0000950134-95-001963.txt : 19950815 0000950134-95-001963.hdr.sgml : 19950815 ACCESSION NUMBER: 0000950134-95-001963 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000316004 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 541025763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10018 FILM NUMBER: 95562556 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-Q 1 FORM 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR --- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- --------- Commission File Number: 0-10018 ------- DSC COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 54-1025763 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1000 Coit Road, Plano, Texas 75075 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (214) 519-3000 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Number of Shares Outstanding Title of Each Class as of July 31, 1995 ---------------------------- ----------------------------- Common Stock, $.01 Par Value 114,722,871 Page 1 of 18 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
June 30, December 31, 1995 1994 --------------- ---------------- (Unaudited) Assets CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . $ 242,847 $ 52,942 Marketable securities . . . . . . . . . . . . . . . . . . 271,471 218,380 Receivables . . . . . . . . . . . . . . . . . . . . . . . 230,702 239,740 Inventories . . . . . . . . . . . . . . . . . . . . . . . 240,099 180,674 Contract development costs . . . . . . . . . . . . . . . 17,064 14,202 Other current assets . . . . . . . . . . . . . . . . . . 34,251 32,516 --------------- ---------------- Total current assets . . . . . . . . . . . . . . . . 1,036,434 738,454 --------------- ---------------- PROPERTY AND EQUIPMENT, at cost . . . . . . . . . . . . . . 602,966 526,248 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . (270,908) (243,285) --------------- ---------------- 332,058 282,963 --------------- ---------------- LONG-TERM RECEIVABLES . . . . . . . . . . . . . . . . . . . 41,617 25,691 CAPITALIZED SOFTWARE DEVELOPMENT COSTS. . . . . . . . . . . 41,227 38,583 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET. . . . . . . . . . . . . . . . . 148,195 152,396 OTHER . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,485 30,449 --------------- ---------------- Total assets . . . . . . . . . . . . . . . . . . $ 1,631,016 $ 1,268,536 =============== ================ Liabilities and Shareholders' Equity CURRENT LIABILITIES Short-term debt . . . . . . . . . . . . . . . . . . . . . $ 19,350 $ 39,791 Accounts payable . . . . . . . . . . . . . . . . . . . . 96,516 91,054 Accrued liabilities . . . . . . . . . . . . . . . . . . . 218,723 153,274 Customer advances . . . . . . . . . . . . . . . . . . . . 24,979 21,834 Income taxes payable . . . . . . . . . . . . . . . . . . 5,327 22,219 Current portion of long-term debt . . . . . . . . . . . . 35,102 17,248 --------------- ---------------- Total current liabilities . . . . . . . . . . . . . 399,997 345,420 --------------- ---------------- LONG-TERM DEBT, net of current portion . . . . . . . . . . 206,483 25,330 NONCURRENT INCOME TAXES AND OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . 61,093 46,686 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value, issued - 119,610 in 1995 and 118,514 in 1994; outstanding - 114,621 in 1995 and 113,525 in 1994. . . . . . . . . . . . . . . . . . . . . 1,196 1,185 Additional capital . . . . . . . . . . . . . . . . . . . 640,689 631,729 Unrealized losses on securities, net of income taxes. . . . . . . . . . . . . . . . . . . (586) (3,764) Accumulated translation adjustment . . . . . . . . . . . 6,323 -- Retained earnings . . . . . . . . . . . . . . . . . . . 358,932 265,061 --------------- ---------------- 1,006,554 894,211 Treasury stock, at cost, 4,989 shares . . . . . . . . . . (43,111) (43,111) --------------- ---------------- Total shareholders' equity . . . . . . . . . . . . . 963,443 851,100 --------------- ---------------- Total liabilities and shareholders' equity . . . . . . . . . . . . . $ 1,631,016 $ 1,268,536 =============== ================
See the accompanying Notes to Condensed Consolidated Financial Statements. Page 2 of 18 3 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------- --------------------------------- 1995 1994 1995 1994 --------------- --------------- --------------- -------------- Revenue . . . . . . . . . . . . . . . . . . . . . . . . $ 360,011 $ 229,574 $ 678,008 $ 430,448 Cost of revenue . . . . . . . . . . . . . . . . . . . . 182,285 116,707 341,612 220,566 --------------- --------------- --------------- -------------- Gross profit . . . . . . . . . . . . . . . . . . . . 177,726 112,867 336,396 209,882 --------------- --------------- --------------- -------------- Operating costs and expenses: Research and product development . . . . . . . . . . 47,946 28,913 94,885 53,616 Selling, general and administrative . . . . . . . . . 50,726 33,910 96,827 64,508 Other operating costs . . . . . . . . . . . . . . . . 2,257 2,400 4,412 4,878 --------------- --------------- --------------- -------------- Total operating costs and expenses . . . . . . . . 100,929 65,223 196,124 123,002 --------------- --------------- --------------- -------------- Operating income . . . . . . . . . . . . . . . . . . 76,797 47,644 140,272 86,880 Interest income . . . . . . . . . . . . . . . . . . . . 7,473 4,078 11,392 7,564 Interest expense . . . . . . . . . . . . . . . . . . . (4,296) (454) (5,327) (684) Other expense, net . . . . . . . . . . . . . . . . . . (44) (918) (1,921) (2,297) --------------- --------------- --------------- -------------- Income before income taxes . . . . . . . . . . . . 79,930 50,350 144,416 91,463 Income taxes . . . . . . . . . . . . . . . . . . . . . 27,975 14,066 50,545 25,578 --------------- --------------- --------------- -------------- Net income . . . . . . . . . . . . . . . . . . . . $ 51,955 $ 36,284 $ 93,871 $ 65,885 =============== =============== =============== ============== Income per share . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.31 $ 0.80 $ 0.57 =============== =============== =============== ============== Average shares used in computation . . . . . . . . . . 118,085 116,604 117,930 116,420
See the accompanying Notes to Condensed Consolidated Financial Statements. Page 3 of 18 4 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, -------------------------------- 1995 1994 ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,871 $ 65,885 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . 36,529 25,271 Amortization of capitalized software development costs . . . . . . . . . . . . . . . . . . 9,088 10,597 (Increase) decrease in current and long-term receivables . . . . . . . . . . . . . . . . . . (2,573) 20,244 Increase in inventories . . . . . . . . . . . . . . . . . . . (55,777) (32,324) Other, including changes in current payables and other current assets . . . . . . . . . . . . . 39,971 19,562 Increase in noncurrent income taxes and other liabilities . . . . . . . . . . . . . . . . . . . 21,861 17,402 ------------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . 142,970 126,637 ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities . . . . . . . . . . . . . (348,982) (263,251) Proceeds from sales and maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . 298,673 201,666 Purchases of property and equipment . . . . . . . . . . . . . (76,860) (63,861) Additions to capitalized software development costs . . . . . . . . . . . . . . . . . . . . . (11,732) (12,214) Purchase of long-term investment security . . . . . . . . . . -- (12,500) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (553) (1,189) ------------- ----------- NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . . . . . . . . . . (139,454) (151,349) ------------- -----------
(Continued) Page 4 of 18 5 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Continued) (In thousands) (Unaudited)
Six Months Ended June 30, --------------------------------- 1995 1994 ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term borrowings . . . . . . . . . . . . . . (20,441) -- Proceeds from long-term borrowings . . . . . . . . . . . . . 225,000 -- Payments of long-term borrowings . . . . . . . . . . . . . . (26,859) (8,781) Proceeds from the sale of common stock under stock programs . . . . . . . . . . . . . . . . . . . . 8,475 3,847 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,315) (626) ------------- ------------ NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . 184,860 (5,560) ------------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 1,529 -- ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 189,905 (30,272) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . 52,942 154,888 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . $ 242,847 $ 124,616 ============= ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 807 $ 1,285 ============= ============ Income taxes paid . . . . . . . . . . . . . . . . . . . . . . $ 27,320 $ 7,008 ============= ============
See the accompanying Notes to Condensed Consolidated Financial Statements. Page 5 of 18 6 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 1995 and 1994 and December 31, 1994 (Unaudited) BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows. Such adjustments are of a recurring nature unless otherwise disclosed herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations promulgated by the Securities and Exchange Commission. However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. Quarterly consolidated financial results may not be indicative of annual consolidated financial results. The Company has not paid or declared a cash dividend on its common stock since its organization. Certain prior year's financial statement information has been reclassified to conform with the current year financial statement presentation. These unaudited financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company's 1994 Annual Report to Shareholders for the year ended December 31, 1994. INVENTORIES Inventories consisted of the following (in thousands):
June 30, December 31, 1995 1994 -------- -------- Raw Materials . . . . . . . . . . . . . . . . . . . . . . $ 90,646 $ 66,466 Work in Process . . . . . . . . . . . . . . . . . . . . . 20,790 18,618 Finished Goods . . . . . . . . . . . . . . . . . . . . . . 128,663 95,590 -------- -------- $240,099 $180,674 ======== ========
Page 6 of 18 7 CREDIT AGREEMENTS AND SHORT-TERM BORROWINGS The Company has an uncollateralized revolving credit facility, which expires on February 24, 1998, with two banks providing for borrowings up to $50 million. The maximum borrowings available are reduced by the value of outstanding letters of credit issued by the banks on behalf of the Company, which totaled approximately $32.9 million at June 30, 1995. Outstanding letters of credit include $27.1 million issued to support various foreign subsidiary credit arrangements. 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 is also assessed. The agreement contains various financial covenants. There have been no borrowings under the credit facility during the six months ended June 30, 1995. During the second quarter of 1995, two of the Company's foreign subsidiaries entered into short-term credit agreements providing borrowings up to $55.2 million, of which $19.4 million were outstanding at June 30, 1995. The interest rates on these agreements are floating market rates which ranged from 6.4% to 7.0% at June 30, 1995. LONG-TERM DEBT On April 21, 1995, the Company borrowed $225 million under a long-term, unsecured loan agreement with several insurance companies. The loan is payable in eight equal annual payments beginning in the second quarter of 1996 and bears interest at a rate of 9%, payable semi-annually. The loan contains various financial covenants including, among other things, limitations on additional debt and minimum levels of net worth. In April 1995, the Company made an unscheduled payment of $9.4 million to retire the outstanding balance of a 9.5% note. One of the Company's foreign subsidiaries entered into a $15.9 million term loan facility agreement on June 29, 1995. The term loan was fully funded in July 1995. The loan bears interest at 8.75% per annum and is repayable in quarterly installments beginning in the third quarter of 1995 through the second quarter of 2000. INCOME TAX EXPENSE The Company's income tax expense includes federal, foreign, and state (including Puerto Rico) income taxes. The estimated effective income tax rate is based upon estimates for the full year for a number of variables including, among other things, forecasted income in the United States and foreign jurisdictions. The effective tax rate could Page 7 of 18 8 change as estimates of these and other variables change throughout the last half of the year. Also, an adjustment to Additional Capital will likely be made to the extent tax benefits are realized from employee exercises of stock options during 1995. The estimated effective income tax rate is higher in 1995 than in 1994 primarily due to limited availability in 1995 of net operating loss and tax credit carryforwards and increased foreign taxes. COMMON STOCK At the April 26, 1995 Annual Shareholders' Meeting, the shareholders approved both an increase in the number of authorized shares of common stock from 250 million to 500 million and an increase of 1 million shares of common stock authorized for issuance under the Company's 1990 Employee Stock Purchase Plan. COMMITMENTS AND CONTINGENCIES Contingent Liabilities The Company has guarantees of $33.5 million outstanding at June 30, 1995 supporting Company and third-party performance bonds to customers and others, of which $5.8 million were collateralized by letters of credit issued under the Company's revolving credit facility. The Company believes it has adequate reserves for any ultimate losses associated with these contingencies. The Company, in management of its exposure to fluctuations in foreign currency exchange rates, enters into forward foreign exchange contracts for both firm commitments and anticipated transactions of sales and purchases which are denominated in foreign currencies. At June 30, 1995, the Company had forward foreign exchange contracts of $68.8 million outstanding. For information regarding litigation, refer to Part II - Other Information, Item 1. "Legal Proceedings". Page 8 of 18 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations For the three months ended June 30, 1995, the Company reported revenue of $360.0 million and net income of $52.0 million, or $0.44 per share, compared to revenue of $229.6 million and net income of $36.3 million, or $0.31 per share, for the three months ended June 30, 1994. For the six months ended June 30, 1995, the Company recorded revenue of $678.0 million and net income of $93.9 million, or $0.80 per share, compared to revenue of $430.4 million and net income of $65.9 million, or $0.57 per share, for the first half of 1994. Revenue for the 1995 second quarter and first six months increased 57% and 58%, respectively, compared to the same periods in 1994. The growth in revenue was primarily the result of increased deliveries of switching, access and transmission systems, including related software, as well as the inclusion of revenue from DSC Communications A/S acquired in November 1994. Gross profit as a percentage of revenue was 49% and 50% for the second quarter and six month period ended June 30, 1995, respectively, compared to 49% in both the respective 1994 periods. The Company's gross margin percentage can vary significantly from period to period due to changes in the relative mix of product deliveries, including software enhancements. Research and product development expense in the second quarter of 1995 and 1994 was $47.9 million and $28.9 million, respectively, representing 13% of revenue for the second quarter of both 1995 and 1994. Research and product development expense for the six months ended June 30, 1995 was $94.9 million, or 14% of revenue, compared to $53.6 million, or 12% of revenue, for the six months in 1994. The growth in research and product development expense includes the development activities of DSC Communications A/S as well as increases in the Company's on-going development of new products and enhancements to existing products across all strategic product areas. Selling, general and administrative expense was $50.7 million and $96.8 million in the second quarter of 1995 and six months ended June 30, 1995, respectively, compared to $33.9 million and $64.5 million, respectively, for the same periods in 1994. As a percentage of revenue, selling, general and administrative expense for both the three months and six months ended June 30, 1995 declined to 14% from 15% as compared to the same periods in 1994. The growth in expenses was due primarily to increased international selling activities, higher legal costs, and expenses of DSC Communications A/S in 1995. Page 9 of 18 10 As discussed in the Notes to Condensed Consolidated Financial Statements, the Company's borrowings have increased significantly, including the $225 million of long-term debt which was funded on April 21, 1995. As a result, interest expense has increased in the first half of 1995 and is expected to increase in the last half of 1995 when the Company makes additional borrowings under its existing credit arrangements. Interest income has also increased as proceeds from the $225 million loan have been invested in short-term investments until required for future business purposes. The Company's estimated effective income tax rate was 35% for the six month period ended June 30, 1995 compared to 28% for the same period in 1994. This increase in the effective income tax rate is due primarily to limited net operating loss and tax credit carryforwards available to reduce taxable earnings in 1995 compared to 1994 and increased foreign taxes. The Company's future quarterly and annual operating results may be affected by a number of factors, including the timing and ultimate receipt of orders from certain customers which continue to constitute a large portion of the Company's revenue; the successful enhancement of existing products; introduction and market acceptance of new products on a timely basis; mix of products sold; product costs; manufacturing lead times; significant fluctuations in foreign currency exchange rates; and changes in general worldwide economic conditions, any of which could have an adverse impact on operations. Financial Condition and Liquidity The Company's cash and cash equivalents at June 30, 1995 were $242.8 million compared to $52.9 million at December 31, 1994 while marketable securities were $271.5 million at June 30, 1995 compared to $218.4 million at December 31, 1994. In April 1995, the Company received proceeds from a $225 million long-term loan bearing interest at 9%. Interest payments will be made semi-annually, and principal payments will be made in eight equal annual installments beginning in the second quarter of 1996. The proceeds from the loan are expected to be used for general corporate purposes, including capital expenditures, although currently the majority of the proceeds from the loan have been used to purchase short-term investments. See "Long-term Debt" in the Notes to Condensed Consolidated Financial Statements for further information. Page 10 of 18 11 Cash of $143.0 million was generated from operating activities. This was primarily the result of strong earnings and an increase in non-debt liabilities, partially offset by an increase in inventories. The inventory growth is to support existing and anticipated customer requirements for 1995 and 1996, including new product introductions. Investing activities during the six months ended June 30, 1995 included additions to property and equipment of $76.9 million. These additions include the purchase of land and the initial construction costs on a new facility in Copenhagen, Denmark. This new facility is expected to cost approximately $50 million and be completed in the early part of 1996. It will consolidate the operations of DSC Communications A/S which are currently located in numerous leased facilities. The Company's rapid business expansion and expected future domestic and international growth have and will continue to increase capital requirements including facilities and manufacturing and development equipment. The timing and extent of additional capital expenditures are dependent upon future business growth; however, it is anticipated that 1995 capital requirements could range from $180 million to $200 million. During the quarter, several of the Company's foreign subsidiaries entered into short-term credit arrangements totaling $55.2 million, of which $19.4 million of borrowings were outstanding at June 30, 1995. Additionally, a foreign subsidiary entered into a $15.9 million term loan facility during the second quarter which was fully funded subsequent to June 30, 1995. These arrangements are being used to fund facilities expansion and working capital needs. See "Credit Agreements and Short-term Borrowings" and "Long-term Debt" in the Notes to Condensed Consolidated Financial Statements for further information. Other financing activities during the first six months of 1995 included the repayment of the remaining $39.8 million of short-term borrowings obtained to fund a portion of the DSC Communications A/S acquisition, an unscheduled payment of $9.4 million to retire a 9.5% note in April 1995, and $17.5 million of scheduled payments on long-term borrowings. Financing activities during the six months ended June 30, 1995 also included proceeds of $8.5 million from the issuance of the Company's common stock under stock programs. The Company has a $50.0 million unsecured revolving credit facility, which expires on February 24, 1998, with $17.1 million of available borrowings at June 30, 1995, net of outstanding letters of credit. There have been no borrowings under the credit facility during the six months ended June 30, 1995. See "Credit Agreements and Short-term Borrowings" in Notes to Condensed Consolidated Financial Statements for further information. The Company believes that its existing cash and marketable securities and available credit facilities will be adequate to support the Page 11 of 18 12 Company's short and long-term financial resource needs, including working capital requirements, capital expenditures, operating lease obligations, and debt payments. Page 12 of 18 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Litigation On January 26, 1994, C. L. Grimes, a shareholder of the Company, filed a derivative suit in Delaware Chancery Court (the "Court"), 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, as well as other employment 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 approved 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. On June 1, 1994, the plaintiff filed an amended complaint in which he restated his existing claims and added a new claim contending that the Company's 1994 proxy statement was misleading in its description of the 1994 Long-Term Incentive Compensation Plan (the "1994 Plan"). On this new claim, the plaintiff seeks a decree that the 1994 proxy statement insofar as it relates to the 1994 Plan and the actions taken pursuant to the proxy statement with respect to the 1994 Plan are null and void, and seeks to enjoin the Company from implementing the 1994 Plan. On June 15, 1994, all defendants filed motions to dismiss all of the plaintiff's claims, with the exception of the claim relating to the Company's 1994 proxy statement. On January 11, 1995, the Delaware Chancery Court granted the defendants' motions to dismiss. The plaintiff later filed a motion seeking entry of a final judgment of dismissal so that he would be free to pursue an immediate appeal of the court's decision. In response, the court directed entry of a final judgment and certified the dismissed claim for appellate review. On March 6, 1995, the plaintiff filed an appeal of the dismissed claims to the Delaware Supreme Court. Briefing has been completed and oral argument before the Delaware Supreme Court is likely to take place within the next two to three months. Page 13 of 18 14 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. 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 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 or certain Consulting Agreements with Quadrium. The Company also seeks unspecified damages for breaches 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 (1) tortiously interfered with existing and prospective contractual relationships, (2) committed industrial espionage and misappropriation, (3) trespassed on AFC's business premises, (4) converted certain property of AFC, and (5) 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. During 1994, AFC amended its counterclaim to include an additional claim under the Racketeering Influenced Corrupt Organization Act against the Company. On December 1, 1994, AFC filed a motion to dismiss the case for lack of diversity jurisdiction and, in the alternative, to transfer the case to the Northern District of California in San Francisco, California. In anticipation of a dismissal of the Texas case, AFC also filed on December 2, 1994, a new action in the United States District Court for the Northern District of California, Oakland Division, in which AFC, as plaintiff, repeated all of the issues in the counterclaim in the Texas case. The judge in the Texas case recently allowed AFC to file amended motions to dismiss or transfer venue. Discovery has closed, and the parties are currently preparing for trial. The Company believes that it has valid and substantial claims against all of the defendants. The Company also intends to vigorously defend all of the defendants' counterclaims, and further believes it has valid defenses to all of the counterclaims. The Company has filed Motions for Partial Summary Judgment on all of AFC's counterclaims except its request for declaratory judgment. On May 25, 1994, the Company filed suit against DGI Technologies, Inc. ("DGI"), a Texas corporation, in the United States District Court Page 14 of 18 15 for the Northern District of Texas, Dallas Division. The Company alleges that DGI has infringed the Company's copyrights on its operating system software for tandem switches and firmware for microprocessor cards. The Company further alleges that DGI has misappropriated the Company's trade secrets regarding several of the Company's cards, including digital trunk interface cards and microprocessor cards. The Company also alleges that DGI has engaged in unfair competition under the Lanham Act and the common law by trading on the Company's reputation, and by misleading customers about DGI's research and development efforts. The Company seeks damages for DGI's prior actions and preliminary and permanent injunctive relief. DGI has brought counterclaims for alleged violations of federal antitrust statutes, tortious interference, industrial espionage, misappropriation of trade secrets, trespass, conversion and unfair competition. DGI's antitrust counterclaims are based upon allegations that the Company's claims constitute "sham" litigation, that the Company's statements to customers about the impact of their use of DGI products on the Company's warranties are unlawful attempts to exclude competition and that the Company has unlawfully tied the sale of its microprocessors to the sale of other products. The balance of DGI's counterclaims are based upon certain investigative procedures employed by the Company in connection with this controversy. DGI asks the Court to award actual damages, treble damages under antitrust statutes, punitive damages, injunctive relief and attorneys fees. Finally, DGI seeks declaratory relief that DGI's sales of microprocessors do not violate any proprietary rights of the Company or any applicable law. Although the outcome of litigation is inherently uncertain, the Company believes that it has valid and substantial claims against DGI and valid defenses to DGI's counterclaims. The case is still in discovery, and the Company intends to vigorously prosecute its claims and to defend all of DGI's counterclaims. On April 10, 1995, the Company filed suit in Texas State Court in Sherman, Texas against Next Level Communications, Inc.("Next Level"), a California corporation, Thomas R. Eames, Peter W. Keeler, and other former Company employees now working for Next Level. The suit alleges that the defendants wrongfully misappropriated the Company's trade secrets and proprietary information for the purpose of competing with the Company with a product which rightfully belongs to the Company. The suit alleges several causes of action, including breach of employment contract, tortious interference with contractual relations, breach of fiduciary duty, usurpation of corporate opportunity, theft of trade secrets, civil conspiracy, unfair competition and injunctive relief. At the time of filing suit, the Company also requested and was granted by Texas State court a temporary restraining order against the defendants. Defendants' first response was to have the action removed from Texas State court to United States District Court for the Eastern District of Texas, Sherman Division. Defendants next filed a motion to dismiss the case for lack of personal jurisdiction. Defendants' motion was denied as to the corporate and senior individual defendants, and the case remains in Texas. Page 15 of 18 16 The Company moved for and obtained a preliminary injunction against the defendants, based on the Court's findings of a substantial likelihood of success at trial on aspects of the Company's case. Substantive discovery is ongoing, and trial is possible by the end of 1995. On April 25, 1995, Next Level filed a complaint against the Company and two of the Company's employees in California State Superior Court in Santa Rosa, California. This complaint asserts causes of action for unfair competition, anticompetitive conduct, interference with contractual relations and interference with perspective economic advantage. Next Level alleged similar claims against the Company in a counterclaim filed in the Texas action. The Company has moved to dismiss the California action as duplicative of and superseded by the Texas action. The Company believes it has valid and substantial claims as asserted against Next Level and the individual defendants. The Company also intends to vigorously defend all of the Defendants' counter suits and further believes it has valid defenses to all such counter suits. 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. Page 16 of 18 17 Item 6. Exhibits and Reports on Form 8-K. A. Exhibits. 11. Computation of Income Per Share. 27. Financial Data Schedule (for EDGAR filing purposes only). B. Reports on Form 8-K. No reports on Form 8-K have been filed during the three months ended June 30, 1995. Page 17 of 18 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DSC COMMUNICATIONS CORPORATION Dated: August 14, 1995 By: /s/ Kenneth R. Vines -------------------- Kenneth R. Vines Vice President, Finance, duly authorized officer and principal accounting officer Page 18 of 18 19 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 11 Computation of Income per Share 27 Financial Data Schedule
EX-11 2 COMPUTATION OF INCOME PER SHARE 1 Exhibit 11 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Computation of Income per Share (In thousands) (Unaudited) The following table sets forth the computation of shares used in the calculation of income per share for the three months and six months ended June 30, 1995 and 1994. Average Shares Used in Income per Share Calculation:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ----------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Weighted average shares outstanding during the period . . . . . . . . . . . . . 114,427 111,981 114,157 111,425 Common share equivalents outstanding: Options and warrants issued and contingently issuable. . . . . . . . . . 5,676 6,029 5,594 6,516 Assumed purchase of treasury shares. . . . . . . . . . . . . (2,018) (1,406) (1,821) (1,521) --------- --------- --------- --------- Weighted average shares used in calculation. . . . . . . . . . . . 118,085 116,604 117,930 116,420 ========= ========= ========= =========
Fully diluted income per share is not shown since the dilutive effect is less than three percent for the three months and six months ended June 30, 1995 and 1994. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 242,847 271,471 230,702 0 240,099 1,036,434 602,966 (270,908) 1,631,016 399,997 206,483 1,196 0 0 962,247 1,631,016 678,008 678,008 341,612 341,612 196,124 0 5,327 144,416 50,545 93,871 0 0 0 93,871 0.80 0