyFN9zLVeWY7vGAoeLQc06b5 pmnztWTKswtf9OpxBAK9BA== 0000912057-94-001219.txt : 19940404 0000912057-94-001219.hdr.sgml : 19940404 ACCESSION NUMBER: 0000912057-94-001219 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000316004 STANDARD INDUSTRIAL CLASSIFICATION: 3661 IRS NUMBER: 541025763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-10018 FILM NUMBER: 94519681 BUSINESS ADDRESS: STREET 1: 1000 COIT RD CITY: PLANO STATE: TX ZIP: 75075 BUSINESS PHONE: 2145193000 MAIL ADDRESS: STREET 1: 1000 COIT ROAD CITY: PLANO STATE: TX ZIP: 75075-5813 FORMER COMPANY: FORMER CONFORMED NAME: DIGITAL SWITCH CORP DATE OF NAME CHANGE: 19850425 10-K 1 FORM 10K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ___________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NO. 0-10018 ____________________ DSC COMMUNICATIONS CORPORATION (Exact Name of Registrant as Specified in Charter) DELAWARE 54-1025763 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1000 COIT ROAD PLANO, TEXAS 75075 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (214) 519-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 1, 1994, 55,770,595 shares of DSC Communications Corporation Common Stock, $.01 par value, were outstanding, and the aggregate market price of the shares held by nonaffiliates was approximately $2,934,418,450. (Solely for the purposes of calculating the preceding amount, all directors and officers of the registrant are deemed to be affiliates.) DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the definitive proxy material for the 1994 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, and 13 of Part III of this report. DSC COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1993 PART I ITEM 1. BUSINESS GENERAL DSC Communications Corporation was incorporated under the laws of the State of Delaware in 1976. As used herein, the term "Company" refers to DSC Communications Corporation and, unless the context clearly indicates otherwise, all of its subsidiaries. The Company's executive offices are located at 1000 Coit Road, Plano, Texas 75075. Its telephone number is (214) 519-3000. The Company designs, develops, manufactures, and markets digital switching, transmission, access, and private network system products for the worldwide telecommunications marketplace. These products allow telecommunications service providers to build and upgrade their networks to support a wide range of voice, data, and video services. The Company offers a comprehensive product line including digital switching systems, intelligent network products, cellular switching systems, digital loop carrier products, and digital cross-connect products. The Company develops hardware and software to meet both United States and international standards, and the specific requirements of its customers. The Company supplies products to both local exchange companies and long- distance carriers. Its customers include all seven of the Regional Bell Holding Companies ("RHCs") and most major domestic independent telephone companies, including GTE Communications Systems Corporation ("GTE"), United Telecommunications, Inc. ("United"), and Alltel Supply, Inc. ("Alltel"). The Company's long-distance carrier customers include MCI Communications Corporation ("MCI"), DDI Corporation of Japan ("DDI"), Sprint Communications Company L.P. ("Sprint"), and AAP Communications Pty Ltd. of Australia ("AAP"). The Company is also a manufacturer of high-capacity cellular switches for Motorola, Inc. ("Motorola"), a global supplier of wireless communication systems. Page 1 PRODUCTS GENERAL. The Company's principal products are sophisticated microprocessor-controlled systems which incorporate advanced hardware and software technology. The Company develops such systems to meet United States and international telecommunications standards, and the specific requirements of the operating companies of the RHCs, independent telephone companies, long-distance carriers, private networks, and companies operating public and private communication networks in other countries. The percentage of consolidated revenue from the Company's product groups, which represented ten percent or more of consolidated revenue, was as follows:
Year Ended December 31, 1993 1992 1991 ---- ---- ---- Switching 45% 54% 49% Access 28% * * Transmission 19% 24% 29% *-Represented less than ten percent of consolidated revenue.
SWITCHING AND INTELLIGENT NETWORK PRODUCTS. The Company's switching and intelligent network products include the MegaHub product line, the Bandwidth Allocation System for Integrated Services ("BASiS"), the Integrated Broadband Service Switch ("iBSS"), cellular switching platforms, and the Company's family of digital tandem switches. The MegaHub family of products is based upon the Message Transfer Network ("MTN") architecture. The MTN architecture affords a high degree of flexibility by interconnecting clusters of independent application processors over high-speed links, using fast-packet switching technology and multifunctional software. Because of the MTN's flexible architecture, the MegaHub platform can serve as a tandem switch, a signal transfer point, a service control point, or as a platform for a variety of wideband and broadband services. One of the Company's first applications of the MegaHub technology was the MegaHub Signal Transfer Point ("MegaHub STP"), a high-capacity switching system used to route or switch signaling messages through the Common Channel Signaling System No. 7 network ("SS7"). The MegaHub STP can be used as an access facility to information services such as 700, 800, and 900 numbers and alternate billing arrangements. The Company is delivering the MegaHub STP to a majority of the major local telephone companies in the United States, Page 2 including the RHCs and several of the RHCs' cellular subsidiaries, and various long-distance carriers in the United States and DDI, a long-distance competitor of Nippon Telegraph and Telephone in Japan. First introduced in 1989, the MegaHub Service Control Point (the "MegaHub SCP") combines the functionalities of the Company's MegaHub STP and standard UNIX-based computing systems. The MegaHub SCP can act as a central storehouse for information about calls and callers, and can answer network requests for such information in an expeditious manner. In 1992, the Company introduced the Programmable Advanced Intelligent Network Computing Environment (the "MegaHub PACE SCP") which builds upon the Company's initial SCP system by creating an open, state-of-the-art computing environment. The capabilities of the MegaHub PACE SCP will provide the user with extremely high transaction rates needed to support applications like credit and calling card validation and cellular fraud detection. The Company has provided the MegaHub PACE SCP to DDI; to a large independent local exchange carrier in the United States; and to Optus Communications Pty Ltd. ("Optus"), a newly-licensed competitive telecommunications service provider in Australia. In March, 1994, the Company entered into an agreement with Cable & Wireless plc, a global telecommunications carrier, who will initially deploy the MegaHub PACE SCP and related equipment in the network of its subsidiary, Mercury Communications Ltd, the first company licensed to compete against British Telecom in the United Kingdom. In 1991, the Company announced the development and testing of the BASiS switching system. BASiS is a circuit switching platform which will allow telecommunications carriers to provide their customers with bandwidth on demand. This capability will serve as the foundation for numerous high-speed applications existing in the market today, including video teleconferencing, medical imaging, high-speed facsimile transmission, local area network interconnection, and certain residential applications such as video-on-demand. The BASiS switching system will allow customer-to-customer connections at data rates ranging from 1.5Mb per second to 45Mb per second. The BASiS switching system is presently being deployed in the network of a major long-distance carrier. In addition, Bell Atlantic chose BASiS as its video switch to provide video-on-demand service for its field trial in northern Virginia. In 1992, the Company announced the development and testing of the iBSS, an Asynchronous Transfer Mode ("ATM") switching platform. The iBSS uses ATM technology to provide a multiservice platform which is designed to provide network-based applications for high-speed data, image, and video. Use of the iBSS will allow network service providers to respond more quickly to customer demands for current and evolving broadband communication services, and to meet the increasing demand for the transfer of information at rates much higher than current data services. The most likely first application of the iBSS will be in Page 3 those situations, such as the interconnection of local area networks, that demand high-speed transmission rates and easy integration of data, voice, and video applications. The iBSS is currently undergoing laboratory evaluations with both local and long-distance carriers. The Company has developed a group of cellular telephone switches utilizing its tandem switching technology. The Company has supplied cellular switches to Motorola since 1985, and currently has an agreement to license software and sell equipment to Motorola on a nonexclusive basis. In July, 1993, the Company and Motorola expanded their ongoing relationship by agreeing that the Company would provide repackaged, smaller configurations of its existing cellular switching system to Motorola as an alternative to Motorola's line of older and smaller cellular switching systems. Motorola has incorporated the Company's cellular switches into cellular communications systems in the United States and in numerous other countries including, most recently, the People's Republic of China and Russia. The Company is a vendor of tandem switches to those United States and Canadian companies which compete with AT&T and Bell Canada as alternate long-distance carriers. In addition, the Company provides tandem switches to DDI and to AAP, an Australian private network provider of value added and virtual private network services. Tandem switches are generally used to route calls over long-distance networks. The MegaHub version of the tandem switch, the MegaHub 600E, was first placed into service in 1990. ACCESS PRODUCTS. The Company designs, manufactures, and sells equipment for the local loop, that portion of the public telecommunications network which extends from the local telephone company's central office switch to the individual home or business user. Such products include the Litespan-2000, which is the world's first digital loop carrier to meet North American Synchronous Optical Network ("SONET") fiber optic standards and related fiber optic interface requirements set forth by the RHCs. The Litespan-2000 allows telecommunications service providers to introduce the high-capacity technology of fiber optics into the local loop, while supporting basic services, in a cost-effective manner. The Company has entered into multi-year agreements with a majority of the seven RHCs for purchase of the Litespan-2000 system. The Company's Starspan-R- product is an optical fiber distribution system which extends the capabilities of the Litespan-2000 through fiber cables to optical network units at the customer's premises. Starspan is a cost-effective means of extending the capacity of optical fibers from the telephone company central office to cover the entire local loop. The Starspan system is currently being deployed and is carrying traffic with several RHCs. Page 4 In addition to improving network reliability, fiber optic technology will be key to local service providers such as the RHCs as they expand services for business and residential users to include voice, data, and video. The Litespan- 2000 and Starspan provide high-capacity capability to transmit large amounts of voice, data, and video simultaneously to and from business or residential users. The Company believes that the introduction of multi-media services, such as video-on-demand, will increase the demand for fiber optics-based products such as the Litespan-2000 and Starspan. In 1993, the Company introduced a new product, Metrospan, which extends the capabilities of the Litespan-2000 technology base outside of the local loop. Metrospan will be used as a broadband transport system within a campus-type setting or a metropolitan communication network. Metrospan has already been selected for use by a leading Canadian utility company. During 1993, the Company developed a new product which will be called Airspan. The Airspan product, which was developed initially in cooperation with a major European carrier, will be used to connect end-user customers to central office facilities via cellular or radio connections. In November, 1993, the Company entered into a cooperative agreement with General Instrument Corporation ("GI"), a leading supplier of equipment to the cable television industry. The Company and GI have agreed to combine the Company's expertise in fiber optics and switching systems and GI's expertise in cable television equipment. The Company and GI plan to develop joint proposals for customers who need to capitalize on emerging digital video cable processing technologies for the distribution of enhanced pay-per-view, video-on-demand, interactive multimedia, and other new video services. The Company also announced in 1993 an agreement with Westell, Inc. to jointly develop systems which allow cost-effective deployment of interactive video services over existing copper wire transmission facilities. TRANSMISSION PRODUCTS. The Company's digital cross-connect systems provide switching, multiplexing, and termination of digital transmission services. The Company's various digital cross-connect products are distinguished from one another principally by the capacity which each system handles. Digital cross-connect products are widely deployed in the United States by the RHCs, long-distance carriers, independent local exchange carriers, and a number of large corporations. In 1992, the Company announced the development and testing of a major new transmission platform, the Integrated Multi-Rate Transport Node ("iMTN"). Building on the Company's experience with digital cross-connect systems, the iMTN will provide for the public telecommunications network's evolution to SONET-based transmission and the deployment of automated administration functions. The iMTN will enable network service providers to offer Page 5 their customers, on an integrated basis, narrowband services such as voice communications, high-speed wideband data services, and broadband services such as video-on-demand. The iMTN has been designed to meet the interconnectivity requirements of SONET in North America, SDH/CCITT in Europe, and the unique standards of Japan. In 1993, the Company entered into an agreement to supply the iMTN to carriers in both the local and long-distance marketplace. MCI, one of the carriers with whom an agreement was signed, is expected to use the iMTN to support SONET-based broadband and wideband network requirements. The Company also develops, manufactures, and markets a variety of digital transmission products such as echo cancellers and transcoders. CUSTOMER PREMISE PRODUCTS. The Company's customer premise products allow service providers and corporate customers with high-capacity networks to transport multiple types of data, voice, and video traffic over public and private network facilities. The Company develops, manufactures, and sells a complete line of T1/E1 multiplexers which have been sold to private and public network service providers throughout the world. In 1993, the Company introduced the iMPAX line of products. The iMPAX product will serve as the Company's next generation multiservice platform. The iMPAX will support voice circuits, frame relay, and cell-based ATM traffic. The iMPAX can be deployed in a telephone company central office, at the site of an independent service provider, or on the premises of an end user. Use of the iMPAX will give service providers access to network elements through which they can offer new wideband and broadband services such as LAN-to-LAN internetworking, video conferencing, and supercomputer connectivity. REGULATION The telecommunications industry is subject to regulation in the United States and other countries. Federal and state regulatory agencies, including the Federal Communications Commission ("FCC") and the various state Public Utility Commissions ("PUCs") and Public Service Commissions ("PSCs"), regulate most of the Company's domestic customers. In addition, the RHCs are restricted by the terms of the Modified Final Judgment which resulted from the court-ordered divestiture of the RHCs by AT&T, and currently prohibits the RHCs from manufacturing telecommunications equipment and providing interexchange or long-distance services. Legislation has been introduced which would lift these restrictions on manufacturing and interexchange services. Should this legislation be enacted, the Company cannot predict the impact on its business, although it is possible that passage of legislation allowing the RHCs to manufacture telecommunications equipment could create additional competition in the markets addressed by the Company's products. Page 6 In addition, the FCC and a majority of the states have enacted or are considering regulations based upon alternative pricing methods. Under traditional rate of return pricing, telecommunications service providers were limited to a stated percentage profit on their investment. Under the new method of pricing, many PUCs have entered into agreements with the local exchange carriers where the PUCs have relaxed or eliminated the profit cap in return for the carrier's promise to reduce or hold service prices at current levels. In some states, the PUCs and the carriers have further agreed, in order to win relaxation of profit limits, that the carriers would invest large sums to further upgrade the digital and optical capabilities of the network. The Company believes that the new methods of price regulation could increase the demand for its products which enhance the efficiency of the network or allow the expedited introduction of new revenue-producing services. Outside the United States, telecommunications networks are primarily owned by the government or are strictly regulated by the government. Although potential growth rates of some international markets are higher than those of the United States, access to such markets is often difficult due to the established relationship between the government owned or controlled telecommunications operating company and its traditional indigenous suppliers of telecommunications equipment. However, there has been a global trend towards privatization and deregulation of the state-owned telecommunications operations. This trend has found favor in the industrialized world, the emerging markets of the newly-industrialized countries, and various developing market countries which want to both capitalize on the value of the existing network and promote the development of the telecommunications network as an integral part of the economic infrastructure. The Company believes that the current trend of privatization and deregulation will continue, and that such trend could provide the Company with additional international opportunities. MARKETING The Company sells products and services on a domestic and international basis to both the public and private network markets through various sales and distribution channels. The Company's internal sales group is a direct sales force, divided into market business segments. The Company also sells through third-party distributors such as original equipment manufacturers ("OEMs") and sales representatives. In 1993, the Company entered into separate agreements with Nokia Telecommunications Oy of Finland ("Nokia") and a European subsidiary of Northern Telecom Ltd. ("Northern") to distribute the iMTN. The agreement with Nokia, a leading worldwide supplier of wireless communications systems, will Page 7 allow Nokia to market the iMTN on a nonexclusive basis in Scandinavia and certain other countries. The agreement with Northern grants the European subsidiary of Northern the exclusive right to market the iMTN system in certain European countries and a nonexclusive right to market the iMTN system in certain other countries. INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS Revenue generated from export sales in 1991 was $48,012,000. Revenue generated from export sales was less than ten percent of consolidated revenue in 1993 and 1992. Revenue and assets of the Company's foreign operations for those same periods were less than ten percent of the Company's consolidated revenue and total assets, respectively. For the year ended December 31, 1993, MCI, Ameritech, Motorola, Bell Atlantic, and NYNEX accounted for 18 percent, 13 percent, 12 percent, 11 percent, and 11 percent, respectively, of the Company's consolidated revenue. The termination or material reduction of the purchases of the Company's products by any of the above-named companies could have a material effect on the Company. BACKLOG The Company's backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $320,000,000 and $200,000,000 on December 31, 1993 and December 31, 1992, respectively. Approximately $70,000,000 of orders included in the December 31, 1993 backlog are scheduled for delivery after December 31, 1994. However, all orders are subject to possible rescheduling by customers. While the Company believes that the orders included in the backlog are firm, some orders may be cancelled by the customer without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes that it is in the Company's best interest to do so. RESEARCH AND PRODUCT DEVELOPMENT The industry in which the Company operates is characterized by rapidly- changing technological and market conditions which may shorten product life cycles. The Company's future competitive position will depend not only upon successful production and sales of its existing products, but also upon its ability to develop and produce, on a timely basis, new products to meet existing and anticipated industry demands. The Company is currently engaged in the Page 8 development of several new products, including the iMTN and the iBSS. During the product development process, the Company invests a substantial amount of resources in products which often require extensive field testing and evaluation prior to actual sales to its customers. The Company's research and product development costs charged to expense were $86,620,000, $68,303,000, and $63,842,000 for the years ended December 31, 1993, 1992, and 1991, respectively. Additionally, approximately $21,947,000, $18,097,000, and $22,793,000 of software development costs were capitalized in the Consolidated Balance Sheets in 1993, 1992, and 1991, respectively. COMPETITION The segments of the telecommunications industry in which the Company competes are intensely competitive and are characterized by continual advances in technology. The Company believes that it enjoys a strong competitive position due to its large installed base, its strong relationship with key customers, and its technological leadership and new product development capabilities. However, many of the Company's foreign and domestic competitors have more extensive engineering, manufacturing, marketing, financial, and personnel resources than those of the Company. The Company's ability to compete is dependent upon several factors, including product features, innovation, quality, reliability, service support, price, and the retention and attraction of qualified design and development personnel. Due to its breadth of product offerings, the Company has different competitors in each of the markets which it serves. The Company's primary competitors in the tandem switching and intelligent network markets are AT&T and Northern. In the ATM switching market, AT&T and Fujitsu, Ltd. ("Fujitsu") are the Company's primary competitors. The Company's primary competitors in the digital cross-connect market are AT&T, Alcatel Network Systems, and Tellabs, Inc. The Company's primary competitors in the access market are AT&T, R-TEC, a wholly-owned subsidiary of Reliance Electric Co., and Fujitsu. MANUFACTURING AND SUPPLIERS The Company generally uses standard parts and components for its products, and believes that, in most cases, there are a number of alternative, qualified vendors for most of those parts and components. The Company purchases certain custom components and products from single suppliers. The Company believes that the manufacturers of the particular custom components and products should be able to meet expected future demands. Although the Page 9 Company has not experienced any material adverse effects from the inability to obtain timely delivery of needed components, an unanticipated failure of any significant supplier to meet the Company's requirements for an extended period, or an interruption of the Company's ability to secure comparable components could have an adverse effect on the Company's revenues and profitability. In addition, the Company's products contain a number of subsystems or components acquired from other manufacturers on an OEM basis. These OEM products are often available only from a limited number of manufacturers. In the event that an OEM product was no longer available from a current OEM vendor, second sourcing would be required and could delay customer deliveries which could have an adverse effect on the Company's revenues and profitability. PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION The Company has been awarded patents and has patent applications pending in the United States and certain foreign countries. There can be no assurance that any of these applications will result in the award of a patent, or that the Company would be successful in defending its patent rights in any subsequent infringement actions. Because of the existence of a large number of third-party patents in the telecommunications field and the rapid rate of issuance of new patents, some of the Company's products, or the use thereof, could infringe third-party patents. If any such infringement exists, the Company believes that, based upon historical industry practice, it or its customers should be able to obtain any necessary licenses or rights under such patents upon terms which would not be materially adverse to the Company. In addition to the patent protection described above, the Company protects its software through contractual arrangements with its customers and through copyright protection procedures. ENVIRONMENTAL AFFAIRS The Company's manufacturing operations are subject to numerous federal, state, and local laws and regulations designed to protect the environment. Compliance with these laws and regulations has not had, and is not expected to have, a material effect upon the capital expenditures, earnings, or the competitive position of the Company. Page 10 EMPLOYEES As of December 31, 1993, the Company had a total of 4,041 employees. The Company is not a party to any collective bargaining agreement. ITEM 2. PROPERTIES The Company owns two buildings and approximately 250 acres of land in Plano, Texas, of which 148 acres were acquired in 1994. One of the buildings is a 282,000 square foot office building. The other building is a 421,000 square foot manufacturing and assembly facility. As of December 31, 1993, the Company had under lease approximately 949,280 square feet of office, manufacturing, and warehouse space in suburban Dallas, Texas; Santa Clara, California; Petaluma, California; and Aguadilla, Puerto Rico under leases expiring between September 30, 1994 and September 30, 2002. Subsequent to December 31, 1993, the Company entered into a lease for approximately 65,000 square feet of office space in Feltham, England expiring on March 25, 2004, which replaced a lease in Weybridge, England for 10,000 square feet expiring March 31, 1994. The Company also has under lease smaller facilities, including sales offices, in the United States, Canada, Japan, Australia, Singapore, and Taiwan, with leases expiring between June 30, 1994 and June 30, 2002. The Company believes that the above-described facilities are suitable and adequate to meet the Company's production requirements. ITEM 3. LEGAL PROCEEDINGS In July, 1991, three complaints were filed in the United States District Court for the Northern District of Texas by three individuals on behalf of themselves and, purportedly, on behalf of an alleged class of persons who purchased common stock of the Company during the period from February 7, 1991 through July 9, 1991. Named as defendants in these actions are the Company, two of the Company's principal officers, and a former principal officer of the Company. In December, 1991, four plaintiffs, including each of the three original plaintiffs, filed a Consolidated Complaint (the "Consolidated Complaint") in the United States District Court for the Northern District of Texas against the Company and six individuals, each of whom is either a present or former officer of the Company, including two present directors and one former director. The Consolidated Complaint amends and consolidates the three original complaints and purports to be a class action on behalf of an alleged class of persons who purchased common stock of the Company during the period from February 7, 1991 through October 31, 1991. The Consolidated Complaint alleges violations of Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and negligent misrepresentation as a result of alleged misrepresentations and omissions with respect to information contained in press releases, reports to the Company's shareholders, and certain filings and periodic reports filed with the Page 11 Securities and Exchange Commission by the Company. The plaintiffs allege that the Company made certain misleading statements regarding the quality and reliability of its products and the Company's financial condition and its prospects. The Consolidated Complaint seeks actual and punitive damages in unspecified amounts, prejudgment interest, and attorneys' fees. On February 3, 1992, the Company filed a motion with the Court seeking dismissal of the complaint. In March, 1993, the Court dismissed the Consolidated Complaint without prejudice. On February 25, 1994, the United States Fifth Circuit Court of Appeals affirmed the Court's decision to dismiss the Consolidated Complaint. The plaintiffs filed a petition for a rehearing on March 25, 1994. On January 26, 1994, C. L. Grimes, a shareholder of the Company, filed a suit in Delaware Chancery Court, derivatively purportedly on behalf of the Company as the real party in interest and as a shareholder of the Company, seeking a declaration that the Employment Agreement of James L. Donald, his Executive Income Continuation Plan, and the 1990 Long-Term Incentive Compensation Plan, as it applies to Mr. Donald and all other benefits of Mr. Donald, including previously-granted Company stock options, are null and void. The defendants in the suit are Mr. Donald, all current non-employee directors, and two former directors of the Company. The Company itself is a nominal defendant. The plaintiff contends that Mr. Donald's employment contract contains an improper delegation of the Board of Directors' authority to Mr. Donald and excess payments. The suit also contends that the salary and benefits established for Mr. Donald pursuant to the Donald agreements referred to above and by the Company's Board of Directors are excessive and constitute a diversion and waste of corporate assets. The suit seeks an injunction restraining Mr. Donald from exercising any stock options, taking any action to implement any of the Donald agreements, or declaring a constructive termination of his employment, and also seeks unspecified damages against the defendants and Grimes' legal fees. The individual defendants will file a responsive pleading and intend to vigorously contest Grimes' claims. On July 20, 1993, the Company filed suit against Advanced Fibre Communications ("AFC"), a California corporation; Quadrium Corporation ("Quadrium"), a California corporation; Alan E. Negrin ("Negrin"); and Henri Sulzer ("Sulzer") in the United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2-93CV126. The Company seeks a declaratory judgment that Negrin and Sulzer are not entitled to any stock options or cash payments under the Company's 1990 Stock Option and Cash Payment Plan Page 12 because of these defendants' alleged breaches of certain employment-related agreements entered into with the Company. The Company further seeks a declaration that AFC's products, including the UMC 1000 digital loop carrier, are the proprietary property of the Company under the terms of certain Proprietary Information Agreements and certain Consulting Agreements with Quadrium. The Company also seeks unspecified damages for breach of contract, civil conspiracy, and tortious interference. The individual defendants have both filed counterclaims whereby they claim entitlement to certain stock options and cash payments under several of the Company's stock option plans. AFC has also filed a counterclaim alleging that the Company has violated the Sherman Antitrust Act and a California statutory antitrust act known as the Cartwright Act. AFC further claims that the Company has (a) tortiously interfered with existing and prospective contractual relationships, (b) committed industrial espionage and misappropriation, (c) trespassed on AFC's business premises, (d) converted certain property of AFC, and (e) committed unfair competition. AFC also seeks a declaratory judgment that it owns all rights to its product, the UMC Digital Loop Carrier. AFC asks the court to award unspecified actual damages, treble damages under the antitrust statutes, punitive damages, injunctive relief, and attorneys' fees. Although the outcome of litigation is inherently uncertain, the Company believes that it has valid and substantial claims against all of the defendants and valid defenses to all of the counterclaims. The case is in the early stages of discovery, and the Company intends to vigorously prosecute its claims and defend all of the defendants' counterclaims. The Company does not believe that the ultimate resolution of any of these suits will have a material adverse effect on its consolidated financial position. The Company is also a party to other legal proceedings which, in the opinion of management, are not expected to have a material adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1993. EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers are elected annually and serve at the pleasure of the Board of Directors. No family relationships exist among the executive officers of the Company. As of March 1, 1994, the executive officers of the Company are as follows: Page 13
NAME AGE PRESENT POSITION(S) WITH COMPANY ---- --- -------------------------------- Allen R. Adams 44 Senior Vice President Wylie D. Basham 55 Vice President Michael R. Bernique 50 Senior Vice President John W. Bischoff 45 Vice President David T. Boyce 43 Vice President Gerald G. Carlton 58 Vice President Robert W. Clark 42 Vice President James L. Donald 62 Chairman of the Board, President, and Chief Executive Officer Daryl J. Eigen 46 Vice President John H. Montgomery 56 Vice President Gerald F. Montry 55 Senior Vice President, Chief Financial Officer, and Director William R. Tempest 50 Vice President, Secretary, and General Counsel Hensley E. West 49 Senior Vice President
Allen R. Adams joined the Company in 1979, as Director of Hardware and Systems Development. Since 1979, Mr. Adams has held a variety of project and design engineering positions. In May, 1991, Mr. Adams was elected Vice President. Mr. Adams was elected Senior Vice President in February, 1993. Wylie D. Basham was named to the position of Vice President, Transmission Products Division in 1993. Mr. Basham has held a variety of management positions since joining the Company in 1983. Michael R. Bernique joined the Company in 1989, as Vice President, Sales. Since joining the Company, Mr. Bernique has held a number of management positions. In 1993, Mr. Bernique was named to the position of Senior Vice President, North American Sales. Page 14 John W. Bischoff joined the Company in 1989, as Vice President, Quality and Reliability Assurance. David T. Boyce joined the Company in 1989, as Managing Director, DSC Communications (Europe) Limited. In March, 1992, Mr. Boyce was named to the position of Vice President, International Sales and Service. Gerald G. Carlton joined the Company in 1988, as Vice President, Administration, responsible for all of the Company's national and international human resource functions and corporate facilities management activities. Robert W. Clark has held a variety of positions since joining the Company in 1982, including Vice President, Program Management. In 1991, Mr. Clark was named to the position of Vice President, Customer Service. James L. Donald became President and a director of the Company in March, 1981. He was elected Chief Executive Officer in August, 1981. Mr. Donald was elected Chairman of the Company's Board of Directors in 1989. Daryl J. Eigen joined the Company in 1993, as Vice President, Corporate Marketing and Planning. Prior to joining the Company, Mr. Eigen was employed by Siemens Stromberg-Carlson since 1984, where his most recent position was that of Vice President, Central Region. John H. Montgomery joined the Company as Vice President, Customer Premises Products in 1990, when the Company acquired Integrated Telecom Corporation ("Integrated"). Since 1988, Mr. Montgomery served as President of Integrated. From 1981 through 1987, Mr. Montgomery was employed by the Company in various senior management capacities. Gerald F. Montry joined the Company in 1986, as Senior Vice President and Chief Financial Officer. In 1989, Mr. Montry was elected to the Company's Board of Directors. William R. Tempest joined the Company in October, 1982, as General Counsel. He was elected Secretary of the Company in December, 1982, and Vice President in 1986. Hensley E. West joined the Company in 1987, as Vice President, Sales. Since joining the Company, Mr. West has held a variety of management positions, including his present position as Senior Vice President, Access Products Division. Page 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock prices are listed daily in THE WALL STREET JOURNAL and other publications under the NASDAQ National Market System of the over-the-counter listing with the abbreviation "DSC Commun" or "DSC". The stock is traded in the NASDAQ National Market System with the ticker symbol "DIGI". The following were the high and low close prices of the Company's stock per the NASDAQ National Market System:
1994: High Low ---- ---- --- First Quarter 69 3/4 52 3/4 (through March 1, 1994) 1993: High Low ---- ---- --- 4th Quarter 70 3/8 53 7/8 3rd Quarter 66 3/4 49 1/8 2nd Quarter 50 3/4 26 1/8 1st Quarter 28 3/4 21 5/8 1992: High Low ---- ---- --- 4th Quarter 22 7/8 11 7/8 3rd Quarter 12 1/4 4 3/8 2nd Quarter 5 3/4 4 1/8 1st Quarter 6 5/8 3 3/4
The Company has not paid or declared any cash dividends on the common stock since its organization. The closing price of the Company's common stock on March 1, 1994, was $53.125 per share. As of December 31, 1993, there were 3,462 shareholders of record of the Company's common stock. Page 16 ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
1993 1992 1991(A) 1990(A)(B) 1989 --------- --------- --------- --------- --------- SUMMARY OF OPERATIONS FOR THE YEAR ENDED: Revenue . . . . . . . . . . . . . $ 730,774 $ 536,319 $ 461,455 $ 519,298 $ 429,730 Operating costs and expenses. . . . . . . . . . . . 620,598 493,888 543,360 475,726 376,206 Operating income (loss) . . . . . 110,176 42,431 (81,905) 43,572 53,524 Financing costs, net. . . . . . . 565 17,215 21,267 16,254 8,799 Net income (loss) . . . . . . . . $ 81,660 $ 11,594 $(108,328) $ 20,122 $ 33,324 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per share . . . . . $ 1.53 $ 0.25 $ (2.62) $ 0.47 $ 0.79 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- FINANCIAL POSITION AT YEAR END: Cash and marketable securities . . . . . . . . . . . $ 313,808 $ 69,839 $ 26,366 $ 34,974 68,272 Working capital . . . . . . . . . 406,752 79,010 4,991 153,331 233,604 Property and equipment, net . . . 179,783 149,209 165,952 189,782 147,978 Total assets. . . . . . . . . . . 900,417 547,669 599,914 759,424 569,995 Long-term and short-term debt . . . . . . . . . . . . . . 70,412 140,409 281,715 315,714 190,840 Shareholders' equity(C) . . . . . 617,800 202,627 174,686 279,221 253,916 OTHER FINANCIAL INFORMATION: Book value per share of common stock . . . . . . . . . . $ 11.23 $ 4.59 $ 4.19 $ 6.86 $ 6.32 Ratio of current assets to current liabilities. . . . . . . 3.1 1.4 1.0 1.6 2.8 Ratio of long-term and short-term debt to shareholders' equity . . . . . . 11.4% 69.3% 161.3% 113.1% 75.2%
Page 17 ITEM 6. SELECTED FINANCIAL DATA (Continued) (Dollars in thousands, except per share data)
1993 1992 1991(A) 1990(A)(B) 1989 --------- --------- --------- --------- --------- OTHER DATA: Shares used to compute income (loss) per share (in thousands) . . . . . . . . . 53,325 46,599 41,339 42,874 42,319 Common shares outstanding at year end (in thousands) . . . . . . . . . 55,018 44,115 41,675 40,695 40,169 Shareholders of record at year end . . . . . . . . . . . . 3,462 4,948 6,110 6,001 4,934 Total employees at year end. . . . . . . . . . . . . . . 4,041 3,301 3,262 4,043 3,317 - --------------------------------------------------------------------------------------------- (A) For the years ended December 31, 1991 and 1990, the Company recorded special charges of $48,084 and $7,544, respectively. See Notes to Consolidated Financial Statements for further discussion related to the 1991 special charges. The 1990 special charges resulted from the write-down of assets of $4,039 associated with a minority-owned joint venture and restructuring costs of $3,505. (B) In July 1990, the Company acquired Optilink Corporation (Optilink). Accordingly, Optilink's results of operations have been included in the Company's consolidated financial data beginning in August 1990. If the acquisition had occurred at the beginning of 1990, after giving effect to certain adjustments, the consolidated results of operations of the Company and Optilink on an unaudited pro forma basis would have been: Revenue - $524,571, Net Income - $9,621 and Income per share $0.22. (C) Since inception, the Company has not declared or paid a cash dividend.
Page 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In 1993, DSC Communications Corporation achieved record revenue levels, a strong operating performance, and ended 1993 with a significantly improved financial position. Revenue grew 36%, while net income increased to $81.7 million, or $1.53 per share, compared to net income of $11.6 million, or $0.25 per share, in 1992. Cash and marketable securities grew to over $313 million at the end of 1993, and debt as a percentage of shareholders' equity declined to 11.4% from 69.3% at the end of 1992. FINANCIAL CONDITION AND LIQUIDITY The Company ended 1993 and 1992 with the following:
December 31, ------------ 1993 1992 ---- ---- (in millions) Cash and cash equivalents . . . . . . . . . . . . $ 154.9 $ 69.8 Marketable securities . . . . . . . . . . . . . . 158.9 -- Non-debt working capital, excluding cash and cash equivalents and marketable securities . . . . . . . . . . . . . 106.6 21.0 Senior debt, including current maturities . . . . . . . . . . . . . . . 34.0 32.3 Subordinated convertible debentures . . . . . . . 36.4 108.1
Two major transactions in 1993 significantly impacted the Company's financial condition and enhanced its long-term liquidity. The Company sold 3.5 million shares of its common stock in a public offering which generated $231.1 million in cash. In addition, the $71.5 million of outstanding 7 3/4% subordinated convertible debentures were converted into 3.8 million shares of common stock. Cash of $79.3 million was also generated from operating activities. Income, before depreciation and amortization, exceeded receivable and inventory growth of $72.0 million, while non-debt current liabilities did not change significantly during 1993. Receivables and inventory grew as business levels increased. Inventory velocity improved to approximately four turns by the end of 1993. Capital expenditures were $71.0 million during 1993. The Company's business expansion during 1993 and expected future domestic and international growth have and will continue to increase capital requirements including facilities, and manufacturing and development equipment and software. As a result of this expected business expansion, it is anticipated that 1994 capital requirements should substantially exceed 1993 capital expenditures. In February 1994, the Company acquired 148 acres of land for approximately $16.4 million. This acreage, along with 42 acres acquired in late 1993, is located near the Company's present campus location and will be used for future building Page 19 expansion. The timing and extent of building expansion will be dependent on future business growth. The Company's commitment to research and product development continued in 1993 with $86.6 million expensed for research and product development costs and $21.9 million capitalized as software development costs. These costs are primarily related to expenditures for various new products which are expected to contribute to revenue in future periods. In addition to the sale of stock to the public, other financing activities included $20.1 million of proceeds from the issuance of common stock under employee stock plans, additional secured borrowings of $20.1 million, and scheduled payments under existing loan agreements of $18.5 million. Scheduled long-term debt maturities for the three years ending December 31, 1996 are $13.7 million, $11.1 million, and $9.2 million, respectively. The Company periodically finances facilities and equipment requirements under operating leases. At December 31, 1993, operating lease obligations were $62.8 million, of which scheduled lease payments for 1994 - 1996 were $17.7 million, $13.7 million and $8.9 million, respectively. In February 1994, the Company entered into a new unsecured revolving credit agreement providing for borrowings up to $50.0 million, reduced by the amount of outstanding letters of credit not to exceed $25.0 million. The new agreement expires in February 1997. See "Credit Agreements" in Notes to Consolidated Financial Statements. The new agreement replaces a $22.5 million credit agreement which was secured by domestic receivables and inventories and expired on February 28, 1994. The Company had no borrowings under existing credit agreements during 1993. In January 1994, the Company called for redemption of all of its $36.4 million outstanding 8% subordinated convertible debentures. As a result, in February 1994, debenture holders converted approximately $34.7 million of debentures into approximately 637,000 shares of the Company's common stock and redeemed approximately $1.7 million for cash. The Company believes that it has the financial resources required to support its expected business growth, including working capital expansion, necessary capital expenditure requirements, operating lease obligations, and scheduled debt payments. The Company is a party to certain litigation, as discussed in "Commitments and Contingencies" in Notes to Consolidated Financial Statements, the outcome of which the Company believes will not have a material adverse effect on its consolidated financial position. Page 20 RESULTS OF OPERATIONS 1993 Compared to 1992 Revenue for 1993 increased 36% to $730.8 million compared to $536.3 million in 1992. Net income was $81.7 million, or $1.53 per share, compared to a net income of $11.6 million, or $0.25 per share, for the year ended December 31, 1992. The Company's 1993 revenue growth was due to a higher volume of switching and access product shipments. Switching products revenue increased 13% over 1992 and represented 45% of consolidated revenue compared to 54% in 1992. The increase in switching products revenue was due, in part, to a higher volume of hardware and software deliveries for customer expansion and upgrades of existing switching systems. This more than offset a reduction in signal transfer point (STP) system product deliveries from the volume achieved in 1992 when several domestic customers populated their networks with the Company's STP's. Access products revenue accounted for approximately 28% of consolidated revenue in 1993 compared to 8% in 1992 as the Company began delivery on several major customer orders received in 1992 and 1993. While the access products group achieved profitability in the last half of 1993, a loss was recorded for the full year. Future profitability will be dependent upon product mix, cost reduction activities, and economies and benefits from continued higher levels of customer deliveries. As a result, the Company believes that as deliveries of access products continue to increase, and as further cost reduction activities are successful, the Company's operating performance will be favorably impacted in the future. Revenue of transmission products grew slightly in 1993 over 1992 and represented 19% of 1993 revenue compared to 24% of 1992 revenue. Cost of revenue of $412.8 million in 1993 represented 56.5% of total revenue, compared to 62.2% in 1992. The Company benefited from cost reduction activities, increased operating efficiencies, and production efficiencies due to the higher business volumes, while the higher volume of lower margin access products revenue impacted product cost as a percentage of revenue. Certain of the Company's products typically produce gross margin content greater than other Company products. As a result, shifts in the product mix of the Company's consolidated revenue in the future could impact gross margin as a percentage of revenue. Research and product development expenses increased in 1993 to $86.6 million, or 11.9% of revenue, compared to $68.3 million in 1992, or 12.7% of revenue. This increase reflects the Company's continued commitment to the development Page 21 of new products which are targeted to high growth markets. Selling, general and administrative expenses were $112.7 million in 1993, or 15.4% of revenue, compared to $87.0 million, or 16.2% of revenue, in 1992. The higher expense level reflects increased domestic and international selling and marketing activities, expansion of the Company's customer base and an increased level of incentive compensation. See "Incentive Compensation" in the Notes to Consolidated Financial Statements for further information. Interest expense declined $15.1 million in 1993 compared to the 1992 period. This reduction was due to the repayment of over $134.0 million of senior unsecured debt during the last half of 1992 and conversion of $71.5 million of 7 3/4% subordinated convertible debentures into approximately 3.8 million shares of the Company's common stock during the 1993 first quarter. Other expense, net in 1993 declined by $8.2 million from $8.3 million in 1992. The 1993 amount includes a $2.2 million gain from the sale of securities acquired several years ago as part of financing provided to a customer. The 1992 amount included provisions for litigation, senior unsecured debt restructuring costs, certain facilities costs and higher cash discounts taken by customers in the first half of 1992 for early payment on receivables. The Company's effective income tax rate was 25% for the year ended December 31, 1993. See "Income Taxes" in Notes to Consolidated Financial Statements for further information. As discussed in Financial Condition and Liquidity above, the Company issued approximately 3.5 million shares of common stock in a public offering in October 1993, which will increase the amount of weighted average shares outstanding used to compute earnings per share in 1994. Until required to support expected future business growth, the proceeds from the public offering are expected to be invested in interest bearing marketable securities which will increase interest income in the future. During the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post Retirement Benefits Other Than Pensions." The implementation of this standard had no financial impact to the Company since post retirement benefits currently provided are reimbursed by the retirees. 1992 Compared to 1991 The Company's 1992 operating results reflect significant improvement in operating performance. Overall, revenue for 1992 increased 16% to $536.3 million compared to $461.5 million in 1991. Net income was $11.6 million, or $0.25 per share, compared to Page 22 a net loss of $108.3 million, or $2.62 per share, in 1991. The results for the year ended December 31, 1991 included non-cash charges of (i) approximately $48.1 million related primarily to a write-down of assets, provision for doubtful receivables, and restructuring and consolidation costs and (ii) approximately $7.0 million of charges (included in costs of revenue) relating primarily to excess and obsolete inventory. The Company's 1992 revenue growth was due to a higher volume of switching products and an increase in shipments of access products. Switching revenue represents 54% of consolidated revenue in 1992 compared to 49% of consolidated revenue in 1991. The significant increase in switching revenue was in part due to increased shipments of signal transfer points (STP's) including a growth in software revenue, partially offset by a lower volume of certain tandem products. Deliveries of STP's in 1991 were unfavorably impacted by a number of factors, including service outages experienced by certain customers. Revenue of transmission products represented 24% of 1992 revenue compared to 29% of 1991 revenue. Access products revenue accounted for approximately 8% of consolidated revenue in 1992 compared to 3% in 1991 with substantial volume increases during the last half of 1992. While shipments have increased, the access products division did not have the volumes necessary in 1992 to achieve profitability. Cost of revenue of $333.5 million in 1992 represented 62.2% of total revenue, compared to 73.3% in 1991. The 1992 improvement was due to increased deliveries of higher margin switching products, including a larger component of software revenue, higher production levels which lowered fixed costs as a percentage of revenue, cost reductions and increased operating efficiencies. Research and product development expenses increased in 1992 to $68.3 million, or 12.7% of revenue, compared to $63.8 million in 1991, or 13.8% of revenue. Selling, general and administrative expenses were $87.0 million in 1992 or 16.2% of revenue compared to $88.6 million or 19.2% of revenue in 1991. The decrease is primarily due to the impact of the Company's 1991 actions to improve operating efficiency and reduce costs. Other operating costs in 1992 were $5.1 million as compared to $4.4 million in 1991, exclusive of the $48.1 million of special charges recorded in 1991. Interest expense of $21.3 million declined $4.1 million from 1991 due to an overall decline in the average outstanding borrowings and a decline in the average cost of borrowing. Page 23 Other expense, net, of $8.3 million in 1992 increased by $4.7 million from $3.6 million in 1991 primarily as a result of provisions recorded in 1992 for litigation, senior unsecured debt restructuring costs and certain idled facilities costs. In addition, higher cash discounts taken by customers, primarily in the first half of 1992, for early payments on receivables increased other expense, net, in 1992. See "Other expense, net" in Notes to Consolidated Financial Statements. See "Income Taxes" in Notes to Consolidated Financial Statements for further information relating to income taxes. Page 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Years ended December 31, --------------------------------- 1993 1992 1991 --------- --------- --------- Revenue. . . . . . . . . . . . . . . . . . . $ 730,774 $ 536,319 $ 461,455 Operating costs and expenses: Cost of revenue. . . . . . . . . . . . . . 412,805 333,543 338,373 Research and product development . . . . . 86,620 68,303 63,842 Selling, general and administrative. . . . 112,723 86,951 88,621 Special charges. . . . . . . . . . . . . . -- -- 48,084 Other operating costs. . . . . . . . . . . 8,450 5,091 4,440 --------- --------- --------- Total operating costs and expenses . . . 620,598 493,888 543,360 --------- --------- --------- Operating income (loss). . . . . . . . . . . 110,176 42,431 (81,905) Interest expense . . . . . . . . . . . . . . 6,256 21,347 25,457 Interest income. . . . . . . . . . . . . . . (5,691) (4,132) (4,190) Other expense, net . . . . . . . . . . . . . 155 8,322 3,647 --------- --------- --------- Income (loss) before income taxes. . . . . 109,456 16,894 (106,819) Income taxes . . . . . . . . . . . . . . . . 27,796 5,300 1,509 --------- --------- --------- Net income (loss). . . . . . . . . . . $ 81,660 $ 11,594 $(108,328) --------- --------- --------- --------- --------- --------- Income (loss) per share. . . . . . . . . . . $ 1.53 $ 0.25 $ (2.62) --------- --------- --------- --------- --------- --------- Average shares used in per share computations. . . . . . . . . . . . . 53,325 46,599 41,339 --------- --------- --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements. Page 25 DSC Communications Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, -------------------- 1993 1992 --------- --------- Assets CURRENT ASSETS Cash and cash equivalents. . . . . . . . . . . . . . . . $ 154,888 $ 69,839 Marketable securities. . . . . . . . . . . . . . . . . . 158,920 -- Receivables. . . . . . . . . . . . . . . . . . . . . . . 139,962 90,370 Inventories. . . . . . . . . . . . . . . . . . . . . . . 122,869 100,445 Contract development costs . . . . . . . . . . . . . . . 5,978 6,036 Other current assets . . . . . . . . . . . . . . . . . . 19,414 8,116 --------- --------- Total current assets . . . . . . . . . . . . . . . . . 602,031 274,806 --------- --------- PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . . 179,783 149,209 LONG-TERM RECEIVABLES. . . . . . . . . . . . . . . . . . . 16,515 20,952 CAPITALIZED SOFTWARE DEVELOPMENT COSTS . . . . . . . . . . 33,485 29,083 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET. . . . . . . . . . . . . . . . . . . . . . 50,317 62,238 OTHER. . . . . . . . . . . . . . . . . . . . . . . . . . . 18,286 11,381 --------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . $ 900,417 $ 547,669 --------- --------- --------- --------- Liabilities and Shareholders' Equity CURRENT LIABILITIES Accounts payable . . . . . . . . . . . . . . . . . . . . $ 48,450 $ 35,287 Accrued liabilities. . . . . . . . . . . . . . . . . . . 112,993 95,474 Customer advances. . . . . . . . . . . . . . . . . . . . 15,712 50,942 Income taxes payable . . . . . . . . . . . . . . . . . . 4,460 2,301 Current portion of long-term debt. . . . . . . . . . . . 13,664 11,792 --------- --------- Total current liabilities. . . . . . . . . . . . . . . 195,279 195,796 --------- --------- LONG-TERM DEBT, NET OF CURRENT PORTION . . . . . . . . . . 56,748 128,617 NONCURRENT INCOME TAXES AND OTHER LIABILITIES. . . . . . . 30,590 20,629 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value, issued-60,047 in 1993 and 49,144 in 1992; outstanding-55,018 in 1993 and 44,115 in 1992. . . . . . . . . . . . . . . . 600 491 Additional capital . . . . . . . . . . . . . . . . . . . 558,222 224,818 Retained earnings. . . . . . . . . . . . . . . . . . . . 102,435 20,775 --------- --------- 661,257 246,084 Treasury stock, at cost, 5,029 shares in 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . (43,457) (43,457) --------- --------- Total shareholders' equity . . . . . . . . . . . . . . 617,800 202,627 --------- --------- Total liabilities and shareholders' equity . . . . . $ 900,417 $ 547,669 --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements. Page 26 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, --------------------------------- 1993 1992 1991 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) . . . . . . . . . . . . . $ 81,660 $ 11,594 $(108,328) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization. . . . . . 44,334 43,628 45,635 Amortization of capitalized software development costs. . . . . . . 17,545 18,577 23,406 Special charges. . . . . . . . . . . . . -- -- 48,084 Income tax benefit related to stock options . . . . . . . . . . . . . . . . 5,800 1,860 -- Utilization of preacquisition net operating loss carryforwards. . . . . . 8,300 -- -- Other. . . . . . . . . . . . . . . . . . (2,888) 1,217 885 Changes in operating assets and liabilities, net of effects of special charges in 1991: (Increase) decrease in current and long-term receivables . . . . . . . . . (51,084) 22,370 58,871 (Increase) decrease in inventories . . . (31,444) 41,127 23,537 Decrease in contract development costs . . . . . . . . . . . . . . . . . 58 5,280 2,001 (Increase) decrease in other current assets. . . . . . . . . . . . . . . . . (4,024) 4,814 (3,336) Increase (decrease) in current payables and accruals . . . . . . . . . 36,331 16,955 (16,925) Increase (decrease) in customer advances. . . . . . . . . . . . . . . . (35,230) 45,468 (11,222) Increase in noncurrent income taxes and other liabilities. . . . . . . . . . . 9,961 6,217 2,919 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . 79,319 219,107 65,527 --------- --------- ---------
(Continued) Page 27 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
Years ended December 31, --------------------------------- 1993 1992 1991 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment . . . . (71,028) (25,814) (24,640) Purchases of marketable securities. . . . . (178,635) -- -- Proceeds from sales of marketable securities. . . . . . . . . . . 19,715 -- -- Additions to capitalized software development costs. . . . . . . . . . . . . (21,947) (18,097) (22,793) Other . . . . . . . . . . . . . . . . . . . 4,828 1,997 (209) Book value of asset dispositions. . . . . . 621 1,617 2,622 --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . . . . . . . (246,446) (40,297) (45,020) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public offering of common stock. . . . . . . . . . . . . . . . . . . 231,149 -- -- Borrowings under debt arrangements. . . . . 20,137 1,269 104,759 Payments of short and long-term debt . . . (18,471) (147,060) (139,322) Costs related to debt redemption. . . . . . (755) -- -- Proceeds from sale/leaseback. . . . . . . . -- -- 1,962 Proceeds from the sale of common stock from employee stock programs . . . . . . . 20,116 10,454 3,486 --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . . . . . . . . 252,176 (135,337) (29,115) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . 85,049 43,473 (8,608) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 69,839 26,366 34,974 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . $ 154,888 $ 69,839 $ 26,366 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid . . . . . . . . . . . . . . . $ 7,459 $ 22,955 $ 25,066 --------- --------- --------- --------- --------- --------- Income taxes paid . . . . . . . . . . . . . $ 4,359 $ 204 $ 3,937 --------- --------- --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements. Page 28 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Common Stock --------------- Accumulated Shares Par Translation Cost of Out- Value Additional Adj- Retained Treasury standing $.01 Capital ustment Earnings Shares Total -------- ----- ---------- ----------- --------- ---------- --------- BALANCES, December 31, 1990. . . 40,695 $ 456 $ 202,967 $ 241 $ 117,509 $ (41,952) $ 279,221 Shares purchased for treasury. . . . . . . . . . . (2) -- -- -- -- -- -- Shares issued upon exercise of options . . . . . 166 2 818 -- -- -- 820 Shares issued for stock purchase plans. . . . . . . . 503 5 2,680 -- -- -- 2,685 Restricted shares issued to employees, net of unearned compensation . . . . 313 3 287 -- -- -- 290 Translation adjustments. . . . -- -- -- (2) -- -- (2) Net loss . . . . . . . . . . . -- -- -- -- (108,328) -- (108,328) ------ ----- --------- ------ ---------- ---------- ---------- BALANCES, December 31, 1991. . . 41,675 466 206,752 239 9,181 (41,952) 174,686 Shares purchased for treasury. . . . . . . . . . . (98) -- -- -- -- (1,505) (1,505) Shares issued upon exercise of options . . . . . 2,221 22 14,582 -- -- -- 14,604 Shares issued for stock purchase plans. . . . . . . . 226 2 912 -- -- -- 914 Income tax benefit related to stock options. . . . . . . -- -- 1,860 -- -- -- 1,860 Restricted shares issued to employees, net of unearned compensation and forfeitures . . . . . . . . . 90 1 694 -- -- -- 695 Conversion of 7.75% subordinated convertible debentures into common stock. . . . . . . . . 1 -- 18 -- -- -- 18 Translation adjustments. . . . -- -- -- (239) -- -- (239) Net income . . . . . . . . . . -- -- -- -- 11,594 -- 11,594 ------ ----- --------- ------ ---------- ---------- ---------- BALANCES, December 31, 1992. . . 44,115 491 224,818 -- 20,775 (43,457) 202,627 Shares issued by public offering, net of expenses . . 3,450 35 231,114 -- -- -- 231,149 Shares issued upon exercise of options . . . . . 1,809 18 15,890 -- -- -- 15,908 Shares issued for stock purchase plans. . . . . . . . 1,543 15 6,296 -- -- -- 6,311 Income tax benefit related to stock options. . . . . . . -- -- 5,800 -- -- -- 5,800 Restricted shares issued to employees, net of unearned compensation . . . . 255 3 5,586 -- -- -- 5,589 Conversion of 7.75% subordinated convertible debentures into common stock, net of expenses. . . . . . . . . . . 3,842 38 68,523 -- -- -- 68,561 Conversion of 8.0% subordinated convertible debentures into common stock. . . . . . . . . 4 -- 195 -- -- -- 195 Net income . . . . . . . . . . -- -- -- -- 81,660 -- 81,660 ------ ----- --------- ------ ---------- ---------- --------- BALANCES, December 31, 1993. . . 55,018 $ 600 $ 558,222 $ -- $ 102,435 $ (43,457) $ 617,800 ------ ----- --------- ------ ---------- ---------- --------- ------ ----- --------- ------ ---------- ---------- ---------
See accompanying Notes to Consolidated Financial Statements. Page 29 DSC Communications Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation DSC Communications Corporation (the "Company") is a leading designer, developer, manufacturer and marketer of digital switching, transmission, access and private network system products for the worldwide telecommunications marketplace. The consolidated financial statements of the Company include the accounts of the Company and all its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated. Certain prior years' financial statement information has been reclassified to conform with the current year financial statement presentation. Revenue Recognition Revenue is generally recognized when the Company has completed substantially all manufacturing and/or software development to customer specifications, factory testing has been completed and the product has been shipped. Additionally, for systems where installation requirements are the responsibility of the Company and payment terms are related to installation completion, revenue is generally recognized when the system has been shipped to the customer's final site for installation. Revenue under contracts with customers for development and customization of software is accounted for using the percentage-of-completion method as certain contracted milestones are completed. Revenue from technical assistance service contracts is recognized ratably over the period the services are performed. The Company establishes an allowance for potential returns pending completion of customer product acceptance and payment. Warranty Costs The Company provides for estimated future warranty costs at the time revenue is recognized. Cash and Cash Equivalents Cash equivalents are primarily short-term, interest bearing, high credit quality investments with major financial institutions and are subject to minimal risk. These investments have maturities at the date of purchase of three months or less (see "Investments in Debt and Equity Securities"). Page 30 Investments in Debt and Equity Securities The Company has elected to adopt Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), in 1993. In accordance with FAS 115, prior years' financial statements have not been restated to reflect the change in accounting method. There was no cumulative effect as a result of adopting FAS 115 in 1993. Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale, along with the Company's investment in equity securities. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. At December 31, 1993, the Company had no investments that qualified as trading or held to maturity. The amortized cost of debt securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and interest are included in interest income. Realized gains and losses are included in other income or expense. The cost of securities sold is based on the specific identification method. At December 31, 1993, the Company's investments in debt and equity securities were classified as cash and cash equivalents and marketable securities. These investments are diversified among high credit quality securities in accordance with the Company's investment policy. Inventories Inventories are valued at the lower of average cost or market. Inventories consisted of the following (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Raw Material.............................. $ 47,845 $ 40,600 Work in Process........................... 12,471 11,106 Finished Goods............................ 62,553 48,739 ------- ------- $122,869 $100,445 ------- ------- ------- -------
Page 31 Contract Development Costs Costs incurred in the development of software and hardware which pertain to specific contracts with customers are capitalized at the lower of cost or net realizable value and charged to cost of revenue when the related revenue is recognized. Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives as follows:
Buildings........................................ 30-40 Years Leasehold improvements........................... 1-20 Years Manufacturing, development and test equipment.... 3-10 Years Office furniture, equipment and other............ 3-10 Years
Capital leases and equipment leased to customers under operating leases are amortized on a straight-line basis over the term of the lease. Amortization of these leases is included in depreciation expense. Capitalized Interest Interest costs related to certain qualifying assets (primarily capitalized software development costs) are capitalized during their construction or development period and amortized over the economic life of the related assets. For the years ended December 31, 1993, 1992 and 1991, the Company capitalized $895,000, $1,112,000 and $725,000, respectively, of such interest costs. Cost in Excess of Net Assets of Businesses Acquired, Net Cost in excess of net assets of businesses acquired generally is amortized on a straight-line basis over its estimated life. The Company periodically reviews the original assumptions and rationale utilized in the establishment of the carrying value and estimated life. The carrying value would be adjusted if significant facts and circumstances altered the Company's original assumptions and rationale. Cost in excess of net assets of businesses acquired, net, was $50,317,000 and $62,238,000 at December 31, 1993 and 1992, respectively. This represents the cost of acquiring businesses over the fair value of net assets received at the date of acquisition, net of accumulated amortization of $12,430,000 and $8,809,000 at December 31, 1993 and 1992, respectively. Amortization was computed by use of the straight-line method over the estimated life of the benefits received from the acquisitions and was included in "Other operating costs" in the Consolidated Statements of Operations. Additionally, the carrying value was reduced in 1993 by $8,300,000 as a result of Page 32 utilization of preacquisition net operating loss carryforwards (see "Income Taxes"). Research and Development Expenditures Certain software development costs are capitalized when incurred. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. Amortization of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of two years is assigned to capitalized software development costs. Capitalized software development costs were $33,485,000 and $29,083,000 at December 31, 1993 and 1992, respectively, net of accumulated amortization costs of $18,638,000 and $13,365,000, respectively. During 1991, the Company reduced the carrying value of certain capitalized software development costs by approximately $9,500,000 to their estimated net realizable value (see "Special Charges"). All other research and development expenditures are charged to research and development expense in the period incurred. Debt Issuance Cost Costs associated with the borrowing of funds and placement of debt are deferred and amortized over the term of the related debt as interest expense or included as an additional cost if the debt is paid prior to its scheduled maturity (see "Other Expense, Net"). Page 33 Income Taxes Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). As permitted by FAS 109, prior year financial statements have not been restated to reflect the change in accounting method. Under FAS 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of FAS 109, income tax expense was determined using the liability method prescribed by Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" (FAS 96), which is superseded by FAS 109. Among other changes, FAS 109 changes the recognition and measurement criteria for deferred tax assets included in FAS 96 and requires that the tax benefit of net operating loss carryforwards, tax credits and future taxable deductions be recorded as deferred tax assets net of an appropriate valuation reserve. Income tax benefits related to stock option exercises are credited to additional capital when recognized. Provision is made for U.S. income taxes, net of available credits, on the earnings of foreign subsidiaries which are in excess of amounts being held for reinvestment in overseas operations. Additionally, Puerto Rican tollgate taxes are not provided on a portion of the undistributed earnings in Puerto Rico, which are considered to be indefinitely invested (see "Income Taxes"). Foreign Currency Translation For the majority of the Company's foreign subsidiaries, the functional currency is the U.S. dollar. Accordingly, most foreign entities translate monetary assets and liabilities at year-end exchange rates while non monetary items are translated at historical rates. Revenue and expense items are translated at the average exchange rates in effect during the year, except for depreciation and cost of sales, which are translated at historical rates. The resulting translation adjustments and transaction gains and losses are included in "Other Expense, Net" in the Consolidated Statements of Operations and were not material in 1993, 1992 or 1991. Income (Loss) Per Share Income (loss) per share is based upon weighted average common shares outstanding and common stock equivalents. Common stock equivalents have been determined assuming the exercise of all dilutive stock options and warrants adjusted for the assumed repurchase of common stock, at the average market Page 34 price, from the exercise proceeds. The fully diluted per share computation also assumes the conversion of the convertible subordinated debentures, when dilutive, and the assumed repurchase of common stock at the ending market price. Primary and fully diluted income (loss) per share are essentially the same for all periods presented except for 1992 when primary income per share was $0.26 and fully diluted income per share was $0.25. INVESTMENTS IN DEBT AND EQUITY SECURITIES The following is a summary of the estimated fair value of available for sale securities by balance sheet classification at December 31, 1993 (in thousands): Cash and cash equivalents: Commercial paper............................ $24,911 Certificates of deposit..................... 15,000 Other debt obligations...................... 26,169 ------- $66,080 ------- ------- Marketable securities: U.S. Treasury obligations.................. $112,243 Mortgage-backed securities................. 29,090 Corporate debt securities.................. 17,587 ------- $158,920 -------- --------
The estimated fair value of each investment approximates the amortized cost, and therefore, there are no unrealized gains or losses as of December 31, 1993. The estimated fair value of debt securities available for sale by contractual maturity at December 31, 1993 is as follows (in thousands): Due in three months or less...................... $66,080 Due after three months through one year.......... 85,849 Due after one year through three years........... 43,981 Due after three years............................ 29,090 ------- $225,000 ------- -------
Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Page 35 RECEIVABLES Receivables consisted of the following (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Current: Trade............................ $132,595 $ 84,369 Leases, notes and other.......... 8,457 7,453 ------- ------- 141,052 91,822 Allowance for doubtful accounts.. (1,090) (1,452) ------- ------- $139,962 $ 90,370 ------- ------- ------- ------- Long-Term: Leases, notes and other.......... $ 19,034 $ 23,093 Allowance for doubtful accounts.. (2,519) (2,141) ------- ------- $ 16,515 $ 20,952 ------- ------- ------- -------
To meet market competition, the Company finances sales of equipment to certain of its customers through sales-type and operating leases. The repayment terms vary from one to five years. The components of the receivables from sales-type leases are as follows (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Total minimum lease payments receivable................. $34,460 $39,827 Less: Unearned income................ (7,149) (9,523) ------ ------ Total receivables..................... 27,311 30,304 Less: Current receivables............ (8,378) (7,381) ------ ------ Total Long-Term receivables........... $18,933 $22,923 ------ ------ ------ -------
Future minimum lease payments to be received on sales-type leases are as follows (in thousands): 1994......................................................... $11,928 1995......................................................... 9,156 1996......................................................... 5,862 1997......................................................... 4,769 1998......................................................... 2,745 ------ $34,460 ------- -------
Page 36 PROPERTY AND EQUIPMENT The Company's property and equipment consisted of the following (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Land.................................. $19,640 $17,807 Buildings and leasehold improvements........................ 71,920 69,621 Manufacturing, development and test equipment...................... 176,117 148,612 Office furniture, equipment and other........................... 112,803 87,952 ------- ------- 380,480 323,992 Less: Accumulated depreciation and amortization.................. (200,697) (174,783) -------- -------- $179,783 $149,209 ------- ------- ------- -------
In late 1993, the Company acquired 42 acres of land for approximately $1,833,000. In February 1994, the Company acquired an additional 148 acres for approximately $16,400,000 in cash. The land will be used for future building expansion. ACCRUED LIABILITIES AND CUSTOMER ADVANCES Accrued liabilities consisted of the following (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Warranty and related.................. $ 30,865 $25,298 Payroll and related................... 27,090 19,685 Taxes other than income............... 15,671 13,062 Other................................. 39,367 37,429 ------ ------ $112,993 $95,474 ------- ------ ------- ------
At December 31, 1992, customer advances included $34,300,000 of cash advanced against future purchases from a customer as part of a settlement of certain litigation. During 1993, the customer purchases exceeded the December 31, 1992 advances, and there is no advance from the customer at December 31, 1993. CREDIT AGREEMENTS In June 1993, the Company entered into a new revolving credit agreement with a bank, which expired on February 28, 1994, providing for borrowings up to $22,500,000 reduced by the value of outstanding letters of credit issued by the Page 37 bank on behalf of the Company up to $14,000,000. This agreement replaced an earlier agreement which had expired. Letters of credit issued by the bank on behalf of the Company were $8,081,000 at December 31, 1993. The Company paid a fee on the unused portion of the credit facility of 0.125% per annum. The agreement was collateralized by current domestic receivables and inventories. There were no borrowings under the credit agreements during 1993. On February 24, 1994, the Company entered into an uncollateralized revolving credit facility, which expires on February 24, 1997, with two banks providing for borrowings up to $50,000,000. The maximum available borrowings are reduced by the value of outstanding letters of credit issued by the banks on behalf of the Company up to $25,000,000. Borrowings under the facility bear interest at the prime rate or at 0.75% to 1.50% above the LIBOR rate. A commitment fee of 0.35% on the daily average unused portion of the facility will also be assessed. The agreement contains various financial covenants. Page 38 DEBT Total debt consisted of the following (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Senior debt: Unsecured 9.5% note, due 1993 - 1996................... $ 18,750 $ 25,000 Secured installment notes: Interest at prime plus 0.5%, due 1993 - 1996.................. 14,514 -- Interest at prime plus 1%, due 1992 - 1993.................. -- 5,576 Other............................... 732 1,732 ------ ------ Total senior debt................. 33,996 32,308 ------ ------ Subordinated convertible debentures: 7.75%............................... -- 71,490 8.0%................................ 36,416 36,611 ------ ------ Total debentures.................. 36,416 108,101 ------ ------- Total debt..................... 70,412 140,409 Less: Current maturities............ (13,664) (11,792) ------- ------- Total long-term debt........... $ 56,748 $128,617 ------- ------- ------- -------
The prime interest rate at December 31, 1993 and 1992 was 6.0%. The aggregate maturities of long-term debt for the next five years are as follows: 1994 - $13,664,000; 1995 - $11,052,000; 1996 - $9,231,000; 1997 - $49,000; 1998 - $0. In June 1993, the Company borrowed $19,975,000 under a loan agreement which is secured by certain long-term lease receivables. This note is due in installments through June 29, 1996, and bears interest at the prime rate plus one-half percent. All of the senior debt contains various financial convenants, including, among other things, minimum working capital levels, maintenance of certain ratios of assets to liabilities, and maximum allowable indebtedness to tangible net worth. Page 39 Subordinated Convertible Debentures 7.75% Debentures In 1993, the Company issued approximately 3,842,000 shares of the Company's common stock upon conversion of its outstanding 7.75% subordinated convertible debentures. As a result, approximately $68,561,000 was credited to common stock and additional capital, which was net of $2,906,000 of remaining deferred debt costs associated with the original issuance of the subordinated convertible debentures and costs related to the conversion. On a pro forma basis, income per share for the year ended December 31, 1993 would have been $1.51 had the 7.75% subordinated convertible debentures been converted on January 1, 1993. 8.0% Debentures On January 14, 1994, the Company called for the redemption of all of the outstanding 8% subordinated convertible debentures. The debentures were convertible, at the option of the holder, into shares of the Company's common stock at $54.50 per share. In February 1994, approximately $34,720,000 of debentures were converted into approximately 636,900 shares of common stock and approximately $1,696,000 of debentures were redeemed for cash. INCOME TAXES Effective January 1, 1992, the Company began accounting for income taxes under the method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). See "Summary of Significant Accounting Policies" for additional details. As permitted under the new rules, prior years' financial statements have not been restated. Accordingly, amounts shown for 1991 reflect income tax accounting under FAS 96. At December 31, 1993 and 1992, the Company had a net deferred tax asset of $66,423,000 and $68,235,000, respectively, reflecting the tax benefits of U.S. and foreign subsidiary net operating loss carryforwards, tax credit carryforwards and net future tax deductions. FAS 109 requires a valuation reserve be established if it is "more likely than not" that realization of the tax benefits will not occur. In recent years, the Company has cumulative losses within its U.S. consolidated tax group which FAS 109 indicates is significant evidence that could require a valuation reserve. Similarly, certain foreign jurisdictions also have cumulative losses. As a result, a valuation allowance equal to the net deferred tax asset was established at December 31, 1993 and 1992, although the Company believes the tax benefits will ultimately be realized through future operations. Because a valuation reserve was established equal to the net deferred tax asset, there was no cumulative effect on pretax net income or cash flows as a result of the adoption of FAS 109 in 1992. The net deferred tax asset would have decreased an additional $1,397,000 had the Federal tax rate not increased from 34% to 35% retroactively effective to January 1, 1993. Page 40 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset as of December 31, 1993 and 1992, are as follows (in thousands):
December 31, --------------------- 1993 1992 -------- -------- Deferred Tax Assets Asset valuation reserves not yet deductible for tax............................... $12,593 $13,522 Accrued liabilities not yet deductible for tax............................... 25,757 18,904 Federal and foreign loss carryforwards............................... 37,835 27,701 Tax credit carryforwards............................ 14,500 14,500 Other............................................... 4,812 16,958 ------ ------ Deferred assets.................................. 95,497 91,585 ------ ------ Deferred Tax Liabilities Deferred revenue.................................... (6,271) (4,876) Capitalized software development costs............................................ (15,422) (11,765) Depreciation........................................ (5,390) (4,794) Other............................................... (1,991) (1,915) ------ ------ Deferred liability............................... (29,074) (23,350) -------- ------- Deferred tax asset, net of deferred liability............................... 66,423 68,235 Less valuation allowance............................ (66,423) (68,235) -------- ------- Net deferred tax asset...................... $ -- $ -- ------- ------- ------- -------
Included in Noncurrent Income Taxes and Other Liabilities at December 31, 1993 and 1992 are $25,150,000 and $17,928,000, respectively, for noncurrent taxes related to foreign jurisdictions. The Federal and foreign loss carryforwards at December 31, 1993 shown above include approximately $33,000,000 of tax benefits related to the exercise of employee stock options which, when recognized, will increase "Additional capital" on the Consolidated Balance Sheet. Page 41 Income tax expense (benefit) was composed of the following (in thousands):
Years ended December 31, -------------------------------- 1993 1992 1991 -------- -------- -------- Current: Federal............................... $16,872 $1,964 $(2,200) Puerto Rico and State................. 4,556 3,142 389 Foreign............................... 6,368 194 129 ------ ----- ------ Total current.............................. 27,796 5,300 (1,682) ------ ----- ------ Deferred: Federal............................... -- -- 2,039 Puerto Rico and State................. -- -- 1,152 ------ ----- ------ Total deferred............................. -- -- 3,191 ------ ----- ------ Total tax expense.......................... $ 27,796 $5,300 $ 1,509 ------ ----- ------ ------ ----- ------
The current Federal tax expense included $5,800,000 and $1,860,000 for 1993 and 1992, respectively, representing the tax benefits of stock option deductions credited to "Additional capital" and $8,300,000 for 1993 representing all of the tax benefits of preacquisition net operating loss carryforwards utilized to reduce the Company's Cost in Excess of Net Assets of Businesses Acquired. The effective income tax rate on pretax income (loss) differed from the Federal income tax statutory rate for the following reasons (in thousands):
Years ended December 31, -------------------------------- 1993 1992 1991 -------- -------- -------- Income tax charge (credit): At statutory rate..................... $38,309 $5,712 $(36,318) Unbenefitted/(utilized) net operating losses................ (12,269) 2,463 37,133 Tax related to foreign jurisdictions....................... 5,691 -- -- Deferred Federal tax.................. -- -- 2,039 Tax benefit of Puerto Rican subsidiary.................... (5,432) (3,751) (1,345) Foreign tax rate differential........................ 1,033 637 -- State income taxes, net of Federal tax effect.......................... 464 66 -- Federal alternative minimum tax......................... -- 173 -- ------ ------ ------ $27,796 $5,300 $ 1,509 ------- ------ ------- ------- ------ -------
At December 31, 1993, the Company had consolidated regular tax net operating loss carryforwards for Federal tax purposes of approximately $99,500,000 available to be carried to future periods. The loss carryforwards expire from 2002 to 2008 if not used. Also, a foreign subsidiary of the Company Page 42 had approximately $9,000,000 of net operating and capital loss carryforwards available to be carried to future periods which do not expire. The Company has general business and other regular tax credit carryforwards of approximately $13,000,000 which expire from 1994 to 2005. The Company also has alternative minimum tax credits of approximately $1,500,000 which can be utilized against regular taxes in the future. Puerto Rican tollgate taxes (maximum rate of 10%) have not been provided on approximately $13,594,000 of undistributed earnings in Puerto Rico, which are considered to be indefinitely invested. DSC's Puerto Rican subsidiary has been granted a 90% tax exemption from Puerto Rican income taxes. The tax grant expires in 2005. Undistributed earnings of foreign subsidiaries are not material. INCENTIVE COMPENSATION The Company has an Incentive Awards Plan administered by the Compensation Committee of the Board of Directors which provides for payment of cash awards to officers and key employees based upon achievement of specific goals by the Company and the participating executives. For the years ended 1993 and 1992, provisions of approximately $6,100,000 and $2,900,000 were charged against income related to the plan. No incentive awards were granted under the plan for 1991. The Company also has a Long-Term Incentive Compensation Plan (LTIP) which awards performance units to certain key executives. Certain officers were awarded units in 1990 under the Company's LTIP by the Compensation Committee of the Board of Directors. The units vest to the officers over six years, and the value of a unit is determined annually based on the Company's operating performance, as defined in the plan. The value of the units charged to income in 1993 was approximately $2,300,000. Prior to 1993, the units awarded had no value. COMMON AND PREFERRED STOCK Description and Dividends At December 31, 1993 the Company was authorized to issue 100,000,000 shares of common stock, $.01 par value, and 5,000,000 shares of preferred stock, $1.00 par value. Since inception, the Company has not declared or paid a cash dividend. In October 1993, the Company issued 3,450,000 shares of the Company's common stock in a public offering for which the Company received net proceeds of approximately $231,149,000. In May 1986 and subsequently amended in April 1991, the Company declared a dividend distribution of one preferred stock purchase right on each outstanding share and each subsequently issued share of the Company's common stock. The rights will not become exercisable until the close of business ten days after a Page 43 public announcement that a person or group has acquired 20% or more of the common stock of the Company, or a public announcement or commencement of a tender or exchange offer which would result in the offeror acquiring 30% or more of the common stock of the Company. Once exercisable, each right would entitle a holder to buy 1/100 of a share of the Company's Series A Junior Participating preferred stock at an exercise price of $45.00. The Company may redeem the rights for 5 cents per right prior to the close of business on the tenth day following the announcement that a person or group has acquired 20% or more of the outstanding common stock of the Company. The rights will expire in 1996 unless redeemed or exercised at an earlier date. Stock Purchase Plans Under provisions of the Company's employee stock purchase plans, employees can purchase the Company's common stock at a specified price through payroll deductions during an offering period, currently established on an annual basis. In July 1993, approximately 1,543,000 shares were issued to employees under the employee stock purchase plan. At December 31, 1993, approximately $3,151,000 had been contributed by employees that will be used to purchase shares at the end of the offering period in July 1994. The amount of shares issuable in July 1994 for the current offering is approximately 166,000 shares assuming no future withdrawals from the plan. At December 31, 1993, the Company could issue up to 4,450,000 shares under the employee stock purchase plans of which approximately 3,672,000 shares had been purchased and issued. Warrants and Options The Company has stock option plans providing for the issuance of both incentive stock options and nonqualified stock options exercisable for a period of ten years, as well as restricted stock issuances. The plans cover 13,420,000 shares of common stock. At December 31, 1993, plan options covering 3,382,000 shares had been granted and are outstanding, options granted under the plans covering 7,369,000 shares had been exercised, 658,000 restricted shares had been issued (net of forfeitures), 224,000 shares had expired and options covering 1,787,000 shares are available for grant. The exercise prices of stock options granted and warrants issued were at the market value of the Company's common stock at the date of grant or issuance. In the event of discontinuation of service by the optionees, all or a portion of the shares acquired pursuant to these options can be repurchased by the Company, at its option, based on the vesting terms in the option agreements. Other options at December 31, 1993 include 34,000 options granted to various current or prior members of the Company's Board of Directors and certain nonemployees who have performed services for the Company. Page 44 Outstanding warrants and options are summarized as follows:
Options -------------------------- Warrants Plans Other ----------- ----------- ------------ December 31, 1990-- Shares issuable upon exercise.................... 500,000 5,558,000 161,000 Price per share.................... $3.33-$9.23 $.01-$39.50 $2.00-$14.88 Average price per share........................ $7.37 $7.12 $8.31 Expiration......................... 1991-1992 1991-2000 1992-1995 1991 Transactions Issuances and grants............... -- 1,196,000 20,000 Price per share.................... -- $4.19-$8.50 $4.19 Exercises and forfeitures...................... 200,000 337,000 39,000 Price per share.................... $9.00 $2.00-$38.75 $2.00-$6.13 December 31, 1991-- Shares issuable upon exercise.................... 300,000 6,417,000 142,000 Price per share.................... $3.33-$9.23 $.01-$39.50 $2.00-$14.88 Average price per share........................ $6.28 $7.04 $8.91 Expiration......................... 1995 1992-2001 1992-1995 1992 Transactions Issuances and grants............... -- 32,000 10,000 Price per share.................... -- $4.63-$18.13 $5.50 Exercises and forfeitures...................... -- 2,268,000 50,000 Price per share.................... -- $.01-$32.67 $2.00-$14.88 December 31, 1992-- Shares issuable upon exercise.................... 300,000 4,181,000 102,000 Price per share.................... $3.33-$9.23 $.01-$39.50 $4.19-$12.13 Average price per share........................ $6.28 $8.06 $9.80 Expiration......................... 1995 1993-2002 1993-1996 1993 Transactions Issuances and grants............... -- 710,000 10,000 Price per share.................... -- $26.13-$67.00 $17.00 Exercises and forfeitures...................... 300,000 1,509,000 78,000 Price per share.................... $3.33-$9.23 $.01-$38.75 $4.19-$12.13 December 31, 1993-- Shares issuable upon exercise.................... -- 3,382,000 34,000 Price per share.................... -- $.01-$67.00 $12.13-$17.00 Average price per share........................ -- $14.07 $13.56 Expiration......................... -- 1994-2003 1994-1997
Page 45 Restricted Stock The Company's Board of Directors authorized the issuance of restricted shares of the Company's common stock to certain key employees under its 1993, 1988 and 1984 employee stock option plans. Holders of restricted stock retain all rights of a shareholder, except the shares cannot be sold until they are vested. Upon employee termination, all unvested shares are forfeited to the Company. The shares vest annually through 1996. The Company issued 255,000, 104,000 and 313,000 shares of restricted stock to employees in 1993, 1992, and 1991, respectively, and increased common stock and additional capital by the fair market value of the stock at the date of issuance ($7,348,000, $778,000 and $1,714,000 in 1993, 1992 and 1991, respectively), net of unearned compensation. At December 31, 1993, 1992 and 1991, unearned compensation related to the restricted shares was $3,266,000, $1,507,000 and $1,424,000, respectively. The unearned compensation will be charged to expense ratably over the vesting period. During 1992, 14,000 restricted shares were forfeited. Reserved Stock Common stock has been reserved for the following purposes (in thousands):
December 31, ----------------------- 1993 1992 -------- -------- Options outstanding............................... 3,416 4,283 Options available for grant under the stock option plans.......................... 1,787 448 Subordinated convertible debentures............... 668 4,515 Warrants outstanding.............................. -- 300 Stock purchase plans.............................. 778 321 ----- ----- 6,649 9,867 ----- ----- ----- -----
SPECIAL CHARGES Special charges for 1991 included the following (in thousands): Write-down of assets: Inventory................................................. $25,300 Capitalized software development costs.................... 9,500 Property and equipment.................................... 1,700 Other..................................................... 300 ----- 36,800 Provision for doubtful receivables.......................... 7,100 Restructuring costs......................................... 4,184 ------ $48,084 ------ ------
These charges resulted from the Company's reassessment in 1991 of anticipated near-term business levels in light of the current economic Page 46 environment and the related impact on estimated revenue levels. Also during 1991, the Company realigned its management structure on a product line basis to refocus key management on product line performance. This realignment resulted in the restructuring charge of $4,184,000 related to excess lease and personnel related costs. OTHER OPERATING COSTS The agreement to acquire a company (Optilink) in 1990 requires the Company to pay certain former employees of Optilink up to $7,900,000 if certain revenue targets are achieved through December 31, 1995. At December 31, 1993, approximately $5,514,000 had been earned under the agreement, including $4,052,000 in 1993, $912,000 in 1992 and $288,000 in 1991. Such amounts are included in "Other Operating Costs" on the Consolidated Statements of Operations. OTHER EXPENSE, NET Other expense, net for the year ended December 31, 1993 included a gain of $2,154,000 from the sale of securities acquired several years ago as part of financing provided to a customer. Other expense, net for the year ended December 31, 1992 included provisions of approximately $1,500,000 for legal and related costs associated with litigation activities and approximately $2,000,000 for costs related to the restructuring of the Company's senior unsecured debt. RELATED PARTIES The Company has agreements to pay consulting fees, which amounted to $486,000 in 1993, $424,000 in 1992 and $411,000 in 1991 to members of the Company's Board of Directors. The Company paid legal fees of $175,000 in 1992 and $199,000 in 1991 to a legal firm with a shareholder who became a member of the Company's Board of Directors during 1989 and subsequently resigned during 1992. During 1992, the Company purchased approximately 98,000 shares of its outstanding common stock from various employees and an officer of the Company, who is also a member of the Board of Directors, at the existing market price at the date of the transactions. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at fair value. Marketable securities are recorded in the financial Page 47 statements at current market values (see "Investments in Debt and Equity Securities"). The following methods and assumptions were used by the Company in estimating its fair value disclosures for the Company's financial instruments: Debt The carrying amounts of the Company's borrowings under its senior unsecured debt agreement and other debt approximate their fair value at December 1993 and 1992 due to renegotiation of the senior unsecured debt in December 1992 combined with similar interest rates at December 1993 and 1992, and the other debt containing market interest rates. The subordinated convertible debentures are based on quoted market values. Forward foreign exchange contracts, letters of credit and guarantees The fair values of the Company's off-balance sheet instruments are based on current settlement values (forward foreign exchange contracts) and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing (guarantees and letters of credit). The difference between these contract values and the fair value of these instruments is included when it is material. The carrying amounts and fair values of the Company's significant financial instruments at December 31, 1993 and 1992 are as follows (in thousands):
Carrying December 31, 1993 Amount Fair Value ----------------- --------- ---------- Debt: Senior unsecured debt........................... $18,750 $18,750 Other........................................... 15,246 15,246 Forward foreign exchange contracts................ 22,277 21,481
Page 48
Carrying December 31, 1993 Amount Fair Value ----------------- --------- ---------- Debt: Senior unsecured debt........................... $25,000 $25,000 7.75% subordinated convertible debentures.................................... 71,490 84,709 8.00% subordinated convertible debentures.................................... 36,611 31,806 Other........................................... 7,308 7,308
COMMITMENTS AND CONTINGENCIES Operating Lease Commitments The Company leases certain facilities and equipment which require future rental payments. These rental arrangements do not impose any financing or dividend restrictions on the Company or contain contingent rental provisions. Certain of these leases have renewal and purchase options generally at the fair value at the renewal or purchase option date. Future minimum rental commitments under operating leases with noncancellable lease terms in excess of one year were as follows at December 31, 1993 (in thousands): 1994........................................................ $17,680 1995........................................................ 13,692 1996........................................................ 8,919 1997........................................................ 6,937 1998........................................................ 4,837 Thereafter.................................................. 10,699 ------ $62,764 ------ ------
Operating lease rental expense was $19,268,000, $17,296,000 and $18,203,000, for the years ended December 31, 1993, 1992 and 1991, respectively. Additionally, for the year ended December 31, 1991, the Company received sublease rental income of $2,530,000. Contingent Liabilities The Company periodically sells customer receivables and operating leases under agreements which contain recourse provisions. The Company could be obligated to repurchase receivables and operating leases which were previously sold on a partial recourse basis, the terms of which allow the Company to limit its risk of loss to approximately $5,328,000 at December 31, 1993. The Company has guarantees of approximately $12,973,000 outstanding at December 31, 1993, supporting Company and third-party performance bonds to customers and others, of which approximately $8,081,000 was collateralized by letters of credit issued under the Company's credit facility. The Company believes it has adequate reserves for any ultimate losses associated with these contingencies. Page 49 The Company enters into forward foreign exchange contracts to hedge certain receivables and firm contracts for delivery of products and services which are denominated in foreign currencies. At December 31, 1993, the Company had forward foreign exchange contracts of $22,277,000 to hedge future receipts in such currencies. Gains and losses related to the forward contracts are recognized as part of the cost of the underlying transactions being hedged. Forward foreign exchange contracts generally have maturities of one year or less and contain an element of risk that the counterparty may be unable to meet the terms of the agreement. However, the Company minimizes such risk exposure by limiting the counterparty to major financial institutions. Management believes the risk of incurring such losses is remote and any losses therefrom would be immaterial. Litigation In February 1994, the United States Fifth Circuit Court of Appeals (the "Court of Appeals") affirmed dismissal by the United States District Court for the Northern District of Texas of a shareholder suit against the Company and certain of its present and former officers and directors. The suit was purportedly filed as a class action on behalf of an alleged class of persons who purchased common stock of the Company from February 7, 1991, through October 31, 1991. The complaint had alleged violations of Section 10(b) of the Securities and Exchange Act of 1934, Rule 10b-5 promulgated thereunder and negligent misrepresentation. The complaint sought actual and punitive damages in unspecified amounts. The plaintiffs have been granted an extension of time through March 25, 1994, in which to determine whether or not to request a rehearing by the Court of Appeals. In addition, the plaintiffs have the option to seek further review by the United States Supreme Court. The Company does not believe the ultimate resolution of this matter will have a material adverse effect on the Company's consolidated financial position. On July 20, 1993, the Company filed suit against Advanced Fibre Communications ("AFC"), Quadrium Corporation and two former employees in the United States District Court for the Eastern District of Texas. The Company seeks: (i) a declaratory judgment that the two former employees are not entitled to any stock options or cash payments under certain employee plans due to alleged breaches of certain employment related agreements; (ii) a declaration that AFC's products are proprietary property of the Company; and (iii) unspecified damages for breach of contract, civil conspiracy and tortious interference. Counterclaims have been filed by the former employees claiming entitlement to certain stock options and cash payments. Additionally, AFC has filed counterclaims including various tort claims and claims based on alleged violations of various Federal and State antitrust and unfair competition laws. AFC also seeks a declaratory judgment that it owns all rights to its products and seeks unspecified damages, including treble damages under antitrust statutes Page 50 and punitive damages. The case is in the early stages of discovery, and the Company intends to vigorously prosecute its claims and defend all of the defendants' counterclaims. The Company believes that it has valid and substantial claims against all of the defendants and valid defenses to all of the counterclaims and does not believe the ultimate resolution of this matter will have a material adverse effect on the Company's consolidated financial position. The Company is a party to other legal proceedings which, in the opinion of management, are not expected to have a material adverse effect on the Company's consolidated financial position. INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS Export Sales Revenue generated from export sales in 1991 was $48,012,000. Revenue generated from export sales was less than 10% of total revenue in 1993 and 1992. Major Customers Customers that accounted for 10% or more of consolidated revenue and their related percentage of consolidated revenue were as follows:
Year ended December 31, --------------------------------- 1993 1992 1991 ---- ---- ---- MCI Communications Corporation.......... 18% 15% 22% Ameritech Services, Inc. and subsidiaries...................... 13% * * Motorola, Inc........................... 12% 13% 13% Bell Atlantic........................... 11% 10% * NYNEX................................... 11% * * *Represented less than 10% of consolidated revenue.
Page 51 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of DSC Communications Corporation: We have audited the accompanying consolidated balance sheets of DSC Communications Corporation and subsidiaries (the "Company") as of December 31, 1993 and 1992 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated financial position of the Company at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young Dallas, Texas January 24, 1994 Page 52 DSC Communications Corporation and Subsidiaries QUARTERLY RESULTS (Unaudited) (In thousands, except per share data)
1993 1992 --------------------------------------------- --------------------------------------------- Fourth Third (B) Second First Fourth Third(A) Second First --------- --------- --------- --------- --------- --------- --------- --------- Revenue. . . . . . . $ 217,934 $ 187,971 $ 168,676 $ 156,193 $ 162,713 $ 142,358 $ 128,532 $ 102,716 Gross profit . . . . 96,050 81,559 73,119 67,241 69,876 56,681 45,771 30,448 Net income (loss). . $ 28,764 $ 23,288 $ 18,236 $ 11,372 $ 13,105 $ 6,937 $ 2,031 $ (10,479) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per share. . . . . $ 0.51 $ 0.43 $ 0.34 $ 0.24 $ 0.28 $ 0.16 $ 0.05 $ (0.25) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (A) The 1992 third quarter includes provisions of approximately $1,500 for legal and related costs associated with litigation activities and approximately $1,000 for costs related to the Company's senior unsecured debt. (B) The 1993 third quarter includes a gain of approximately $2,154 from the sale of securities acquired several years ago as part of financing provided to a customer.
Page 53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to the directors and nominees for election to the Board of Directors of the Company is incorporated by reference from the information set forth on page 1 of the definitive proxy statement of the Company, previously filed in connection with its 1994 Annual Meeting of Stockholders under the heading "ELECTION OF DIRECTORS", and on pages 11 and 12 of such definitive proxy material under the heading "DIRECTORS CONTINUING IN OFFICE". The information regarding executive officers of the Company is contained in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information set forth under the heading "EXECUTIVE COMPENSATION" on pages 5 through 11 of the definitive proxy statement of the Company, previously filed in connection with its 1994 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information set forth under the heading "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on page 14 of the definitive proxy statement of the Company, previously filed in connection with the 1994 Annual Meeting of Stockholders. Page 54 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information set forth under the heading "COMPENSATION OF DIRECTORS" on pages 12 and 13 of the definitive proxy statement of the Company, previously filed in connection with the 1994 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following is a list of the consolidated financial statements and financial statement schedules which are included in this Form 10-K or which are incorporated herein by reference. 1. Financial Statements: As of December 31, 1993 and 1992: Consolidated Balance Sheets For the Years Ended December 31, 1993, 1992, and 1991 -- Consolidated Statements of Operations -- Consolidated Statements of Cash Flows -- Consolidated Statements of Changes in Shareholders' Equity Notes to Consolidated Financial Statements Report of Independent Auditors 2. Financial Statement Schedules: As of December 31, 1993: -- Schedule I -- Marketable Securities - Other Investments For the years Ended December 31, 1993, 1992, and 1991: -- Schedule II -- Amounts Receivable From Related Parties, Underwriters, Promoters, and Employees Other Than Related Parties -- Schedule V -- Property and Equipment -- Schedule VI -- Accumulated Depreciation and Amortization of Property and Equipment -- Schedule VIII -- Valuation and Qualifying Accounts Page 55 -- Schedule IX -- Short Term Borrowings -- Schedule X -- Supplementary Income Statement Information All other financial statements and financial statement schedules have been omitted because they are not applicable, or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits: 3.1 Amended and Restated Certificate of Incorporation of the Company (1) 3.2 Amended and Restated By-laws of the Company (8) 4.3 Rights Agreement, Dated as of May 12, 1986, Between the Company and The Chase Manhattan Bank, N.A., as Rights Agent (3) 4.4 Form of Letter to the Company's Stockholders, Dated May 22, 1986, Relating to the Adoption of the Rights Agreement Described in Exhibit 4.3 (3) 10.1 Employment Agreement Between the Company and James L. Donald, Dated January 1, 1990 (9) 10.2 Executive Income Continuation Plan, Dated January 1, 1990, Between the Company and James L. Donald (9) 10.3 Insurance Ownership Agreement, Dated January 1, 1990, Between the Company and James L. Donald (9) 10.4 Management Consulting Agreement Among the Company, Nolan Consulting, Inc., and James M. Nolan, Dated March 15, 1982 (4) 10.5 Amended and Restated Note Agreement, Dated December 31, 1992, Between the Company and an Institutional Lender (10) 10.6 Revolving Credit Agreement, Dated as of February 24, 1994, Between the Company and Certain of its Subsidiaries and Certain Financial Institutions Providing for Secured Revolving Credit (13) Page 56 10.7 The Company's Amended and Restated 1979 Employee Stock Option Plan (5) 10.8 The Company's Amended and Restated 1981 Employee Stock Option Plan (5) 10.9 The Company's Amended and Restated 1984 Employee Stock Option Plan (7) 10.10 The Company's Amended and Restated 1988 Employee Stock Option Plan (7) 10.11 The Company's Amended and Restated 1985 Convertible Debenture Plan (2) 10.12 The Company's 1993 Employee Stock Option and Securities Award Plan (11) 10.13 The Company's 1993 Non-Employee Directors Stock Option Plan (11) 10.14 The Company's Employee Thrift Plan as Amended and Restated (2) 10.15 The Company's 1988 Employee Stock Ownership Plan (6) 10.16 Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Executive Officers (8) 10.17 The Company's Restoration Plan, Dated July 1, 1988 (6) 10.18 Form of Indemnification Agreement Between the Company and its Directors and Senior Officers as Approved by the Board of Directors and Entered Into on or After January 22, 1990, and the Related Trust Agreement, Dated March 1, 1990, Between the Company and First City, Texas-Dallas, as Trustee (7) 10.19 The Company's Long-Term Incentive Compensation Plan, Effective as of January 1, 1990 (9) 10.20 The 1990 Optilink Stock Option and Cash Payment Plan, Dated May 15, 1990 (9) Page 57 10.21 The Company's Long-Term Incentive Compensation Plan, Effective as of January 1, 1994 (12) 11.1 Statement re: Computation of Per Share Earnings (13) 22.1 Subsidiaries of the Registrant (13) 23.1 Consent of Ernst & Young (13) MANAGEMENT CONTRACTS OR COMPENSATORY PLANS AND ARRANGEMENTS The following above-described exhibits are management contracts or compensatory plans and arrangements: 10.1 Employment Agreement Between the Company and James L. Donald, Dated January 1, 1990; 10.2 Executive Income Continuation Plan, Dated January 1, 1990, Between the Company and James L. Donald; 10.3 Insurance Ownership Agreement, Dated January 1, 1990, Between the Company and James L. Donald; 10.4 Management Consulting Agreement Among the Company, Nolan Consulting, Inc., and James M. Nolan, Dated March 15, 1982; 10.7 the Company's Amended and Restated 1979 Exployee Stock Option Plan; 10.8 The Company's Amended and Restated 1981 Employee Stock Option Plan; 10.9 The Company's Amended and Restated 1984 Employee Stock Option Plan; 10.10 The Company's Amended and Restated 1988 Employee Stock Option Plan; 10.11 The Company's Amended and Restated 1985 Convertible Debenture Plan; 10.12 The Company's 1993 Employee Stock Option and Securities Award Plan; 10.13 The Company's 1993 Non-Employee Directors Stock Option Plan; 10.14 The Company's Employee Thrift Plan as Amended and Restated; 10.15 The Company's 1988 Employee Stock Ownership Plan; 10.16 Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Executive Officers; 10.17 The Company's Restoration Plan, Dated July 1, 1988; 10.18 Form of Indemnification Agreement Between the Company and its Directors and Senior Officers as Approved by the Board of Directors and Entered Into on or After January 22, 1990, and the Related Trust Agreement, Dated March 1, 1990, Between the Company and First City, Texas-Dallas, as Trustee; 10.19 The Company's Long-Term Incentive Compensation Plan, Effective as of January 1, 1990; 10.21 The Company's Long-Term Incentive Compensation Plan, Effective as of January 1, 1994. (b) Reports on Form 8-K: None - ------------------------------------------------------------------------------ (1) Incorporated by reference from the Company's Amendment to Application or Report on Form 8, dated July 28, 1989 (2) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1986 (3) Incorporated by reference from the Company's Registration Statement on Form 8-A, dated May 21, 1986, as amended by Amendment No. 1 on Form 8, dated July 28, 1989, and Amendment No 2. on Form 8, dated May 28, 1991, each as filed with the Securities and Exchange Commission pursuant to Section 12(g) of the Exchange Act (4) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1981 (5) Incorporated by reference from the Company's Registration Statement on Form S-8 (Registration No. 2-83398) (6) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1988 (7) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1990 Annual Meeting of Stockholders (8) Incorporated by reference from the Company's Annual Report for the year ended December 31, 1989 (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1990 Page 58 (10) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (11) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1993 Annual Meeting of Stockholders (12) Incorporated by reference from the definition proxy statement of the Company, filed in connection with the 1994 Annual Meeting of Stockholders (13) Filed herewith Page 59 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. DSC COMMUNICATIONS CORPORATION (Registrant) /s/ James L. Donald ------------------------------ James L. Donald, Chairman of the Board, President, Chief Executive Officer, and Director 60 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date ------------------- ---- /s/ James L. Donald March 30, 1994 - ------------------------------ James L. Donald, Chairman of the Board, President, Chief Executive Officer, and Director (Principal Executive Officer) /s/ Clement M. Brown, Jr. March 30, 1994 - ------------------------------ Clement M. Brown, Jr. Director /s/ Frank J. Cummiskey March 30, 1994 - ------------------------------ Frank J. Cummiskey Director /s/ Sir John Fairclough March 30, 1994 - ------------------------------ Sir John Fairclough Director /s/ Raymond J. Dempsey March 30, 1994 - ------------------------------ Raymond J. Dempsey Director /s/ James L. Fischer March 30, 1994 - ------------------------------ James L. Fischer Director /s/ Robert S. Folsom March 30, 1994 - ------------------------------ Robert S. Folsom Director 61 Signature and Title Date ------------------- ---- /s/ Gerald F. Montry March 30, 1994 - ------------------------------ Gerald F. Montry, Senior Vice President, Chief Financial Officer, and Director (Principal Financial Officer) /s/ James M. Nolan March 30, 1994 - ------------------------------ James M. Nolan Director /s/ Kenneth R. Vines March 30, 1994 - ------------------------------ Kenneth R. Vines Vice President and Controller (Principal Accounting Officer) 62 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE I MARKETABLE SECURITIES-OTHER INVESTMENTS FOR THE YEAR ENDED DECEMBER 31, 1993 (In Thousands)
Number of Amount at Which Shares or Each Portfolio of Units - Equity Security Principal Market Value of Issues and Each Amounts of Each Issue at Other Security Name of Issuer and Bonds and Cost of Balance Sheet Issue Carried in Title of Each Issue Notes Each Issue Date the Balance Sheet - --------------------------------------------- ---------- ---------- --------------- ------------------ SECURITIES AVAILABLE FOR SALE (1) U.S. Treasury obligations $112,243 $112,243 $112,243 Mortgage-backed securities (2) Federal National Mortgage Association Pool #70169 Maturing 12/1/18 $5,712 5,896 5,896 5,896 Bear Stearns Secured Investments Inc. Collateralized Mortgage Obligation Series 88-2 Class 2-D Maturing 4/1/18 $5,000 5,027 5,027 5,027 Resolution Trust Corporation Mortgage Pass Through Securities Maturing 5/25/24 $2,754 2,799 2,799 2,799 Other 15,368 15,368 15,368 --------- --------- --------- 29,090 29,090 29,090 Corporate debt securities 17,587 17,587 17,587 --------- --------- --------- $158,920 $158,920 $158,920 --------- --------- --------- --------- --------- --------- (1) Securities available for sale are carried at fair value with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. At December 31, 1993 there are no unrealized gains or losses. (2) Certain investments in mortgage-backed securities are guaranteed by an agency of the United States government.
63 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES FOR THE YEAR ENDED DECEMBER 31, 1993
Deductions Balance at End Balance at -------------------- of Period Beginning Amounts Amounts -------------------- Name of Debtor of Period Additions Collected Written-Off Current Noncurrent - ----------------- ---------- --------- --------- ----------- ------- ---------- Mike Bodine (4) $ 42,220 $ 72,496 $ 112,954 $ -- $ 1,762 $ -- Kim Marshall (4) 39,983 82,627 122,610 -- -- -- Dane Hobbs (4) 1,422 113,401 102,559 -- 12,264 -- --------- --------- --------- ------- -------- ------- $ 83,625 $ 268,524 $ 338,123 $ -- $ 14,026 $ -- --------- --------- --------- ------- -------- ------- --------- --------- --------- ------- -------- -------
FOR THE YEAR ENDED DECEMBER 31, 1992 Deductions Balance at End Balance at ---------------------- of Period Beginning Amounts Amounts -------------------- Name of Debtor of Period Additions Collected Written-Off Current Noncurrent - ----------------- ---------- --------- --------- ----------- ------- ---------- Louis Wooldridge (3) $ 330,500 $ 39,000 $ 369,500 $ -- $ -- $ -- Dennis Duffy (3) 186,250 20,750 207,000 -- -- -- --------- --------- --------- ------- -------- ------- $ 516,750 $ 59,750 $ 576,500 $ -- $ -- $ -- --------- --------- --------- ------- -------- ------- --------- --------- --------- ------- -------- -------
(CONTINUED) 64 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II (CONTINUED) AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES FOR THE YEAR ENDED DECEMBER 31, 1991 Caption> Deductions Balance at End Balance at --------------------- of Period Beginning Amounts Amounts -------------------- Name of Debtor of Period Additions Collected Written-Off Current Noncurrent - ----------------- ---------- --------- --------- ----------- ------- ---------- James Donald (2) $ 918,750 $ -- $ 918,750 $ -- $ -- $ -- Gerald Montry (2) 204,250 -- 204,250 -- -- -- Gunnar Korpinen (2) 612,500 -- 612,500 -- -- -- William Tempest (2) 308,000 -- 308,000 -- -- -- Pete Waal (1)(2) 203,750 -- 203,750 -- -- -- Louis Wooldridge (3) 254,000 76,500 -- -- 330,500 -- Dennis Duffy (3) 146,500 39,750 -- -- 186,250 -- Doug Bailey (2) 181,750 -- 181,750 -- -- -- John Bischoff (2) 121,250 -- 121,250 -- -- -- Gerald Carlton (2) 242,500 -- 242,500 -- -- -- Dave Holland (2) 583,000 -- 583,000 -- -- -- Frank Perpiglia (2) 121,250 -- 121,250 -- -- -- ---------- --------- ---------- ------- --------- ------- $3,897,500 $ 116,250 $3,497,000 $ -- $ 516,750 $ -- ---------- --------- ---------- ------- --------- ------- ---------- --------- ---------- ------- --------- ------- (1) Employee - 0% to 12% notes made in connection with relocation of employee, due April 1991. (2) Employee - 8% to 12% notes for the purchase of non-negotiable convertible subordinated debentures, due on various dates through April, 2000. During 1991, the Company allowed the officers and employees to exchange the outstanding notes for subordinated convertible debentures due to the officers and employees in the same amount. (3) Employee - 8% notes associated with expatriate income taxes, due on demand. (4) Employee - Advances associated with expatriate income taxes.
65 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE V PROPERTY AND EQUIPMENT (In Thousands) FOR THE YEAR ENDED DECEMBER 31, 1993
Balance at Additions Other Balance Beginning at Changes at End Classification of Period Cost Retirements Add (Deduct) of Period - -------------- --------- --------- ----------- ------------ --------- Land $ 17,807 $ 1,833 $ -- $ -- $ 19,640 Buildings and Leasehold Improvements 69,621 4,977 (2,677) (1) 71,920 Manufacturing & Test Equipment 148,612 33,464 (5,667) (292) 176,117 Office Furniture, Equipment & Other 87,952 30,754 (6,100) 197 112,803 --------- -------- --------- ------- --------- TOTAL $ 323,992 $ 71,028 $ (14,444) $ (96) $ 380,480 --------- -------- --------- ------- --------- --------- -------- --------- ------- ---------
FOR THE YEAR ENDED DECEMBER 31, 1992 Balance at Additions Other Balance Beginning at Changes at End Classification(4) of Period Cost Retirements Add (Deduct) of Period - -------------- --------- --------- ----------- ------------ --------- Land $ 17,807 $ -- $ -- $ -- $ 17,807 Buildings and Leasehold Improvements 70,456 102 (946) 9 69,621 Manufacturing & Test Equipment 143,786 14,671 (4,779) (5,066)(3) 148,612 Office Furniture, Equipment & Other 81,526 11,041 (4,015) (600) 87,952 --------- -------- --------- ------- --------- TOTAL $ 313,575 $ 25,814 $ (9,740) $(5,657) $ 323,992 --------- -------- --------- ------- --------- --------- -------- --------- ------- ---------
(CONTINUED) 66 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE V (CONTINUED) PROPERTY AND EQUIPMENT (In Thousands) FOR THE YEAR ENDED DECEMBER 31, 1991
Balance at Additions Other Balance Beginning at Changes at End Classification(4) of Period Cost Retirements Add (Deduct) of Period - -------------- --------- --------- ----------- ------------ --------- Land $ 17,807 $ -- $ -- $ -- $ 17,807 Buildings and Leasehold Improvements 68,217 2,980 (741) -- 70,456 Manufacturing & Test Equipment 142,814 12,555 (2,792) (8,791)(2) 143,786 Office Furniture, Equipment & Other 81,884 9,105 (8,587)(1) (876) 81,526 --------- -------- --------- ------- --------- TOTAL $ 310,722 $ 24,640 $ (12,120) $(9,667) $ 313,575 --------- -------- --------- ------- --------- --------- -------- --------- ------- --------- (1) Includes approximately $3,000 related to a write-down of assets in 1991. (2) Test equipment transferred to inventory for resale to customers. (3) Includes equipment transfers to inventory and other reclassifications. (4) Certain prior year balances have been adjusted to be consistent with current year presentation.
67 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE VI ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT (In Thousands) FOR THE YEAR ENDED DECEMBER 31, 1993
Balance Additions at Charged To Other Balance Beginning Costs and Changes at End Description of Period Expenses Retirements Add (Deduct)* of Period ----------- --------- ---------- ----------- ------------- --------- Buildings & Leasehold Improvements $ 21,725 $ 3,674 $ (1,653) $ 17 $ 23,763 Manufacturing & Test Equipment 97,464 20,255 (5,033) (274) 112,412 Office Furniture, Equipment & Other 55,594 14,608 (5,932) 252 64,522 ---------- --------- ---------- -------- --------- TOTAL $ 174,783 $ 38,537 $ (12,618) $ (5) $ 200,697 ---------- --------- ---------- -------- --------- ---------- --------- ---------- -------- --------- FOR THE YEAR ENDED DECEMBER 31, 1992 Balance Additions at Charged To Other Balance Beginning Costs and Changes at End Description(4) of Period Expenses Retirements Add (Deduct)* of Period ----------- --------- ---------- ----------- ------------- --------- Buildings & Leasehold Improvements $ 18,906 $ 3,679 $ (867) $ 7 $ 21,725 Manufacturing & Test Equipment 81,882 21,450 (3,646) (2,222)(3) 97,464 Office Furniture, Equipment & Other 46,835 12,179 (3,610) 190 55,594 ---------- --------- ---------- -------- --------- TOTAL $ 147,623 $ 37,308 $ (8,123) $ (2,025) $ 174,783 ---------- --------- ---------- -------- --------- ---------- --------- ---------- -------- ---------
(CONTINUED) 68 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE VI (CONTINUED) ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT (In Thousands) FOR THE YEAR ENDED DECEMBER 31, 1991
Balance Additions at Charged To Other Balance Beginning Costs and Changes at End Description(4) of Period Expenses Retirements Add (Deduct)* of Period ----------- --------- ---------- ----------- ------------- --------- Buildings & Leasehold Improvements $ 15,704 $ 4,071 $ (873) $ 4 $ 18,906 Manufacturing & Test Equipment 65,880 21,797 (2,468) (3,327)(2) 81,882 Office Furniture, Equipment & Other 39,356 11,344 (4,360) (1) 495 46,835 ---------- --------- ---------- -------- --------- TOTAL $ 120,940 $ 37,212 $ (7,701) $ (2,828) $ 147,623 ---------- --------- ---------- -------- --------- ---------- --------- ---------- -------- --------- * Transfers and reclassifications (1) Includes approximately $1,300 related to a write-down of assets in 1991. (2) Test equipment transferred to inventory for resale to customers and other reclassifications. (3) Includes equipment transfers to inventory and other reclassifications. (4) Certain prior year balances have been adjusted to be consistent with current year presentation.
69 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS (In Thousands)
Additions ---------------------- Balance at Charged Deductions Balance at Beginning Charged to to Other from End of Receivables of Period Income Accounts Reserves Period ----------- ---------- ---------- -------- ---------- ---------- Year Ended December 31, 1993 $ 3,593 $ 942 $ -- $ 926 (2) $ 3,609 Year Ended December 31, 1992 9,124 1,761 800 (1) 8,092 (2) 3,593 Year Ended December 31, 1991 5,770 5,000 -- 1,646 (2) 9,124 (1) Transfers from a reserve for customer guarantees, which were included in "Accrued Liabilities", to Allowance for Doubtful Accounts". (2) Accounts written off, net of collections.
70 DSC COMMUNICATIONS CORPORATION SCHEDULE IX SHORT-TERM BORROWINGS (In thousands)
Maximum Average Weighted Category of Weighted Amount Amount Average Aggregate Balance Average Outstanding Outstanding Interest Rate Short-term at End of Interest During the During the During the Borrowing Period Rate Period Period (1) Period (1) ---------- --------- --------- ----------- ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1993 Notes payable to banks $ -- -- $ -- $ -- (3) -- FOR THE YEAR ENDED DECEMBER 31, 1992 Notes payable to banks $ -- -- $ -- $ -- (3) -- FOR THE YEAR ENDED DECEMBER 31, 1991 Notes payable to banks $ -- (2) 8.50% $ 93,000 $ 79,638 8.94% (1) The average amount outstanding during the period is the average of the daily balances. The weighted average interest rate during the period is determined by dividing interest expense related to short-term borrowings by the average of daily balances. (2) At December 31, 1991, $93,000 of short-term borrowings was reclassified to "Senior debt subject to accelerated maturity." (See Notes to Consolidated Financial Statements in the 1991 Annual Report, which is incorporated by reference herein.) (3) There were no short-term borrowings for the years ended December 31, 1992 and December 31, 1993.
71 DSC COMMUNICATIONS CORPORATION SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION (In thousands)
Charged to Costs and Expenses Years Ended December 31, ------------------------------------- 1993 1992 1991 --------- --------- --------- Maintenance and repairs $ 9,502 $ 6,908 $ 5,901 Taxes, other than payroll and income taxes * 6,180 5,881 Depreciation and amortization, other than property, plant and equipment * 6,320 8,215 * Amount is less than 1% of total sales.
72 EXHIBIT INDEX 10.6 Revolving Credit Agreement, Dated as of February 24, 1994, Between the Company and Certain of its Subsidiaries and Certain Financial Institutions Providing for Secured Revolving Credit 11.1 Statement re: Computation of Per Share Earnings 22.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young EX-10.6 2 EXHIBIT 10.6 Exhibit 10.6 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $50,000,000 CREDIT AGREEMENT AMONG DSC COMMUNICATIONS CORPORATION DSC TECHNOLOGIES CORPORATION DSC FINANCE CORPORATION DSC INTERNATIONAL CORPORATION DSC MARKETING SERVICES, INC. DSC OF PUERTO RICO, INC. CERTAIN LENDERS and NATIONSBANK OF TEXAS, N.A., AS ADMINISTRATIVE LENDER February 24, 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. CERTAIN DEFINED TERMS. . . . . . . . . . . . . . . . . . 1 SECTION 1.02. ACCOUNTING TERMS.. . . . . . . . . . . . . . . . . . . . 16 SECTION 1.03. INTERPRETATION.. . . . . . . . . . . . . . . . . . . . . 16 ARTICLE II ADVANCES SECTION 2.01. THE ADVANCES.. . . . . . . . . . . . . . . . . . . . . . 17 SECTION 2.02. MANNER OF BORROWING AND DISBURSEMENT.. . . . . . . . . . 18 SECTION 2.03. INTEREST.. . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.04. FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.05. PREPAYMENT.. . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.06. REDUCTION OF COMMITMENTS.. . . . . . . . . . . . . . . . 21 SECTION 2.07. NON-RECEIPT OF FUNDS BY THE ADMINISTRATIVE LENDER. . . . 22 SECTION 2.08. PAYMENT OF PRINCIPAL OF ADVANCES.. . . . . . . . . . . . 22 SECTION 2.09. REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.10. MANNER OF PAYMENT. . . . . . . . . . . . . . . . . . . . 24 SECTION 2.11. LIBOR LENDING OFFICES. . . . . . . . . . . . . . . . . . 24 SECTION 2.12. SHARING OF PAYMENTS. . . . . . . . . . . . . . . . . . . 24 SECTION 2.13. CALCULATION OF LIBOR RATE. . . . . . . . . . . . . . . . 25 SECTION 2.14. BOOKING ADVANCES.. . . . . . . . . . . . . . . . . . . . 25 SECTION 2.15. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.16. LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . 26 SECTION 2.17. EXTENSION OF MATURITY DATE.. . . . . . . . . . . . . . . 30 ARTICLE III CONDITIONS PRECEDENT SECTION 3.01. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND THE LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . 30 SECTION 3.02. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT.. . . . . . . . . . . . . . . . . . . . . . . . . 31 i ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE LOAN PARTIES SECTION 4.01. ORGANIZATION, QUALIFICATION, AUTHORIZATION, ETC. . . . . 33 SECTION 4.02. FULL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.03. CHANGES, ETC.. . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.04. FINANCIAL STATEMENTS, ETC. . . . . . . . . . . . . . . . 34 SECTION 4.05. TAX RETURNS AND PAYMENTS.. . . . . . . . . . . . . . . . 34 SECTION 4.06. DEFAULTS RESPECTING INDEBTEDNESS.. . . . . . . . . . . . 34 SECTION 4.07. PROPERTY.. . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.08. CONFLICTING AGREEMENTS OR RESTRICTIONS.. . . . . . . . . 35 SECTION 4.09. LITIGATION, ETC. . . . . . . . . . . . . . . . . . . . . 35 SECTION 4.10. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 4.11. USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . 36 SECTION 4.12. FEDERAL RESERVE REGULATIONS. . . . . . . . . . . . . . . 36 SECTION 4.13. FOREIGN ASSETS CONTROL REGULATIONS, ETC. . . . . . . . . 36 SECTION 4.14. STATUS UNDER CERTAIN FEDERAL STATUTES. . . . . . . . . . 36 SECTION 4.15. ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . 37 SECTION 4.16. SOLVENCY.. . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 4.17. SENIOR INDEBTEDNESS. . . . . . . . . . . . . . . . . . . 39 SECTION 4.18. PATENTS, TRADEMARKS, ETC.. . . . . . . . . . . . . . . . 39 SECTION 4.19. LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE V COVENANTS SECTION 5.01. REPORTING REQUIREMENTS.. . . . . . . . . . . . . . . . . 40 SECTION 5.02. INSPECTION OF PROPERTY; BOOKS AND RECORDS. . . . . . . . 42 SECTION 5.03. SUBORDINATED DEBT. . . . . . . . . . . . . . . . . . . . 43 SECTION 5.04. PAYMENT OF TAXES AND CLAIMS. . . . . . . . . . . . . . . 43 SECTION 5.05. MAINTENANCE OF PROPERTIES; INSURANCE.. . . . . . . . . . 44 SECTION 5.06. COMPLIANCE WITH LAWS.. . . . . . . . . . . . . . . . . . 44 SECTION 5.07. PERFORMANCE OF LOAN DOCUMENTS. . . . . . . . . . . . . . 45 SECTION 5.08. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 45 SECTION 5.09. CORPORATE EXISTENCE, ETC.. . . . . . . . . . . . . . . . 46 SECTION 5.10. OWNERSHIP OF LOAN PARTIES. . . . . . . . . . . . . . . . 46 SECTION 5.11. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 5.12. MERGERS, CONSOLIDATIONS AND DISPOSITIONS . . . . . . . . 48 SECTION 5.13. TRANSACTIONS WITH AFFILIATES.. . . . . . . . . . . . . . 49 SECTION 5.14. INVESTMENT.. . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 5.15. RESTRICTED PAYMENTS. . . . . . . . . . . . . . . . . . . 50 ii SECTION 5.16. MINIMUM CURRENT RATIO. . . . . . . . . . . . . . . . . . 50 SECTION 5.17. MAXIMUM LEVERAGE RATIO.. . . . . . . . . . . . . . . . . 50 SECTION 5.18. MINIMUM TANGIBLE NET WORTH.. . . . . . . . . . . . . . . 50 SECTION 5.19. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED EXCESS CASH FLOW RATIO.. . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 5.20. PATENTS, TRADEMARKS AND LICENSES.. . . . . . . . . . . . 51 SECTION 5.21. NOTICE OF LABOR DISPUTES.. . . . . . . . . . . . . . . . 51 SECTION 5.22. NATURE OF BUSINESS.. . . . . . . . . . . . . . . . . . . 51 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT AND REMEDIES.. . . . . . . . . . . . . 51 SECTION 6.02. REMEDIES.. . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 6.03. INJUNCTIVE RELIEF. . . . . . . . . . . . . . . . . . . . 55 ARTICLE VII GUARANTY SECTION 7.01. GUARANTY.. . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 7.02. CONTINUING GUARANTY. . . . . . . . . . . . . . . . . . . 56 SECTION 7.03. EFFECT OF DEBTOR RELIEF LAWS.. . . . . . . . . . . . . . 57 SECTION 7.04. WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . . 58 SECTION 7.05. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.06. WAIVER.. . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.07. FULL FORCE AND EFFECT. . . . . . . . . . . . . . . . . . 59 SECTION 7.08. ENFORCEABILITY.. . . . . . . . . . . . . . . . . . . . . 59 ARTICLE VIII CHANGES IN CIRCUMSTANCES SECTION 8.01. LIBOR BASIS DETERMINATION INADEQUATE.. . . . . . . . . . 59 SECTION 8.02. ILLEGALITY.. . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 8.03. INCREASED COSTS. . . . . . . . . . . . . . . . . . . . . 60 SECTION 8.04. BASE RATE ADVANCES RATHER THAN LIBOR ADVANCES. . . . . . 61 SECTION 8.05. CAPITAL ADEQUACY.. . . . . . . . . . . . . . . . . . . . 61 ARTICLE IX AGREEMENT AMONG LENDERS SECTION 9.01. AGREEMENT AMONG LENDERS. . . . . . . . . . . . . . . . . 62 SECTION 9.02. LENDER CREDIT DECISION.. . . . . . . . . . . . . . . . . 64 iii ARTICLE X MISCELLANEOUS SECTION 10.01. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.02. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.03. WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 10.04. DETERMINATION BY THE LENDERS CONCLUSIVE AND BINDING. . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10.05. SET-OFF. . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10.06. ASSIGNMENT.. . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10.07. COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . 69 SECTION 10.08. SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . 69 SECTION 10.09. INTEREST AND CHARGES.. . . . . . . . . . . . . . . . . . 69 SECTION 10.10. HEADINGS.. . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 10.11. AMENDMENT AND WAIVER.. . . . . . . . . . . . . . . . . . 70 SECTION 10.12. EXCEPTION TO COVENANTS.. . . . . . . . . . . . . . . . . 70 SECTION 10.13. RELEASE OF LIENS.. . . . . . . . . . . . . . . . . . . . 70 SECTION 10.14. CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . 70 SECTION 10.15. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . 71 SECTION 10.16. WAIVER OF TEXAS DECEPTIVE TRADE PRACTICES ACT. . . . . . 71 SECTION 10.17. WAIVER OF JURY TRIAL.. . . . . . . . . . . . . . . . . . 71 SECTION 10.18. FINAL AGREEMENT OF THE PARTIES.. . . . . . . . . . . . . 72 iv EXHIBITS Form of Note Exhibit A Form of Compliance Certificate Exhibit B Form of Assignment Agreement Exhibit C Form of Notice of Advance Request Exhibit D Form of Request for Issuance Exhibit E SCHEDULES Schedule 1.01 (a) Existing Letters of Credit Schedule 1.01 (b) Subordinated Debt Schedule 2.11 LIBOR Lending Offices Schedule 4.01 Jurisdiction of Incorporation Schedule 4.04 Disclosure of Certain Events Schedule 4.09 Litigation Schedule 4.19 Labor Matters Schedule 5.11 Permitted Liens v CREDIT AGREEMENT CREDIT AGREEMENT dated as of February 24, 1994, among DSC COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"), DSC TECHNOLOGIES CORPORATION, a Delaware corporation, DSC FINANCE CORPORATION, a Delaware corporation, DSC INTERNATIONAL CORPORATION, a Delaware corporation, DSC MARKETING SERVICES, INC., a Delaware corporation, and DSC OF PUERTO RICO, INC., a Delaware corporation (such other corporations being collectively, the "GUARANTORS") (the Company and the Guarantors being collectively, the "LOAN PARTIES"), the Lenders from time to time party hereto (the "LENDERS") and NATIONSBANK OF TEXAS, N.A., a national banking association, as Administrative Lender for the Lenders (the "ADMINISTRATIVE LENDER"). BACKGROUND The Company has requested that the Lenders make a revolving credit facility available to the Company in the maximum principal amount of $50,000,000. The Lenders have agreed to do so, subject to the terms and conditions set forth below. In consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ADMINISTRATIVE LENDER FEE LETTER" has the meaning ascribed thereto in SECTION 2.04 (c). "ADVANCE" means any amount advanced by the Lenders to the Company pursuant to ARTICLE II hereof on the occasion of any borrowing, including without limitation any Refinancing Advance. "AFFILIATE" means when used with respect to any Person any other Person which controls or is controlled by or is under common control with such Person. As used in this definition, "control" means the possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or ownership interests, by contract or otherwise). -1- "AGREEMENT" means this Credit Agreement, as the same may be amended, supplemented or modified from time to time. "AGREEMENT DATE" means the date of this Agreement. "APPLICABLE LAW" means (a) in respect of any Person, all provisions of constitutions, statutes, rules, regulations and orders of governmental bodies or regulatory agencies applicable to such Person and its properties, including, without limiting the foregoing, all orders and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party, and (b) in respect of contracts relating to interest or finance charges that are made or performed in the State of Texas, "Applicable Law" shall mean the laws of the United States of America, including without limitation 12 USC Sections 85 and 86, as amended from time to time, and any other statute of the United States of America now or at any time hereafter prescribing the maximum rates of interest on loans and extensions of credit, and the laws of the State of Texas, including, without limitation, Article 5069-1.04, Title 79, Revised Civil Statutes of Texas, 1925, as amended ("Art.1.04"), and any other statute of the State of Texas now or at any time hereafter prescribing maximum rates of interest on loans and extensions of credit; provided that the parties hereto agree that the provisions of Chapter 15, Title 79, Revised Civil Statutes of Texas, 1925, as amended, shall not apply to Advances, this Agreement, the Notes or any other Loan Documents. "APPLICABLE MARGIN" means the following per annum percentages, applicable in the following situations: LIBOR APPLICABILITY MARGIN ------------------------------------------------------------- (i) If the Consolidated Funded Debt to Consolidated 1.50% Excess Cash Flow Ratio is equal to or greater than 2.0 to 1 (ii) If the Consolidated Funded Debt to Consolidated 1.25% Excess Cash Flow Ratio is less than 2.0 to 1 but is equal to or greater than 1.50 to 1 (iii) If the Consolidated Funded Debt to Consolidated 1.00% Excess Cash Flow Ratio is less than 1.50 to 1 but equal to or greater than 1.00 to 1 (iv) If the Consolidated Funded Debt to Consolidated 0.75% Excess Cash Flow Ratio is less than 1.00 to 1 -2- The Applicable Margin payable by the Company on the Advances outstanding hereunder shall be subject to reduction or increase, as applicable and as set forth in the table above according to the performance of the Company as tested by the Consolidated Funded Debt to Consolidated Excess Cash Flow Ratio; PROVIDED, that each adjustment in the Applicable Margin shall be effective with respect to LIBOR Advances (i) made following the date of receipt by the Administrative Lender of the financial statements required pursuant to SECTION 5.01(a) or (b) hereof, on the date of making such LIBOR Advance and (ii) outstanding on the date of receipt of the financial statements referred to in clause (i) immediately preceding and which are continued as LIBOR Advances beyond the then effective Interest Period therefor, on the first day of the immediately succeeding Interest Period. If financial statements of the Company (and corresponding Compliance Certificate setting forth the Consolidated Funded Debt to Consolidated Excess Cash Flow Ratio) are not received by the Administrative Lender by the fifth day following the date required pursuant to SECTION 5.01 hereof, the Applicable Margin shall be determined as if the Consolidated Funded Debt to Consolidated Excess Cash Flow Ratio is equal to or greater than 2.00 to 1 until such time as such financial statements and Compliance Certificate are received. Anything herein to the contrary notwithstanding, the Applicable Margin from and including the Agreement Date to but not including the fifth day following receipt of the Company's June 30, 1994, financial statements shall be 1.25%. "ASSIGNEES" means any assignee of a Lender pursuant to an Assignment Agreement and shall have the meaning ascribed thereto in SECTION 10.06. "ASSIGNMENT AGREEMENT" has the meaning ascribed thereto in Section 10.06. "AUTHORIZED SIGNATORY" means such senior personnel of the Company as may be duly authorized and designated in writing by the Company to execute documents, agreements and instruments on behalf of the Company, and to request Advances and Letters of Credit hereunder. "BASE RATE" means, for any day, a per annum interest rate equal to the lesser of (a) the Highest Lawful Rate on such day, or (b) the higher of (i) the Prime Rate on such day, or (ii) the sum of the Federal Funds Effective Rate on such day plus .50%. The Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Prime Rate or Federal Funds Effective Rate, as the case may be, to account for such change. "BASE RATE ADVANCE" means any Advance bearing interest at the Base Rate. "BENEFIT ARRANGEMENT" means an employee benefit plan within the meaning of section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and with respect to which any Loan Party or a member of the ERISA Group has a liability or an obligation, whether or not current, accrued or contingent, to make contributions. -3- "BOARD" means the Board of Governors of the Federal Reserve System of the United States. "BUSINESS DAY" means a day (1) when the main office of each Lender is open for business, and (2) with respect to any transaction involving the issuance of a Letter of Credit, or otherwise requiring the facilities or services of any financial institution, in England, on which commercial banks are open for domestic or international business in London, England. "CAPITAL LEASE" means any lease in respect of which the obligations of any Loan Party constitute Capitalized Lease Obligations. "CAPITALIZED LEASE OBLIGATIONS" means, without duplication, all lease obligations which shall have been or should be, in accordance with GAAP, capitalized on the books of the Loan Parties. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. SECTION 9601 et.seq.). "CODE" means Internal Revenue Code of 1986 and the regulations promulgated thereunder. "COMMITMENT" means, collectively, $50,000,000, as reduced from time to time, pursuant to SECTION 2.06, and as to each Lender, such Lender's Specified Percentage of such amount. "COMPANY" has the meaning specified in the introduction to this Agreement. "COMPLIANCE CERTIFICATE" means a certificate in the form of EXHIBIT B to be executed by a Financial Officer of the Company certifying, INTER ALIA, the truth and accuracy of the information required to be contained therein, and delivered to each Lender on a quarterly basis as provided in ARTICLE V. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, expenditures made by the Company and its Subsidiaries to acquire or construct fixed assets, plants and equipment, computed in accordance with GAAP, consistently applied, including, without limitation renewals, improvements and replacements during such period and the aggregate amount of items leased or acquired under Capital Leases at the cost of the item, but excluding expenditures on capitalized software development cost. -4- "CONSOLIDATED CURRENT ASSETS" means, at any time, all amounts which, in accordance with GAAP, would be included as current assets on a consolidated balance sheet of the Company and its consolidated Subsidiaries at such time. "CONSOLIDATED CURRENT LIABILITIES" means, at any time, all amounts which, in accordance with GAAP, would be included as current liabilities on a consolidated balance sheet of the Company and its consolidated Subsidiaries at such time. "CONSOLIDATED EBITDA" means, for any period, without duplication, an amount equal to (a) Consolidated Income From Continuing Operations Before Income Taxes and Extraordinary Items for such period plus (b) the aggregate amount which in accordance with GAAP, was deducted, in determining Consolidated Income From Continuing Operations Before Income Taxes and Extraordinary Items for such period under clause (a) in respect of Consolidated Interest Expense, depreciation and amortization (including the amortization of capitalized software development costs of the Company and its consolidated Subsidiaries for such period) of the Company and its consolidated Subsidiaries for such period. "CONSOLIDATED EXCESS CASH FLOW" means, for any four consecutive fiscal quarters of the Company, an amount equal to the sum of (i) Consolidated EBITDA for such period minus (ii) Consolidated Capital Expenditures for such period. "CONSOLIDATED FUNDED DEBT" means, for the Company and its Subsidiaries on a consolidated basis determined in accordance with GAAP, at any time, without duplication, an amount equal to the sum of Capital Leases and debt created, issued or incurred or assumed for money borrowed or for the capitalized deferred purchase price of property or services purchased (excluding accounts payable in the ordinary course of business and obligations in respect of undrawn letters of credit). "CONSOLIDATED FUNDED DEBT TO CONSOLIDATED EXCESS CASH FLOW RATIO" means, with respect to any fiscal quarter of the Company, the ratio of Consolidated Funded Debt as of the last day of such fiscal quarter to Consolidated Excess Cash Flow for the immediately preceding four consecutive fiscal quarters of the Company ending on such fiscal quarter. "CONSOLIDATED INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS" means, without duplication, for any period, all amounts which, in accordance with GAAP, would be included as income from continuing operations of the Company and its consolidated Subsidiaries before income taxes and extraordinary items and cumulative effects of accounting changes, if any, for such period. "CONSOLIDATED INCOME TAX EXPENSE" means, with respect to any period, the aggregate of the income tax expense of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. -5- "CONSOLIDATED INTEREST EXPENSE" means, without duplication, for any period, the sum of: (a) aggregate interest expense of the Company and its consolidated Subsidiaries for such period, as determined in accordance with GAAP and in any event including, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptances and net costs under interest rate protection agreements and the portion of any Capitalized Lease Obligations allocable to consolidated interest expense; plus (b) interest expense of the type described in clause (a) above of the Company and its consolidated Subsidiaries capitalized during such period. "CONSOLIDATED NET EARNINGS" means, with respect to any period, the net income (or loss) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED TANGIBLE NET WORTH" means at any time, determined on a consolidated basis in accordance with GAAP: (a) the sum of capital stock, additional paid-in capital and retained earnings (minus treasury stock and accumulated deficits) of the Company and its consolidated Subsidiaries, all as shown on a consolidated balance sheet of the Company and its consolidated Subsidiaries prepared at such date; reduced by (b) to the extent reflected as an asset in such consolidated balance sheet at such date, the sum of unamortized debt discount and expenses, deferred charges, goodwill, licenses, franchises, patents, patent applications, trade names, trademarks, acquired technology, capitalized software development costs, and capitalized research and development costs or other like intangibles (excluding, however, contract development costs as shown on such consolidated balance sheet) shown on such consolidated balance sheet. "CONSOLIDATED TOTAL ASSETS" means, at any time, all amounts which, in accordance with GAAP, would be included as total assets on a consolidated balance sheet of the Company and its consolidated Subsidiaries at such time. -6- "CONSOLIDATED TOTAL LIABILITIES" means, at any time, the sum of all amounts which, in accordance with GAAP, would be included as a liability on a consolidated balance sheet of the Company and its consolidated Subsidiaries at such time plus, to the extent not reflected on such balance sheet, all Guarantees of (a) Indebtedness of the type described in clause (g) of the definition of the term Indebtedness with respect to letters of credit issued for the account of the Company or any of its consolidated Subsidiaries with respect to transactions not in the ordinary course of their respective businesses and (b) debt for borrowed money. "DEBTOR RELIEF LAWS" means any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar debtor relief Laws affecting the rights of creditors generally from time to time in effect. "DEFAULT" means the occurrence of any event which with the giving of notice or the passage of time could become an Event of Default. "DEFAULT RATE" means a simple per annum interest rate equal to the lesser of (a) the Highest Lawful Rate, or (b) the sum of the Base Rate plus two percent. "DETERMINING LENDERS" shall mean, on any date of determination, any combination of the Lenders having at least 100% of the aggregate amount of the Advances then outstanding; provided, however, that if there are no Advances outstanding hereunder, "Determining Lenders" shall mean any combination of Lenders whose Specified Percentages aggregate at least 100%; PROVIDED, FURTHER, HOWEVER, if on any date of determination there are more than two Lenders, "Determining Lenders" shall mean, on such date, any combination of the Lenders having at least 66-2/3% of the aggregate amount of Advances then outstanding; provided, however, that if on any date of determination there are more than two Lenders and there are no Advances outstanding, "Determining Lenders" shall mean any combination of Lenders whose Specified Percentages aggregate at least 66-2/3%. "DOLLARS" and the symbol "$" mean the lawful currency of the United States. "EFFECTIVE DATE" means the date on which the conditions set forth in ARTICLE III are first met. "ENVIRONMENTAL LAWS" means any Laws (including the common law) of any Tribunal (including, without limitation, related determinations, orders, decrees, judgments, opinions or interpretations by any Tribunal) pertaining to pollution, environmental, health, safety, industrial hygiene or similar matters. "ERISA" means the United States Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder. -7- "ERISA GROUP" means all corporations, trades or businesses (whether or not incorporated) and other Persons which, together with any Loan Party, are treated as a single employer under either section 414(b), (c), (m) or (o) of the Code or Sections 4001(a)(14) or 4001(b)(1) of ERISA. "EVENT OF DEFAULT" means any of the events described in Article VI. "FDIC" means the Federal Deposit Insurance Corporation (or any successor). "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds broker, as published on the succeeding Business Day by the Federal Reserve Bank of Dallas, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Lender from three federal funds brokers of recognized standing selected by it. "FINANCE" means DSC Finance Corporation, a Delaware corporation, and a Loan Party. "FINANCIAL OFFICER" of any Person means its chief financial officer, principal accounting officer, or treasurer or assistant treasurer. "FOREIGN SUBSIDIARIES" means DSC Communications Australia (Pty.) Ltd., a corporation organized under the laws of Australia, DSC Communications (Europe) Ltd., a corporation organized under the laws of the United Kingdom, DSC Communications Limited, a corporation organized under the laws of the United Kingdom, DSC Japan Incorporated, a corporation organized under the laws of Japan, DSC Communications Canada Inc., a corporation organized under the laws of Canada, DSC Local Networks (Europe) Ltd., a corporation organized under the laws of the United Kingdom, DSC Communications (Asia-Pacific) Pte. Ltd., a corporation organized under the laws of Hong Kong, and any New Subsidiary which is organized under the laws of a jurisdiction other than the fifty states of the United States of America, Puerto Rico or the District of Columbia. "GAAP" means generally accepted accounting principles as in effect from time to time as set forth in the opinions, statements and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, the Financial Accounting Standards Board and such other Persons who shall be approved by a significant segment of the accounting profession and concurred in by the independent certified public accountants certifying any audited financial statements of the Company. "GOVERNMENT ACTS" has the meaning specified in Section 2.16(e). -8- "GOVERNMENT SECURITIES" means readily marketable direct full faith and credit obligations of the United States or obligations unconditionally guaranteed by the full faith and credit of the United States. "GUARANTEE" means as to a Person any guarantee or other contingent liability (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligation of another Person, through an agreement or otherwise, including, without limitation, (a) any other endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligation and (b) any agreement (i) to purchase, or to advance or supply funds for the payment or purchase of, any such obligation, (ii) to purchase, sell or lease property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the property, products, materials or supplies or transportation or services or (iii) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy any obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. The amount of any Guarantee shall be equal to the outstanding amount of the obligation directly or indirectly guaranteed. The term "Guarantee" used as a verb has a corresponding meaning. "GUARANTEED OBLIGATIONS" has the meaning specified in SECTION 7.01. "GUARANTORS" has the meaning specified in the introduction to this Agreement. "GUARANTORS' AGREEMENT" means that certain Guarantors' Agreement dated as of the date hereof among the Guarantors. "GUARANTY" means the guaranty contained in ARTICLE VII. "HAZARDOUS MATERIALS" means any pollutants, contaminants, toxic or hazardous materials or substances, wastes, petroleum or petroleum products, flammable, explosive or radioactive materials or other substances or materials listed, designated, defined or regulated under any Environmental Law. "HIGHEST LAWFUL RATE" means at the particular time in question the maximum rate of interest which, under Applicable Law, the Lenders are then permitted to charge on the Obligations. If the maximum rate of interest which, under Applicable Law, the Lenders are permitted to charge on the Obligations shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of -9- the effective time of each change in the Highest Lawful Rate without notice to the Company. For purposes of determining the Highest Lawful Rate under the Applicable Law of the State of Texas, the applicable rate ceiling shall be (a) the indicated rate ceiling described in and computed in accordance with the provisions of Section (a)(1) of Art. 1.04, or (b) if the parties subsequently contract as allowed by Applicable Law, the quarterly ceiling or the annualized ceiling computed pursuant to Section (d) of Art. 1.04; provided, however, that at any time the indicated rate ceiling, the quarterly ceiling or the annualized ceiling shall be less than 18% per annum or more than 24% per annum, the provisions of Sections (b)(1) and (2) of said Art. 1.04 shall control for purposes of such determination, as applicable. "IMPERMISSIBLE QUALIFICATION" means, relative to the opinion by independent public accountants as to any financial statement of the Company and its consolidated Subsidiaries, any qualification or exception to such opinion: (a) which is of a so-called "going concern" or a similar nature; (b) which relates to the limited scope of examination of matters relevant to such financial statement (other than scope limitations included in the standard form of opinion utilized by such accountants); or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause any Loan Party to be in default of any of its obligations under SECTION 5.03, SECTION 5.16, SECTION 5.17, SECTION 5.18 or SECTION 5.19. "INDEBTEDNESS" with respect to any Person means, without duplication, (a) all indebtedness for borrowed money of such Person or for the deferred purchase price of property acquired by, or services rendered to, such Person, (b) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to any property acquired by such Person, (c) Capitalized Lease Obligations of such Person, (d) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any Lien upon or in any property owned by such Person whether or not such Person has assumed or become liable for the payment of such indebtedness for borrowed money, (e) indebtedness arising in connection with surety or other similar bonds, (f) obligations of such Person in respect of banker's acceptances, (g) the undrawn maximum face amount of all outstanding letters of credit issued for the account of such Person and, without duplication, the outstanding amount of all drafts drawn thereunder, (h) obligations of such Person in respect of interest rate protection agreements, (i) all liabilities in respect of unfunded vested benefits under Benefit Arrangements, and (j) all Guarantees by such Person of indebtedness described in clauses (a) through (i) of this definition of any other Person; -10- PROVIDED, that, for purposes of this definition trade payables incurred within the ordinary course of business and payable within 120 days of the incurrence thereof shall not be included. "INDEMNITEES" means each Lender and the holders of participations in the Notes and other Obligations and each of their successors and assigns, along with each of their respective officers, directors, shareholders, employees, agents and servants. "INTEREST PERIOD" means, for any LIBOR Advance, the period beginning on the day the Advance is made and ending one, two, three or six months thereafter (as the Company shall select). "INVESTMENT" means any investment so classified under GAAP by a Person made by stock purchase, capital contribution, loan or advance or by purchase of property or otherwise, but in any event shall include as an investment of such Person in any other Person the amount of all Indebtedness owed by the other Person to the investing Person and all receivables from such other Person owed to the investing Person which are not current assets and did not arise from service rendered or sales to such other Person in the ordinary course of the investing Person's business. "ISSUING BANK" means NationsBank of Texas, N.A. in its capacity as issuer of the Letters of Credit. "LAWS" means all statutes, laws, ordinances, rules, regulations, orders, writs, injunctions, decrees, judgments, opinions or interpretations of any Tribunal. "LETTER OF CREDIT" means a Letter of Credit described in SECTION 2.16(a) and issued under the Letter of Credit Facility or issued pursuant to the NationsBank Revolving Credit Agreement and listed on SCHEDULE 1.01(a). "LETTER OF CREDIT AGREEMENT" shall have the meaning specified in SECTION 2.16(b). "LETTER OF CREDIT FACILITY" shall have the meaning specified in SECTION 2.16(a). "LIBOR ADVANCE" means an Advance which the Company requests to be made as a LIBOR Advance or which is reborrowed as a LIBOR Advance, in accordance with the provisions of SECTION 2.02 hereof. "LIBOR BASIS" means a simple per annum interest rate equal to the lesser of (a) the Highest Lawful Rate, or (b) the sum of the LIBOR Rate plus the Applicable Margin. The LIBOR Basis shall, with respect to LIBOR Advances subject to reserve or deposit requirements, be subject to premiums therefor assessed by each Lender, which are payable -11- directly to each Lender. Once determined at the beginning of an Interest Period, the LIBOR Basis shall remain unchanged during the applicable Interest Period. "LIBOR LENDING OFFICE" means, with respect to a Lender, the office designated as its LIBOR Lending Office on SCHEDULE 2.11 attached hereto, and such other office of the Lender or any of its affiliates hereafter designated by notice to the Company and the Administrative Lender. "LIBOR RATE" means, for any Interest Period, the interest rate per annum (rounded upward to the nearest one-sixteenth (1/16th) of one percent) at which deposits in United States Dollars are offered to the Administrative Lender by leading banks reasonably selected by the Administrative Lender in the London interbank market at approximately 11:00 a.m. (London time), two Business Days before the first day of such Interest Period, in an amount approximately equal to the principal amount of, and for a length of time approximately equal to the Interest Period for, the LIBOR Advance sought by the Company. "LIEN" means, as to any Person, any mortgage, lien, pledge, adverse claim, charge, security interest or other encumbrance in or on, or any interest or title of any vendor, lessor, lender or other secured party to or of the Person under any conditional sale or other title retention agreement or Capital Lease with respect to, any property or asset of the Person, or the signing or filing of a financing statement which names the Person as debtor, or the signing of any security or other agreement authorizing any other Person as the secured party thereunder to file any financing statement. "LOAN DOCUMENTS" means this Agreement, the Notes, the Guarantors' Agreement, the Letters of Credit and all other documents and instruments executed by any Loan Party in connection with this Agreement, the Advances and the Letters of Credit for the benefit of the Lenders and the Issuing Bank. "LOAN PARTY" has the meaning specified in the introduction to this Agreement. "MATERIAL ADVERSE EFFECT" means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) and after taking into account actual insurance coverage and effective indemnification with respect to such occurrence, (a) a material adverse effect on the financial condition, business or operations of the Company and its Subsidiaries taken as a whole or (b) any material impairment upon the collective ability of the Loan Parties to perform their payment or other obligations hereunder or under the Notes or the right of the Administrative Lender or any Lender to enforce any of such obligations or any of their remedies under the Loan Documents. -12- "MATERIAL INDEBTEDNESS" means any one or more items of Indebtedness of a domestic Subsidiary which is not a Loan Party, which Indebtedness in the aggregate exceeds, based on the most recent audited financial statements of the Company and its Consolidated Subsidiaries, 5% of Consolidated Tangible Net Worth. "MATURITY DATE" means February 24, 1997 or the earlier date of termination in whole of the Commitment pursuant to SECTION 2.06 or 6.02 hereof, or such later date as established pursuant to SECTION 2.17. "MAXIMUM AMOUNT" means the maximum amount of interest which, under Applicable Law, the Lenders are permitted to charge on the Obligations. "MULTIEMPLOYER PLAN" means any employee pension benefit plan as defined in Section 4001(a)(3) of ERISA to which any Loan Party or a member of its ERISA Group has a liability or an obligation, whether or not current, accrued or contingent, to make contributions or has within the preceding five plan years made or accrued an obligation to make contributions. "NATIONSBANK REVOLVING CREDIT AGREEMENT" means that certain Revolving Credit Agreement, dated as of June 18, 1993, among the Loan Parties and NationsBank of Texas, N.A., as amended or modified from time to time. "NEW SUBSIDIARY" has the meaning specified in SECTION 5.12(c). "NON-EXCLUDED TAXES" has the meaning ascribed to it in SECTION 2.15. "NOTE" means each Promissory Note of Company evidencing Advances hereunder, substantially in the form of EXHIBIT A hereto, together with any extension, renewal or amendment thereof, or substitution therefor. "NOTICE OF ADVANCE REQUEST" has the meaning ascribed to it in SECTION 2.02(a). "NOTICE OF ISSUANCE" has the meaning ascribed to it in SECTION 2.16(b) . "OBLIGATIONS" means (a) all obligations of any nature (whether matured or unmatured, fixed or contingent, including the Reimbursement Obligations) of the Company or any Subsidiary to the Lenders under the Loan Documents as they may be amended from time to time, and (b) all obligations of the Company or any Subsidiary for losses, damages, expenses or any other liabilities of any kind that any Lender may suffer by reason of a breach by the Company or any Subsidiary of any obligation, covenant or undertaking with respect to any Loan Document. -13- "OFFICER'S CERTIFICATE" means a certificate signed in the name of a Loan Party by a Responsible Officer of such Loan Party. "OTHER RETURNS" has the meaning specified in SECTION 4.05. "PAYMENT DATE" shall mean the last day of the Interest Period for any LIBOR Advance. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "PERMITS" means any and all registrations, notifications, licenses, authorizations, permits, certificates, approvals and consents required by any Tribunal. "PERMITTED PORTFOLIO INVESTMENTS" means, when used in connection with any Person, the Person's Investments in: (a) Government Securities; (b) repurchase agreements collateralized by Government Securities; (c) commercial paper rated at time of purchase at least P-1 or A-1 by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or an equivalent rating by a recognized rating agency; (d) corporate notes rated at time of purchase at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or an equivalent rating by a recognized rating agency; (e) bank obligations with a financial institution rated at time of purchase at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or an equivalent rating by a recognized rating agency; (f) mortgage-backed securities rated at time of purchase at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or an equivalent rating by a recognized rating agency; (g) asset-backed securities rated at time of purchase at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or an equivalent rating by a recognized rating agency; -14- (h) other securities which satisfy the criteria of being rated at time of purchase at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or an equivalent rating by a recognized rating agency; or (i) Investments in shares of the Merrill Lynch Institutional Fund or the Goldman Sachs ILA/POP fund, or investments in other mutual funds with investment objectives substantially equivalent to either of these mutual funds. "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "PLAN" means an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under section 412 of the Code and with respect to which (i) any Loan Party or any member of the ERISA Group has a liability or an obligation, whether or not current, accrued or contingent, to make contributions or (ii) at any time within the preceding six years any Loan Party or any Person which was at such time a member of the ERISA Group made or had a liability or obligation, whether or not current, accrued or contingent, to make contributions. "PRIME RATE" means, as of a particular date, the rate of interest for loans established by the Administrative Lender from time to time as its prime rate, automatically fluctuating upward and downward with and at the time specified in each such establishment without special notice to the Company, the other Loan Parties or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "PUERTO RICO" means DSC of Puerto Rico, Inc., a Delaware corporation. "QUARTERLY DATE" means the last day of each March, June, September and December, beginning March 31, 1994. "REFINANCING ADVANCE" means any LIBOR Advance which is used to pay the principal amount (or any portion thereof) of a LIBOR Advance at the end of its Interest Period and which, after giving effect to such application, does not result in an increase in the aggregate amount of outstanding LIBOR Advances. "REGULATION G" means Regulation G of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "REGULATION T" means Regulation T of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. -15- "REGULATION U" means Regulation U of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "REGULATION X" means Regulation X of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "REIMBURSEMENT OBLIGATIONS" shall mean, in respect of any Letter of Credit as at any date of determination, the maximum aggregate amount which is then available to be drawn under such Letter of Credit. "RELEASE" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles). "RESPONSIBLE OFFICER" means (a) as to any Loan Party, the Chairman of its Board of Directors, its President, any Senior Vice President, its Treasurer, its Controller, or its General Counsel, and (b) as to any other Person, the Chairman of its Board of Directors, its President, any Senior Vice President, its Treasurer, its Controller, its General Counsel, any Vice President, or the chief financial officer of such Person. "RESTRICTED PAYMENT" means, with respect to any Loan Party: (a) the declaration of any dividend on, or the incurrence of any liability to make any other payment or distribution in respect of, any shares of such Loan Party (other than one payable solely in its common shares); or (b) any payment or distribution on account of the purchase, redemption or other retirement of any shares of such Loan Party, or the purchase, redemption or other retirement of any warrant, option or other right to acquire such shares, or any other payment or distribution (other than pursuant to a dividend theretofore declared or liability theretofore incurred as specified in subsection (a)), made in respect thereof, (i) either directly or indirectly or (ii) the purchase, redemption or other retirement of shares of such Loan Party in exchange for, or out of the net cash proceeds received by such Loan Party from a substantially concurrent sale of, other shares of such Loan Party. "SPECIAL COUNSEL" means the law firm of Donohoe, Jameson & Carroll, P.C., or such other legal counsel as Administrative Lender may select. "SPECIFIED PERCENTAGE" means, as to any Lender, the percentage indicated beside its name on the signature pages hereof, or if applicable, specified in its most recent Assignment Agreement. -16- "SUBORDINATED DEBT" means, without duplication, the subordinated debt of the Loan Parties which is listed on Schedule 1.01(b). "SUBSIDIARY" means, as to any Person, any corporation, partnership or other entity a majority of (a) the total combined voting power of all classes of Voting Stock of which or (b) the outstanding equity interest of which shall, at the time as of which any determination is being made, is owned by such Person either directly or through one or more Subsidiaries. "TAXES" means all taxes, assessments, fees or other charges at any time imposed by any Laws or Tribunal. "TRIBUNAL" means any municipal, state, commonwealth, federal, foreign, territorial or other court, governmental body, subdivision, agency, department, commission, board, bureau or instrumentality. "U.S." and "United States" means the United States of America. "UNUSED PORTION" means, at any time, the excess of the Commitment at such time over the sum of (i) the aggregate principal amount of Advances outstanding at such time, plus (ii) the aggregate unfunded portion of the Letter of Credit Facility at such time. "VOTING STOCK" means any share of stock or other equity ownership interest of a Person having general voting power under ordinary circumstances to elect a majority of the Board of Directors or other governing body of such Person (irrespective of whether at the time stock or equity ownership interests of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "WITHDRAWAL LIABILITY" has the meaning given such term under Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. ACCOUNTING TERMS. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP and, except as otherwise herein expressly provided, the GAAP which shall be applied under this Agreement are those which shall be in effect from time to time. SECTION 1.03. INTERPRETATION. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; -17- (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, PROVIDED that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to any agreement, document, or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to the Notes includes any note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto; (vii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; (ix) reference to any Law means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time; and (x) whenever the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or accounting computation is required to be made, for purposes hereof, such determination or computation shall be made in accordance with GAAP. (b) The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. -18- (d) Whenever this Agreement refers to any Person having knowledge of a particular fact or situation, such Person and the Financial Officer or Responsible Officer making any representation or warranty on behalf of such Person shall be deemed to possess the actual knowledge of all Responsible Officers (but not other employees) of the Person in question relating to said fact or situation. ARTICLE II ADVANCES SECTION 2.01. THE ADVANCES. Each Lender severally agrees, upon the terms and subject to the conditions of this Agreement, to make Advances to the Company from time to time in an aggregate amount not to exceed an amount equal to its Specified Percentage of the Commitment less an amount equal to its Specified Percentage of the aggregate amount of all Reimbursement Obligations then outstanding (assuming compliance with all conditions to drawing) for the purposes set forth in SECTION 4.11 hereof. Subject to SECTION 2.09 hereof, Advances, in part or in whole, may be repaid and then reborrowed. Any Advance shall, at the option of the Company as provided in SECTION 2.02 hereof (and, in the case of LIBOR Advances, subject to availability and to the provisions of ARTICLE VIII hereof), be made as a Base Rate Advance or a LIBOR Advance; provided that there shall not be outstanding to any Lender, at any one time, more than five LIBOR Advances. On the Maturity Date unless sooner paid as provided herein, the outstanding Advances shall be repaid in full. SECTION 2.02. MANNER OF BORROWING AND DISBURSEMENT. (a) In the case of Base Rate Advances, the Company, through a Financial Officer, shall give the Administrative Lender prior to 11:00 a.m., Dallas, Texas time, on the date of any proposed Base Rate Advance irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Company's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), of its intention to borrow a Base Rate Advance hereunder. Such notice of borrowing (a "NOTICE OF ADVANCE REQUEST") shall be substantially in the form of EXHIBIT D hereto. (b) In the case of LIBOR Advances, the Company, through a Financial Officer, shall give the Administrative Lender at least three Business Days' irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Company's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), of its intention to borrow a LIBOR Advance hereunder. Notice shall be given to the Administrative Lender prior to 11:00 a.m., Dallas, Texas time, in order for such Business Day to count toward the minimum number of Business Days required. LIBOR Advances shall in all cases be subject to availability and to ARTICLE VIII hereof. For LIBOR Advances, the Notice of Advance Request shall specify the requested funding date, which shall be a Business Day, the amount of the proposed aggregate LIBOR Advances to be made by -19- Lenders and the Interest Period selected by the Company, provided that no such Interest Period shall extend past the Maturity Date, or prohibit or impair the Company's ability to comply with SECTION 2.08 hereof. The Administrative Lender, whose determination shall be conclusive, shall determine the LIBOR Basis no later than the second Business Day prior to the applicable funding date and shall notify (which notice may be telephonic) the Company and the Lenders of such LIBOR Basis. The Company, no later than the second Business Day prior to the applicable funding date, through a Financial Officer shall give the Administrative Lender irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Company's failure to confirm any telephonic notice in writing shall not invalidate any notice so given) of its decision to borrow such LIBOR Advance. (c) Subject to SECTIONS 2.01 and 2.09 hereof, at least three Business Days prior to each Payment Date for a LIBOR Advance, the Company, through an Authorized Signatory, shall give the Administrative Lender irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Company's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), specifying whether all or a portion of such LIBOR Advance outstanding on the Payment Date (i) is to be repaid and then reborrowed in whole or in part as a LIBOR Advance, (ii) is to be repaid and then reborrowed in whole or in part as a Base Rate Advance, or (iii) is to be repaid and not reborrowed at that time; provided, however, notwithstanding anything in this Agreement to the contrary, if on any Payment Date a Default shall exist, such LIBOR Advance may only be reborrowed as a Base Rate Advance. Upon such Payment Date, such LIBOR Advance shall, subject to the provisions hereof, be so repaid and, as applicable, reborrowed. (d) The aggregate amount of Base Rate Advances to be made by the Lenders on any day shall be in a principal amount which is at least $250,000 and which is an integral multiple of $50,000; provided, however, that such amount may equal the Unused Portion. The aggregate amount of LIBOR Advances having the same Interest Period and to be made by the Lenders on any day shall be in a principal amount which is at least $1,000,000 and which is an integral multiple of $100,000. (e) The Administrative Lender shall promptly notify the Lenders of each notice received from the Company pursuant to this Section. Failure of the Company to give any oral notice in accordance with SECTION 2.02(c) hereof shall result in a repayment of any such existing LIBOR Advance on the applicable Payment Date by an Advance which is a Base Rate Advance. Each Lender shall, not later than 1:00 p.m., Dallas, Texas time, on the date of any Advance that is not a Refinancing Advance, deliver to the Administrative Lender, at its address set forth herein, an amount equal to such Lender's Specified Percentage of such Advance in immediately available funds in accordance with the Administrative Lender's instructions. Prior to 2:00 p.m., Dallas, Texas time, on the date of any Advance which is not a Refinancing Advance, the Administrative Lender shall, subject to satisfaction of the -20- conditions set forth in ARTICLE III, disburse the amounts made available to the Administrative Lender by the Lenders by (i) transferring such amounts by wire transfer pursuant to the Company's instructions, or (ii) in the absence of such instructions, crediting such amounts to the account of the Company maintained with the Administrative Lender. All Advances shall be made by each Lender according to its Specified Percentage. SECTION 2.03. INTEREST. (a) ON BASE RATE ADVANCES. (i) The Company shall pay interest on the unpaid principal amount of the Base Rate Advances outstanding from time to time, until due (whether at maturity or by reason of acceleration) or repaid, which shall be payable as set forth in SECTION 2.03(a)(ii) hereof, at a simple interest rate per annum equal to the Base Rate as in effect from time to time. (ii) Interest on Base Rate Advances shall be computed on the basis of a year of 365 or 366 days, as applicable, for the number of days actually elapsed, and shall be payable in arrears on each Quarterly Date and on the Maturity Date. (b) ON LIBOR ADVANCES. (i) The Company shall pay interest on the unpaid principal amount of each LIBOR Advance, from the date such Advance is made until it is due (whether at maturity or by reason of acceleration) or repaid, at a rate per annum equal to the LIBOR Basis for such Advance. (ii) Subject to SECTION 10.09 hereof, interest on each LIBOR Advance shall be computed on the basis of a 360-day year for the actual number of days elapsed, and shall be payable in arrears on the applicable Payment Date and on the Maturity Date; provided, however, that if the Interest Period for such Advance exceeds three months, interest shall also be due and payable in arrears on the 90th day of such Interest Period. (c) INTEREST IF NO NOTICE OF SELECTION OF INTEREST RATE BASIS. If the Company fails to give the Administrative Lender timely notice of its selection of a LIBOR Basis or an Interest Period for a LIBOR Advance, or if for any reason a determination of a LIBOR Basis for any Advance is not timely concluded due to the fault of the Company in the reasonable opinion of the Determining Lenders, the Base Rate shall apply to the applicable Advance. (d) INTEREST AFTER AN EVENT OF DEFAULT. (i) Commencing 30 days after an Event of Default (other than an Event of Default specified in Section 6.01(g) or (h) hereof) and during any continuance thereof, at the option of Determining Lenders, and (ii) after an Event of -21- Default specified in SECTION 6.01(g) or (h) hereof and during any continuance thereof, automatically and without any action by the Administrative Lender or any Lender, the Obligations shall bear interest at a rate per annum equal to the Default Rate. Such interest shall be payable on the earlier of demand or the Maturity Date, and shall accrue until the earlier of (i) waiver or cure (to the reasonable satisfaction of the Determining Lenders) of the applicable Event of Default, (ii) agreement by the Lenders to rescind the charging of interest at the Default Rate, or (iii) payment in full of the Obligations. The Lenders shall not be required to (i) accelerate the maturity of the Advances, (ii) exercise any other rights or remedies under the Loan Documents, or (iii) give notice to the Company of the decision to charge interest at the Default Rate. The Lenders will undertake to notify the Company, after the effective date, of the decision to charge interest at the Default Rate. SECTION 2.04. FEES. (a) COMMITMENT FEE. Subject to SECTION 10.09 hereof, the Company agrees to pay to the Administrative Lender, for the ratable account of the Lenders, a commitment fee (which shall be payable quarterly in arrears on each Quarterly Date and on the Maturity Date) equal to 0.35% per annum of the daily average Unused Portion (subject to Section 10.09 hereof, computed on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed). (b) PARTICIPATION FEE. Subject to SECTION 10.09 hereof, the Company agrees to pay to the Administrative Lender, for the account of the Lenders a one-time participation fee of 0.25% based on the amount of each Lender's Commitment. Such fee shall be payable on the Agreement Date, and shall be fully-earned when due and, subject to SECTION 10.09 hereof, nonrefundable when paid. (c) OTHER FEES. Subject to SECTION 10.09 hereof, the Company agrees to pay to the Administrative Lender, for its account and not the account of the Lenders, the fees provided for in the letter agreement ("ADMINISTRATIVE LENDER FEE LETTER"), dated as of the Agreement Date, between the Company and the Administrative Lender on the date and in the amounts specified therein. SECTION 2.05. PREPAYMENT. (a) VOLUNTARY PREPAYMENTS. The principal amount of any Base Rate Advance may be voluntarily prepaid in full or in part at any time without penalty, upon telephonic notice (to be promptly followed by written notice) by an Authorized Signatory to the Administrative Lender prior to 10:00 a.m., Dallas, Texas time, on the date of such prepayment. The principal amount of any LIBOR Advances may be voluntarily prepaid in full or in part at any time without penalty upon three Business Days' prior telephonic notice (to be promptly followed by written notice) by an Authorized Signatory to the Administrative Lender, but only so long as -22- the Company concurrently reimburses the Lenders in accordance with SECTION 2.09 hereof. Any notice of prepayment shall be irrevocable. (b) MANDATORY PREPAYMENT. On or before the date of any reduction of the Commitment, the Company shall prepay outstanding Advances in an amount necessary to cause the sum of outstanding Advances and Reimbursement Obligations to be an amount not greater than the Commitment as so reduced pursuant to Section 2.06 hereof. The Company shall first prepay all Base Rate Advances and shall thereafter prepay LIBOR Advances. To the extent that any prepayment requires that a LIBOR Advance be repaid on a date other than the last day of its Interest Period, the Company shall reimburse each Lender in accordance with Section 2.09 hereof. (c) PREPAYMENTS, GENERALLY. Any prepayment of a Base Rate Advance or LIBOR Advance shall be accompanied by interest accrued on the principal amount being prepaid. Any voluntary partial prepayment of a Base Rate Advance shall be in a principal amount of $100,000 or an integral multiple thereof. SECTION 2.06. REDUCTION OF COMMITMENTS. (a) VOLUNTARY REDUCTION. The Company shall have the right, upon not less than 10 Business Days' notice (provided only 1 Business Day's notice shall be required for a termination in whole of Commitment) by an Authorized Signatory to the Administrative Lender (if telephonic, to be confirmed by telex or in writing on or before the date of reduction or termination), which shall promptly notify the Lenders, to reduce the Commitment in part. Each partial termination shall be in an aggregate amount which is at least $5,000,000 and which is an integral multiple of $1,000,000, and no voluntary reduction in the Commitment shall cause any LIBOR Advance to be repaid prior to the last day of its Interest Period unless the Company concurrently reimburses the Lenders in accordance with SECTION 2.09 hereof. (b) MANDATORY REDUCTION. On the Maturity Date, the Commitment (other than the obligation of the Issuing Bank to honor drawings against Letters of Credit outstanding on the Maturity Date) shall automatically reduce to zero. (c) GENERAL REQUIREMENTS. Upon any reduction of a Commitment pursuant to this Section, the Company shall immediately make a repayment of applicable Advances in accordance with SECTION 2.05(b) hereof. The Company shall reimburse each Lender for any loss or out-of-pocket expense incurred by each Lender in connection with any such payment, as set forth in SECTION 2.09 hereof to the extent applicable. The Company shall not have any right to rescind any termination or reduction. Once reduced, the Commitment may not be increased or reinstated. -23- SECTION 2.07. NON-RECEIPT OF FUNDS BY THE ADMINISTRATIVE LENDER. Unless the Administrative Lender shall have been notified by a Lender prior to the date of any proposed Advance (which notice shall be effective upon receipt) that such Lender does not intend to make the proceeds of such Advance available to the Administrative Lender, the Administrative Lender may assume that such Lender has made such proceeds available to the Administrative Lender on such date, and the Administrative Lender may in reliance upon such assumption (but shall not be required to) make available to the Company a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Lender by such Lender, the Company and the Lender severally agree to repay to the Administrative Lender forthwith on demand such corresponding amount together with interest thereon in respect of each day during the period commencing on the date such amount was available to the Company and ending on (but excluding) the date the Administrative Lender receives such amount from the Lender or the Company at a per annum rate equal to the lesser of (i) the Highest Lawful Rate or (ii) (A) in the case of such Lender, the Federal Funds Effective Rate and (B) in the case of the Company, the interest rate applicable to such Advance; provided, however, no provision of this Agreement or any other Loan Document shall require the Company to pay interest on such amount except as provided in this Section 2.07. If such Lender shall repay to the Administrative Lender such corresponding amount, such amount shall constitute such Lender's Advance for purposes of this Agreement. No Lender shall be liable for any other Lender's failure to fund an Advance hereunder. SECTION 2.08. PAYMENT OF PRINCIPAL OF ADVANCES. The Company agrees to pay the principal amount of the Advances to the Administrative Lender for the account of the Lenders as follows: (a) BASE RATE ADVANCES. The unpaid principal amount of the Base Rate Advances shall be due and payable on the Maturity Date. (b) LIBOR ADVANCES. The principal amount of each LIBOR Advance hereunder shall be due and payable on its Payment Date, which principal payment may be made by means of a Refinancing Advance. (c) COMMITMENT REDUCTION. On the date of any reduction of the Commitment pursuant to SECTION 2.06 hereof, including the Maturity Date, the aggregate amount of the Advances outstanding on such date of reduction in excess of the Commitment as reduced minus all outstanding Reimbursement Obligations shall be due and payable, which principal payment may not be made by means of Refinancing Advances. (d) MATURITY DATE. To the extent not otherwise required to be paid earlier as provided herein, the principal amount of the Advances, all accrued interest and fees thereon, and all other Obligations related thereto, shall be due and payable in full on the Maturity Date. -24- SECTION 2.09. REIMBURSEMENT. Whenever any Lender shall sustain or incur any losses or reasonable out-of-pocket expenses in connection with (a) failure by the Company to borrow any LIBOR Advance after having given notice of its intention to borrow in accordance with SECTION 2.02 hereof (whether by reason of the Company's election not to proceed or the non-fulfillment of any of the conditions set forth in ARTICLE III hereof), or (b) any payment or prepayment for any reason of any LIBOR Advance in whole or in part (including a prepayment pursuant to SECTIONS 2.05(c) and 8.03(b) hereof), the Company agrees to pay to any such Lender, upon its demand, subject to SECTION 10.09 hereof, an amount sufficient to compensate such Lender for all such losses and out-of-pocket expenses, including, but not limited to, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such LIBOR Advance or any part thereof as a LIBOR Advance. Such loss shall equal an amount equal to the excess, if any, as reasonably determined by each Lender of (i) its cost of obtaining the funds for the LIBOR Advance being paid, prepaid or converted pursuant to ARTICLE VIII hereof or not borrowed (based on the LIBOR Basis applicable thereto) for the period from the date of such payment, prepayment or conversion or failure to borrow to the last day of the Interest Period for such LIBOR Advance (or, in the case of a failure to borrow, the Interest Period for such LIBOR Advance which would have commenced on the date of such failure to borrow) over (ii) the amount of interest (as reasonably determined by such Lender) that could be realized by such Lender in reemploying during such period the funds so paid, prepaid or converted or not borrowed in an instrument or investment of substantially similar yield to such LIBOR Advance. Such Lender's good faith determination of the amount of such losses or out-of-pocket expenses, calculated in its usual fashion, absent demonstrable error, shall be binding and conclusive. Such Lender shall provide a certificate setting forth the amount to be paid to it by the Company hereunder and calculations therefor. SECTION 2.10. MANNER OF PAYMENT. (a) Each payment (including prepayments) by the Company of the principal of or interest on the Advances, fees, and any other amount owed under this Agreement or any other Loan Document shall be made not later than 12:00 noon (Dallas, Texas time) on the date specified for payment under this Agreement to the Administrative Lender at the Administrative Lender's office, in lawful money of the United States of America constituting immediately available funds. (b) If any payment under this Agreement or any other Loan Document shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, unless such Business Day falls in another calendar month, in which case payment shall be made on the preceding Business Day. Any extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. -25- (c) The Company agrees to pay principal, interest, fees and all other amounts due under the Loan Documents without deduction for set-off or counterclaim or any deduction whatsoever. (d) If some but less than all amounts due from the Company are received by the Administrative Lender, the Administrative Lender shall apply such amounts in the following order of priority: (i) to the payment of the Administrative Lender's expenses incurred on behalf of the Lenders then due and payable, if any; (ii) to the payment of all other fees then due and payable; (iii) to the payment of interest then due and payable on the Advances; (iv) to the payment of all other amounts not otherwise referred to in this clause (d) then due and payable under the Loan Documents; and (v) to the payment of principal then due and payable on the Advances. SECTION 2.11. LIBOR LENDING OFFICES. Each Lender's initial LIBOR Lending Office is set forth opposite its name in SCHEDULE 2.11 attached hereto. Each Lender shall have the right at any time and from time to time to designate a different office of itself or of any Affiliate as such Lender's LIBOR Lending Office, and to transfer any outstanding LIBOR Advance to such LIBOR Lending Office. No such designation or transfer shall result in any liability on the part of the Company for increased costs or expenses resulting solely from such designation or transfer (except any such transfer which is made by a Lender pursuant to SECTION 8.02 or 8.03 hereof, or otherwise for the purpose of complying with Applicable Law). Increased costs for expenses resulting from a change in law occurring subsequent to any such designation or transfer shall be deemed not to result solely from such designation or transfer. SECTION 2.12. SHARING OF PAYMENTS. Any Lender obtaining a payment (whether voluntary or involuntary, due to the exercise of any right of set-off, or otherwise) on account of its Advances in excess of its Specified Percentage of all payments made by the Company with respect to Advances shall purchase from each other Lender such participation in the Advances made by such other Lender as shall be necessary to cause such purchasing Lender to share the excess payment pro rata according to Specified Percentages with each other Lender; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Company agrees that any Lender so purchasing a participation from another Lender pursuant to this Section, to the fullest extent permitted by law, may exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. SECTION 2.13. CALCULATION OF LIBOR RATE. The provisions of this Agreement relating to calculation of the LIBOR Rate are included only for the purpose of determining the rate of interest or other amounts to be paid hereunder that are based upon such rate, it being -26- understood that each Lender shall be entitled to fund and maintain its funding of all or any part of a LIBOR Advance as it sees fit. SECTION 2.14. BOOKING ADVANCES. Any Lender may make, carry or transfer Advances at, to or for the account of any of its branch offices or the office of any Affiliate. SECTION 2.15. TAXES. If each Lender has complied with the provisions of the last paragraph of this SECTION 2.15, all payments by the Company for the account of such Lender of principal of, and interest on, the Advances and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp, or franchise taxes and other taxes, fees, duties, withholdings, or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by any Lender's net income or receipts (such non-excluded items being called "Non-Excluded Taxes"). In the event that any withholding or deduction from any payment to be made by the Company hereunder is required in respect of any Non-Excluded Taxes pursuant to any Applicable Law, then the Company will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Administrative Lender an official receipt or other documentation satisfactory to the Administrative Lender evidencing such payment; and (c) pay to the Administrative Lender for the account of the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Moreover, if any Non-Excluded Taxes are directly asserted against the Administrative Lender or any Lender with respect to any payment received by the Administrative Lender or such Lender hereunder, the Administrative Lender or such Lender may pay such Non-Excluded Taxes and the Company will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such Person after the payment of such Non-Excluded Taxes (including any Non-Excluded Taxes on such additional amount) shall equal the amount such Person would have received had no such Non- Excluded Taxes been asserted. If the Company fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Lender, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Company shall indemnify the Lenders for any incremental Non-Excluded Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this -27- SECTION 2.15, a distribution hereunder by the Administrative Lender or any Lender to or for the account of any Lender shall be deemed a payment by the Company. Upon the request of the Company or the Administrative Lender from time to time and on each anniversary of the Effective Date, each Lender shall execute and deliver to the Company and the Administrative Lender one or more (as the Company and the Administrative Lender may reasonably request) United States Internal Revenue Service Forms 4224 or Forms 1001 or such other forms or documents (or successor forms or documents), appropriately completed, as may be necessary to establish the extent, if any, to which a payment to such Lender is exempt from withholding or deduction of Non-Excluded Taxes. SECTION 2.16. LETTERS OF CREDIT. (a) THE LETTER OF CREDIT FACILITY. The Company may request the Issuing Bank, on the terms and conditions hereinafter set forth, to issue, and the Issuing Bank shall, if so requested, issue, Letters of Credit for the account of any Loan Party from time to time on any Business Day from the Effective Date until the Maturity Date in an aggregate maximum amount (assuming compliance with all conditions to drawing) not to exceed at any time outstanding the lesser of (i) $25,000,000 or (ii) the sum of (A) the Commitment minus (B) the aggregate principal amount of Advances then outstanding (the "LETTER OF CREDIT FACILITY"). No Letter of Credit shall have an expiration date (including all rights of renewal) later than February 24, 1997. Immediately upon the issuance of each Letter of Credit, the Issuing Bank shall be deemed to have sold and transferred to each Lender, and each Lender shall be deemed to have purchased and received from the Issuing Bank, in each case irrevocably and without any further action by any party, an undivided interest and participation in such Letter of Credit, each drawing thereunder and the obligations of the Company under this Agreement in respect thereof in an amount equal to the product of such Lender's Specified Percentage of the Commitment times the maximum amount available to be drawn under such Letter of Credit (assuming compliance with all conditions to drawing). Within the limits of the Letter of Credit Facility, and subject to the limits referred to above, the Company may request the issuance of Letters of Credit under this SECTION 2.16(a), repay any Advances resulting from drawings thereunder pursuant to SECTION 2.16(c) and request the issuance of additional Letters of Credit under this SECTION 2.16(a). (b) REQUEST FOR ISSUANCE. Each Letter of Credit shall be issued upon notice, given not later than 11:00 A.M. (Dallas time) on the Business Day prior to the date of the proposed issuance of such Letter of Credit, by the Company to the Issuing Bank, which shall give to the Administrative Lender and each Lender prompt notice thereof by telex, telecopier or cable. Each Letter of Credit shall be issued upon notice given in accordance with the terms of any separate application and agreement between the Company (or, if different, the Loan Party for whose account such Letter of Credit is being issued) and the Issuing Bank in form and substance reasonably satisfactory to the Company and the Issuing Bank providing for the -28- issuance of Letters of Credit pursuant to this Agreement and containing terms and conditions not inconsistent with this Agreement (a "LETTER OF CREDIT AGREEMENT"), provided that if any such terms and conditions are inconsistent with this Agreement, this Agreement shall control. Each such request for issuance of a Letter of Credit (a "REQUEST FOR ISSUANCE") shall be by telex or telecopier, and shall be in substantially the form of EXHIBIT E hereto. If the requested terms of such Letter of Credit are acceptable to the Issuing Bank in its reasonable discretion, the Issuing Bank will, upon fulfillment of the applicable conditions set forth in ARTICLE III hereof, make such Letter of Credit available to the Company at the Company's office referred to in SECTION 10.01 or as otherwise agreed with the Company in connection with such issuance on the proper issuance date. (c) DRAWING AND REIMBURSEMENT. The payment by the Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the Issuing Bank of an Advance, which shall bear interest at the Base Rate, in the amount of such draft (but without any requirement for compliance with the conditions set forth in ARTICLE III hereof). In the event that such Advance is not reimbursed by the Company by 11:00 A.M. (Dallas time) on the first Business Day after such drawing, the Issuing Bank shall promptly notify Administrative Lender and each other Lender. Each such Lender shall, on the first Business Day following such notification, make an Advance, which shall bear interest at the Base Rate, and shall be used to repay the applicable portion of the Issuing Bank's Advance with respect to such Letter of Credit, in an amount equal to the amount of its participation in such drawing for application to reimburse the Issuing Bank (but without any requirement for compliance with the applicable conditions set forth in ARTICLE III hereof) and shall make available to the Administrative Lender for the account of the Issuing Bank, by deposit at the Administrative Lender's office, in same day funds, the amount of such Advance. In the event that any Lender fails to make available to the Administrative Lender for the account of the Issuing Bank the amount of such Advance, the Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest thereon at a rate per annum equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal Funds Effective Rate. (d) INCREASED COSTS. If any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit or guarantees issued by, or assets held by, or deposits in or for the account of, the Issuing Bank or any Lender or (ii) impose on the Issuing Bank or any Lender any other condition regarding this Agreement or such Lender or any Letter of Credit, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Issuing Bank of issuing or maintaining any Letter of Credit or to any Lender of purchasing any participation therein or making any Advance pursuant to SECTION 2.16(c), then, upon written demand by the Issuing Bank or such Lender, the Company shall, subject to SECTION 10.09 hereof, pay to the Issuing Bank or such Lender, from time to time as specified by the Issuing Bank or such Lender in the below-mentioned certificate, -29- additional amounts that shall be sufficient to reasonably compensate the Issuing Bank or such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Company by the Issuing Bank or such Lender, shall include in reasonable detail the basis for the demand for additional compensation and shall be conclusive and binding for all purposes, absent demonstrable error. The obligations of the Company under this SECTION 2.16(d) shall survive termination of this Agreement. The Issuing Bank or any Lender claiming any additional compensation under this SECTION 2.16(d) shall use reasonable efforts (consistent with legal and regulatory restrictions) to reduce or eliminate any such additional compensation which may thereafter accrue and which efforts would not, in the sole discretion of the Issuing Bank or such Lender, be otherwise disadvantageous. (e) INDEMNITY. In addition to amounts payable as elsewhere provided in this ARTICLE II, the Company hereby agrees to protect, indemnify, pay and save the Issuing Bank and each Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Issuing Bank or any Lender may incur or be subject to as a consequence, direct or indirect, of (1) the issuance of any Letter of Credit other than, as a result of its willful misconduct or gross negligence, as determined by a court of competent jurisdiction, or (2) the failure of the Issuing Bank to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Tribunal (all such acts or omissions herein called "GOVERNMENT ACTS"). (f) ASSUMPTION OF RISK. As among the Company, the other Loan Parties, the Issuing Bank and the Lenders, the Company and the other Loan Parties assume all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Request for Issuance, neither the Issuing Bank nor any Lender or any of their respective officers or directors shall be liable or responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (viii) for any consequences arising from causes beyond the control of the Issuing -30- Bank or any Lender, including, without limitation, any Government Acts. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Bank or any Lender under or in connection with the Letters of Credit or any related certificates, shall not put the Issuing Bank or any Lender under any resulting liability to any Loan Party or relieve any Loan Party of any of its obligations hereunder to any such Person unless such liability to a Loan Party is proximately caused by the gross negligence of the Issuing Bank or any Lender, as determined by a court of competent jurisdiction, and in such case, any resulting liability shall be solely that of the party so adjudicated to have legal responsibility therefor. (g) COMPENSATION FOR LETTERS OF CREDIT. (i) LETTER OF CREDIT FEES. Subject to SECTION 10.09 hereof, the Company shall pay to the Administrative Lender for the account of each Lender a letter of credit fee (which shall be payable quarterly in arrears on each Quarterly Date and on the Maturity Date) on the average daily amount available for drawing under all outstanding Letters of Credit (other than the Letters of Credit set forth on SCHEDULE 1.01(a)), computed, subject to SECTION 10.09 hereof, on the basis of a year of 365 or 366 days, as appropriate, for the actual number of days elapsed, at a rate per annum equal to the LIBOR Margin percentages set forth in the definition of Applicable Margin in SECTION 1.01. The letter of credit fees for the Letters of Credit set forth on SCHEDULE 1.01(a) shall be calculated and payable in accordance with terms of the Letter of Credit Agreements executed in connection with such Letters of Credit, and such letter of credit fees shall, commencing on the Agreement Date, be for the account of each Lender. (ii) ADJUSTMENT OF LETTER OF CREDIT FEE. The letter of credit fee payable in respect of the Letters of Credit (other than the Letters of Credit set forth on SCHEDULE 1.01(a)) shall be subject to reduction or increase, as applicable and as set forth in the table contained in the definition of Applicable Margin in SECTION 1.01 according to the performance of the Company as tested by the Consolidated Funded Debt to Consolidated Excess Cash Flow Ratio. Any such increase or reduction in such fee shall be effective as of the fifth day following the date of receipt of the financial statements required pursuant to SECTION 5.01(a) or (b) hereof, as appropriate. If such financial statements are not received by the fifth day following the date required, the fee payable in respect of the Letters of Credit shall be determined as if the Consolidated Funded Debt to Consolidated Excess Cash Flow Ratio is greater than or equal to 2.00 to 1 until such time as such financial statements are received. Notwithstanding anything herein to the contrary, the letter of credit fee payable in respect of the Letters of Credit from and including the Agreement Date to but not including the 5th day following receipt of the Company's June 30, 1994, financial statements shall be 1.25%. -31- (iii) ISSUANCE FEE. Subject to SECTION 10.09 hereof, the Company shall pay to the Administrative Lender for the sole account of the Issuing Bank an issuance fee (which fee shall be payable quarterly in arrears on each Quarterly Date and on the Maturity Date) equal to 0.125% per annum on the average daily amount available for drawing under all outstanding Letters of Credit (other than the Letters of Credit set forth on SCHEDULE 1.01(a)), and computed, subject to SECTION 10.09 hereof, on the basis of a year of 365 or 366 days, as appropriate, for the actual number of days elapsed. SECTION 2.17. EXTENSION OF MATURITY DATE. The Company may notify the Administrative Lender in writing by October 15 of each year while this Agreement is in effect, commencing October 15, 1994, of its desire to extend the Maturity Date for an additional 12 months beyond the then present Maturity Date. If such notice is given by the Company, the Administrative Lender, by December 1 of each year while this Agreement is in effect will notify the Company in writing of the Lenders' decision whether to extend the Maturity Date. Extension of the Maturity Date shall be at the sole option and discretion of the Lenders, and the decision to extend the Maturity Date shall require the consent of all Lenders. If either the Company or the Administrative Lender fail to give notice within the time prescribed above, the Maturity Date shall be the then present Maturity Date. An extension of the Maturity Date pursuant to this SECTION 2.17 shall not require any renewal Note or amendment of or a supplement to this Agreement or any other Loan Document (other than to extend the date set forth in SECTION 2.16(a) by an additional twelve months) unless otherwise required by Administrative Lender. ARTICLE III CONDITIONS PRECEDENT SECTION 3.01. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND THE LETTERS OF CREDIT. The obligation of each Lender to make the initial Advance and the obligation of the Issuing Bank to issue the initial Letter of Credit is subject to (i) receipt by the Administrative Lender of each of the following, in form and substance satisfactory to each Lender, with a copy (except for this Agreement and the Notes) for each Lender and (ii) satisfaction of the following conditions, except as otherwise waived by each Lender: (a) A certificate of the Secretary or an Assistant Secretary of the Company certifying, inter alia, (i) true and correct copies of (A) the Certificate of Incorporation and Bylaws of the Company and (B) resolutions adopted by the Executive Committee of the Company authorizing the Company to borrow and effect other transactions hereunder, (ii) the incumbency and specimen signatures of the Persons executing any documents on behalf of the Company, and (iii) a good standing certificate for the Company from the Secretaries of State of Delaware and California, and a good standing certificate for the Company from the Comptroller of the State of Texas, each to be dated a recent date prior to the Agreement Date: -32- (b) A certificate of the Secretary or an Assistant Secretary of each Guarantor certifying, INTER ALIA, (i) true and correct copies of (A) the Certificate of Incorporation and Bylaws of such Guarantor and (B) resolutions adopted by the Board of Directors of such Guarantor authorizing such Guarantor to guaranty the Obligations and effect other transactions hereunder, (ii) the incumbency and specimen signatures of the Persons executing any documents on behalf of such Guarantor, and (iii) a certificate of existence and a good standing certificate or similar evidence of qualification to do business (or their equivalents) for each Guarantor from the Secretary of State (or other appropriate Tribunal) of the state in which each of the Guarantors is incorporated and from the States of Texas, California (except Finance and DSC International Corporation) and (with respect to DSC of Puerto Rico, Inc.) Puerto Rico, each to be dated a recent date prior to the Agreement Date; (c) duly executed Notes, payable to the order of each Lender and in an amount for each Lender equal to its Specified Percentage of the Commitment; (d) this Agreement, duly executed by the Loan Parties, together with all exhibits and schedules which shall be true, complete and correct in all material respects as of the Effective Date; (e) opinions of counsel to the Company and its Subsidiaries addressed to the Lenders and in form and substance satisfactory to the Lenders, dated the Agreement Date, and covering such matters incident to the transactions contemplated hereby as the Administrative Lender or Special Counsel may reasonably request; (f) reimbursement for the Administrative Lender for Special Counsel's reasonable fees and expenses rendered as of the date set forth in the invoice of Special Counsel; (g) the participation fee and other fees as required pursuant to SECTIONS 2.04(b) and (c) hereof, respectively; (h) a duly executed and completed Guarantors' Agreement, dated as of the Agreement Date; and (i) payment in full of the existing Indebtedness (other than with respect to letters of credit outstanding under the NationsBank Revolving Credit Agreement) of the Company to NationsBank of Texas, N.A., outstanding on the Agreement Date. SECTION 3.02. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT. The obligation of each Lender to make each Advance hereunder (including the initial Advance) and the obligation of the Issuing Bank to issue each Letter of Credit (including the initial Letter of -33- Credit) is subject to fulfillment of the following conditions immediately prior to or contemporaneously with each such Advance or issuance: (a) With respect to Advances (other than Refinancing Advances and deemed Advances in respect of Letters of Credit pursuant to SECTION 2.16(c)) and each issuance of a Letter of Credit, all of the representations and warranties of the Company under this Agreement are deemed made at and as of the time of such Advance or issuance unless modified as permitted herein (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as to such earlier date), shall be true and correct at such time in all material respects, both before and after giving effect to the application of the proceeds of the Advance or issuance; (b) The incumbency of the Authorized Signatories shall be as stated in the certificate of incumbency delivered in the Company's loan certificate pursuant to SECTION 3.01(a) or as subsequently modified and reflected in a certificate of incumbency delivered to the Administrative Lender. The Lenders may, without waiving this condition, consider it fulfilled and a representation by the Company made to such effect if no written notice to the contrary, dated on or before the date of such Advance and deemed Advance pursuant to SECTION 2.16(c) or issuance, is received by the Administrative Lender from the Company prior to the making of such Advance or issuance; (c) There shall not exist a Default hereunder, with respect to Advances (other than Refinancing Advances and deemed Advance pursuant to SECTION 2.16(c)) and with respect to issuance of each Letter of Credit, or an Event of Default, with respect to any Refinancing Advance, and, with respect to each Advance (other than a Refinancing Advance or a deemed Advance pursuant to SECTION 2.16(c)) and with respect to issuance of each Letter of Credit, the Administrative Lender shall have received written or telephonic certification thereof by an Authorized Signatory (which certification, if telephonic, shall be followed promptly by written certification); (d) The aggregate Advances and amount available for draws under Letters of Credit, after giving effect to such proposed Advance or Letter of Credit, shall not exceed the Commitment; (e) No Law shall prohibit, and no order, judgment or decree of any Tribunal shall enjoin, prohibit or restrain the Lenders from making the requested Advance or the Issuing Bank from making the deemed Advance pursuant to SECTION 2.16(c) or from issuing the Letter of Credit requested to be issued; and (f) The Administrative Lender shall have received all such other certificates, reports, statements, or other documents as the Administrative Lender or any Lender may reasonably request. -34- Each request by the Company to the Administrative Lender or the Issuing Bank, as appropriate, for an Advance (including a Refinancing Advance) or the issuance of a Letter of Credit shall constitute a representation and warranty by the Company as of the date of the making of such Advance or the issuance of such Letter of Credit that all the conditions contained in this SECTION 3.02 have been satisfied. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE LOAN PARTIES Each Loan Party represents and warrants as to itself that: SECTION 4.01. ORGANIZATION, QUALIFICATION, AUTHORIZATION, ETC. (a) Each Loan Party (i) is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, (ii) is qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the failure to be so qualified or be in good standing (when considered alone or together with the failure of any other one or more of them to be so qualified or be in good standing) would reasonably be expected to have a Material Adverse Effect and (iii) has all requisite power and authority (corporate or, to the knowledge of each Loan Party, otherwise) to own, lease, operate and maintain its assets and to carry on its business as now conducted. The jurisdiction under which each Loan Party is incorporated is listed on SCHEDULE 4.01. (b) The execution, delivery and performance by each Loan Party of this Agreement, the Notes and the other Loan Documents to which it is a party have been duly authorized by all necessary corporate action on the part of such Loan Party. Each of this Agreement and the other Loan Documents to which any Loan Party is a party constitutes, and the Notes (when executed and delivered as contemplated hereby) will constitute, legal, valid and binding obligations of such Loan Party, enforceable in accordance with their respective terms, except as enforcement thereof may be limited by Debtor Relief Laws and general principles of equity (whether applied in a proceeding at law or in equity). SECTION 4.02. FULL DISCLOSURE. (a) Neither this Agreement, the Notes, the other Loan Documents, the documents and statements referred to in SECTION 4.04, nor any other document delivered by or on behalf of any Loan Party contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. The Company has furnished certain financial and operational forecasts to the Lenders, and with respect to such forecasts, this representation is not intended to warrant the ability of the Company to achieve such forecasts. -35- (b) There is no fact peculiar to any Loan Party which has a Material Adverse Effect which has not been set forth in the Loan Documents or in the other documents, certificates and statements furnished to the Lenders by or on behalf of the Loan Parties at the direction of such Loan Party prior to the date hereof in connection with the transactions contemplated hereby. SECTION 4.03. CHANGES, ETC. Neither the business nor the properties of any Loan Party is presently affected by any fire, explosion, accident, labor controversy, strike, lockout or other dispute, embargo, act of God or act of a public enemy or other similar event, condition or casualty which would reasonably be expected to have a Material Adverse Effect, or if any such existing event, condition or casualty were to continue for more than 30 additional days (unless in the reasonable opinion of such Loan Party such event or condition is not likely to continue for such period) would reasonably be expected to have a Material Adverse Effect. SECTION 4.04. FINANCIAL STATEMENTS, ETC. The Company has furnished the Lenders with its annual audited consolidated financial statements as at December 31, 1992. Such financial statements (including any related schedules and/or notes) are true, correct and complete in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), and have been prepared in accordance with GAAP followed throughout the periods involved. The balance sheets fairly present the consolidated condition of the Company and its consolidated Subsidiaries as at the dates thereof, and the statements of income and statements of cash flow fairly present the consolidated results of the operations of the Company and its consolidated Subsidiaries for the periods indicated. Since December 31, 1992, no events have occurred which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, except as disclosed in this SCHEDULE 4.04 or as otherwise disclosed to the Lenders in writing. SECTION 4.05. TAX RETURNS AND PAYMENTS. Each Loan Party has filed or has caused to be filed all United States federal income tax returns and all other tax returns ("Other Returns") which are required by Law to be filed by it (or obtained extensions with respect thereto) and has paid all Taxes levied upon it or any of its properties, assets, income or franchises which are due and payable; PROVIDED, HOWEVER, THAT, if the Company is in compliance with Section 5.11, the Loan Parties shall not be required to pay any Taxes or to file any other Returns if (a) such Other Returns and Taxes do not involve an obligation to pay Taxes of $2,000,000 or more, or (b) regardless of the amount involved, the Taxes are being contested in good faith by appropriate proceedings diligently conducted for which such reserves or other appropriate provisions, if any, as shall be required by GAAP, have been made. The consolidated federal income tax returns of the Company and its consolidated Subsidiaries have been examined and reported upon by the Internal Revenue Service for all fiscal years to and including the fiscal year ended December 31, 1985. -36- SECTION 4.06. DEFAULTS RESPECTING INDEBTEDNESS. No payment default under the provisions of any instrument evidencing any Indebtedness (other than with respect to trade payables the payment of which is being contested in good faith by appropriate proceedings diligently conducted for which such reserves or other appropriate provisions, if any, as shall be required by GAAP, have been made) or under any agreement relating thereto and no other default under any such instrument or agreement which is a default covered under SECTION 6.01(e) has occurred which would reasonably be expected to have a Material Adverse Effect. SECTION 4.07. PROPERTY. Each Loan Party has good and defensible title to its real property and good and defensible title to all of its other property and assets which are materially necessary for the operation of its business, including the property and assets reflected in the consolidated balance sheet as at December 31, 1992 referred to in SECTION 4.04 (other than properties and assets disposed of in the ordinary course of business or as otherwise permitted pursuant to the terms of this Agreement), and shall not be subject to any Lien prohibited by SECTION 5.11. All leases of real property, and all other material leases necessary for the conduct of the respective businesses of the Loan Parties are valid and subsisting and are in full force and effect. SECTION 4.08. CONFLICTING AGREEMENTS OR RESTRICTIONS. The execution and delivery of this Agreement and the other Loan Documents and the consummation of the transactions contemplated hereby or thereby will not (i) conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument relating to Indebtedness of such Loan Party to which any Loan Party is a party (ii) result in the creation of any Lien upon any of the properties or assets of any Loan Party pursuant to any agreement or instrument relating to Indebtedness of such Loan Party to which any Loan Party is a party or (iii) result in any violation of (A) the provisions of the charter documents of any Loan Party or (B) any Law, which, in the case of clause (iii)(B), would reasonably be expected to have a Material Adverse Effect; and, to the knowledge of the Loan Parties, no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the consummation by the Loan Parties of the transactions contemplated by this Agreement. SECTION 4.09. LITIGATION, ETC. Except as listed on SCHEDULE 4.09, or as otherwise disclosed to the Lenders in writing, there is no action, suit, investigation or proceeding pending or, to the knowledge of the Loan Parties, threatened against any Loan Party, or any property or rights of any Loan Party, by or before any court, arbitrator or administrative or governmental body which, having regard to (a) the size of the claim and (b) whether there is a reasonable possibility of an adverse determination, would reasonably be expected to have a Material Adverse Effect. SECTION 4.10. ERISA. Each Loan Party and each member of its ERISA Group is in compliance in all material respects with the applicable provisions of ERISA, the Code and -37- other Law with respect to the Plan(s) and Benefit Arrangement(s), (for purposes of this sentence, "compliance in all material respects" means such failure(s) to comply with respect to one or more Plan(s), and/or Benefit Arrangement(s), individually or in the aggregate, would not result in a Material Adverse Effect.) All payments required to be made to or in respect of a Plan, whether or not previously terminated, Multiemployer Plan or Benefit Arrangement by a Loan Party or a member of its ERISA Group have been paid to the extent that nonpayment would have a Material Adverse Effect. No Loan Party or any member of its ERISA Group has any unpaid liability under Title IV of ERISA (other than a liability to the PBGC for premiums under section 4007 of ERISA), which would result in a Material Adverse Effect. There is no "amount of unfunded benefit liabilities," as defined in section 4001(a)(18) of ERISA, under any Plan and should complete or partial withdrawals occur with respect to all Multiemployer Plans, the aggregate amount of such withdrawal liability(ies), if any, would not reasonably be expected to have a Material Adverse Effect. To the knowledge of the Loan Parties after reasonable investigation, no litigation, proceeding(s), investigation(s) or claim(s) (other than a routine, undisputed claim for benefits) is or are pending or, to the knowledge of the Loan Parties, threatened concerning any Plan(s), Multiemployer Plan(s) or Benefit Arrangement(s), which, individually or in the aggregate, would result in a Material Adverse Effect. Except as disclosed in writing to the Administrative Lender prior to the Agreement Date, the Loan Parties or a member of their ERISA Group may terminate any and/or all currently existing Plan(s) and/or Benefit Arrangement(s) so long as such termination would not reasonably be expected to have a Material Adverse Effect. As of the Agreement Date, the Loan Parties and/or members of the ERISA Group do not currently maintain, sponsor or contribute to any employee pension benefit plan, as defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or Section 412 of the Code. SECTION 4.11. USE OF PROCEEDS. The Company will apply the proceeds of the Advances for working capital and other general corporate purposes, including loans to its Subsidiaries. The Loan Parties represent and warrant to the Lenders that the proceeds of the Advances and the Letters of Credit will be used to benefit all the Loan Parties, directly or indirectly. SECTION 4.12. FEDERAL RESERVE REGULATIONS. No Loan Party is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin stock" (within the meaning of Regulation G, T, U or X). The making of the Advances, the issuance of the Letters of Credit and the execution, delivery, and performance of this Agreement, the Notes and the other Loan Documents, and the use of the proceeds of the Advances and the Letters of Credit do not and will not constitute a violation of Regulation G, T, U or X. SECTION 4.13. FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the issue of the Notes by the Company nor the use of the proceeds thereof or of any Letter of Credit contemplated by this Agreement will violate the Export Administration Act, the Foreign -38- Corrupt Practices Act of 1977, the Foreign Assets Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the Nicaragua Trade Control Regulations, the South African Transactions Regulations, the Libyan Sanctions Regulations, the Soviet Gold Coin Regulations or the Panamanian Transactions Regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended). SECTION 4.14. STATUS UNDER CERTAIN FEDERAL STATUTES. No Loan Party is (a) an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, (b) a "holding company" or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, (c) a "public utility" as such term is defined in the Federal Power Act, as amended, (d) a "rail carrier or a person controlled by or affiliated with a rail carrier," within the meaning of Title 49, U.S.C., or (e) a "carrier" to which 49 U.S.C. Section 11301(b)(1) is applicable. SECTION 4.15. ENVIRONMENTAL MATTERS. (a) Each Loan Party and has all environmental Permits which are necessary for the conduct of its business as presently conducted and for the ownership, use, maintenance and operation of its assets (except where the failure to have such environmental Permits would not, individually or in the aggregate, reasonably be expected to have or have a Material Adverse Effect), and is in compliance with all material terms of its environmental Permits; and, as to any such environmental Permit that has expired or is about to expire or is needed for the proposed conduct of its business, each Loan Party has timely and properly applied for renewal or receipt of the same or, if such Permit is not reasonably expected to be renewed, such nonrenewal would not reasonably be expected to have a Material Adverse Effect. (b) Without in any manner limiting any other representations and warranties set forth in this Agreement: (i) neither any Loan Party nor any real property or facility currently owned, used, maintained or operated by any such Person, nor any of the other assets of any such Person is in violation of or is in noncompliance with, any applicable Environmental Laws in connection with the ownership, use, maintenance or operation of such real property, facility or other assets or the conduct of the business related thereto, except for violations or noncompliances which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; and -39- (ii) without in any manner limiting the generality of (i) above: (A) except for those of the activities described below (including Releases or threatened Releases) which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, no Hazardous Materials have been used, generated, manufactured, stored or treated or disposed of, landfilled or in any other way Released (and no Release is threatened), on, under or about any property owned, used, maintained or operated by any Loan Party or transported to or from any such property, and, to the knowledge of each Loan Party, no Hazardous Materials have been generated, manufactured, stored or treated or disposed of, landfilled or in any other way Released (and no Release is threatened), on, under, about or from any property adjacent to any such property, except in accordance with Environmental Laws (including, without limitation, the obtaining of necessary Permits); (B) except for liabilities or requirements which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, no Loan Party is, as a result of the ownership, operation or condition of its business or assets prior to or at the Agreement Date, subject to any (1) contingent liability in connection with any Release or threatened Release of any Hazardous Materials into the environment whether on or off any property currently or formerly owned, used, maintained or operated by any Loan Party or (2) reclamation or remediation requirements under Environmental Laws, or any reporting requirements related thereto; (C) no Loan Party has been named as a potentially responsible party under, and, to the knowledge of any Loan Party none of the property currently or formerly owned, used, maintained or operated by any Loan Party has been nominated or identified as a facility which is subject to an existing or potential claim under, CERCLA or other Environmental Laws (other than any violation or noncompliance which is the subject of the cause of action styled VARIAN ASSOCIATES, INC., a DELAWARE CORPORATION, PLAINTIFF v. DSC COMMUNICATIONS CORPORATION, et al, pending before the United States District Court for the Northern District of California), and no such property is subject to any Lien arising under Environmental Laws except for Liens which individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect; (D) each Loan Party has all environmental and pollution control equipment necessary for compliance in all material respects with all applicable Environmental Laws (including, without limitation, all applicable Permits) and operation of the business of any Loan Party as it is presently conducted; -40- (E) except in accordance with Environmental Laws, no Hazardous Materials have been incorporated by any Loan Party into or, to the knowledge of any Loan Party, contained in any of the personal property or improvements to the real property owned, used, maintained or operated by any Loan Party such that such Hazardous Materials would reasonably be expected to have a Material Adverse Effect; (F) none of the off-site locations where Hazardous Materials from any of the current or former assets of any Loan Party have been stored, treated, recycled, disposed of or Released, has been, to the knowledge of any Loan Party, nominated or identified as a facility which is subject to an existing or potential claim under CERCLA or other Environmental Laws such that such nomination or indemnification would reasonably be expected to have a Material Adverse Effect; (G) no Loan Party has received any notices of any violation of, noncompliance with, or remedial obligation under, Environmental Laws, relating to the current or former ownership, use, maintenance, operation of, or conduct of business related to, any property or assets of such Loan Party, or of any Release or threatened Release of Hazardous Materials, except for violations, noncompliances, obligations, Releases or threatened Releases which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; (H) except for writs, injunctions, decrees, orders, judgments, lawsuits, claims, proceedings or investigations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, there are no writs, injunctions, decrees, orders or judgments outstanding, or lawsuits, claims, proceedings or investigations pending or, to the knowledge of any Loan Party, threatened, relating to the current or former ownership, use, maintenance, operation of, or conduct of business related to, any property or assets of any Loan Party, nor is there any basis for any of the foregoing; (I) to the knowledge of the Loan Parties, no underground or aboveground storage tanks or surface impoundments, not in material compliance with all applicable Environmental Laws, are located at any property owned, used, maintained or operated by any Loan Party, and to the knowledge of any Loan Party there are no remedial or other liabilities with respect to underground or aboveground storage tanks or surface impoundments that may have been located at any property owned, used, maintained or operated by any Loan Party, except for liabilities which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; and -41- (J) there are no material obligations, undertakings or liabilities arising out of or relating to Environmental Laws which any Loan Party has agreed to, assumed or retained, by contract or other agreement. SECTION 4.16. SOLVENCY. The Loan Parties, viewing their businesses and operations as a single consolidated entity, have capital sufficient to carry on their businesses and transactions and all businesses and transactions in which they are about to engage, and are now solvent and able to pay their collective debts as they mature, and the Loan Parties now collectively own property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay all existing debts of the Loan Parties. SECTION 4.17. SENIOR INDEBTEDNESS. The Indebtedness evidenced by the Notes and this Agreement is senior to the Indebtedness evidenced by the Subordinated Debt. The terms and provisions of the Subordinated Debt have been disclosed to the Lenders, the instruments evidencing the Subordinated Debt have not been amended or modified except as disclosed in writing to the Lenders, and no payments have been made in respect of the Subordinated Debt other than regularly scheduled interest payments. SECTION 4.18. PATENTS, TRADEMARKS, ETC. The Loan Parties collectively possess adequate assets, licenses, patents, patent applications, copyrights, trademarks, service marks, trademark applications, trade names, technology, processes, logotypes and Permits and other governmental approvals and authorizations to conduct their businesses. Except as previously disclosed to the Lenders in writing, there are no existing or, to the Loan Parties' knowledge, threatened claims of any Person based on the use of such Permits, patents, trademarks, trade names, copyrights, technology and processes by the Loan Parties. The consummation of the transactions contemplated by the Loan Documents will not impair the ownership by the Loan Parties of or the rights of any of such parties under (or the license or other right to use, as the case may be) any Permits, patents, trademarks, trade names, copyrights, technology or processes. SECTION 4.19. LABOR MATTERS. Except as disclosed in writing to the Lenders, as provided in SECTION 5.21 hereof, SCHEDULE 4.19 sets forth a complete and correct list of all labor union contracts to which any of the Loan Parties is a party, specifying the expiration date of each such contract and the nature of any strikes, walkouts or other disputes related thereto. ARTICLE V COVENANTS SECTION 5.01. REPORTING REQUIREMENTS. The Company will deliver to each Lender: -42- (a) as soon as practicable and in any event within 90 days after the end of each fiscal year of the Company, audited consolidated and unaudited consolidating statements of income, audited consolidated cash flows and changes in shareholders equity of the Company and its consolidated Subsidiaries for such fiscal year, and audited consolidated and unaudited consolidating (consolidating may be non- GAAP) balance sheets of the Company and its consolidated Subsidiaries as at the end of such fiscal year, and, with respect to such consolidated statements, setting forth in comparative form corresponding figures from the immediately preceding fiscal year end, and, with respect to the consolidated statements, certified without any Impermissible Qualification by Ernst & Young or other independent public accountants of recognized national standing selected by the Company, together with a certificate of such accountants stating in connection with performing their audit of such consolidated financial statements, the scope of which was not directed toward obtaining knowledge regarding any Loan Party's compliance with any of the covenants, terms, provisions or other conditions of this Agreement or the occurrence of an Event of Default hereunder, that nothing came to their attention to cause them to believe that, as at the end of such fiscal year, the Company and its consolidated Subsidiaries were not in compliance with any of the financial covenants hereof, except as specifically stated therein, indicating the nature of such non-compliance or other Default or Event of Default; it being understood that such accountants shall have no liability to any Lender by reason of the failure of such accountants to obtain knowledge of the occurrence of such Default or Event of Default. (b) as soon as practicable and in any event within 45 days after the end of the first three fiscal quarters of each fiscal year of the Company, an unaudited consolidated and consolidating (consolidating may be non-GAAP) balance sheet and statements of income and an unaudited consolidated statement of cash flows of the Company and its consolidated Subsidiaries as reported on Form 10-Q and filed with the Securities and Exchange Commission for each such fiscal quarter, and an unaudited consolidated statement of changes in shareholders' equity of the Company and its consolidated Subsidiaries for each such fiscal quarter, and, with respect to the consolidated statements, certified by a Financial Officer of the Company as presenting fairly, in accordance with GAAP applied on a basis consistent with prior fiscal quarters, the information contained therein, subject to changes resulting from year-end adjustments; (c) if requested by any Lender, promptly upon the Company's receipt thereof, copies of all other accounting or financial reports or statements submitted to the Company by independent public accountants in connection with any annual, interim or special audit of the books of the Company and its consolidated Subsidiaries; (d) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as the Company shall send to its public stockholders and copies of all registration statements (without exhibits) and all reports which it files with the -43- Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (e) as soon as practicable and in any event within five Business Days after any Loan Party obtains knowledge (i) of any condition or event which would reasonably be expected to have a Material Adverse Effect, (ii) of the occurrence of a Default or Event of Default, (iii) of the institution of any litigation involving claim against any Loan Party equal to or greater than $2,000,000 with respect to any single cause of action, or (iv) of any regulatory proceeding which, if determined adversely to such Loan Party, would reasonably be expected to have a Material Adverse Effect, a Responsible Officer of the Company will deliver an Officer's Certificate to the Lenders specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such Person and the nature of any such Default or Event of Default, or specifying the details of such proceeding or litigation and what action, if any, such Loan Party has taken, is taking or proposes to take with respect thereto; (f) promptly, but in any event within 15 calendar days, after any Loan Party obtains knowledge thereof, if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in section 4043 of ERISA) (other than a "reportable event" not subject to the provisions for 30-day notice to the PBGC under the regulations issued under section 4043 of ERISA) with respect to any Material Plan which may reasonably be expected to constitute grounds for a termination of such Material Plan under Title IV of ERISA, or knows that the plan administrator of any Material Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is (or may become) in reorganization or partitioned, is (or may become) insolvent or has been (or may be) terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under section 4007 of ERISA) in respect of, or appoint a trustee to administer, any Material Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under section 412 of the Code, a copy of such application; (v) gives notice of intent to terminate any Material Plan under section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Material Plan pursuant to section 4063 of ERISA (or an event is deemed under section 4062(e) of ERISA to be a withdrawal under section 4063); (vii) fails to timely make any required payment(s) or contribution(s) to any Plan(s) or Multiemployer Plan(s) or in respect of any Benefit Arrangement(s) in an amount individually or in the aggregate in excess of $2,000,000 or makes any amendment(s) to any Plan(s) which could result in the imposition of a lien(s) or the posting of a bond(s) or other security under ERISA or the Code in an amount individually or in the aggregate in excess of $2,000,000, a statement of the chief financial officer of such Loan Party reasonably describing such event and the action which such Loan Party or applicable member of the ERISA Group -44- has taken, is taking or proposes to take with respect to such event; (viii) engages in one or more prohibited transactions (as defined in section 406 of ERISA or section 4975 of the Code) or receives notice of a claim or claims involving one or more violations of fiduciary duties under ERISA which individually or in combination could result in a liability in excess of $2,000,000, a statement of the chief financial officer of such Loan Party reasonably describing such event of notice and the action which such Loan Party or applicable member of the ERISA Group has taken, is taking or proposes to take with respect thereto; or (ix) receives any proposed unfavorable determination letter (or notice proposing to revoke a favorable letter) from the Internal Revenue Service regarding the qualification of a Plan under section 401(a) of the Code, a copy of such notice (for purposes of this paragraph (f), a "MATERIAL PLAN" is one or more Plans, Multiemployer Plans and/or Benefit Arrangements (individually or collectively) with respect to which a Loan Party and/or one or more members of the ERISA Group has incurred or can be reasonably expected to incur liabilities, whether or not current, in excess of $2,000,000); and (g) with reasonable promptness, such other information respecting the business, financial condition or results or operations of the Loan Parties as the Lenders may reasonably request. Together with each delivery of financial statements required by clause (b) above, the Company will deliver a Compliance Certificate signed by a Financial Officer of the Company demonstrating (with computations in reasonable detail) compliance by the Loan Parties with the provisions of SECTION 5.03 and SECTIONS 5.16 through SECTION 5.20 and stating that there exists no Event of Default or a Default, or, if any Event of Default or a Default exists, specifying the nature and period of existence thereof and what action, if any, the Loan Parties propose to take or cause to be taken with respect thereto; PROVIDED, HOWEVER, the certification as to whether a Default or Event of Default is a result of the representation contained in SECTION 4.02 may be to the knowledge of a Financial Officer, after due inquiry has been made by such Financial Officer. SECTION 5.02. INSPECTION OF PROPERTY; BOOKS AND RECORDS. (a) Each Loan Party covenants that it will permit or cause to be permitted any Person designated by any Lender to examine and inspect any properties of the Loan Parties, to examine and inspect and take extracts from the corporate books and financial records of the Loan Parties and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of such Loan Party and (with the prior written consent of the Controller of the Company, which consent shall not be unreasonably withheld) the certified public accountants of the Company, all at such reasonable times and as often as any Lender may reasonably request. During such visits and inspections such Person will comply with the Loan Parties' normal safety and security procedures which have been made available to such Person in writing or as to which such Person has been apprised prior to such visit or inspection. -45- (b) The Company will keep or cause to be kept, adequate records and books of account on a Consolidated basis in which complete entries are to be made reflecting the business and financial transactions of it and the other Loan Parties and as required by applicable rules and regulations of any Tribunal having jurisdiction over the Company or any such Loan Party or the transactions contemplated by this Agreement. Such books of account shall be kept in a manner consistent with GAAP; SECTION 5.03. SUBORDINATED DEBT. (a) No Loan Party shall make any payment or distribution of cash or other property on account of the purchase, redemption or other acquisition or retirement of any Subordinated Debt or the setting aside or payment to a trustee of money with respect to any Subordinated Debt, PROVIDED, so long as no Default or Event of Default shall exist prior to or immediately after giving effect to such payment or distribution, the Company may make (i) redemptions of its 8% Convertible Subordinated Debentures due 2003 for an aggregate amount not to exceed $37,000,000; (ii) distributions of its common stock, on account of its Subordinated Debt, including, without limitation, the Company exercising any rights of conversion or redemption; and (iii) mandatory payments of cash on account of the payment of interest thereon on the regularly scheduled due dates therefor. (b) No Loan Party will materially amend or otherwise materially modify any provision of its Subordinated Debt without the prior written consent of the Lenders. SECTION 5.04. PAYMENT OF TAXES AND CLAIMS. Each Loan Party covenants that it will pay or discharge all Taxes imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or profits before any penalty accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by Law have or may become a Lien upon any of its property or assets, PROVIDED that no such Tax or claim need be paid or discharged (a) while the same is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such accrual or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor or (b) if the aggregate amount of all such unpaid Taxes and claims for all Loan Parties does not exceed $2,000,000 (without regard to whether such Taxes and claims under this clause (b) are being contested in good faith by appropriate proceedings diligently conducted for which such reserves or other appropriate provisions, if any, as shall be required by GAAP, have been made); provided, -46- further, that clauses (a) and (b) of this SECTION 5.04 shall apply only if the Company otherwise complies with SECTION 5.11. SECTION 5.05. MAINTENANCE OF PROPERTIES; INSURANCE. (a) Each Loan Party will maintain or cause to be maintained in good repair, working order and condition, all property materially necessary for the operation of the business of such Loan Party and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof; and (b) Each Loan Party will maintain or cause to be maintained with financially sound and reputable insurers, insurance with respect to their property and business against such liabilities, casualties, risks and contingencies (including business interruption insurance) and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated unless such coverage is not available at commercially reasonable rates for reasons other than the acts or omissions of such Loan Party. The Loan Parties shall furnish or cause to be furnished to each Lender (i) at least annually, a summary of all insurance coverage of the Loan Parties prepared by an independent insurance broker and (ii) upon request of any Lender during the continuance of any Default or Event of Default, copies of all policies of insurance. SECTION 5.06. COMPLIANCE WITH LAWS. (a) The Company shall comply with all Laws, the non-compliance with which, when considered alone or together with all non-compliance with such Laws by all such Loan Parties, would reasonably be expected to have a Material Adverse Effect; PROVIDED, HOWEVER, such Loan Party shall have the right to diligently contest any Law so long as (i) the contest is in good faith and by appropriate proceedings and such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor and (ii) such contest shall operate to suspend the collection of any disputed amount from any property of such Loan Party and any forfeiture or sale of such property. (b) Notwithstanding, and without limitation of the foregoing, each Loan Party shall (i) comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Environmental Laws, including, without limitation, any such Laws relating to contamination from, or remedial obligations in connection with, any Hazardous Materials, (ii) obtain, where its business is to be changed so it is different than the business presently conducted, all environmental Permits necessary for the conduct of its business as intended to be so conducted, with such Permits obtained prior to such change, (iii) notify each Lender promptly in the event of any actual or alleged noncompliance with any Environmental Laws and (iv) promptly forward to each Lender a copy of any claim, judgment, order, notice, applications for Permits, Permits or other communication or report in connection with any -47- material matter relating to Environmental Law as it may affect any Loan Party or any of their respective assets. SECTION 5.07. PERFORMANCE OF LOAN DOCUMENTS. Each Loan Party will duly and punctually pay and perform their respective obligations under the Loan Documents to which it is a party in accordance with, and without breach of, the terms of each thereof. SECTION 5.08. INDEMNIFICATION. (a) The Loan Parties shall, jointly and severally indemnify and hold harmless each Indemnitee from and against any and all claims, damages and liabilities whatsoever which any Indemnitee may directly or indirectly incur (or which may be claimed against such Indemnitee by any Person or entity whatsoever) by reason of or in connection with (i) this Agreement, Advances or the Letters of Credit (including without limitation the enforcement of this Agreement, the Notes and the other Loan Documents and the defense of such Indemnitee's actions and inactions in connection therewith); (ii) any breach of any Loan Party or any other Person of any warranty, covenant, term or condition in, or the occurrence of any default under, this Agreement, the Notes or any other Loan Document, including all reasonable fees or expenses resulting from the settlement or defense of any claims or liabilities arising as a result of any such breach or default; and (iii) involvement in any legal suit, investigation, proceeding, inquiry or action as to which any Indemnitee is involved as a consequence, directly or indirectly, of the making of any Advance, the issuance of any Letter of Credit, its execution of this Agreement or the other Loan Documents or any other event or transaction contemplated by any of the foregoing. Nothing in this SECTION 5.08 is intended to limit the obligations of the Loan Parties contained in any other Section of this Agreement. The Loan Parties jointly and severally shall pay all expenses (including without limitation fees and disbursements of counsel) reasonably incurred by each Indemnitee in investigating, defending or preparing to defend against any such claim, damage or liability and for all costs of settlement made with the written consent of the Company in connection with any such claim, damage or liability. However, such indemnities shall not apply to any particular Indemnitee (but shall apply to the other Indemnitees) to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of such particular Indemnitee. Notwithstanding any provision to the contrary contained herein, no Indemnitee will be indemnified for liability arising in connection with its gross negligence or willful misconduct. (b) Without limiting any provision of this Agreement, it is the express intention of the parties hereto that each Indemnitee shall be indemnified and held harmless against any and all losses, liabilities, claims or damages arising out of or resulting from the ordinary, sole or contributory negligence of such Indemnitee. Without prejudice to the survival of any other obligations of the Loan Parties under this Agreement, the Notes or the other Loan Documents, -48- the obligations of the Loan Parties under this SECTION 5.08 shall survive the termination of this Agreement. SECTION 5.09. CORPORATE EXISTENCE, ETC. Except as expressly permitted by SECTION 5.12(b), each Loan Party covenants that it will, at all times, preserve and maintain its corporate existence, rights, privileges and franchises material to its business and will qualify to do business in any jurisdiction where the failure to do so when considered alone or together with the failure of any or all of the other Loan Parties to do so would reasonably be expected to have a Material Adverse Effect. SECTION 5.10. OWNERSHIP OF LOAN PARTIES. The Company will at all times own and hold the entire legal title to and beneficial interest, either directly or indirectly through one or more intermediaries, in all outstanding shares of all classes of the capital stock of the other Loan Parties. SECTION 5.11. LIENS. The Loan Parties will not create or otherwise allow any Liens to exist on or otherwise to affect any of its assets, except the following Liens which shall be permitted: (1) Liens imposed by Law, carriers', warehousemen's or mechanics' liens, and liens to secure claims for labor, material or supplies arising in the ordinary course of business, but only to the extent that payment thereof shall not at the time be due or is being contested in good faith by appropriate proceedings diligently conducted and with respect to which appropriate reserves have been set aside in accordance with GAAP, and so long as the enforcement thereof has been stayed and such Liens do not individually or in the aggregate materially impair the value or materially interfere with the use of the property subject thereto or the operation of the usual business of the Loan Party(ies) involved; (2) Deposits or pledges to enable the Loan Parties to exercise any privilege or license, deposits or pledges made in connection with, or to secure payment of, worker's compensation, unemployment insurance, old age pensions or other social security, or to secure the performance of bids, tenders, contracts (other than those relating to borrowed money) or leases or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business, or in connection with contests, to the extent that payment thereof shall not at the time be due or is being contested in good faith by appropriate proceedings diligently conducted and there have been set aside on its books appropriate reserves with respect thereto and in accordance with GAAP, and so long as the enforcement thereof has been stayed and such Liens do not individually or in the aggregate materially impair the value or materially interfere with the use of the property subject thereto or the operation of the usual business of the Loan Party(ies) involved; -49- (3) Liens arising out of judgments or awards against a Loan Party with respect to which such Person shall be in good faith prosecuting an appeal or a proceeding for review, or Liens incurred by a Loan Party for the purpose of obtaining a stay or discharge of any legal proceeding to which such Person is a party, PROVIDED, HOWEVER, nothing herein is intended to waive any Event of Default that may result from any such judgment, award or proceeding under SECTION 6.01(i); (4) Liens which relate to Taxes, assessments, levies or other governmental charges which in the aggregate do not exceed $2,000,000, whether contested or otherwise, or Liens which relate to Taxes, assessments, levies or other governmental charges which in the aggregate are greater than $2,000,000, in which latter case, such Taxes, assessments, levies or charges must either (i) not yet be due or (ii) be the subject of a pending contest made in good faith by appropriate proceedings diligently conducted and with respect to which appropriate reserves have been set aside in accordance with GAAP (so long as the enforcement of the Liens with respect to the contested amounts has been stayed and such Liens do not individually or in the aggregate materially impair the operation of the usual business of the Loan Parties involved); (5) Liens covering the cash or deposit accounts of the Loan Parties; (6) Purchase money Liens having a duration of effectiveness of not longer than forty-five days which are created in connection with the purchase by a Loan Party of any raw materials comprising a part of its inventory, which are filed in favor of a vendor as part of its payment terms on credit sales of raw materials to a Loan Party; (7) Easements, rights of way, restrictions and other similar encumbrances on the use of real property that do not render title to the property encumbered thereby unmarketable or materially adversely offset the use of such property for its present purposes; (8) Liens which are described on SCHEDULE 5.11 and renewals and extensions thereof, provided such Liens as renewed or extended shall not cover additional assets; (9) Other Liens created to secure Indebtedness incurred solely for the purpose of financing Consolidated Capital Expenditures, whether or not incurred at the time of acquisition, so long as each such Lien shall at all times be confined solely to the asset or assets so financed (and proceeds thereof), so long as any such Lien remains solely on the asset or assets financed and the aggregate amount of Indebtedness incurred during each fiscal year and secured by such Liens does not exceed the aggregate Consolidated Capital Expenditures during such fiscal year; -50- (10) Landlord's Liens covering any part of the Loan Parties' assets which secure an amount of past due rent not to exceed $500,000 in aggregate amount; or (11) Liens granted by a Loan Party upon a customer's obligation payable to such Loan Party and the collateral securing such obligation and including without limitation any chattel paper, document, instrument, account, or general intangible arising therefrom, or necessary or related thereto and all products and proceeds thereof, as a result of the sale or lease of any item of goods, materials, equipment, supplies, merchandise or other personal property of such Loan Party through any type of conditional sales contract, note and security agreement, operating or financing lease, or other form of chattel paper, including without limitation such obligations being financed at Agreement Date or at any time thereafter, by Sanwa Business Credit or any similar lender. SECTION 5.12. MERGERS, CONSOLIDATIONS AND DISPOSITIONS. (a) The Loan Parties will not in any single transaction or series of transactions: (i) be a party to any merger or consolidation; (ii) change or modify any of their corporate structures; (iii) sell, transfer, convey or lease (or agree to take any such action) any assets; or (iv) take any action with a view toward dissolution, liquidation, winding up its affairs or termination. (b) Notwithstanding the foregoing, so long as no Default or Event of Default would exist after giving effect thereto or would result therefrom: (i) the Loan Parties may sell, transfer, convey or lease any asset, except that sales, transfers, conveyances and leases of assets to Persons who are not Loan Parties, together with the aggregate amount of Investments (not including Permitted Portfolio Investments) made pursuant to SECTION 5.14(H), shall not at any time exceed 50% of the Consolidated Total Assets, based on the most recent audited financial statements of the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, notwithstanding anything in this Section 5.12(b)(i) to the contrary, the Loan Parties may sell, transfer, convey or lease inventory in the ordinary course of business without any restriction or limitation. (ii) the Company may merge into or consolidate with any other Loan Party provided that in each case the Company is the survivor; -51- (iii) any Loan Party (other than the Company) may merge into or consolidate with any Loan Party (other than the Company), PROVIDED that the Company and its consolidated Subsidiaries are no less creditworthy in the reasonable opinion of the Lenders immediately after such merger or consolidation; or (iv) any Loan Party may accomplish a consolidation or merger via a stock for stock transaction, PROVIDED, that in each case (A) a Loan Party (provided, in the event the Company is involved in any such consolidation or merger, the Company must be the survivor) is the survivor and (B) the consolidation or merger would not have a Material Adverse Effect. (c) The Company may, at the Company's option, after any Person organized under the Laws of any domestic jurisdiction shall become a direct or indirect Subsidiary of the Company (each such Subsidiary being a "NEW SUBSIDIARY"), (i) give written notice thereof to the Lenders and (ii) deliver or cause to be delivered to the Administrative Lender (A) an amendment to this Agreement (including SCHEDULE 4.01 hereto) executed by the New Subsidiary and the Loan Parties, which has the effect of adding the New Subsidiary as a Loan Party to this Agreement, and, as a guarantor of the Guaranteed Obligations, all in form and substance satisfactory to the Lenders, and (B) a copy of the resolutions of the board of directors or similar governing body of such Subsidiary approving the form of such amendment and such guaranty, their respective execution and delivery, the transactions under this Agreement as amended by such amendment and the guaranteeing of the Guaranteed Obligations by such New Subsidiary hereunder, which copy shall be certified to be a true and complete copy by the Secretary or Assistant Secretary of such New Subsidiary. SECTION 5.13. TRANSACTIONS WITH AFFILIATES. The Loan Parties will not enter into any material Investment, transaction, contract or agreement of any kind (except for ordinary and reasonable compensation arrangements for full-time employees of such Person) with any officer, director or holder of any of the outstanding capital stock of such Person or any Affiliate, unless such Investment, transaction, contract or agreement is made (i) upon terms and conditions no less favorable to any Loan Party that is a party thereto than terms and conditions which could have been obtained from wholly independent and unrelated sources, and (ii) in the ordinary course of business of the Loan Party and Affiliate in question; PROVIDED, HOWEVER, nothing in this SECTION 5.13 shall prohibit sales or transfers of inventory, equipment or any other asset from any Loan Party to another Loan Party or an Affiliate of a Loan Party in the ordinary course of business that is not otherwise prohibited by this Agreement; provided, however, that notwithstanding anything in this Agreement to the contrary, no Loan Party shall directly or indirectly transfer or dispose of any of its properties to an Affiliate of such Loan Party or to any other Person with actual intent to delay, defraud or hinder collection or enforcement of any rights of the Administrative Lender or any Lender under this Agreement, or otherwise at Law or in equity; and provided, further, that no Loan -52- Party shall directly or indirectly transfer or otherwise dispose of any of its assets in a transaction with an Affiliate of such Loan Party wherein the Loan Party receives less than reasonably equivalent value (as such term is used and construed in Section 548 of the United States Bankruptcy Code) in exchange for such transfer, regardless of the solvency of such Loan Party. SECTION 5.14. INVESTMENT. The Loan Parties will not make or have any Investment in any Person, or make any commitment to make such Investment, except the following which shall be permitted as stated below: (a) Permitted Portfolio Investments; (b) stock or securities received in the settlement of debts (created in the ordinary course of business) or as a premium from a customer; (c) travel advances to officers and employees made in the ordinary course of business; (d) loans made by the Loan Parties in the ordinary course of business to officers and employees not exceeding $1,000,000 at any one time outstanding for all such loans made by all Loan Parties; (e) customer obligations and receivables owing to the Loan Parties in the ordinary course of business; (f) loans made to expatriate officers and employees to compensate or reimburse such Persons for foreign tax obligations, which loans shall not be included for purposes of calculating the amount of loans made under SECTION 5.14(D); (g) Investments by a Loan Party in any other Loan Party; and (h) Investments (not including Permitted Portfolio Investments) in Persons who are not Loan Parties, together with the aggregate amount of assets sold, transferred, conveyed or leased to Persons who are not Loan Parties as provided in SECTION 5.12(B)(I) (other than asset sales in the ordinary course of business), in an aggregate amount at any time not in excess of 50% of the Consolidated Total Assets, based on the most recent audited financial statements of the Company and its Consolidated Subsidiaries. SECTION 5.15. RESTRICTED PAYMENTS. The Loan Parties will not directly or indirectly, declare, order, pay, make or set apart any Restricted Payment which together with all other Restricted Payments made during the term of this Agreement exceed the amount of $20,000,000, other than dividends from a Subsidiary of the Company to any Loan Party. -53- SECTION 5.16. MINIMUM CURRENT RATIO. On the last day of each fiscal quarter, the ratio of Consolidated Current Assets to Consolidated Current Liabilities shall be at least 1.75 to 1. SECTION 5.17. MAXIMUM LEVERAGE RATIO. On the last day of each fiscal quarter, the ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth shall not exceed 1.25 to 1. SECTION 5.18. MINIMUM TANGIBLE NET WORTH. Consolidated Tangible Net Worth shall be at least $479,000,000, plus (a) an amount equal to 50% of cumulative Consolidated Net Earnings for the period from January 1, 1994 to the date of calculation (but excluding from the calculation of such cumulative Consolidated Net Earnings the effect, if any, of any fiscal quarter, or a portion of a fiscal quarter not yet ended, of the Company for which Consolidated Net Earnings was a negative number), plus (b) an amount equal to 50% of any increase in shareholders equity of the Company pursuant to offerings of equity securities (including as a result of the exercise of employee stock options and warrants) of the Company or any of its Subsidiaries on or after the Agreement Date, plus (c) without duplication, an amount equal to the tangible net worth of any Person that, on or after the Agreement Date, becomes a Subsidiary of the Company or is merged into or consolidated with the Company or any Subsidiary or substantially all of the assets of which are acquired by the Company or any Subsidiary to the extent the purchase price therefor is paid in equity securities of the Company or any Subsidiary. SECTION 5.19. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED EXCESS CASH FLOW RATIO. On the last day of each fiscal quarter, the ratio of Consolidated Funded Debt to Consolidated Excess Cash Flow shall not exceed 3.25 to 1. SECTION 5.20. PATENTS, TRADEMARKS AND LICENSES. The Loan Parties shall collectively maintain adequate assets, licenses, patents, copyrights, trademarks, service marks, trade names, Permits and other governmental approvals and authorizations to conduct their respective businesses. SECTION 5.21. NOTICE OF LABOR DISPUTES. The Loan Parties shall notify the Lenders in writing, promptly upon learning thereof, of any labor union dispute to which any Loan Party may become a party, any strikes or walkouts relating to any of the Loan Parties' plants or other facilities, and the expiration or termination of any labor union contract to which any Loan Party is a party or by which any Loan Party is bound or of any negotiations with respect thereto. SECTION 5.22. NATURE OF BUSINESS. The Loan Parties shall not make any material change in the nature of its business as carried on at the Agreement Date. The Loan Parties -54- shall not make an Investment in any Person whose business is not in the same or similar line of business as the business carried on by the Loan Parties at the Agreement Date. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT AND REMEDIES. If any of the following events ("Events of Default") shall occur and be continuing: (a) (i) principal of any Note or any other amount due hereunder (other than amounts due (A) in respect of any drawing after acceleration of the Maturity Date pursuant to SECTION 6.02 hereof with respect to a Letter of Credit or (B) in respect of any LIBOR Advance at the end of its Interest Period) shall not be paid on the date on which such payment is due, (ii) any installment of interest of any Note (other than amounts due in respect of any LIBOR Advance at the end of its Interest Period) shall not be paid within two Business Days following the date on which such payment is due, (iii) any amount due in respect of any drawing after the Maturity Date with respect to a Letter of Credit shall not be paid within one Business Day following the date on which such payment is due or (iv) any amount due in respect of any LIBOR Advance at the end of its Interest Period shall not be paid within three Business Days following the date on which such payment is due; or (b) any representation or warranty made by any Loan Party herein or in any document, certificate or financial statement delivered in connection with this Agreement shall prove to have been incorrect in any material respect when made or deemed made or reaffirmed, as the case may be; or (c) any Loan Party shall fail to perform or observe any covenant contained in SECTION 5.03 or SECTIONS 5.11 through SECTION 5.23 of this Agreement; or (d) any Loan Party shall fail to perform or observe any other term, covenant (provided that such a failure with respect to a covenant in subsection (i), (ii) or (iii) of SECTION 5.06(b) shall be an Event of Default only in the event that the failure to comply in the case of subsection (i), the failure to obtain a Permit in the case of subsection (ii) or the noncompliance referenced in subsection (iii) would reasonably be expected to have a Material Adverse Effect) or agreement contained in this Agreement (other than those specified in SECTION 6.01(A), SECTION 6.01(B) or SECTION 6.01(C)), and any such failure shall remain unremedied for 30 calendar days after the earlier of (i) written notice of such failure shall have been given to a Responsible Officer of the Company by the Administrative Lender or (ii) any Loan Party knows of such failure; or -55- (e) (i) any Loan Party shall default in the payment of principal or interest of any Indebtedness having an unpaid principal balance in excess of $2,000,000 (excluding Indebtedness evidenced by the Notes or any other amounts due under the Loan Documents) of such Loan Party, when due whether by acceleration or otherwise, beyond any period of grace provided with respect thereto, or (ii) any event shall occur or condition shall exist which gives rise to a default in the performance or observance of any other obligation or condition with respect to any Indebtedness having an unpaid principal balance in excess of $2,000,000 (excluding Indebtedness evidenced by the Notes or any other amounts due under the Loan Documents) if the effect of such default results in the holder of such other Indebtedness or any Person acting on such holder's behalf being authorized to accelerate the maturity of such other Indebtedness (or any portion thereof which is greater than $2,000,000); or (f) any Loan Party shall default in its obligation to pay any dividend respecting its capital stock when due, or to purchase, redeem, retire or otherwise acquire shares of its capital stock; or (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of any Loan Party, or of a substantial part of the property or assets of such Loan Party, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Loan Party or for a substantial part of the property or assets of such Loan Party or (iii) the winding-up or liquidation of any Loan Party; and such proceeding or petition shall continue undismissed for 90 days or an order or decree approving or ordering any of the foregoing shall be entered; or (h) any Loan Party shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for such Loan Party or for a substantial part of the property or assets of such Loan Party, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing, or (i) a final judgment or judgments for the payment of money shall be entered by a court or courts against any Loan Party and such judgment or judgments remain unstayed or undischarged (or provision shall not be made for such discharge) for a period of 30 days from the date of entry thereof and the aggregate amount of all such judgments against all such -56- Persons exceeds $2,000,000 (net of actual insurance coverage if the Lenders receive evidence satisfactory to it that coverage exists); or (j) (i) a proceeding shall be commenced to have a trustee appointed, or a trustee shall be appointed, to terminate or administer a Plan under Section 4042(b) of ERISA which proceeding or appointment is, in the reasonable opinion of the Lenders, likely to result in the termination of such Plan and to give rise to a material liability of any member(s) of the ERISA Group with respect to such termination, (ii) a notice of intent to terminate a Plan under Section 4041(c) of ERISA is filed with the PBGC, if such termination would give rise to a material liability of any member(s) of the ERISA Group, (iii) any Multiemployer Plan is in reorganization or is insolvent and the circumstances are such that, in the reasonable opinion of the Lenders, a material liability is likely to be incurred by any member(s) of the ERISA Group, (iv) there is a complete or partial withdrawal from a Multiemployer Plan that subjects any member(s) of the ERISA Group to a material liability, (v) any member(s) of the ERISA Group shall fail to pay an amount or amounts aggregating in excess of $10,000,000 which it (or they) shall have become liable to pay to or with respect to one or more Plans, Multiemployer Plans and/or Benefit Arrangements, (vi) a waiver of the minimum funding standard under section 412 of the Code or an extension of any amortization period thereunder is requested by any member(s) of the ERISA Group with respect to a Plan that has "unfunded benefit liabilities," within the meaning of Section 4001(a)(18) of ERISA, in excess of $10,000,000, (vii) any member(s) of the ERISA Group shall have any liability for health benefits pursuant to a group health plan to any group of employees or former employees beyond their retirement or other termination of service, other than coverage mandated by Part 6 of Subtitle B of Title I of ERISA or coverage that can be unilaterally terminated by the member(s) of the ERISA Group at any time without resulting in a material liability, (viii) any member(s) of the ERISA Group or any of its (or their) agents or representatives shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor and such prohibited transaction subjects any member(s) of the ERISA Group to a material liability, or (ix) more than one or any combination of the events or conditions described in (i) through (viii) above shall occur or exist (determined without regard to whether each such event or condition taken alone would result in a material liability) and such events or conditions in the aggregate result in a material liability to any member(s) of the ERISA Group (for purposes of this SECTION 6.01(J), an obligation or liability shall be considered material if it equals or exceeds $10,000,000); (k) Any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) shall own, directly or indirectly, beneficially or of record 50% or more of any class of the Voting Stock of the Company; or (l) Any holder or holders of any Material Indebtedness or any Person acting on such holder's or holders' behalf shall accelerate the maturity of such Material Indebtedness. -57- SECTION 6.02. REMEDIES. If an Event of Default shall have occurred and shall be continuing: (a) With the exception of an Event of Default specified in SECTION 6.01(g) or SECTION 6.01(H), the Administrative Lender shall, upon the direction of the Determining Lenders, by notice to the Company terminate the Commitment and/or declare the principal of and interest on the Advances and all other Obligations (including the aggregate amount of the Reimbursement Obligations outstanding at such time) to be forthwith due and payable without presentation, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind (other than notice as expressly provided herein), all of which are hereby expressly waived, anything in this Agreement or the other Loan Documents to the contrary notwithstanding. (b) Upon the occurrence of an Event of Default specified in SECTION 6.01(G) or SECTION 6.02(H) hereof, the principal of and interest on the Advances and all other Obligations (including the aggregate amount of the Reimbursement Obligations outstanding at such time) shall thereupon and concurrently therewith become due and payable and the Commitment shall forthwith terminate, all without any action by the Administrative Lender, any Lender or any holders of the Notes and without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Loan Documents to the contrary notwithstanding. (c) The Loan Parties recognize that notwithstanding any termination of the Commitment pursuant to SECTION 6.02(A) or SECTION 6.02(B) hereof, the obligation of the Issuing Bank to fund draws against Letters of Credit outstanding on the Maturity Date, as accelerated pursuant to the said SECTION 6.02, shall continue until expiration of each such Letter of Credit. In consideration of the agreement of the Lenders to not require that the Loan Parties provide cash collateral to secure the Reimbursement Obligations in respect of the Letters of Credit outstanding on the Maturity Date, as so accelerated, the Loan Parties hereby unconditionally and irrevocably agree that upon any acceleration of the Obligations pursuant to SECTION 6.02(A) or SECTION 6.02(B) hereof, the aggregate amount of the Reimbursement Obligations outstanding at such time shall be immediately due and payable in full. To the extent that amounts received by the Administrative Lender and the Lenders in the exercise of their post-default rights granted to them under the Loan Documents and under applicable law exceed the unpaid Obligations (other than the outstanding Reimbursement Obligations), such excess, up to an amount equal to the aggregate amount of the Reimbursement Obligations, shall be deposited in a deposit account maintained by the Administrative Lender (the "REIMBURSEMENT OBLIGATION ACCOUNT"). Title to, and ownership of, the Reimbursement Obligation Account shall be in and for the benefit of the Lenders and the Reimbursement Obligation Account shall be under the sole dominion and control of the -58- Administrative Lender. Except as set forth herein, no Loan Party shall have any interest or right with respect to the Reimbursement Obligation Account. The Administrative Lender, as draws are made against Letters of Credit, shall apply the funds in the Reimbursement Obligation Account to the unpaid Obligations then outstanding. After all Letters of Credit have been funded or expired by their terms, and all unpaid Obligations then outstanding have been paid in full, the Administrative Lender shall refund any amount remaining in the Reimbursement Obligation Account to the Company. The Loan Parties acknowledge that (i) if the Letters of Credit outstanding on the Maturity Date are not extended beyond their respective expiration dates in effect on the Maturity Date, such Letters of Credit will be drawn upon on or prior to their respective expiration dates, (ii) the Issuing Bank will not extend the expiration date of any Letter of Credit outstanding on the Maturity Date, (iii) as a result of clauses (i) and (ii) immediately preceding, the Reimbursement Obligations of the Company will be a fixed amount in the aggregate amount of the Letters of Credit outstanding on the Maturity Date and not a contingent amount and (iv) as a result of clauses (i), (ii) and (iii) immediately preceding, no provision herein shall be deemed to be a confession of judgment. (d) Subject to the terms and provisions of the Loan Documents, the Administrative Lender and the Lenders may exercise all of the post-default rights granted to them under the Loan Documents or under Applicable Law. (e) The rights and remedies of the Administrative Lender and the Lenders hereunder shall be cumulative, and not exclusive. SECTION 6.03. INJUNCTIVE RELIEF. The Loan Parties recognize that in the event they fail to perform, observe or discharge any of their obligations or liabilities under this Agreement or any other Loan Document, any remedy of law may prove to be inadequate relief to the Lenders; therefore, the Loan Parties agree that the Lenders, if the Lenders so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. The Lenders recognize that in the event it fails to perform, observe or discharge any of their obligations or liabilities under this Agreement or any other Loan Document, any remedy of law may prove to be inadequate relief to the Loan Parties; therefore, the Lenders agree that the Loan Parties shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. ARTICLE VII GUARANTY SECTION 7.01. GUARANTY. In consideration of the Commitment, the Guarantors hereby absolutely, unconditionally and irrevocably, jointly and severally guarantee the punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of the Obligations (including, without limitation, interest accruing or becoming -59- owing both prior to and subsequent to the commencement of any proceeding against or with respect to the Company under any chapter of the Bankruptcy Code of 1978 (11 U.S.C. Section 101 ET SEQ.), fees, commissions, expenses (including reasonable attorneys' fees and expenses) or otherwise, and all reasonable costs and expenses, if any, incurred by the Lenders in connection with enforcing any rights under this Guaranty (all such obligations being the "GUARANTEED OBLIGATIONS"), and agree to pay any and all reasonable expenses incurred by the Lenders in enforcing this Guaranty. This Guaranty is an absolute, unconditional, present and continuing guaranty of payment and not of collectibility and is in no way conditioned upon any attempt to collect from the Company or any other action, occurrence or circumstance whatsoever. SECTION 7.02. CONTINUING GUARANTY. Each Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, the Notes and the other Loan Documents. Each Guarantor agrees that the Guaranteed Obligations and Loan Documents may be extended or renewed, and Advances repaid and reborrowed in whole or in part, without notice to or assent by such Guarantor, and that it will remain bound upon this Guaranty notwithstanding any extension, renewal or other alteration of any Guaranteed Obligations or Loan Documents, or any repayment and reborrowing of Advances. The obligations of each Guarantor under this Guaranty shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms hereof under any circumstances whatsoever, including: (a) any extension, renewal, modification, settlement, compromise, waiver or release in respect of any Guaranteed Obligations; (b) any extension, renewal, amendment, modification, rescission, waiver or release in respect of any Loan Documents; (c) any release, exchange, substitution, non-perfection or invalidity of, or failure to exercise rights or remedies with respect to, any direct or indirect security for any Guaranteed Obligations, including the release of any other Guarantor or other Person liable on any Guaranteed Obligations; (d) any change in the corporate existence, structure or ownership of the Company, any Guarantor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company, such Guarantor, any other Guarantor or any of their respective assets; (e) the existence of any claim, defense, set-off or other rights or remedies which such Guarantor at any time may have against the Company, or the Company or such Guarantor may have at any time against the Lenders, any other Guarantor or any other Person, whether in connection with this Guaranty, the Loan Documents, the transactions contemplated thereby or any other transaction; -60- (f) any invalidity or unenforceability for any reason of this Agreement or other Loan Documents, or any provision of Law purporting to prohibit the payment or performance by the Company, such Guarantor or any other Guarantor of the Guaranteed Obligations or Loan Documents; (g) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. SECTION 7.03. EFFECT OF DEBTOR RELIEF LAWS. If after receipt of any payment of, or proceeds of any security applied (or intended to be applied) to the payment of all or any part of the Guaranteed Obligations, any Lender is for any reason compelled to surrender or voluntarily surrenders, such payment or proceeds to any Person (a) because such payment or application of proceeds is or may be avoided, invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, fraudulent conveyance, fraudulent transfer, impermissible set-off or a diversion of trust funds, or (b) for any other reason, including (i) any judgment, decree or order of any court or administrative body having jurisdiction over any Lender or any of its properties, or (ii) any settlement or compromise of any such claim effected by any Lender with any such claimant (including the Company), then the Guaranteed Obligations or part thereof intended to be satisfied shall be reinstated and continue, and this Guaranty shall continue in full force as if such payment or proceeds have not been received, notwithstanding any revocation thereof or the cancellation of the Notes or any other instrument evidencing any Guaranteed Obligations or otherwise; and the Guarantors, jointly and severally, shall be liable to pay such Lender, and hereby do indemnify such Lender and hold it harmless for the amount of such payment or proceeds so surrendered and all expenses (including reasonable attorneys' fees, court costs and expenses attributable thereto) incurred by such Lender in the defense of any claim made against it that any payment or proceeds received by such Lender in respect of all or part of the Guaranteed Obligations must be surrendered. The provisions of this paragraph shall survive the termination of this Guaranty, and any satisfaction and discharge of the Company by virtue of any payment, court order or any federal or state law. SECTION 7.04. WAIVER OF SUBROGATION. Notwithstanding any payment or payments made by any Guarantor hereunder, or any set-off or application by any Lender of any security or of any credits or claims, no Guarantor will assert or exercise any rights of any Lender or of such Guarantor against the Company to recover the amount of any payment made by such Guarantor to any Lender hereunder by way of subrogation, reimbursement, contribution, indemnity, or otherwise arising by contract or operation of law, and such Guarantor shall not have any right of recourse to or any claim against assets or property of the Company, whether or not the obligations of the Company have been satisfied, all of such rights being herein expressly waived by such Guarantor. Each Guarantor agrees not to seek contribution or indemnity or other recourse from any other Guarantor or other Person. If any amount shall nevertheless be paid to a Guarantor by the Company or another Guarantor prior -61- to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of the Lenders and shall forthwith be paid to the Administrative Lender to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. The provisions of this paragraph shall survive the termination of this Guaranty, and any satisfaction and discharge of the Company by virtue of any payment, court order or any Law. SECTION 7.05. SUBORDINATION. If any Guarantor becomes the holder of any indebtedness payable by the Company, each Guarantor hereby subordinates all indebtedness owing to it from the Company to all indebtedness of the Company to the Lenders, and agrees that upon the occurrence and continuance of a Default or an Event of Default, it shall not accept any payment on the same until payment in full of the obligations of the Company under this Agreement, the Notes and all other Loan Documents, and shall in no circumstance whatsoever attempt to set-off or reduce any obligations hereunder because of such indebtedness. If any amount shall nevertheless be paid to a Guarantor by the Company or another Guarantor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of the Lenders and shall forthwith be paid to the Administrative Lender to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. SECTION 7.06. WAIVER. Each Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and waives presentment, demand of payment, notice of intent to accelerate, notice of dishonor or nonpayment and any requirement that the Administrative Lender or any Lender institute suit, collection proceedings or take any other action to collect the Guaranteed Obligations, including any requirement that the Administrative Lender or any Lender protect, secure, perfect or insure any Lien against any property subject thereto or exhaust any right or take any action against the Company or any other Person or any collateral (it being the intention of each Lender and each Guarantor that this Guaranty is to be a guaranty of payment and not of collection). It shall not be necessary for the Administrative Lender or any Lender, in order to enforce any payment by any Guarantor hereunder, to institute suit or exhaust its rights and remedies against the Company, any other Guarantor or any other Person, including others liable to pay any Guaranteed Obligations, or to enforce its rights against any security ever given to secure payment thereof. Each Guarantor hereby expressly waives each and every right to which it may be entitled by virtue of the suretyship laws of the State of Texas, including, without limitation, any and all rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code and Chapter 34 of the Texas Business and Commerce Code. Each Guarantor hereby waives marshaling of assets and liabilities, notice by any Lender of any indebtedness or liability to which any Lender applies or may apply any amounts received by any Lender, and of the creation, advancement, increase, existence, extension, renewal, rearrangement and/or modification of the Guaranteed Obligations. Each Guarantor expressly waives, to the extent -62- permitted by applicable law, the benefit of any and all laws providing for exemption of property from execution or for valuation and appraisal upon foreclosure. SECTION 7.07. FULL FORCE AND EFFECT. This Guaranty is a continuing guaranty and shall remain in full force and effect until payment in full of the Obligations of the Company under this Agreement, the Note and all other Loan Documents and all other amounts payable under this Guaranty. SECTION 7.08. ENFORCEABILITY. Notwithstanding any other provision of this ARTICLE VII, if any one or more provisions of this Guaranty should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected, impaired, prejudiced or disturbed thereby. If at any time any portion of the obligations of the Guarantors under this Guaranty shall be determined by any Tribunal to be invalid, unenforceable or avoidable, the remaining portion of the obligations of the Guarantors under this Guaranty shall not in any way be affected, impaired, prejudiced or disturbed thereby and shall remain valid and enforceable to the fullest extent permitted by Applicable Law. If at any time all or any portion of the obligation of the Guarantors under this Guaranty would otherwise be determined by a court of competent jurisdiction to be invalid, unenforceable or avoidable under Section 548 of the United States Bankruptcy Code or under a similar Applicable Law of any jurisdiction, then notwithstanding any other provisions of this Guaranty to the contrary such obligation or portion thereof of the Guarantors under this Guaranty shall be limited to the greatest of (i) the value of any quantifiable economic benefits accruing to the Guarantors as a result of this Guaranty, (ii) an amount equal to 95% of the excess on the date the relevant liabilities were incurred of the present fair saleable value of the assets of the Guarantors over the amount of all liabilities of the Guarantors, contingent or otherwise, and (iii) the maximum amount for which this Guaranty is determined to be enforceable under applicable Law. ARTICLE VIII CHANGES IN CIRCUMSTANCES SECTION 8.01. LIBOR BASIS DETERMINATION INADEQUATE. If with respect to any proposed LIBOR Advance for any Interest Period, any Lender determines that (i) deposits in dollars (in the applicable amount) are not being offered to that Lender in the relevant market for such Interest Period or (ii) the LIBOR Basis for such proposed LIBOR Advance does not adequately cover the cost to such Lender of making and maintaining such proposed LIBOR Advance for such Interest Period, such Lender shall forthwith give notice thereof to the Company, whereupon until such Lender notifies the Company that the circumstances giving rise to such situation no longer exist, the obligation of such Lender to make LIBOR Advances shall be suspended. -63- SECTION 8.02. ILLEGALITY. If any applicable law, rule or regulation, or any change therein or adoption thereof, or interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its LIBOR Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall make it unlawful or impossible for such Lender (or its LIBOR Lending Office) to make, maintain or fund its LIBOR Advances, such Lender shall so notify the Company and the Administrative Lender. Before giving any notice to the Company pursuant to this Section, the notifying Lender shall designate a different LIBOR Lending Office or other lending office if such designation will avoid the need for giving such notice and will not, in the sole judgment of the Lender, be materially disadvantageous to the Lender. Upon receipt of such notice, notwithstanding anything contained in ARTICLE II hereof, the Company shall repay in full the then outstanding principal amount of each LIBOR Advance owing to the notifying Lender, together with accrued interest thereon, on either (a) the last day of the Interest Period applicable to such Advance, if the Lender may lawfully continue to maintain and fund such Advance to such day, or (b) immediately, if the Lender may not lawfully continue to fund and maintain such Advance to such day. Concurrently with repaying each affected LIBOR Advance owing to such Lender along with any reimbursement required under SECTION 2.09 hereof, notwithstanding anything contained in ARTICLE II hereof, the Company shall borrow a Base Rate Advance from such Lender, and such Lender shall make such Base Rate Advance, in an amount such that the outstanding principal amount of the Advances owing to such Lender shall equal the outstanding principal amount of the Advances owing immediately prior to such repayment. SECTION 8.03. INCREASED COSTS. (a) If any applicable law, rule or regulation, or any change in or adoption of any law, rule or regulation, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by any Lender (or its LIBOR Lending Office) with any request or directive (whether or not having the force of law) or any such authority, central bank or compatible agency: (i) shall subject a Lender (or its LIBOR Lending Office) to any Tax (net of any tax benefit engendered thereby) with respect to its LIBOR Advances or its obligation to make such Advances, or shall change the basis of taxation of payments to a Lender (or to its LIBOR Lending Office) of the principal of or interest on its LIBOR Advances or in respect of any other amounts due under this Agreement, as the case may be, or its obligation to make such Advances (except for changes in the rate of tax on the overall net income, net worth or capital of the Lender and franchise taxes, doing business taxes or minimum taxes imposed upon such Lender); or -64- (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Lender's LIBOR Lending Office or shall impose on the Lender (or its LIBOR Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its LIBOR Advances or its obligation to make such Advances; and the result of any of the foregoing is to increase the cost to a Lender (or its LIBOR Lending Office) of making or maintaining any LIBOR Advances, or to reduce the amount of any sum received or receivable by a Lender (or its LIBOR Lending Office) with respect thereto, by an amount reasonably deemed by a Lender to be material, then, within 15 days after demand by a Lender, the Company agrees to pay to such Lender such additional amount as will reasonably compensate such Lender for such increased costs or reduced amounts, subject to SECTION 10.09 hereof. The affected Lender will as soon as practicable notify the Company of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different LIBOR Lending Office or other lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole judgment of the affected Lender made in good faith, be disadvantageous to such Lender. (b) A certificate of any Lender claiming compensation under this Section and setting forth the additional amounts to be paid to it hereunder and calculations therefor shall be conclusive in the absence of demonstrable error. In determining such amount, a Lender may use any reasonable averaging and attribution methods. If a Lender demands compensation under this Section, the Company may at any time, upon at least five Business Days' prior notice to the Lender, after reimbursement to the Lender by the Company in accordance with this Section of all costs incurred, prepay in full the then outstanding LIBOR Advances of the Lender, together with accrued interest thereon to the date of prepayment, along with any reimbursement required under SECTION 2.09 hereof. Concurrently with prepaying such LIBOR Advances, the Company may borrow a Base Rate Advance from the Lender, and the Lender shall make such Base Rate Advance, in an amount such that the outstanding principal amount of the Advances owing to such Lender shall equal the outstanding principal amount of the Advances owing immediately prior to such prepayment. SECTION 8.04. BASE RATE ADVANCES RATHER THAN LIBOR ADVANCES. If notice has been given pursuant to SECTION 8.01, 8.02 or 8.03 hereof suspending the obligation of a Lender to make LIBOR Advances, or requiring LIBOR Advances of a Lender to be repaid or prepaid, then, unless and until the Lender notifies the Company that the circumstances giving rise to such repayment no longer apply, all Advances which would otherwise be made by such Lender as LIBOR Advances shall be made instead as Base Rate Advances. -65- SECTION 8.05. CAPITAL ADEQUACY. If either (a) the introduction of or any change in or in the interpretation of any law, rule or regulation or (b) compliance by a Lender with any law, rule or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by a Lender or any corporation controlling such Lender, and such Lender determines that the amount of such capital is increased by or based upon the existence of such Lender's commitments or Advances hereunder and other commitments or advances of such Lender of this type, then, upon demand by such Lender, subject to SECTION 10.09, the Company shall immediately pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender with respect to such circumstances, to the extent that such Lender reasonably determines in good faith such increase in capital to be allocable to the existence of such Lender's Commitment hereunder. A certificate as to such amounts submitted to the Company by a Lender hereunder, shall, in the absence of demonstrable error, be conclusive and binding for all purposes. The failure of any Lender to demand compensation hereunder shall not constitute a waiver of such Lender's rights to demand such compensation. Without prejudice to the survival of any other obligations of the Company hereunder, the obligations of the Company under this SECTION 8.05 shall survive the payment of the Obligations and termination of this Agreement. ARTICLE IX AGREEMENT AMONG LENDERS SECTION 9.01. AGREEMENT AMONG LENDERS. The Lenders agree among themselves that: (a) ADMINISTRATIVE LENDER. Each Lender hereby appoints the Administrative Lender as its nominee in its name and on its behalf, to receive all documents and items to be furnished hereunder; to act as nominee for and on behalf of all Lenders under the Loan Documents; to, except as otherwise expressly set forth herein, take such action as may be requested by the Determining Lenders, provided that, unless and until the Administrative Lender shall have received such requests, the Administrative Lender may take such administrative action, or refrain from taking such administrative action, as it may deem advisable and in the best interests of the Lenders; to arrange the means whereby the proceeds of the Advances of the Lenders are to be made available to the Company; to distribute promptly to each Lender information, requests and documents received from the Company, and each payment (in like funds received) with respect to any of such Lender's Advances, fee or other amount; and to deliver to the Company requests, demands, approvals and consents received from the Lenders. Administrative Lender agrees to promptly distribute to each Lender, at such Lender's address set forth below information, requests, documents and payments received from the Company. -66- (b) REPLACEMENT OF ADMINISTRATIVE LENDER. Should the Administrative Lender or any successor Administrative Lender ever cease to be a Lender hereunder, or should the Administrative Lender or any successor Administrative Lender ever resign as Administrative Lender, or should the Administrative Lender or any successor Administrative Lender ever be removed with cause by the Determining Lenders, then the Lender appointed by the other Lenders, with the consent of the Company, shall forthwith become the Administrative Lender, and the Company and the Lenders shall execute such documents as any Lender may reasonably request to reflect such change. Any resignation or removal of the Administrative Lender or any successor Administrative Lender shall become effective upon the appointment by the Lenders, with the consent of the Company, of a successor Administrative Lender; provided, however, that if the Lenders fail for any reason to appoint a successor within 60 days after the resigning Administrative Lender's giving notice of resignation or the Determining Lenders' removal of the Administrative Lender, the Administrative Lender or any successor Administrative Lender (as the case may be) may, on behalf of the Lenders, appoint a successor Administrative Lender, which shall be a commercial bank organized under the Laws of the United States of America or of any state thereof and having a combined capital and surplus of at least $10,000,000, and the resigning Administrative Lender shall thereafter have no obligation to act as Administrative Lender hereunder. (c) EXPENSES. Each Lender shall pay its pro rata share, based on its Specified Percentage, of any expenses paid by the Administrative Lender directly and solely in connection with any of the Loan Documents if Administrative Lender does not receive reimbursement therefor from other sources within 60 days after the date incurred, unless payment of such fees is being diligently disputed by such Lender or the Company in good faith. Any amount so paid by the Lenders to the Administrative Lender shall be returned by the Administrative Lender pro rata to each paying Lender to the extent later paid by the Company or any other Person on the Company's behalf to the Administrative Lender. (d) DELEGATION OF DUTIES. The Administrative Lender may execute any of its duties hereunder by or through officers, directors, employees, attorneys or agents, and shall be entitled to (and shall be protected in relying upon) advice of counsel concerning all matters pertaining to its duties hereunder. (e) RELIANCE BY ADMINISTRATIVE LENDER. The Administrative Lender and its officers, directors, employees, attorneys and agents shall be entitled to rely and shall be fully protected in relying on any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telex or teletype message, statement, order, or other document or conversation reasonably believed by it or them in good faith to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinions of counsel selected the Administrative Lender. The Administrative Lender may, in its reasonable judgment, deem and treat the payee of any Note as the owner thereof for all purposes hereof. -67- (f) LIMITATION OF ADMINISTRATIVE LENDER'S LIABILITY. Neither the Administrative Lender nor any of its officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by it or them hereunder in good faith and believed by it or them to be within the discretion or power conferred to it or them by the Loan Documents or be responsible for the consequences of any error of judgment, except for its or their own gross negligence or wilful misconduct. Except as aforesaid, the Administrative Lender shall be under no duty to enforce any rights with respect to any of the Advances, or any security therefor. The Administrative Lender shall not be compelled to do any act hereunder or to take any action towards the execution or enforcement of the powers hereby created or to prosecute or defend any suit in respect hereof, unless indemnified to its satisfaction against loss, cost, liability and expense. The Administrative Lender shall not be responsible in any manner to any Lender for the effectiveness, enforceability, genuineness, validity or due execution of any of the Loan Documents, or for any representation, warranty, document, certificate, report or statement made herein or furnished in connection with any Loan Documents, or be under any obligation to any Lender to ascertain or to inquire as to the performance or observation of any of the terms, covenants or conditions of any Loan Documents on the part of the Company. To the extent not reimbursed by the Company, each Lender hereby jointly and severally indemnifies and holds harmless the Administrative Lender, pro rata according to its Specified Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and/or disbursements of any kind or nature whatsoever which may be imposed on, asserted against, or incurred by the Administrative Lender (in its capacity as Administrative Lender and not as a Lender) in any way with respect to any Loan Documents or any action taken or omitted by the Administrative Lender in its capacity as Administrative Lender and not as a Lender under the Loan Documents (including any negligent action of the Administrative Lender), except to the extent the same result from gross negligence or wilful misconduct by the Administrative Lender. (g) LIABILITY AMONG LENDERS. No Lender shall incur any liability (other than the sharing of expenses and other matters specifically set forth herein and in the other Loan Documents) to any other Lender, except for acts or omissions in bad faith. (h) RIGHTS AS LENDER. With respect to its commitment hereunder, the Advances made by it and Note issued to it, the Administrative Lender shall have the same rights as a Lender and may exercise the same as though it were not the Administrative Lender, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Lender in its individual capacity. The Administrative Lender or any Lender may accept deposits from, act as trustee under indentures of, and generally engage in any kind of business with, the Company and any of its Affiliates, and any Person who may do business with or own securities of the Company or any of its Affiliates, all as if the Administrative Lender were not the Administrative Lender hereunder and without any duty to account therefor to the Lenders. -68- SECTION 9.02. LENDER CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Lender or any other Lender and based upon the financial statements referred to in SECTIONS 4.04, 5.01(a) and 5.01(b) hereof, and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Lender or any other Lender and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. ARTICLE X MISCELLANEOUS SECTION 10.01. NOTICES. (a) All notices and other communications under this Agreement shall be in writing and shall be deemed to have been given on the date personally delivered or sent by telecopy, or three days after deposit in the mail, designated as certified mail, return receipt requested, postage-prepaid, or one day after being entrusted to a reputable commercial overnight delivery service, or one day after being delivered to the telegraph office or sent out by telex addressed to the party to which such notice is directed at its address determined as provided in this Section. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses: (i) If to the Company, to it or if to any other Loan Party, to it in care of the Company, in each case, at: DSC Communications Corporation 3701 Plano Parkway Plano, Texas 75075 Telecopy Number: (214) 519-3000 Attn: Christian J. Ornes, Vice President and Treasurer (ii) If to the Administrative Lender, at: NationsBank of Texas, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 Telecopy Number: (214) 508-0980 Attn: Yousuf Omar, Vice President Chad Coben, Assistant Vice President -69- (iii) If to a Lender, at its address shown below its name on the signature pages hereof, or if applicable, set forth in its Assignment Agreement. (b) Any party hereto may change the address to which notices shall be directed by giving 10 days' written notice of such change to the other parties. SECTION 10.02. EXPENSES. The Company shall promptly pay: (a) all reasonable out-of-pocket expenses of the Administrative Lender in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents, the transactions contemplated hereunder and thereunder, and the making of Advances and the issuance of Letters of Credit hereunder, including, without limitation, the reasonable fees of Special Counsel not to exceed $40,000 and the out-of-pocket expenses incurred by Special Counsel; (b) all reasonable out-of-pocket expenses and attorneys' fees of the Administrative Lender in connection with the administration of the transactions contemplated in this Agreement and the other Loan Documents and the preparation, negotiation, execution and delivery of any waiver, amendment or consent by the Lenders relating to this Agreement or the other Loan Documents; and (c) (i) all costs, out-of-pocket expenses and attorneys' fees of the Administrative Lender incurred for enforcement, collection, restructuring, refinancing and "work-out", or otherwise incurred in obtaining performance under the Loan Documents, which in each case shall include, without limitation, fees and expenses of counsel for the Administrative Lender, and administrative fees for the Administrative Lender, (ii) after the occurrence of an Event of Default specified in SECTION 6.01(a), all costs, out-of-pocket expenses and attorneys' fees of each Lender incurred for enforcement, collection, restructuring, refinancing and "work-out", or otherwise incurred in obtaining performance under the Loan Documents, and all costs and out-of-pocket expenses of collection, which in each case shall include, without limitation, fees and expenses of consultants and counsel for each Lender, and (iii) after the occurrence of an Event of Default other than that specified in SECTION 6.01(a), all non-legal out-of-pocket expenses of each Lender and all attorneys' fees of one counsel acting on behalf of all the Lenders incurred for enforcement, restructuring, refinancing and "work-out", or otherwise incurred in obtaining performance under the Loan Documents. SECTION 10.03. WAIVERS. The rights and remedies of the Lenders under this Agreement and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies which they would otherwise have. No failure or delay by the Administrative Lender or any Lender in exercising any right shall operate as a waiver of such right. The Lenders expressly reserve the right to require strict compliance with the terms of this -70- Agreement in connection with any funding of a request for an Advance and the Issuing Bank expressly reserves the right to require strict compliance with the terms of this Agreement in connection with any issuance of a Letter of Credit. In the event that any Lender decides to fund an Advance or the Issuing Bank decides to issue a Letter of Credit at a time when the Company is not in strict compliance with the terms of this Agreement, such decision by such Lender shall not be deemed to constitute an undertaking by the Lender to fund any further requests for Advances or by the Issuing Bank to issue any additional Letters of Credit or preclude the Lenders from exercising any rights available under the Loan Documents or at law or equity. Any waiver or indulgence granted by the Lenders shall not constitute a modification of this Agreement, except to the extent expressly provided in such waiver or indulgence, or constitute a course of dealing by the Lenders at variance with the terms of the Agreement such as to require further notice by the Lenders of the Lenders' intent to require strict adherence to the terms of the Agreement in the future. Any such actions shall not in any way affect the ability of the Administrative Lender or the Lenders, in their discretion, to exercise any rights available to them under this Agreement or under any other agreement, whether or not the Administrative Lender or any of the Lenders are a party thereto, relating to any Loan Party. SECTION 10.04. DETERMINATION BY THE LENDERS CONCLUDIVE AND BINDING. Any material determination required or expressly permitted to be made by the Administrative Lender or any Lender under this Agreement shall be made in its reasonable judgment and in good faith, and shall when made, absent demonstrable error, be conclusive and binding on all parties. SECTION 10.05. SET-OFF. Upon the occurrence and continuance of an Event of Default and acceleration of the Note and Obligations, each Lender and any subsequent holder of any Note, and any assignee in any Note is hereby authorized by each Loan Party at any time or from time to time to set-off, appropriate and apply any deposits (general or special (except trust and escrow accounts), time or demand, including without limitation Indebtedness evidenced by certificates of deposit, in each case whether matured or unmatured) and any other Indebtedness at any time held or owing by such Lender or holder to or for the credit or the account of any Loan Party, against and on account of the Obligations and other liabilities of any Loan Party to such Lender or holder, irrespective of whether or not the Lender or holder shall have made any demand hereunder (other than as expressly provided in SECTION 6.02) and although certain of such obligations and liabilities, or any of them, shall be contingent. Any sums obtained by any Lender or by any assignee or subsequent holder of any Note shall be subject to pro rata treatment of all Obligations and other liabilities hereunder. Each Lender agrees promptly to notify any Loan Party after any such set-off and application by such Lender, but the failure to give such notice shall not affect the validity of such set-off and application. -71- SECTION 10.06. ASSIGNMENT. (a) No Loan Party may assign or transfer any of its rights or obligations hereunder or under the other Loan Documents without the prior written consent of the Lenders. (b) No Lender shall be entitled to assign its interest in this Agreement, its Notes or its Advances, except as hereinafter set forth. (c) No Lender may at any time sell participations in all or any part of its Commitment, Advances or participation interests in the Letters of Credit. (d) Each Lender may assign to one or more financial institutions or funds organized under the laws of the United States, or any state thereof, or under the laws of any other country that is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, which is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business (each, an "ASSIGNEE") its rights and obligations under this Agreement and the other Loan Documents; PROVIDED, HOWEVER, that (i) each such assignment shall be subject to the prior written consent of the Administrative Lender and the Loan Parties, which consent shall not be unreasonably withheld, (ii) each such assignment shall be of a constant, and not a varying, percentage of the Lender's rights and obligations under this Agreement, (iii) the amount of the Advances and Reimbursement Obligations being assigned pursuant to each such assignment (determined as of the date of the assignment with respect to such assignment) shall in no event be less than the lesser of (A) $5,000,000, or (B) the applicable Lender's Commitment, (iv) the applicable Lender, Administrative Lender and applicable Assignee shall execute and deliver to the Administrative Lender an Assignment and Acceptance Agreement (an "ASSIGNMENT AGREEMENT") in substantially the form of EXHIBIT C hereto, together with the Notes subject to such assignment, (v) the Assignee or the Lender executing the Assignment Agreement as the case may be, shall deliver to the Administrative Lender a processing fee of $2,500, and (vi) the Administrative Lender shall give the Company notice of any proposed assignment no later than 30 days prior to any assignment by any Lender. Upon such execution, delivery and acceptance from and after the effective date specified in each Assignment Agreement, which effective date shall be at least three Business Days after the execution thereof, (A) the Assignee thereunder shall be party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment, have the rights and obligations of a Lender hereunder and (B) the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish such rights and be released from such obligations under this Agreement. (e) Notwithstanding anything in clause (d) above to the contrary, any Lender may assign and pledge all or any portion of its Advances and Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of F.R.S. Board and any Operating Circular -72- issued by such Federal Reserve Bank; provided, however, that no such assignment under this clause (e) shall release the assignor Lender from its obligations hereunder. (f) Upon its receipt of an Assignment Agreement executed by a Lender and an Assignee, and any Note or Notes subject to such assignment, the Company shall, within three Business Days after its receipt of such Assignment Agreement, at its own expense, execute and deliver to the Administrative Lender, in exchange for the surrendered Notes, new Notes to the order of such Assignee in an amount equal to the portion of the Commitment assigned to it pursuant to such Assignment Agreement and new Notes to the order of the assigning Lender in an amount equal to the portion of the Advances and Commitment retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment Agreement and shall otherwise be in substantially the form of EXHIBIT A hereto. (g) Any Lender may, in connection with any assignment or proposed assignment pursuant to this SECTION 10.06, disclose to the Assignee or proposed Assignee, any information relating to the Loan Parties furnished to such Lender by or on behalf of the Company. (h) Except as specifically set forth in this SECTION 10.06, nothing in this Agreement or any other Loan Documents, expressed or implied, is intended to or shall confer on any Person other than the respective parties hereto and thereto and their successors and Assignees permitted hereunder and thereunder any benefit or any legal or equitable right, remedy or other claim under this Agreement or any other Loan documents. (i) Notwithstanding anything in this SECTION 10.06 to the contrary, no Assignee shall be entitled to receive any greater payment under SECTION 2.15 or SECTION 8.03 than such assigning Lender would have been entitled to receive with respect to the interest assigned to such Assignee. SECTION 10.07. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. SECTION 10.08. SEVERABILITY. Any provision of this Agreement which is for any reason prohibited or found or held invalid or unenforceable by any court or governmental agency shall be ineffective to the extent of such prohibition or invalidity or unenforceability without invalidating the remaining provisions hereof in such jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.09. INTEREST AND CHARGES. It is not the intention of any parties to this Agreement to make an agreement in violation of the laws of any applicable jurisdiction relating to usury. Regardless of any provision in any Loan Documents, no Lender shall ever be -73- entitled to receive, collect or apply, as interest on the Obligations, any amount in excess of the Maximum Amount. If any Lender ever receives, collects or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial repayment of principal and treated hereunder as such; and if principal is paid in full, any remaining excess shall be paid to the Company. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Maximum Amount, the Loan Parties and the Lenders shall, to the maximum extent permitted under Applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effect thereof, and (c) amortize, prorate, allocate and spread in equal parts, the total amount of interest throughout the entire contemplated term of the Obligations so that the interest rate is uniform throughout the entire term of the Obligations; provided, however, that if the Obligations are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Amount, the Lenders shall refund to the Company the amount of such excess or credit the amount of such excess against the total principal amount of the Obligations owing, and, in such event, the Lenders shall not be subject to any penalties provided by any laws for contracting for, charging or receiving interest in excess of the Maximum Amount. This Section shall control every other provision of all agreements pertaining to the transactions contemplated by or contained in the Loan Documents. SECTION 10.10. HEADINGS. Headings used in this Agreement are for convenience only and shall not be used in connection with the interpretation of any provision hereof. SECTION 10.11. AMENDMENT AND WAIVER. The provisions of this Agreement may not be amended, modified or waived except by the written agreement of the Loan Parties and the Determining Lenders; provided, however, that no such amendment, modification or waiver shall be made (a) without the consent of all Lenders, if it would (i) increase the Specified Percentage or commitment of any Lender, or (ii) extend the date of maturity of, extend the due date for any payment of principal or interest on, reduce the amount of any principal of or interest on, or reduce the rate of interest on, any Advance or other amount owing under any Loan Documents, or (iii) release any guaranty of the Obligations (except pursuant to this Agreement), or (iv) reduce the fees payable hereunder, or (v) revise this SECTION 10.11, (vi) waive the date for payment of any of the Obligations, or (vii) amend the definition of Determining Lenders, or (vii) amend or waive the provisions of SECTION 5.03(b); or (b) without the consent of the Administrative Lender, if it would alter the rights, duties or obligations of the Administrative Lender. Neither this Agreement nor any term hereof may be amended orally, nor may any provision hereof be waived orally but only by an instrument in writing signed by the Administrative Lender and, in the case of an amendment, by the Loan Parties. SECTION 10.12. EXCEPTION TO COVENANTS. Neither the Company, any Loan Party nor any Subsidiary of the Company shall be deemed to be permitted to take any action or fail -74- to take any action which is permitted as an exception to any of the covenants contained herein or which is within the permissible limits of any of the covenants contained herein if such action or omission would result in the breach of any other covenant contained herein. SECTION 10.13. RELEASE OF LIENS. Upon payment in full of the existing Indebtedness (other than in respect of the letters of credit outstanding under the NationsBank Revolving Credit Agreement) of the Company to NationsBank of Texas, N.A. outstanding on the Agreement Date, such bank shall release all liens related thereto. SECTION 10.14. CONFIDENTIALITY. Each Lender and the Administrative Lender agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement which is identified by the Company as being confidential at the time the same is delivered to the Lenders or the Administrative Lender, provided that nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for any Lender or the Administrative Lender, (c) to bank examiners, auditors or accountants of any Lender, (d) to the Administrative Lender or any other Lender, (e) in connection with any litigation involving a Loan Party to which any one or more of Lenders is a party, provided, further, that, unless specifically prohibited by Applicable Law or court order, each Lender shall, prior to disclosure thereof, notify the Company of any request for disclosure of any such not-public information (i) by any governmental agency or representative thereof (other than any such request in connection with an examination of such Lender's financial condition by such governmental agency) or (ii) pursuant to legal process, or (f) to any Assignee (or prospective Assignee) so long as such Assignee (or prospective Assignee) agrees to handle such information confidentially. SECTION 10.15. GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT PURSUANT TO ARTICLE 5069-15.10(b), TITLE 79, REVISED CIVIL STATUTES OF TEXAS, 1925, AS AMENDED, IT IS AGREED THAT THE PROVISIONS OF CHAPTER 15, TITLE 79, REVISED CIVIL STATUTES OF TEXAS, 1925, AS AMENDED, SHALL NOT APPLY TO THE ADVANCES, THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE COMPANY AGREES THAT THE STATE AND FEDERAL COURTS OF TEXAS LOCATED IN DALLAS, TEXAS SHALL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. THIS AGREEMENT AND -75- THE OTHER LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS COUNTY, TEXAS. SECTION 10.16. WAIVER OF TEXAS DECEPTIVE TRADE PRACTICES ACT. EACH LOAN PARTY HEREBY WAIVES AND RELEASES ALL OF SUCH LOAN PARTY'S RIGHTS AND REMEDIES UNDER THE TEXAS DECEPTIVE TRADE PRACTICES--CONSUMER PROTECTION ACT (HEREINAFTER REFERRED TO AS THE "DTPA"), SUBCHAPTER E OF CHAPTER 17 OF THE TEXAS BUSINESS AND COMMERCE CODE, IF ANY, INCLUDING WITHOUT LIMITATION ALL RIGHTS AND REMEDIES RESULTING FROM, ARISING OUT OF OR ASSOCIATED WITH ANY AND ALL ACTS OR PRACTICES OF ANY OF THE INDEMNITEES IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER SUCH ACTS OR PRACTICES OCCUR BEFORE OR AFTER THE EXECUTION OF THE AGREEMENT OR SUCH OTHER LOAN DOCUMENTS. EACH LOAN PARTY UNDERSTANDS THAT ITS RIGHTS AND REMEDIES WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND WITH RESPECT TO ALL ACTS OR TRANSACTIONS SHALL BE GOVERNED BY LEGAL PRINCIPLES OTHER THAN THE DTPA. IN CONNECTION WITH THIS WAIVER, EACH LOAN PARTY ACKNOWLEDGES, REPRESENTS AND WARRANTS THAT IT HAS ASSETS OF $5,000,000 OR MORE CALCULATED IN ACCORDANCE WITH GAAP, THAT IT HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF TRANSACTIONS SUCH AS THOSE CONTEMPLATED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND THAT IT IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH ANY OF THE INDEMNITEES. SECTION 10.17. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH LOAN PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY LOAN DOCUMENT, AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM OR RELATING TO THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 10.18. FINAL AGREEMENT OF THE PARTIES. A LOAN DOCUMENT IN WHICH THE AMOUNT INVOLVED EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE LOAN DOCUMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR BY THAT PARTY'S AUTHORIZED -76- REPRESENTATIVE. THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO THE LOAN DOCUMENTS SUBJECT TO THE IMMEDIATELY PRECEDING SENTENCE SHALL BE DETERMINED SOLELY FROM THE WRITTEN LOAN DOCUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY THIS AGREEMENT AND OTHER LOAN DOCUMENTS. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS SECTION 10.18 IS INCLUDED IN THIS AGREEMENT PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE LOAN PARTIES: DSC COMMUNICATIONS CORPORATION, a Delaware corporation By: /s/ CHRISTIAN J. ORNES ----------------------------- Christian J. Ornes Vice President and Treasurer DSC TECHNOLOGIES CORPORATION a Delaware corporation By: /s/ CHRISTIAN J. ORNES ----------------------------- Christian J. Ornes Vice President and Treasurer DSC MARKETING SERVICES, INC. a Delaware corporation By: /s/ CHRISTIAN J. ORNES ----------------------------- Christian J. Ornes Vice President and Treasurer -77- DSC INTERNATIONAL CORPORATION a Delaware corporation By: /s/ CHRISTIAN J. ORNES ----------------------------- Christian J. Ornes Vice President and Treasurer DSC FINANCE CORPORATION a Delaware corporation By: /s/ CHRISTIAN J. ORNES ----------------------------- Christian J. Ornes Vice President and Treasurer DSC OF PUERTO RICO, INC. a Delaware corporation By: /s/ CHRISTIAN J. ORNES ----------------------------- Christian J. Ornes Vice President and Treasurer ADMINISTRATIVE LENDER: NATIONSBANK OF TEXAS, N.A., as Administrative Lender By: /s/ DONALD L. HARRISON, JR. ----------------------------- Donald L. Harrison, Jr. Senior Vice President LENDERS: NATIONSBANK OF TEXAS, N.A., as a Lender and as Issuing Bank Specified Percentage: -78- 60% By: /s/ DONALD L. HARRISON, JR. ----------------------------- Donald L. Harrison, Jr. Senior Vice President 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Yousuf Omar, Vice President THE FIRST NATIONAL BANK OF CHICAGO 40% By: /s/ JEANETTE GANOUSIS ----------------------------- Jeanette Ganousis Title: One First National Plaza Mail Stop 0088, 1-14 Chicago, Illinois 60670-0088 Attn: Jeanette Ganousis -79- EXHIBIT A PROMISSORY NOTE February 24, 1994 FOR VALUE RECEIVED, the undersigned DSC COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"), hereby promises to pay to the order of _______________________ (the "Bank") the lesser of (i) the amount of the Bank's Commitment or (ii) the aggregate amount of Advances made or deemed made by the Bank to the Company and outstanding on the Maturity Date or thereafter deemed made as a result of a post-Maturity Date funding under any Letter of Credit which is issued and outstanding on or before the Maturity Date. The principal amount of each Advance made by the Bank to the Company pursuant to the Credit Agreement (as hereinafter defined) (including Advances deemed made pursuant to a funding under any Letter of Credit) shall be due and payable as provided in the Credit Agreement. The Company promises to pay interest on the unpaid principal amount of each Advance (including Advances made pursuant to a drawing under any Letter of Credit) from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such dates and times, as are specified in the Credit Agreement dated as of February 24, 1994 (as the same may from time to time be amended, modified or supplemented, the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined) among the Company, DSC Technologies Corporation, DSC Marketing Services, Inc., DSC Finance Corporation, DSC International Corporation and DSC of Puerto Rico, Inc., NationsBank of Texas, N.A., as Administrative Lender, and the Lenders party thereto. Both principal and interest are payable in same day funds in lawful money of the United States to NationsBank of Texas, N.A. at 901 Main Street, Dallas, Texas 75202, or at such other place as the Bank shall designate in writing to the Company. The amount of each Advance made or deemed made by the Bank to the Company and the date on which such Advance was made and the maturity thereof, and all payments made on account of principal and interest hereof, shall be recorded by the Bank in its books and records maintained for such purposes and such books and records shall be deemed to be accurate absent demonstrable error. This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of Advances by the Bank to the Company from time to time, the indebtedness of the Company resulting from each such Advance being evidenced by this Note, (ii) provides for the making of Advances pursuant to drawings under Letters of Credit issued by the Bank, (iii) provides that in no event shall the aggregate amount of Advances made or deemed made by the Lenders plus the aggregate unfunded portion of the Letters of Credit under the Credit Agreement exceed the Commitment and (iv) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, and to the effect that no provision of the Credit Agreement, this Note or any other Loan Document shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. Except as otherwise expressly provided in the Loan Documents, the Company and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default or intent to accelerate or acceleration, protest and notice of protest and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, in whole or in part, with or without notice, before or after maturity. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of Texas and any applicable laws of the United States of America. A LOAN DOCUMENT IN WHICH THE AMOUNT INVOLVED EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE LOAN DOCUMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR BY THAT PARTY'S AUTHORIZED REPRESENTATIVE. THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO THE LOAN DOCUMENTS SUBJECT TO THE IMMEDIATELY PRECEDING SENTENCE SHALL BE DETERMINED SOLELY FROM THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS. THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS PARAGRAPH IS INCLUDED IN THIS NOTE PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, AS AMENDED FROM TIME TO TIME. DSC COMMUNICATIONS CORPORATION By:__________________________________________ Name:_______________________________________ Title:______________________________________ EXHIBIT B FORM OF COMPLIANCE CERTIFICATE NationsBank of Texas, N.A., as Administrative Lender 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Yousuf Omar, Vice President [Date] Dear Sirs: Reference is made to the Credit Agreement dated as of February 24, 1994 (the "Credit Agreement") among DSC Communications Corporation (the "Company"), DSC Technologies Corporation (formerly known as DSC Corporate Services, Inc.), DSC Marketing Services, Inc., DSC Finance Corporation, DSC International Corporation, DSC of Puerto Rico, Inc., NationsBank of Texas, N.A., as Administrative Lender, and the Lenders party thereto. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Company hereby delivers to you this Compliance Certificate pursuant to Section 5.01 of the Credit Agreement, and certifies as follows:
In Compliance (PLEASE INDICATE) 1. FINANCIAL STATEMENTS AND REPORTS (i) Quarterly unaudited financial statements within 45 days after the end of each of the first three fiscal quarters of each fiscal year (Section 5.01(b)). Yes No (ii) Other accounting or financial reports specially requested by any Lender (Section 5.01(c)). Yes No (iii) All documents disclosed to shareholders or the Securities and Exchange Commission (5.01(d)). Yes No (iv) Any required disclosure of certain conditions or events (Section 5.01(e)). Yes No 2. CURRENT RATIO Minimum 1.75:1.00 Actual for [date] _____:1.00 $__________________ DIVIDED BY $________ =__________ Yes No
-1-
Consolidated Current Assets Consolidated Current Current Ratio Liabilities 3. MAXIMUM LEVERAGE RATIO A. Maximum 1.25:1.00 B. Actual for [date] _____:1.00 1. Consolidated Total Liabilities (a) liabilities according to GAAP $_________ (b) PLUS Guaranties with respect to letters of credit $_________ (c) PLUS Guaranties of debt for borrowed money $_________ Consolidated Total Liabilities $_________ [(a) + (b) + (c)] 2. Consolidated Tangible Net Worth (a) sum of capital stock, $_________ additional paid-in capital and retained earnings (minus treasury stock and accumulated deficits) (b) MINUS to the extent $_________ reflected as an asset in a consolidated balance sheet at such date, the sum of unamortized debt discount and expenses, deferred charges, goodwill, licenses, franchises, patents, patent applications, trade names, trademarks, acquired technology, capitalized software development costs, and capitalized research and development costs or other like intangibles (excluding contract development costs) Consolidated Tangible Net Worth [(a) + (b)] 3. ______________________________ DIVIDED BY $_________ = ____ Yes No Consolidated Total Liabilities Consolidated Maximum Tangible Net Leverage Worth Ratio 4. MINIMUM TANGIBLE NET WORTH A. Minimum (i) Minimum $479,000,00
-2- (ii) 50% of cumulative Consolidated $_________ Net Earnings for the period from January 1, 1994 to the date of calculation (excluding therefrom cumulative Consolidated Net Earnings for any fiscal quarter such number was a negative) (iii) 50% of increase in stock- $_________ holder's equity pursuant to offerings (including as a result of exercise of employee stock options and warrants) (iv) Without duplication, tangible $_________ net worth of any Person becoming a Subsidiary on or after the Agreement Date or substantially all of the assets of which are acquired and paid for in equity securities Minimum $________ (i) + (ii) + (iii) + (iv) Consolidated Tangible Net Worth from 3.B.2 $________ Yes No 5. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED EXCESS CASH FLOW RATIO Minimum for the quarter ending _________ 3.25:1.00 Actual for the quarter ending _________ ____:1.00 6. INVESTMENTS AND DISPOSITIONS OF ASSETS A. Maximum (i) Maximum $________ 50% of Consolidated Total Assets based on most recent audited financial statements B. Actual (i) Aggregate amount of Investments $________ to date to Persons who are not Loan Parties (not including Permitted Portfolio Investments) (ii)Aggregate amount of sales, $________ transfers, conveyances or leases of assets to date to Persons not Loan Parties outside the ordinary course of business Actual [(i) + (ii)] $________
-3- 7. RESTRICTED PAYMENTS
A. Maximum (i) Aggregate maximum amount $20,000,000 during term of Agreement B. Actual (ii)Aggregate amount to date $__________ (excluding dividends from a Subsidiary of the Company to any Loan Party)
The undersigned hereby certifies that the above information and computations are true and correct and not misleading as of the date hereof, and that no Default or Event of Default has occurred and is continuing. Executed this ________ day of _____________, 19___. Very truly yours, DSC COMMUNICATIONS CORPORATION By:_______________________________ Name:___________________________ Title:__________________________ - 4 - EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated _______________, 199__ Reference is made to the Credit Agreement dated as of February 24, 1994 (the "Credit Agreement") among DSC Communications Corporation, DSC Marketing Services, Inc., DSC Finance Corporation, DSC International Corporation, DSC of Puerto Rico, Inc., NationsBank of Texas, N.A. as Administrative Lender ("Administrative Lender"), and the Lenders parties thereto. Terms defined in the Credit Agreement are used herein with the same meaning. ______________________("Assignor") and _____________("Assignee") agree as follows: 1. Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor, a % interest in and to all of Assignor's rights and obligations under the Credit Agreement as of the Effective Date (as defined below), with respect to such percentage interest in Assignor's Commitment as in effect on the Effective Date, the principal amount of Advances owing to Assignor on the Effective Date, and the Note held by Assignor, and Assignor's participation in any Letters of Credit and Reimbursement Obligations outstanding on the Effective Date, subject to the terms and conditions of this Assignment and Acceptance. 2. Assignor (a) represents and warrants that (i) as of the date hereof its Commitment (without giving effect to assignments thereof which have not yet become effective) is $____________ and, as of the date hereof, the outstanding principal amount of the Advances owing to it (without giving effect to assignments thereof which have not yet become effective) is $_______, (ii) as of the date hereof its participation in Letters of Credit and Reimbursement Obligations (without giving effect to assignments thereof which have not yet become effective) is $____________, and (iii) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to (i) any statements, warranties, or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency, or value of the Credit Agreement or any other instrument or document furnished pursuant thereto or (ii) the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (c) attaches the Note referred to in Paragraph 1 above to exchange such Note for new Notes as follows: a Note dated ______________, 199 __, in the principal amount of $_____________________ payable to the order of Assignee, and a Note dated ________________, 199 __, in the principal amount of $____________________ payable to the order of Assignor. -1- 3. Assignee (a) confirms that it has received a copy of the Credit Agreement and the other Loan Documents, together with copies of the financial statements referred to in Sections 4.04 and 5.01 of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (b) agrees that it will, independently and without reliance upon the Administrative Lender, Assignor, or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement and the other Loan Documents; (c) appoints and authorizes the Administrative Lender to take such action as agent on its behalf and to exercise such powers under the Credit Agreement, the other Loan Documents, and this Assignment and Acceptance as are delegated to the Administrative Lender by the terms thereof and hereof, together with such powers as are reasonably incidental thereto and hereto; (d) agrees that it will perform in accordance with its terms all of the obligations which by the terms of the Credit Agreement, the other Loan Documents, and this Assignment and Acceptance are required to be performed by it as a Lender; [and] (e) specifies the addresses set forth in Schedule I attached hereto as its address for the receipt of notices and as its initial LIBOR Lender Office, respectively[; and (f) attaches the forms prescribed by the IRS certifying as to Assignee's status for purposes of determining exception from United States withholding taxes with respect to all payments to be made to Assignee under the Credit Agreement, the other Loan Documents, and this Assignment and Acceptance or such other documents as are necessary to indicate that all such payments are subject to such taxes at a rate reduced by an applicable tax treaty]. 4. The effective date for this Assignment and Acceptance shall be _____________, 199 __ (the "Effective Date"). 5. Upon such acceptance as of the Effective Date and upon the remittance of a $2,500 processing fee to the Administrative Lender, (a) Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (b) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance from and after the Effective Date, whenever the Administrative Lender shall receive a payment, or whenever the Administrative Lender shall make an application of funds, in respect of any aggregate outstanding principal amount of the Advances or in respect of any aggregate amount of interest accrued on the Advances, or in respect of the commitment fee (other than a payment or an application of funds in respect of any amount due and owing to any Lender or the Administrative Lender under Sections 2.09, 5.08, 8.03, 8.05, or 10.02 of the Credit Agreement), the Administrative Lender shall pay over to each of the Lenders an amount equal to (i) such Lender's Pro Rata Share (as defined below) of such aggregate amount of principal, (ii) such Lender's Pro Rata Share of such aggregate -2- amount of interest, and (iii) such Lender's Pro Rata Share of such aggregate amount of the commitment fee. The "Pro Rata Share" of any aggregate amount means, with respect to such Lender, the amount equal to the product obtained by multiplying (i) such aggregate amount and (ii) a fraction, the numerator of which is such Lender's Commitment, or after the Advances have been made, the principal amount of the Advances owing to such Lender and the denominator of which is the sum of the Commitments of all of the Lenders, or after the Advances have been made, the aggregate principal amount of the Advances owing to all of the Lenders. 7. In the event that, after the Administrative Lender has paid to any Lender its Pro Rata Share of any such payment received by the Administrative Lender or any such application made by the Administrative Lender, such payment or application is rescinded or must otherwise be returned or must be paid over by the Administrative Lender for any reason, such Lender shall, upon notice by the Administrative Lender, forthwith pay back to the Administrative Lender such Lender's Pro Rata Share of the amount so rescinded or so returned or paid over. 8. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of Texas and the United States of America. Without excluding any other jurisdiction, Assignee agrees that the courts of Texas will have jurisdiction over proceedings in connection herewith. 9. Assignee's Specified Percentage shall be _____ %. 10. This Assignment and Acceptance may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. [NAME OF ASSIGNOR] By:__________________________________________ ____________________,____________________ (Print Name) (Print Title) [NAME OF ASSIGNEE] By:__________________________________________ ____________________,____________________ (Print Name) (Print Title) -3- Accepted this ___ day of ____________, 199___ NATIONSBANK OF TEXAS, N.A., as Administrative Lender By:__________________________________________ ____________________,____________________ (Print Name) (Print Title) DSC COMMUNICATIONS CORPORATION DSC MARKETING SERVICES, INC. DSC FINANCE CORPORATION DSC INTERNATIONAL CORPORATION DSC OF PUERTO RICO, INC. By:__________________________________________ ____________________,____________________ (Print Name) (Print Title) -4- Schedule I ASSIGNEE'S ADDRESS 1. ADDRESS FOR THE ADVANCES AND RECEIPT OF NOTICES 2. INITIAL LIBOR LENDING OFFICE EXHIBIT D FORM OF NOTICE OF ADVANCE REQUEST NationsBank of Texas, N.A., as Administrative Lender 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Yousuf Omar, Vice President [Date] Dear Sirs: Reference is made to the Credit Agreement dated as of February 24, 1994 (the "Credit Agreement"), among DSC Communications Corporation (the "Company"), DSC Technologies Corporation, DSC Marketing Services, Inc., DSC Finance Corporation, DSC International Corporation, DSC of Puerto Rico, Inc., NationsBank of Texas, N.A., as Administrative Lender, and the Lenders party thereto. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Company hereby gives you notice pursuant to Section 2.02 of the Credit Agreement that it requests an Advance under the Credit Agreement, and in that connection sets forth below the terms on which such Advance is requested to be made: (A) Advance Date of Advance (which is a Business Day) ________________________________ (B) Aggregate Principal Amount of Advance(1) ______________________________ The Company further requests and directs that the proceeds of such Advance be deposited into Account No._______________ of DSC Technologies Corporation maintained with Administrative Lender. By each of the delivery of this Notice of Advance Request and the acceptance of any or all of the Advances made by Lenders in response to this Notice of Advance Request, the _______________________ (1) Not less than $250,000 and in integral multiples of $50,000 for Base Rate Advances. Not less than $1,000,000 and in integral multiples of $100,000 for LIBOR Advances. - 1 - Company shall be deemed to have represented and warranted that the conditions to lending specified in Article III of the Credit Agreement have been satisfied with respect to the Advance requested hereby. Very truly yours, DSC COMMUNICATIONS CORPORATION By:___________________________________ Name:______________________________ Title:_____________________________ - 2 - EXHIBIT E REQUEST FOR ISSUANCE [Date] NationsBank of Texas, N.A., as Issuing Bank 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Yousuf Omar, Vice President Dear Sir: Reference is made to the Credit Agreement dated as of February 24, 1994 (the "Credit Agreement") among DSC Communications Corporation (the "Company"), DSC Marketing Services, Inc., DSC Finance Corporation, DSC International Corporation, DSC of Puerto Rico, Inc., NationsBank of Texas, N.A., as Administrative Lender, and the Lenders party thereto. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Company hereby gives NationsBank of Texas, N.A., as the Issuing Bank, notice pursuant to Section 2.16 of the Credit Agreement that it requests the issuance by the Issuing Bank of a Letter of Credit under the Credit Agreement, and in that connection sets forth the following requested terms: (A) Issuance Date of Letter of Credit (which is a Business Day) ___________________________ (B) Face amount and Currency Denominated(1) ___________________________ (C) Requested Expiry Date(2) ___________________________ (D) Requested Account Party ___________________________ ______________________________ (1) Which together with all other Letters of Credit issued and outstanding do not exceed the lesser of (a) $25,000,000 and (b) the sum of (x) the Commitment MINUS (y) the aggregate principal amount of Advances then outstanding. (2) Not later than February 24, 1997. -1- (E) Requested Beneficiary ___________________________ (F) Special Terms ___________________________ ___________________________ By each of the delivery of this Notice of Issuance and the issuance of a Letter of Credit pursuant hereto by the Issuing Bank in response to this Notice of Issuance, the Company shall be deemed to have represented and warranted that the conditions to lending specified in Article III of the Credit Agreement and the special conditions to the issuance of a Letter of Credit specified in Section 2.16(b) of the Credit Agreement have been satisfied with respect to the Letter of Credit requested hereby. Very truly yours, DSC COMMUNICATIONS CORPORATION By:________________________________ Name:___________________________ Title:__________________________ -2- EX-11.1 3 EXHIBIT 11.1 Exhibit 11.1 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Computation of Income (Loss) per Share (In thousands) The following table sets forth the computation of shares used in the calculation of income (loss) per share for the years ended December 31, 1993, 1992, and 1991. AVERAGE SHARES USED IN INCOME (LOSS) PER SHARE CALCULATION:
1993 1992 1991 ----------------- ----------------- -------------------- Fully Fully Fully Primary Diluted(A) Primary Diluted Primary Diluted(C) ------- ---------- ------- ------- ------- ---------- Weighted average shares outstanding during the year. . . . . . . . . . . 49,709 -- 42,222 42,222 41,339 -- Common share equivalents outstanding: Options and warrants issued and contingently issuable. . . . . . . 4,471 -- 4,819 6,332 --(B) -- Assumed purchase of treasury shares. . . . . . . . . . (855) -- (2,811) (1,955) --(B) -- ------ ------ ------ ------ ------ ------ Weighted average shares used in calculation. . . . . . . . . 53,325 -- 44,230 46,599 41,339 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ (A) Fully diluted income per share is not shown in 1993 since the dilutive effect is less than three percent. (B) Common stock equivalents are not included in the income (loss) per share calculation when there is a net loss since their inclusion would result in antidilution. (C) Fully diluted loss per share is not shown in 1991 since the effect is anti-dilutive.
EX-22.1 4 EXHIBIT 22.1 Form 10-K Exhibit 22.1 DSC COMMUNICATIONS CORPORATION Subsidiaries Incorporated In ------------ --------------- DSC Communications (Asia/Pacific) Pte Ltd Singapore DSC Communications Canada Inc. Canada DSC Finance Corporation Delaware DSC Korea, Inc. Delaware DSC International Corporation Delaware DSC Marketing Services, Inc. Delaware DSC Technologies Corporation Delaware DSC Taiwan, Inc. Delaware DSC Communications Limited* United Kingdom DSC of Puerto Rico, Inc. Delaware DSC of the Virgin Islands, Inc. Virgin Islands DSC Communications (Australia) Pty. Ltd. Australia DSC Communications (Japan), Inc.** Japan Granger Associates, Inc. Delaware - -------------------------------------------------------------------------------- *Subsidiary: DSC Local Networks (Europe) Ltd. United Kingdom **Jointly-owned Japanese subsidiary of DSC Communications Corporation and Mitsubishi Corporation. EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements File No. 2-83398 (Amendment No. 2), 2-95833, 2-97314 (Amendment No. 1), 2-85528 (Amendment No. 1), 33-17459, 33-22745, 33-23505, 33-38544, 33-65212, 33-65214, and 33-64784 of DSC Communications Corporation and in the related Prospectuses of our report dated January 24, 1994, with respect to the consolidated financial statements and schedules of DSC Communications Corporation included in this Annual Report on Form 10-K for the year ended December 31, 1993. ERNST & YOUNG Dallas, Texas March 29, 1994 -----END PRIVACY-ENHANCED MESSAGE-----