-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kie5GwOv9j6IvmiwUcNO6PNC/hU/7arzF6mRw7vEIYw2Fti6LLaZxgJjdx3rZfAH oeekegnLGGhAGVHTcgbeLw== 0000950134-97-002505.txt : 19970401 0000950134-97-002505.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950134-97-002505 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10018 FILM NUMBER: 97570215 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-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1996 1 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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 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: (972) 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 PREFERRED STOCK PURCHASE RIGHTS (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. [X] As of March 3, 1997, 117,338,563 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 $2,393,362,373. (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 1997 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, and 13 of Part III of this report. Certain portions of the Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference in Item 1 of Part I, Items 6, 7, and 8 of Part II, and Item 14 of Part IV of this report. 2 DSC COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1996 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 (972) 519-3000. The Company designs, develops, manufactures, and markets digital switching, access, transport, 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, digital cross-connect products, and optical transmission systems and related advanced network management systems. The Company develops such systems to meet American and international telecommunications standards, and the specific requirements of the operating companies of the Regional Holding Companies ("RHCs"), independent telephone companies, long-distance carriers, private networks, and companies operating public and private communications networks in other countries. The Company acquired NKT Elektronik A/S (subsequently renamed DSC Communications A/S), a Copenhagen, Denmark-based manufacturer of optical transmission equipment, for approximately Page 1 3 $149 million in cash in November, 1994. The operating results of DSC Communications A/S are reported as part of the Company's Transport Systems Group. The Company supplies products to a domestic and international customer base, including local exchange telephone companies, long-distance carriers, cellular telephone companies, international telephone companies, various Fortune 1000 companies, and utility companies. Its domestic customers include the RHCs and most major domestic independent telephone and long-distance companies, including MCI Communications Corporation, U.S. Sprint Communications Company L.P., GTE Communications Systems Corporation, and LDDS/WorldCom, Inc. (formerly LDDS Communications, Inc.). The Company is also a major manufacturer of high-capacity cellular switches for Motorola, Inc. ("Motorola"), a leading supplier of wireless communication systems throughout the world. International customers include DDI Corporation ("DDI") of Japan, Tele Danmark, Deutsche Telekom in Germany, Mercury Communications, Ltd., a subsidiary of Cable & Wireless PLC in the United Kingdom, British Telecommunications PLC, Telefonos de Mexico, S.A. de C.V., and AAP Communications, Pty. Ltd. of Australia. PRODUCTS The percentage of consolidated revenue from the Company's product groups was as follows: Year Ended December 31, 1996 1995 1994 ------ ------ ------ Switch systems 42% 48% 52% Access systems 33% 28% 27% Transport systems 23% 23% 19%
SWITCH SYSTEMS. The Company develops, manufactures and markets advanced switching and intelligent network systems for the worldwide telecommunications marketplace. These systems connect and route calls and provide the application intelligence for intelligent network management and signaling for wireline and wireless networks, long distance switching, and switching for the support of high-speed communications such as data, image and video. The Company's Page 2 4 primary switching and intelligent network products include the INfusion Intelligent Network Product family, as well as tandem and cellular switching equipment. THE INfusion (TM) PRODUCT LINE. The Company's INfusion family of intelligent network products covers the full range of intelligent network ("IN") functionality including signaling, service creation and management and service delivery. To minimize development time and allow rapid introduction of IN services, the Company also provides a variety of pre-packaged wireline and wireless applications. With this compatible family of IN products, wireline and wireless service providers can significantly reduce the time required to introduce new services into the network and can cost-effectively evolve to a large-scale service implementation. The INfusion product family includes the INfusion SCE, SMS, SCP, ISP and STP. The INfusion SCE (Service Creation Environment), a platform providing the capability to create services from a library of reusable components, is used to develop and test Intelligent Network services and their supporting logic. The INfusion SMS (Service Management System) provides the tools to deploy, provision, and activate SCE-created IN services. The INfusion SCP (Service Control Point) and SCP/m are scaleable, fault-tolerant service delivery platforms that execute SCE-created services. Designed to allow multiple services on a single platform, the INfusion SCP and SCP/m support a variety of database-related IN services such as number translation, calling card validation, virtual private network and Home Location Register. Another service delivery platform, the INfusion ISP (Intelligent Service Peripheral) executes SCE-created services that require the exchange of information with the caller (i.e., PIN input, voice-activated dialing) as well as database look-up (SCP functions). The INfusion STP (Signal Transfer Point) is a network signaling hub that provides access to CCS7 common channel signaling networks and routing of signaling messages between network nodes and other networks. Supporting both SS7 and C7 signaling protocols, the Company's INfusion STPs are installed in cellular, long distance and local networks throughout the world. Page 3 5 The Company also offers a variety of pre-packaged applications such as Home Location Register and Short Message Service for wireless networks, Enhanced 800, Enhanced Routing, and Calling Card and Debit Card authorization. Providing immediate service deployment in their "off-the-shelf" state, these SCE-created services can also be customized by the service provider for specific customers or markets. TANDEM SWITCHES. As a telephone network becomes increasingly complex, the number of switching locations grows to a point where it is not economical to connect every switching point directly to every other switching point. Intermediate switching points served by a tandem (or transit) switch solve this problem. The Company offers a complete line of modular tandem switches that not only fulfill the intermediate switching function but also provide flexible dialing plans, service access codes, and customized screening, translation and routing. The tandem product family also works with the INfusion ISP to provide intelligent network services. The Company's DEX 600 tandem switching systems are a family of high capacity, modular tandem switches for the North American market supporting from 10,000 to 120,000 traffic carrying ports. The Company's international customer base continues to grow with the increasing demand for tandem switching in foreign countries. Supporting both T1 and E1 trunk interfaces, the 600GT is a full featured gateway/transit switch for deployment in international long distance, wireless and private networks. WIRELESS SWITCHES. Since 1984, the Company has provided switching platforms to Motorola which, when augmented with a variety of I/O peripherals and co-developed mobility management software, produces wireless switching systems, currently in service in 37 countries worldwide for both cellular and PCS applications. These applications currently include both analog and digital modes of operation. The Company's wireless switch platforms, DSC DEX200C and DSC DEX600C, utilize the same proven common control elements which are integral to the Company's overall switching products family, including the large installed base of tandem switching systems. BROADBAND PRODUCTS. Broadband products utilize Asynchronous Transfer Mode ("ATM") technology to enable service providers to offer the most advanced network capabilities, including multimedia, high-speed data, voice and interactive video services. The Company's iMPAX(TM) product is an ATM-based switch that can be located at the premises of a large corporation to enable the corporation to transport a variety of communication services throughout its network. iMPAX can also be deployed in a telephone company's central office or at the site of an independent service provider. Use of iMPAX will give service providers and corporations access to network elements through which they can offer new wideband and broadband services such as Page 4 6 LAN-to-LAN inter-networking, video conferencing and supercomputer connectivity. The ATM-based technology is expected to be incorporated into the Company's switching, access and transport products. The Company's primary competitors in the switching and intelligent network markets are Northern Telecom Ltd. ("Nortel"), Tandem Computers, Inc., Lucent Technologies, Inc. ("Lucent") and AB Telefon LM Ericsson ("Ericsson"). ACCESS PRODUCTS. The Company designs, manufactures and markets 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. The demand for access equipment has been strong in recent years due primarily to the deployment of fiber optics in many of the networks served by the major service providers in the United States. The Company believes that software-based access products which support fiber optic communications will continue to experience growth in demand and accordingly, has developed a line of access products to serve telecommunications service carriers in the United States and abroad. LITESPAN(R)-2000. In 1991, the Company began shipments of Litespan-2000, an access product which enables local exchange carriers and other service providers to utilize fiber optics in the local loop. Over a single pair of optical fibers, Litespan-2000 can transmit voice, data and video on an integrated basis to as many as 2,000 subscribers. The Litespan-2000 is the world's first digital loop carrier to meet North American Synchronous Optical Network ("SONET") 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 believes that the introduction of multi-media services, such as video on demand, will increase the demand for fiber optic-related products. The Company currently has multi-year agreements with six of the seven RHCs for purchases of Litespan-2000 systems. Page 5 7 LITESPAN(R)-120. The Company has evolved the Litespan system to address access applications in international markets. The Litespan-120 is a flexible access multiplexer that may be deployed as a loop carrier or primary mux, using copper, fiber or radio feeders and offers benefits such as integral fiber optic interfaces, software control and support of a wide range of telephony services in a compact, cost effective package. Deliveries of Litespan-120 began during late 1995. Network deployments are taking place in Latin America and Eastern Europe. There is also additional field testing under way. AIRSPAN(TM). Airspan, which is currently undergoing customer market trials, provides access service over a wireless local loop, thereby providing users access to the public telecommunications network without having to install copper wire or fiber lines. The primary markets for this product are areas where the last link in the subscriber connection is radio rather than copper or fiber lines. Airspan is expected to be popular in developing countries where copper or fiber line access connections can be expensive and time consuming to install. In addition, Airspan and Multiline, an application of Airspan integrated with Litespan-120, are cost effective and quick response alternatives in dense urban environments of developed countries. SWITCHED DIGITAL VIDEO. The Company is also currently developing Switched Digital Video ("SDV") technology to provide an ATM-based, interactive, fiber switched solution capable of delivering video, data, and voice services to residences and businesses. The Company will offer SDV as a migratory path for new and current Litespan customers as they upgrade to interactive broadband full-service networks. These new SDV-based networks will enable carriers to offer a multitude of new revenue-generating services over a single integrated platform. Companion products from the Company's access products portfolio include Starspan(R), which extends the capabilities of the Litespan-2000 to the customer's premises; and Metrospan(R), which is used as a broadband transport system within a campus-type Page 6 8 setting or a metropolitan communications network. New access product offerings in 1996 included the OC-12 Transport system which provides delivery of very high rate services such as DS3 and OC3 to end users. The Company's primary competitors in the access market are Lucent, Nortel and Fujitsu, Ltd. TRANSPORT SYSTEMS. Transport equipment includes a vast array of products that carry signals throughout the telecommunications network. The Company's transport product portfolio consists of digital cross-connects, high-capacity fiber optic add/drop and terminal multiplexers, access multiplexers, and network management systems that route voice, video, and data traffic efficiently through the network. The Company's products are used by telephone companies, cellular service providers, and large private or governmental networks to add efficiency, lower costs, improve network resiliency, and enhance the quality of their services. DIGITAL CROSS-CONNECTS. The Company's digital cross-connect family, comprised of the DEXCS, DEX ECS1 and DEX ECS3 models, has enabled telephone companies to make their central offices and long distance facilities more efficient and less labor-intensive. iDCS (TM) (Integrated Digital Cross-connect System). iDCS addresses the smaller size transmission requirements for management of voice and data circuits in the telecommunications network. This product also meets the Page 7 9 domestic requirements of SONET and international specifications of SDH. iDCS provides optical and electrical interfaces to other telephone company equipment and economically manages the circuit traffic through the network. microDX(TM). The microDX offers sophisticated cross-connect features to sites of varying size and remoteness. For example, with the Company's microDX, cell sites, wireless hubs, and private networks can inexpensively incorporate high-end cross-connect features. microDX supports small-capacity applications that require DSO-level add/drop multiplexing, as well as RF fingerprinting fraud control interconnect, Cellular Digital Packet Data, and Rural Service Area cellular hubbing. iMTN(R) (Integrated Multi-Rate Transport Node). iMTN provides routing, distribution, and management throughout the network. The iMTN provides for the public telecommunications network's evolution to transmission equipment which meets the North American SONET and international Synchronous Digital Hierarchy ("SDH") fiber optic standards. Early applications of iMTN include network video broadcast and high-volume voice/data transfer. The iMTN has been deployed both domestically and internationally. LINE TRANSMISSION. The Company's line transmission equipment, which was acquired as part of the acquisition of DSC Communications A/S at the end of 1994, includes the FOCUS 2 to 140 and 2 to 150 multiplexers and line terminals for access networks, and the FOCUS 620 to 2500 terminal multiplexers and regenerators for high-capacity trunk transmission systems. These products incorporate plesiochronous digital hierarchy ("PDH") systems, representing the established embedded base of transmission technology, and SDH systems, representing new emerging transmission technology analogous to SONET in the North American market. During the latter part of 1996, the Company began deliveries of the AC1 add/drop and terminal SDH multiplexer. Deliveries of AC4, the next of a new generation of SDH products, should commence in 1997. These products will bring enhanced features such as add-drop mux and cross-connect capability to the Company's SDH product line, resulting in a comprehensive and economical next-generation product offering for the rapidly growing worldwide SDH transmission market. The Company also develops, manufactures, and markets a variety of digital transmission products such as echo cancelers and transcoders, as well as various customer premises products. The Company's primary competitors in the digital cross-connect market are Lucent, Alcatel Network Systems ("Alcatel") and Tellabs, Inc. The primary competitors in the line transmission equipment market are Alcatel, Ericsson and Siemens AG. Page 8 10 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, 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 Corporation, which prohibited the RHCs from manufacturing telecommunications equipment and providing interexchange or long-distance services. In early 1996, the Telecommunications Act of 1996 (the "1996 Legislation") was passed. The 1996 Legislation contains provisions that permit the RHCs, subject to satisfying certain conditions, to manufacture telecommunications equipment. One or more RHCs may decide to manufacture telecommunications equipment, to design and provide telecommunications software, or to form alliances with other manufacturers. Any of these developments could result in increased competition for the Company and reduce the RHCs' purchases from the Company. The 1996 Legislation also permits local exchange telephone companies, long-distance carriers, cable television companies and electric utility companies to compete with each other to provide local and long-distance telephone and video services. The Company believes that the 1996 Legislation should increase the demand for systems, software and services as network operators respond to the changing competitive environment by constructing new or enhancing existing networks. 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 Page 9 11 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"), sales representatives and certain distributors in foreign countries. Page 10 12 INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS The information required for this section is set forth in the "International Operations and Major Customers" footnote on page 38 of the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. Customers which accounted for at least 10% of the Company's consolidated revenue in 1996 included Motorola, MCI, and Ameritech. BACKLOG The Company's backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $811 million and $688 million on December 31, 1996 and December 31, 1995, respectively. Approximately $189 million of orders included in the December 31, 1996 backlog are scheduled for delivery after December 31, 1997. 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 canceled 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 development of several new products and enhancements to existing products. 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 $210.1 million, $189.8 million, and $127.3 Page 11 13 million for the years ended December 31, 1996, 1995, and 1994, respectively. Additionally, approximately $37.0 million, $26.8 million, and $24.6 million of software development costs were capitalized in the Consolidated Balance Sheets in 1996, 1995, and 1994, respectively. COMPETITION The portions 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 (which are listed in the PRODUCTS section) 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. 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 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 revenue 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 Page 12 14 OEM vendor, second sourcing would be required and could delay customer deliveries which could have an adverse effect on the Company's revenue 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. EMPLOYEES As of December 31, 1996, the Company had a total of 6,367 employees. Page 13 15 ITEM 2. PROPERTIES The Company's principal facilities are in the following locations:
Approximate Square Footage ---------------------- Location Owned Leased Description - ----------------------- ---------- ---------- ------------------------------ Plano, Texas 1,295,000 497,000 Corporate offices; administration; engineering, research and development; manufacturing and assembly; customer service and support; and warehousing. Copenhagen, Denmark 223,000 38,000 Administration; engineering, research and development; manufacturing and assembly; and warehousing. Aguadilla, Puerto Rico -- 164,000 Manufacturing and assembly. Petaluma, California -- 131,000 Engineering, research and development; and assembly. Feltham and Ashford, -- 87,000 Engineering, research and England development; customer sales and service; and warehousing. San Jose, Costa Rica -- 59,000 Manufacturing and assembly. Drogheda, Ireland -- 122,000 Manufacturing and assembly; engineering, research and development; and warehousing.
The Company owns approximately 281 acres of land in Plano, Texas and approximately 28 acres of land in Copenhagen, Denmark, Page 14 16 of which 99 acres have been developed for existing facilities and the balance is undeveloped. The undeveloped land is expected to be used for future Company expansion. The Company also has additional leased facilities, which are primarily sales offices, located in various cities throughout the world. The Company believes that the above-described facilities are suitable and adequate to meet the Company's production requirements. ITEM 3. LEGAL PROCEEDINGS On February 14, 1996, the Company joined Bell Atlantic in bringing an antitrust action against AT&T Corporation ("AT&T") and Lucent alleging the use of monopoly power in the central office switch market as part of a scheme to gain an unfair competitive advantage in the remote digital terminal market. In July 1996, Lucent brought a counterclaim against the Company alleging a "false advertising" claim under the Lanham Act. On February 18, 1997, the Company and Bell Atlantic settled their claims against AT&T. The Company, Bell Atlantic and Lucent settled all claims against each other on March 13, 1997. In conjunction with these settlements, Bell Atlantic agreed to purchase a significant amount of product from the Company over a five year period beginning in 1998. The agreement requires a minimum annual purchase level substantially above the amount purchased by Bell Atlantic from the Company in 1996 which totaled approximately $120 million. On June 11, 1996, a federal court entered a $137.7 million judgment in the Company's favor and against Next Level Corporation ("Next Level") and two former Company employees. The Company had filed suit in 1995 alleging theft of trade secrets and diversion of corporate opportunities. On February 28, 1997, the Fifth Circuit of Appeals upheld the judgment. Both Next Level and the Company are appealing to an En Banc panel of judges in the Fifth Circuit. The defendants are enjoined from disclosing the Company's trade secrets until the judgment is satisfied. In August 1996, the Company filed suit against Samsung Information Systems America, Inc., Samsung Electronics Co., Ltd. and several former employees of the Company (collectively the "Defendants") alleging claims for breach of contract, theft of trade secrets, unfair competition and tortious interference with contract and prospective contractual relations related to the Company's development of a next generation switching system. The Company is seeking unspecified damages. The Company is also Page 15 17 seeking an injunction against the Defendants to prevent them from using the Company's trade secrets. In late December 1996, the Defendants filed a counterclaim against the Company, alleging claims for declaratory judgment, wrongful injunction, tortious interference with actual and prospective contractual relations, misappropriation of trade secrets, unfair competition, exclusion from telephony switch market, civil conspiracy, fraud and negligent misrepresentation, breach of fiduciary or confidential relationship, defamation and intentional infliction of emotional distress. These allegations arise primarily out of the filing and prosecution of the Company's suit against the Defendants. In October 1996, the Company filed suit against Pulse Communications, Inc. ("Pulsecom") alleging contributory copyright infringement and misappropriation of trade secrets relating to the manufacture and sale of a POTS line card advertised as compatible with the Company's Litespan-2000 system. The Company is seeking damages and an injunction barring further infringement of the Company's intellectual property rights by Pulsecom and its agents. Pulsecom has filed a counterclaim alleging that the Universal Voice Grade line card manufactured by the Company for the Litespan-2000 system infringes a patent assigned to Pulsecom. On May 25, 1994, the Company filed suit against DGI Technologies, Inc. ("DGI"), alleging that DGI misappropriated the Company's trade secrets regarding digital trunk interface cards and microprocessor cards. The Company seeks damages and permanent injunctive relief. DGI brought counterclaims for damages and injunctive and declaratory relief for alleged violations of federal antitrust statutes, tortious interference, industrial espionage, misappropriation of trade secrets, trespass, conversion, and unfair competition, 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 case was tried in January 1997 and the jury returned a verdict. The Court sealed the verdict and postponed entering a judgment pending the outcome of additional mediation. The Company is also party to other routine legal proceedings incidental to its business. Page 16 18 The Company does not believe the ultimate resolution of the above litigation will have a material adverse effect on its 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 1996. 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 3, 1997, the executive officers of the Company are as follows: NAME AGE PRESENT POSITION(S) WITH COMPANY ---- --- -------------------------------- Allen R. Adams 47 Senior Vice President Wylie D. Basham 58 Group Vice President John W. Bischoff 48 Vice President James L. Donald 65 Chairman of the Board, President, and Chief Executive Officer David L. Hinshaw 55 Group Vice President Douglas K. Jacobs 53 Vice President Gerald F. Montry 58 Senior Vice President, Chief Financial Officer, and Director Michael J. Myers 50 Group Vice President George M. Simpson 42 Vice President Philip A. Wilkinson 49 Senior Vice President Page 17 19 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 1996 he was appointed Senior Vice President, Corporate Strategic Planning and Business Development. In February 1997, Mr. Adams was named Senior Vice President, iMTN Systems/Corporate Strategic Planning and Business Development. Mr. Adams assumed the added responsibility for the Company's iMTN operations, overseeing the design and development of the iMTN transmission system. Wylie D. Basham joined the Company in February 1983 as Vice President, Quality and Reliability Assurance. In March 1993 he was appointed Vice President, Subassembly Operations, and in June of that year given the added responsibility for the Access Product Division. In August 1996, Mr. Basham was named Group Vice President, Switch Systems, with responsibility for the Company's switch, intelligent networking and ATM product activity. John W. Bischoff joined the Company in August 1989 as Vice President, Quality and Reliability Assurance. Mr. Bischoff has responsibility for overseeing the Company's total corporate quality program, including the quality and reliability of software and hardware. 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. David L. Hinshaw joined the Company in May 1995 as Vice President, Switch Products. Mr. Hinshaw was appointed Vice President, Transport and Access Systems Group in October 1996, and currently serves as Group Vice President, Access Systems. Mr. Hinshaw has the responsibility for the development and marketing of the Company's access product line. Douglas K. Jacobs joined the Company in July 1990 as Vice President, RHC sales, with responsibility for managing the RHC sales force. Mr. Jacobs was appointed Vice president, Switch Products Domestic Marketing in October 1991 and in January 1995 assumed the added responsibility of switch products international marketing. Previously Mr. Jacobs served as Executive Vice President and Chief Operating Officer for DSC Communications A/S, Page 18 20 the Company's optical transmission business. In January 1997, Mr. Jacobs was appointed Vice President, North American Sales and Global Customer Services. 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. Michael J. Myers joined the Company in January 1989 as Vice President, Finance for the International Division. He served as Vice President, Finance for the Switch Systems Group from November 1991 until February 1997 when he was appointed Group Vice President, Transport Systems. Mr. Myers has the responsibility for the development and marketing of the Company's transport products. George M. Simpson joined the Company in December 1982. He has served in several management positions for the Company including a five-year assignment as general manager of the Company's operations in Puerto Rico. In January 1997, Mr. Simpson was appointed Vice President, Operations with responsibility for the development and execution of the Company's global manufacturing strategy in support of customer requirements and the Company's global business objectives. Philip A. Wilkinson joined the Company in 1995 as Senior Vice President to lead the Transport Systems Group. In February 1997, Mr. Wilkinson was appointed Senior Vice President, International Sales/Network Management Systems. In addition to being responsible for all international sales activities, Mr. Wilkinson oversees the network management systems. 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 of the over-the-counter listing with the abbreviation "DSC Commun" or "DSC". The stock is traded in the NASDAQ National Market with the ticker symbol "DIGI". Page 19 21 The following were the high and low closing prices of the Company's stock per the NASDAQ National Market:
1996: High Low ---- ---- --- 4th Quarter $23 1/8 $12 7/8 3rd Quarter 32 3/4 25 1/8 2nd Quarter 35 1/4 24 3/8 1st Quarter 37 1/8 22 7/8 1995: High Low ---- ---- --- 4th Quarter $58 3/4 $31 3rd Quarter 63 45 5/8 2nd Quarter 46 1/2 31 3/4 1st Quarter 39 31 5/8
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 3, 1997, was $20 5/8 per share. As of December 31, 1996, there were 5,242 shareholders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is set forth on page 19 of the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is set forth in the text on pages 20 through 23 of the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth on pages 24 through 40 of the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. Page 20 22 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, filed in connection with its 1997 Annual Meeting of Stockholders on page 1 under the heading "ELECTION OF DIRECTORS", and on page 18 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. The information required by this item regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference from the information set forth under the heading "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 20 of the definitive proxy statement of the Company, filed in connection with its 1997 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information set forth under the headings "EXECUTIVE COMPENSATION" on pages 10 through 17, and "Compensation of Directors" and "Non-Employee Directors Stock Option Plan" on page 19 of the definitive proxy statement of the Company, filed in connection with its 1997 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 Page 21 23 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on page 20 of the definitive proxy statement of the Company, filed in connection with the 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information set forth under the headings "Compensation of Directors" on page 19 of the definitive proxy statement of the Company, filed in connection with the 1997 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) The following is a list of the consolidated financial statements and the financial statement schedule which are included in this Form 10-K or which are incorporated herein by reference. 1. Financial Statements: As of December 31, 1996 and 1995: Consolidated Balance Sheets For the Years Ended December 31, 1996, 1995, and 1994: - 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 Schedule: For the Years Ended December 31, 1996, 1995, and 1994: Page 22 24 - Schedule II - Valuation and Qualifying Accounts 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 Certificate of Amendment of Certificate of Incorporation of the Company dated April 27, 1994 (9) 3.2 Certificate of Correction of Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 8, 1995 (9) 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 8, 1995 (9) 3.4 Amended and Restated By-laws of the Company (15) 4.3 Rights Agreement, Dated as of April 25, 1996, Between the Company and KeyCorp Shareholder Services, Inc., as Rights Agent (12) 4.4 Form of Letter to the Company's Stockholders, Dated May 8, 1996, Relating Page 23 25 to the Adoption of the Rights Agreement Described in Exhibit 4.3 (12) 10.1 Employment Agreement Between the Company and James L. Donald, Dated January 1, 1990 (4) 10.2 Executive Income Continuation Plan, Dated January 1, 1990, Between the Company and James L. Donald (4) 10.3 Insurance Ownership Agreement, Dated January 1, 1990, Between the Company and James L. Donald (4) 10.4 Management Consulting Agreement Among the Company, Nolan Consulting, Inc., and James M. Nolan, Dated March 15, 1982 (1) 10.5 The Company's Amended and Restated 1984 Employee Stock Option Plan (3) 10.6 The Company's Amended and Restated 1988 Employee Stock Option Plan (3) 10.7 The Company's 1993 Employee Stock Option and Securities Award Plan (5) 10.8 The Company's 1993 Non-Employee Directors Stock Option Plan (5) 10.9 Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers (7) 10.10 Schedule to Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers (10) Page 24 26 10.11 The Company's Restoration Plan, Dated July 1, 1988 (2) 10.12 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 Texas Commerce Bank, N.A., as Trustee (3) 10.13 The 1990 Optilink Stock Option and Cash Payment Plan, Dated May 15, 1990 (4) 10.14 The Company's 1994 Long-Term Incentive Compensation Plan, Effective as of January 1, 1994 (6) 10.15 DSC Communications Corporation Executive Deferred Income Plan (7) 10.16 Note Purchase Agreement Between the Company and Certain Financial Institutions, dated April 15, 1995 (8) 10.17 Consulting Agreement Between the Company and Clement M. Brown, Jr., Dated January 23, 1986 (10) Page 25 27 10.18 Consulting Agreement Between the Company and Sir John Fairclough, Dated December 31, 1992 (10) 10.19 Consulting Agreement Between the Company and Frank J. Cummiskey, Dated May 1, 1993 (10) 10.20 Multicurrency Credit Agreement, Dated as of May 8, 1996, Among the Company and Certain of its Subsidiaries and Certain Lenders Providing for Unsecured Revolving Credit (11) 10.21 Promissory Note for 250 Million Danish Kroner dated July 23, 1996 to Den Danske Bank (13) 10.22 Line Letter for 250 Million Danish Kroner dated July 23, 1996 issued by Den Danske Bank (13) 10.23 Promissory Note for 300 Million Danish Kroner dated July 23, 1996 to Den Danske Bank (13) 10.24 Line Letter for 300 Million Danish Kroner dated July 23, 1996 issued by Den Danske Bank (13) 10.25 Guaranty dated July 23, 1996 (13) 10.26 Subordination Agreement dated July 23, 1996 (13) 10.27 First Amendment (Effective September 27, 1996) to the 250 Million Danish Kroner and the 300 Million Danish Kroner Promissory Notes to Den Danske Bank, Guaranty and Subordination Agreement dated July 23, 1996 (14) 10.28 First Amendment (Effective September 27, 1996) to Multicurrency Credit Agreement Dated May 8, 1996 (14) 10.29 Form of Severance Compensation Agreement Between the Company and Certain of its Officers (15) 10.30 Schedule to Form of Severance Compensation Agreement Between the Company and Certain of its Officers (15) 11.1 Statement re: Computation of Per Share Earnings (15) 13.1 1996 Annual Report to Shareholders (for EDGAR filing purposes only) 21.1 Subsidiaries of the Registrant (15) 23.1 Consent of Ernst & Young LLP (15) 27.1 Financial Data Schedule (for EDGAR filing purposes only) 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; 10.5 The Company's Amended and Restated 1984 Employee Stock Option Plan; 10.6 The Company's Amended and Restated 1988 Employee Stock Option Plan; 10.7 The Company's 1993 Employee Stock Option and Securities Award Plan; 10.8 The Company's 1993 Non-Employee Directors Stock Option Plan; 10.9 Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Page 26 28 Officers; 10.10 Schedule to Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers; 10.11 The Company's Restoration Plan, Dated July 1, 1988; 10.12 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 Texas Commerce Bank, N.A., as Trustee; 10.14 The Company's 1994 Long-Term Incentive Compensation Plan, Effective as of January 1, 1994; 10.15 DSC Communications Corporation Executive Deferred Income Plan; 10.17 Consulting Agreement Between the Company and Clement M. Brown, Jr., Dated January 23, 1986; 10.18 Consulting Agreement Between the Company and Sir John Fairclough, Dated December 31, 1992; 10.19 Consulting Agreement Between the Company and Frank J. Cummiskey, Dated May 1, 1993; 10.29 Form of Severance Compensation Agreement Between the Company and Certain of its Officers; 10.30 Schedule to Form of Severance Compensation Agreement Between the Company and Certain of its Officers. (b) Reports on Form 8-K: None - ----------------------------------------------------------------- (1) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1981 (2) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1988 Page 27 29 (3) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1990 Annual Meeting of Stockholders (4) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (5) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1993 Annual Meeting of Stockholders (6) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1994 Annual Meeting of Stockholders (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 Page 28 30 (9) Incorporated by reference from the Company's Registration Statement on Form S-8, File No. 33-61423, filed with the Securities and Exchange Commission on July 31, 1995 (10) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (12) Incorporated by reference from the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on May 9, 1996 (13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (15) Filed herewith Page 29 31 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. With the exception of historical information, the matters discussed or incorporated by reference in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties including, but not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development, ability to enforce patents, availability of raw materials and critical manufacturing equipment, new plant startups, the regulatory and trade environment, and other risks indicated in filings with the Securities and Exchange Commission. Page 30 32 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 March 31, 1997 33 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 31, 1997 - ------------------------------- James L. Donald, Chairman of the Board, President, Chief Executive Officer, and Director (Principal Executive Officer) /s/ FRANK J. CUMMISKEY March 31, 1997 - ------------------------------- Frank J. Cummiskey Director /s/ SIR JOHN FAIRCLOUGH March 31, 1997 - ------------------------------- Sir John Fairclough Director /s/ RAYMOND J. DEMPSEY March 31, 1997 - ------------------------------- Raymond J. Dempsey Director /s/ JAMES L. FISCHER March 31, 1997 - ------------------------------- James L. Fischer Director /s/ ROBERT S. FOLSOM March 31, 1997 - ------------------------------- Robert S. Folsom Director /s/ GERALD F. MONTRY March 31, 1997 - ------------------------------- Gerald F. Montry, Senior Vice President, Chief Financial Officer, and Director (Principal Financial Officer)
34
Signature and Title Date ------------------- ---- /s/ MORTON L. TOPFER March 31, 1997 - ------------------------------- Morton L. Topfer Director /s/ KENNETH R. VINES March 31, 1997 - ------------------------------- Kenneth R. Vines Vice President, Finance (Principal Accounting Officer)
35 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II 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, 1996 $ 6,904 $ 1,381 $ 660 (1) $ 1,883 (2) $ 7,062 Year Ended December 31, 1995 4,012 1,233 4,077 (1) 2,418 (2) 6,904 Year Ended December 31, 1994 3,609 1,222 1,275 (1) 2,094 (2) 4,012
(1) Both 1995 and 1994 amounts include amounts related to the acquisition of DSC Communications A/S. Additionally, the 1996 and 1994 amounts include a transfer from a customer related reserve, which was included in "Accrued Liabilities", to "Allowance for Doubtful Accounts". (2) Includes accounts written off, net of collections. 36 EXHIBIT INDEX
Exhibit Description - ------- ----------- 3.4 Amended and Restated Bylaws of the Company 10.29 Form of Severance Compensation Agreement 10.30 Schedule to Form of Severance Compensation Agreement 11.1 Statement re: Computation of Per Share Earnings 13.1 1996 Annual Report to Shareholders 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 27.1 Financial Data Schedule
EX-3.4 2 AMENDED AND RESTATED BYLAWS OF THE COMPANY 1 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF DSC COMMUNICATIONS CORPORATION (AS AMENDED AS OF OCTOBER 28, 1996) 2 AMENDED AND RESTATED BYLAWS OF DSC COMMUNICATIONS CORPORATION A DELAWARE CORPORATION PREAMBLE These Bylaws are subject to, and governed by, the Delaware General Corporation Law and the Certificate of Incorporation of DSC Communications Corporation (the "Corporation"). In the event of a direct conflict between the provisions of these Bylaws and the mandatory provisions of the Delaware General Corporation Law or the provisions of the Certificate of Incorporation of the Corporation, such provisions of the Delaware General Corporation Law or the Certificate of Incorporation, as the case may be, will be controlling. ARTICLE ONE: OFFICES 1.01 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. 1.02 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.01 Annual Meeting. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such meeting and subject to the provisions in these Bylaws, the stockholders shall elect directors and transact such other business as may properly be brought before the meeting. 2.02 Special Meeting. Special meetings of stockholders of the Corporation for any purpose or purposes may be called only by (i) the Board of Directors pursuant to a resolution stating the purpose or purposes thereof approved by a majority of the total number of Directors which the Corporation would have if there were no vacancies (the "Whole Board"), or (ii) by the Chairman of the Board of Directors of the Corporation. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting. 2.03 Place of Meetings. The Board of Directors or the Chairman of the Board, as the case may be, may designate the place of meeting for any annual meeting or for any special meeting of the 3 stockholders. If no designation is so made, the place of meeting shall be the principal office of the Corporation. 2.04 Notice. Written or printed notice stating the place, date, and hour of each meeting of the stockholders and, in the case of a special meeting, the purposes or purposes for which the meeting is called, shall be given not less than ten or more than sixty (60) days before the date of the meeting, either personally or by mail, by the Corporation. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. 2.05 Voting List. At least ten (10) days before each meeting of stockholders, the Secretary shall prepare or cause to be prepared a complete list of shareholders entitled to vote thereat, arranged in alphabetical order, with the address of, and number of voting shares held by each. For a period of ten (10) days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not so specified, at the place where the meeting is to be held and shall be subject to inspection by any stockholder during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting, and shall be subject to inspection by any stockholder who is present. 2.06 Quorum. The holders of a majority of the outstanding shares entitled to vote, present in person or by proxy at any meeting of stockholders, shall constitute a quorum at such meeting, except as otherwise provided by law, the Certificate of Incorporation, or these Bylaws. If a quorum shall not be present or represented at any meeting of stockholders, the stockholders entitled to vote thereat who are present, in person or by proxy, or, if no stockholder entitled to vote is present, any officer of the Corporation may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. In addition, The Chairman of the meeting may adjourn the meeting from time to time, whether or not there is such a quorum. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have been transacted at the original meeting had a quorum been present; provided that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. 2.07 Majority Vote; Withdrawal of a Quorum. When a quorum is present at any meeting, the vote of the holders of a majority of the outstanding shares entitled to vote who are present, in person or by proxy, shall decide any question brought before such meeting, unless the question is one on which by express provision of statute, the Certificate of Incorporation, or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2 4 2.08 Method of Voting; Proxies. Except as otherwise provided in the Certificate of Incorporation or by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. At all meetings of stockholders, a stockholder may vote by proxy executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware (the "DGCL")) by the stockholder, or by such person's duly authorized attorney in fact. 2.09 Fixing Record Date; Procedure for Consents. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action other than stockholder action by written consent, the Board of Directors may fix a record date, which shall not precede the date such record date is fixed and shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any such other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given. The record date for any other purpose other than stockholder action by written consent shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of stockholders meetings are recorded, to the attention of the Secretary of the Corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action 3 5 in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. (c) In the event of the delivery to the Corporation of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent and any revocation thereof is referred to in this Section 2.09(c) as a "Consent"), the Secretary of the Corporation shall provide for the safekeeping of such Consents and shall as soon as practicable thereafter conduct such reasonable investigation as he or she deems necessary or appropriate for the purpose of ascertaining the validity of such Consents and all matters incident thereto, including, without limitation, whether the holders of shares having the requisite voting power to authorize or take the action specified in the Consents have given consent; provided, however, that if the corporate action to which the Consents relate is the removal or election of one or more members of the Board of Directors, the Secretary of the Corporation shall designate an independent, qualified inspector with respect to such Consents and such inspector shall discharge the functions of the Secretary of the Corporation under this Section 2.09(c). If after such investigation the Secretary or the inspector (as the case may be) shall determine that any action purportedly taken by such Consents has been validly taken, that fact shall be certified on the records of the Corporation kept for the purpose of recording the proceedings of meetings of the stockholders and the Consents shall be filed with such records. In conducting the investigation required by this Section 2.09(c), the Secretary or the inspector may, at the expense of the Corporation, retain to assist them special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate. 2.10 Conduct of Meeting. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the rights and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. 4 6 2.11 Notice of Stockholder Business and Nominations. (a) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting delivered pursuant to Section 2.04 of these Bylaws, (b) by or at the direction of the Chairman or the Board of Directors or (c) by any stockholder of the Corporation who is entitled to vote at the meeting, who complied with the notice procedures set forth in clauses (2) and (3) of this paragraph (A) and this Section 2.11 and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 2.11, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than seventy (70) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty (20) days, or delayed by more than seventy (70) days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder, including such persons's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the nomination or proposal is made; and (c) as to the stockholder giving the notice and the beneficial owners, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 2.11 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement 5 7 naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least eighty (80) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 2.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting pursuant to Section 2.04 of these Bylaws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Section 2.11 and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as are specified in the Corporation's notice of meeting, if the stockholder's notice as required by paragraph (A)(2) of this Section 2.11 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the seventieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only persons who are nominated in accordance with the procedures set forth in this Section 2.11 shall be eligible to serve as director and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.11. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 2.11 and if any proposed nomination or business is not in compliance with this Section 2.11, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 2.11, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with 6 8 the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 2.11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.11. Nothing in this Section 2.11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE THREE: DIRECTORS 3.01 Management. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, and subject to the restrictions imposed by law, the Certificate of Incorporation, or these Bylaws, the Board of Directors may exercise all the powers of the Corporation. 3.02 Number; Qualification; Election; Term. The number of directors which shall constitute the entire Board of Directors shall be not less than seven nor more than fifteen. Within the limit above specified, the number of directors shall be determined by resolution adopted by a majority of the directors holding office at such time; provided, however, that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. None of the directors need be a stockholder of the Corporation or a resident of the State of Delaware. Each director must have attained the age of majority. In all elections of directors, the persons receiving a plurality of the votes cast at any such meeting in such election shall be elected if a quorum is present at such meeting. The Board of Directors is divided into three classes, Class I, Class II, and Class III. Such classes shall be as nearly equal in number of directors as possible. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which such director was elected; provided, that each director shall serve until a successor shall have been elected and qualified, unless he shall resign, become disqualified, disabled, or shall otherwise be removed. At each annual election of directors, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board shall designate one or more directorships whose term then expires as directorships of another class in order to more nearly achieve equality of number of directors among the classes. Notwithstanding the rule that the three classes of directors shall be as equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal. 7 9 Subject to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at an annual meeting or special meeting called for that purpose only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than thirty (30) days prior to such meeting. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (e) the consent of each nominee. 3.03 Change in Number. No decrease in the number of directors constituting the entire Board of Directors shall have the effect of shortening the term of any incumbent director. 3.04 Vacancies. Newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been duly elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. 3.05 Place of Meeting. The directors may hold their meetings, except as otherwise provided by law, in such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice or waiver of notice of such meeting. 3.06 First Meeting. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as each Annual Meeting of Stockholders, and no notice of such meeting shall be necessary. 8 10 3.07 Election of Officers. At the first meeting of the Board of Directors after each Annual Meeting of Stockholders at which a quorum shall be present, the Board of Directors shall elect the officers of the Corporation. 3.08 Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by resolution of the Board of Directors. Notice of such regular meetings shall not be required. 3.09 Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President, or by a majority of the Board of Directors then in office. 3.10 Notice. The Secretary shall give notice of each special meeting to each director. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 3.11 Quorum; Majority Vote. At all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there be less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice if the time and place to which the meeting is adjourned are announced at the meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that may have been transacted at the meeting originally called. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by law, the Certificate of Incorporation of these Bylaws. 3.12 Procedure. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board of Directors may determine. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, a chairman selected among the directors present shall preside. The Secretary of the Corporation shall act as the Secretary of the meetings of the Board of Directors unless the Board of Directors appoints another person to act as Secretary of the meeting. The Board of Directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. 3.13 Compensation. The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the Board of Directors or for other service to the corporation; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefore. 3.14 Telephone Meetings. Members of the Board of Directors, and members of any committee of the Board of Directors, may participate in and hold a meeting of the Board of Directors, or such committee, by means of a conference telephone or similar communications 9 11 equipment by means of which persons participating in the meeting can hear each other, and participation in such a meeting pursuant to this Section shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 3.15 Action Without a Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors, or all of the committee members, as the case may be, and such consent shall have the same force and effect as a vote of such directors, or committee members, as the case may be, at a meeting fully called and held and may be stated as such in any articles or document filed with the Secretary of State of the State of Delaware or in any certificate delivered to any person. 3.16. Removal. Any Director may be removed from office only for cause by the affirmative vote of the holders of at least a majority of the voting power of all voting stock then outstanding, voting together as a single class. ARTICLE FOUR: EXECUTIVE AND OTHER COMMITTEES 4.01 Designation. The Board of Directors may, by resolution passed by a majority of the Whole Board, designate an executive and/or other committees. 4.02 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee and such alternate members may replace any absent or disqualified member at any meeting of that committee. Further, in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire Board of Directors. Each committee member and alternate committee member shall serve as such until the expiration of his term as a director or his earlier resignation, unless sooner removed as a committee member, alternate committee member, or director. 4.03 Authority. Each committee of the Board of Directors shall have and may exercise only the authority granted to such committee in a resolution adopted by a majority of the entire Board of Directors; provided that no such committee shall have the authority of the Board of Directors in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation recommending to the stockholders the sale, lease, or exchange of all or substantially all of the property and assets of the corporation, recommending to the stockholders a dissolution of the corporation or a revocation thereof, or amending, altering, or repealing these Bylaws or adopting new Bylaws for the Corporation. 10 12 4.04 Vacancies. Any vacancy in any committee of the Board of Directors may be filled by resolution passed by a majority of the Board of Directors remaining in office. 4.05 Regular Meetings. Regular meetings of any committee of the Board of Directors may be held without notice at such time and place as shall be determined from time to time by such committee and communicated to all members thereof. 4.06 Special Meetings. Special meetings of any committee of the Board of Directors may be called by the Chairman of that committee or any member thereof at anytime by giving notice to each member, either personally or by mail, telephone or telegraph. 4.07 Quorum. A majority of the members of any committee of the Board of Directors shall be necessary to constitute a quorum for the transaction of business. Any questions coming before any committee of the Board of Directors shall be determined by a majority of those present. 4.08 Procedure. Each committee of the Board of Directors shall keep minutes of its proceedings and report the same to the Board of Directors at the Board of Directors' next meeting. The minutes of the proceedings of each such committee shall be placed in the minute book of the corporation. 4.09 Removal. Any member of any committee of the Board of Directors may be removed by the Board of Directors by the affirmative vote of a majority of the number of directors fixed in the manner provided in these Bylaws whenever in the judgment of the Board of Directors the best interest of the Corporation will be served thereby. ARTICLE FIVE: NOTICE 5.01 Method. Whenever by law, the Certificate of Incorporation, or these Bylaws, notice is required to be given to any committee member, director or stockholder and no provision is made as to how such notice shall be given, such provision shall not be construed to mean personal notice, but any such notice may be given (a) in writing, by mail, postage prepaid, addressed to such member, director, or stockholder at his address as it appears on the books or, in the case of a stockholder, the stock transfer records of the Corporation; or (b) by any other method permitted by law (including but not limited to telegram). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.02 Waiver. Whenever any notice is required to be given to any committee member, stockholder, or director of the Corporation by law, the Certificate of Incorporation, or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein shall be equivalent to the giving of such notice. Attendance of a committee member, stockholder, or director at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting, at the beginning of 11 13 the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE SIX: OFFICERS 6.01 Number; Titles; Term of Office. The officers of the Corporation shall be a Chairman of the Board and a Vice Chairman of the Board (if the Board of Directors shall determine the election of such officers to be appropriate), a President, one or more Vice Presidents (and, in the case of each Vice President, with such descriptive title, if any, as the Board of Directors shall determine), a Secretary, a Treasurer, and such other officers as the Board of Directors may from time to time elect or appoint. Each officer shall hold office until his successor shall have been duly elected and shall have qualified, until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware. 6.02 Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the affirmative vote of a majority of the Whole Board whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.03 Vacancies. Any vacancy occurring in an office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the Board of Directors. 6.04 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these Bylaws. 6.05 Compensation. The compensation, if any, of the Corporation's officers and agents shall be fixed from time to time by the Board of Directors provided, however, that the Board of Directors may, in its discretion, delegate the authority to fix compensation of the Corporation's officers and agents to a Committee of the Board and, provided further, that the President of the Corporation may fix the salaries of the Corporation's officers (other than himself) and agents if the Board of Directors and/or any Committee designated by the Board of Directors fails to do so. 6.06 Chairman of the Board. The Chairman of the Board, if one is elected by the Board of Directors, shall preside at all meetings of the Board of Directors and shall have such additional powers and duties as may be assigned to him by the Board of Directors. 6.07 Vice Chairman of the Board. The Vice Chairman of the Board, if one is elected by the Board of Directors, shall have such powers and duties as may be assigned to him by the Board of Directors. 12 14 6.08 President. The President shall be the chief executive and operating officer of the Corporation and, subject to the Board of Directors, he shall have general executive charge, management and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. The President shall also be the chief administrative officer of the Corporation and, subject to the Board of Directors, shall have charge of the actual day-to-day operations and management of the corporation and its properties, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. He shall preside at all meetings of stockholders. He may agree upon and execute all division and transfer orders, bonds, contracts, and other obligations in the name of the Corporation, and he may sign all certificates for shares of stock of the Corporation. 6.09 Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors or the Chairman of the Board, and (in such order as is determined by the Board of Directors or, in the absence of such a determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken. 6.10 Treasurer. The Treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate account of receipts and disbursements, shall deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, or the President. 6.11 Assistant Treasurers. Each Assistant Treasurer shall have such power and duties as may be assigned to him by the Board of Directors, the Chairman of the Board, or the President. The Assistant Treasurers (in such order as is determined by the Board of Directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer's absence or inability to act. 6.12 Secretary. Except as otherwise provided in these Bylaws, the Secretary shall keep the minutes of all meetings of the Board of Directors and of the stockholders in books provided for that purpose, and he shall attend to the giving and service of all notices. He may sign with the Chairman of the Board or President all certificates for shares of stock of the corporation, and he shall have charge of the certificate books, transfer books, and stock papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection by any director upon application at the office of the Corporation during business hours. He shall in general perform all duties incident to the office of the Secretary, subject to the control of the Board of Directors, the Chairman of the Board, and the President. 13 15 6.13 Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him by the Board of Directors, the Chairman of the Board, or the president. The Assistant Secretaries (in such order as is determined by the Board of Directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer's absence or inability to act. ARTICLE SEVEN: STOCK CERTIFICATES AND STOCKHOLDERS 7.01 Certificates for Shares. Certificates for shares of stock of the Corporation shall be in such form as shall be shall be approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board or the President or a Vice President and also by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and each such certificate may be sealed with the seal of the Corporation or a facsimile thereof. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the corporation as they are issued and shall exhibit the holder's name and the number of shares. 7.02 Replacement of Lost or Destroyed Certificates. The Board of Directors may direct a new certificate or certificates representing shares of stock be issued in place of a certificate or certificates representing shares of stock theretofore issued by a Corporation and alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares of stock that was or were lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond of a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. 7.03 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall, subject to any applicable restrictions on transfer duly noted thereon, issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 7.04 Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be 14 16 bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 7.05 Regulations. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer, and registration or the replacement of certificates for shares of stock of the Corporation. 7.06 Legends. The Board of Directors shall have the power and authority to provide that the certificates representing shares of stock bear such legends as the Board of Directors deem appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. ARTICLE EIGHT: INDEMNIFICATION 8.01 Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation or of a partnership, joint venture trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in Section 8.03, the Corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board of Directors of the Corporation. 8.02 Prepayment of Expenses. The Corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Article VIII or otherwise. 8.03 Claims. If a claim for indemnification or payment of expenses under this Article VIII is not paid in full within sixty (60) days after a written claim therefor by the Indemnitee has been received by the Corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. 15 17 8.04 Nonexclusivity of Rights. The rights conferred on any Indemnitee by this Article VIII shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise. 8.05 Other Sources. The Corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other Corporation, partnership, joint venture, trust, enterprise or non-profit enterprise. 8.06 Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VIII shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omissions occurring prior to the time of such repeal or modification. 8.07 Other Indemnification and Prepayment of Expenses. This Article VIII shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action. ARTICLE NINE: MISCELLANEOUS PROVISIONS 9.01 Dividends. Subject to provisions of law and the Certificate of Incorporation, dividends may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property, or in securities of the Corporation. Such declaration and payment shall be at the discretion of the Board of Directors. 9.02 Reserves. There may be created by the Board of Directors out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, to repair or maintain any property of the Corporation, or for such other purpose as the Board of Directors shall consider beneficial to the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 9.03 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders, Board of Directors, and any committee of the Board of Directors, and shall keep at its registered office or principal place of business, a record of its stockholders, giving the name and address of all stockholders and the number and class of the shares held by each. 9.04 Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors; provided, that if such fiscal year is not fixed by the Board of Directors it shall be the calendar year. 16 18 9.05 Seal. The seal of the Corporation shall be such as from time to time may be approved by the Board of Directors. 9.06 Resignation. Any committee member or director may resign by so stating at any meeting of the Board of Directors or any committee member, director or officer may resign by giving written notice to the Board of Directors, the Chairman of the Board, the President, or the Secretary. Such resignation shall take effect at the time specified therein, or immediately if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9.07 Securities of Other Corporations. The Chairman of the Board, the President or any other officer of the Corporation that the Board of Directors may designate from time to time shall have the power and authority to transfer, endorse for transfer, vote, and take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 9.08 Amendments of Bylaws. The Bylaws may be altered or repealed and new Bylaws may be adopted (1) at any annual or special meeting of stockholders by the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, provided, however, that any proposed alteration or repeal of, or the adoption of any Bylaw inconsistent with, Section 2.02 or 2.11 of Article II or Section 3.02 or 3.04 of Article III of the Bylaws by the stockholders shall require the affirmative vote of the holders of at least 80% of the voting power of all voting stock then outstanding, voting together as a single class, and provided, further, however, that, in the case of any such stockholder action at a special meeting of stockholders, notice of the proposed alteration, repeal or adoption of the new Bylaw or Bylaws must be contained in the notice of such special meeting, or (2) by the affirmative vote of a majority of the Whole Board. 9.09 Invalid Provisions. If any part of these Bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative. 9.10 Headings. The Headings used in these Bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation. 9.11 References. Whenever herein the singular number is used, the same shall include the plural where appropriate and words of any gender shall include each other gender where appropriate. 17 EX-10.29 3 FORM OF SEVERANCE COMPENSATION 1 EXHIBIT 10.29 SEVERANCE COMPENSATION AGREEMENT SEVERANCE COMPENSATION AGREEMENT dated as of __________, between DSC COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company) and _______________ (the "Executive"). WHEREAS, the Compensation Committee of the Board of Directors of the Company has determined that it is appropriate to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a change in control of the Company; and WHEREAS, the Company's Board of Directors has determined that it is in the best interest of the Company and its stockholders to enter into this Severance Compensation Agreement (the "Agreement"); NOW THEREFORE, this Agreement sets forth the severance compensation which the Company agrees it will pay the Executive if the Executive's employment with the Company terminates under certain circumstances described herein following a Change of Control of the Company (as defined herein). 1. TERM. This Agreement shall terminate, except to the extent that any obligation of the Company hereunder remains unpaid as of such time, upon the earliest to occur of (i) the termination of Executive's employment for any reason prior to a Change in Control; (ii) two years after the date of a Change in Control of the Company if the Executive has not terminated his employment for Good Reason (as defined herein) as of such time; and (iii) _______________. 2. CHANGE IN CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (a "Person"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the 2 following acquisitions shall not constitute a Change in Control: (a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion provision), (b) any acquisition by the Company (excluding any acquisition by any successor of the Company), (c) any acquisition by an employee benefit plan (or related trust) sponsored by or maintained by the Company or any corporation controlled by the Company, or (d) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the condition described in clauses (a), (b), and (c) of subsection (iii) of this Section 2 are satisfied; or (ii) individuals who, as of the date hereof, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors then constituting the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest subject to Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (a) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger, or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be (for purposes of determining whether such percentage test is satisfied, there shall be excluded from the number of shares and voting securities of the resulting corporation owned by the Company's stockholders, but not from the total number of outstanding shares and voting securities of the resulting corporation, any shares or voting securities received by any such stockholder in respect of any consideration other than shares or voting -2- 3 securities of the Company), (b) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, any qualified employee benefit plan of such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, twenty percent (20%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization merger or consolidation; or (iv) (a) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company or (b) the first to occur of (1) the sale or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, or (2) the approval by the stockholders of the Company of any such sale or disposition, other than, in each case, any such sale or disposition to a corporation, with respect to which immediately thereafter, (A) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be (for purposes of determining whether such percentage test is satisfied, there shall be excluded from the number of shares and voting securities of the transferee corporation owned by the Company's stockholders, but not from the total number of outstanding shares and voting securities of the transferee corporation, any shares or voting securities received by any such stockholder in respect of any consideration other than shares or voting securities of the Company), (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company, any qualified employee benefit plan of such transferee corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, twenty percent -3- 4 (20%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of such transferee corporation and the combined voting power of the then outstanding voting securities of such transferee corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such transferee corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the board providing for such sale or other disposition of assets of the Company. 3. TERMINATION FOLLOWING A CHANGE IN CONTROL. (a) At any time following a Change in Control of the Company, the Executive shall be entitled to the compensation provided in Section 5 upon the occurrence of either of the following: (i) the termination by the Company of the Executive's employment with the Company unless such termination is as a result of (w) the Executive's Retirement (as defined in Section 3(c) below); (x) the Executive's death; (y) the Executive's Disability (as defined in Section 3(b) below); or (z) the Executive's termination by the Company for Cause (as defined in Section 3(d) below); or (ii) the termination by the Executive of the Executive's employment with the Company for Good Reason (as defined in Section 3(e) below). (b) Disability. The term "Disability" as used in this Agreement shall mean the Executive's absence from his duties with the Company for a period of six months, as a result of the Executive's incapacity due to physical or mental illness. (c) Retirement. The term "Retirement" as used in this Agreement shall mean termination by the Company or the Executive of the Executive's employment based on the Executive's having reached age 65 or such other age as shall have been fixed in any arrangement established pursuant to this Agreement with the Executive's consent with respect to the Executive. (d) Cause For purposes of this Agreement, the Company's termination of the Executive's employment with the Company shall be considered for "Cause" if it results from and of the following: (i) the continuing and material failure by the Executive to fulfill his employment obligations or willful misconduct or gross neglect in the performance of such duties, -4- 5 (ii) the Executive's committing fraud, embezzlement or misappropriation in the performance of his duties as an employee of the Company, or (iii) The Executive's committing any felony for which he is convicted and which, as determined in good faith by the Board of Directors of the Company, constitutes a crime involving moral turpitude and may result in material harm to the Company. (e) Good Reason. The Executive may terminate the Executive's employment for Good Reason at any time following a Change in Control. For purposes of this Agreement, "Good Reason" shall mean any of the following (without the Executive's express written consent): (i) the assignment to the Executive by the Company of duties inconsistent with the Executive's position, duties, responsibilities or status with the Company immediately prior to a Change in Control of the Company, or a change in the Executive's titles or offices as in effect immediately prior to a Change in Control of the Company, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of his employment for Disability, Retirement or Cause or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) a reduction by the Company in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the terms of this Agreement; (iii) any failure by the Company to continue in effect any benefit plan or arrangement (including, without limitation, the Company's Employee Stock Purchase Plan, Employee Thrift Plan, DSC Communications Corporation Employee Stock Ownership Plan and life insurance, medical, dental, accident and disability plans) in which the Executive is participating at the time of a Change in Control of the Company, or any other plan or arrangement providing the Executive with benefits that are no less favorable, (hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such Benefit Plan or deprive the Executive or any material fringe benefit or perquisite of office enjoyed by the Executive at the time a Change in Control of the Company; (iv) any failure by the Company to continue in effect any incentive plan or arrangement (including, without limitation, the Company's bonus and contingent bonus arrangements, including the supplemental -5- 6 compensation policy of the Company, and credits and the right to receive performance awards and similar incentive compensation benefits) in which the Executive is participating at the time of a Change in Control of the Company, or any other plans or arrangements providing him with substantially similar benefits, (hereinafter referred to as "Incentive Plans") or the taking of any action by the Company which would adversely affect the Executive's participation in any such Incentive Plan or reduce the Executive's benefits under any such Incentive Plan, expressed as a percentage of his base salary, by more than 10 percentage points in any fiscal year as compared to the average of the two highest of the three immediately preceding fiscal years; (v) any failure by the Company to continue in effect any plan or arrangement to receive securities of the Company (including, without limitation, the Company's 1979 Stock Option Plan, 1981 Stock Option Plan, 1984 Stock Option Plan, 1988 Stock Option Plan, 1993 Stock Option and Securities Award Plan, and any other plan or arrangement to receive and exercise stock options, stock appreciation rights, restricted stock or grants thereof in which the Executive is participating at the time of a Change in Control of the Company, or any other plan or arrangement providing him with substantially similar benefits, (hereinafter referred to as "Securities Plans") or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such Securities Plan; (vi) a relocation of the Company's principal executive offices to a location more than fifty (50) miles from the location of the principal executive offices prior to a Change in Control of the Company, or the Executive's relocation to any place more than fifty (50) miles from the location at which the Executive performed the Executive's duties prior to a Change in Control of the Company, except for required travel by the Executive on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the time of a Change in Control of the Company; (vii) any failure by the Company to provide the Executive with at least fifty percent (50%) of the number of annual paid vacation days to which the Executive is entitled at the time a Change in Control of the Company occurs; (viii) any material breach by the Company of any provision of this Agreement; (ix) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or -6- 7 (x) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(f), and for purposes of this Agreement, no such purported termination shall be effective. For purposes of this subsection (e), an isolated, immaterial, and inadvertent action not taken in bad faith by the Company in violation of paragraph (ii), (iii), (iv), (v) or (vii) of this subsection that is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not be considered Good Reason for the Executive's termination of employment with the Company. In the event the Executive terminates his employment for Good Reason hereunder, then notwithstanding that the Executive may also retire for purposes of the Benefit Plans, Incentive Plans or Securities Plans, the Executive shall be deemed to have terminated his employment for Good Reason for purposes of this Agreement. (f) Notice of Termination. Any termination of the Executive by the Company pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate those specific termination provisions in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination by the Company shall be effective without such Notice of Termination. (g) Date of Termination. "Date of Termination" shall mean (i) if this Agreement is terminated by the Company for Disability, 30 days after Notice of Termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such 30-day period) or (ii) if the Executive's employment is terminated by the Company for any other reason, the date on which a Notice of Termination is given; provided, however that if within 30 days after any Notice of termination is given to the Executive by the Company, the Executive notifies the Company that a dispute exists concerning the termination, the Date of Termination shall be the date the dispute is finally determined, whether by mutual agreement by the parties or upon final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 4. TERMINATION UPON DISABILITY. In the event of the termination of the Executive's employment with the Company by the Company or by the Executive for Disability, the Executive shall be entitled to continue to receive payment of his annual base salary, at the then current rate, for a period of two years following such termination in accordance with the ordinary payroll practices of the Company, reduced by (i) the amount of any salary replacement payments made -7- 8 to Executive under a disability plan of the Company which is provided at no cost to the Executive and (ii) any social security or other governmental disability benefits received by the Executive. 5. SEVERANCE COMPENSATION UPON TERMINATION OF EMPLOYMENT. If the Company shall terminate the Executive's employment other than as a result of (i) the Executive's Retirement; (ii) the Executive's death; (iii) the Executive's Disability; or (iv) the Executive's termination by the Company for Cause, or if the Executive shall terminate his employment for Good Reason, then the Company shall pay to the Executive as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to three times the Executive's "base amount" (as defined in Section 280G(b) of the Internal Revenue Code of 1986, as amended (the "Code")) determined with respect to a base period ending on the last day of the last fiscal year prior to such Date of Termination; provided, however, that in no event shall the amount of such payment be less than three times Executive's annual base salary at the higher of the rate in effect (i) immediately prior to the Date of Termination or (ii) on the date six months prior to the Date of Termination. 6. 1994 LONG-TERM INCENTIVE PLAN. For purposes of the DSC Communications Corporation 1994 Long-Term Incentive Compensation Plan and the definitions of "Disability" and "Termination Without Cause" therein, this Agreement shall constitute Executive's Employment Agreement. 7. EXCISE TAXES. If the payments made pursuant to paragraph 5 of this Agreement, when aggregated with any other payments made to Executive, would result in the imposition of an excise tax under Section 4999 of the Code, the Company shall pay to the Executive, in addition to amounts otherwise payable under this Agreement, an amount sufficient, after federal and state income taxes, to pay the excise tax so payable and all directly related interest and penalties such that the net amount to the Executive would be the same as if no excise tax had been imposed. Upon such time as Executive determines that the Company shall owe Executive money for the payment of excise taxes pursuant to this Section 7, Executive shall deliver to the Company a completed form of Executive's federal or state tax return, as applicable, in the form in which it will be filed. The Company shall, within five days of receiving such tax return, pay to Executive the amount of any excise tax to be paid by Executive as shown on such Executive's tax return. -8- 9 8. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, Incentive Plan or Securities Plan, employment agreement or other contract, plan or agreement with or of the Company. 9. SUCCESSORS. (a) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle the Executive to terminate the Executive's employment for Good Reason and receive the compensation provided for in Section 5 hereof. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him hereunder all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee, or, if there be no such designee, to the Executive's estate. -9- 10 10. NOTICE. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: DSC Communications Corporation 1000 Coit Road Plano, TX 75075 Attention: Secretary and General Counsel If to the Executive: _____________________ c/o DSC Communications Corporation 1000 Coit Road Plano, TX 75075 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to any principles of conflicts of law. 12. CONFLICT IN BENEFITS. Except as otherwise provided in Sections 4 and 6 of this Agreement, this Agreement is not intended to and shall not affect, limit or terminate any other agreement or arrangement between the Executive and the Company presently in effect or hereafter entered into. -10- 11 13. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. LEGAL FEES AND EXPENSES. The Company shall pay all legal fees and expenses which the Executive may incur as a result of the Company's contesting the validity, enforceability or the Executive's interpretation of, or determinations under, this Agreement. 15. EFFECTIVE DATE. This Agreement shall become effective upon execution. 16. COUNTERPARTS. This agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. NO GUARANTEE OF EMPLOYMENT. Neither this Agreement or any action taken hereunder shall be construed as giving the Executive the right to be retained in employment with the Company, nor shall it interfere with either the Company's right to terminate the employment of the Executive at any time or the Executive's right to terminate his employment at any time. 18. NO ASSIGNMENT BY PARTICIPANT. The Executive's rights and interest under this Agreement shall not be assignable (in law or in equity) or subject to any manner of alienation, sale, transfer, claims or creditors, pledge, attachment, garnishment, levy, execution or encumbrances of any kind, and any attempt by the Executive or other person to do so shall be void. 19. WAIVER. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision of this Agreement. Any waiver of any provision of this Agreement shall not be deemed to be a waiver of any other provision, and -11- 12 any waiver of default in any provision of this Agreement shall not be deemed to be a waiver of any later default thereof or of any other provision. 20. WITHHOLDING. All amounts paid pursuant to this Agreement shall be subject to withholding for taxes (federal, state, or local or otherwise) to the extent required by applicable law. 21. HEADINGS. The headings of this agreement have been inserted for convenience of reference only and are to be ignored in the construction of the provisions hereof. 22. NUMBER AND GENDER. The use of the singular shall be interpreted to include the plural and plural the singular, as the context requires. The use of the masculine, feminine or neuter shall be interpreted to include the masculine, feminine or neuter as the context shall require. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. DSC COMMUNICATIONS CORPORATION By:________________________________ EXECUTIVE: ___________________________________ -12- EX-10.30 4 SCHEDULE TO FORM OF SEVERANCE COMPENSATION 1 EXHIBIT 10.30 Schedule to Severance Compensation Agreement Between the Company and Certain of its Officers The Severance Compensation Agreement, substantially in the form as filed herewith as Exhibit 10.29, was entered on January 27, 1997 with the following officers of the Company: John W. Bischoff David L. Hinshaw Douglas K. Jacobs George M. Simpson EX-11.1 5 STATEMENT RE : COMPUTATION OF PER SHARE EARNINGS 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, 1996, 1995 and 1994. Average Shares Used in Income (Loss) per Share Calculation:
1996 1995 1994 ------------------------ ------------------------ --------------------- Fully Fully Fully Primary Diluted(B) Primary Diluted(B) Primary Diluted(B) ------- ------- ------- ------- ------- ------- Weighted average shares outstanding during the year................ 116,514 -- 114,681 -- 112,254 -- Common share equivalents outstanding: Options and warrants issued and contingently issuable........ -- (A) -- 5,271 -- 6,104 -- Assumed purchase of treasury shares.............. -- (A) -- (1,826) -- (1,469) -- ------- ------- ------- ------- ------- ------- Weighted average shares used in calculation............ 116,514 -- 118,126 -- 116,889 -- ======= ======= ======= ======= ======= =======
(A) Common stock equivalents are not included in the income (loss) per share calculation in a period in which a net loss is incurred since their inclusion would be antidilutive. (B) Fully diluted income (loss) per share is not shown since the dilutive effect is less than three percent. EX-13.1 6 1996 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 DSC Communications Corporation and Subsidiaries ITEM 6. SELECTED FINANCIAL DATA
1996(A) 1995 1994(B) 1993 1992 ------- ---- ------- ---- ---- (Dollars in thousands, except per share data) SUMMARY OF OPERATIONS FOR THE YEAR: Revenue ............................... $ 1,380,891 $ 1,422,018 $ 1,003,125 $ 730,774 $ 536,319 Gross profit .......................... 455,144 685,899 490,392 317,969 202,776 Operating income (loss) ............... (12,043) 279,418 213,999 110,176 42,431 Interest income ....................... 24,146 27,147 16,306 5,691 4,132 Interest expense ...................... (26,355) (18,599) (2,075) (6,256) (21,347) Net income (loss) ..................... $ (7,555) $ 192,680 $ 162,626 $ 81,660 $ 11,594 =========== =========== =========== =========== =========== Income (loss) per share (C) ........... $ (0.06) $ 1.63 $ 1.39 $ 0.77 $ 0.12 =========== =========== =========== =========== =========== FINANCIAL POSITION AT YEAR-END: Cash and marketable securities ........................... $ 334,039 $ 569,264 $ 271,322 $ 313,808 $ 69,839 Working capital ....................... 769,956 738,965 393,034 406,752 79,010 Property and equipment, net .................................. 403,596 370,522 282,963 179,783 149,209 Total assets .......................... 1,925,655 1,865,275 1,268,536 900,417 547,669 Short-term and long-term debt ................................. 308,580 326,977 82,369 70,412 140,409 Shareholders' equity (D) .............. 1,147,636 1,124,079 851,100 617,800 202,627 OTHER FINANCIAL INFORMATION: Shareholders' equity per share of common stock outstanding (C) ................ $ 9.79 $ 9.72 $ 7.50 $ 5.61 $ 2.30 Return on average shareholders' equity ................. (0.7%) 19.5% 22.1% 19.9% 6.1% Ratio of current assets to current liabilities .................. 2.8 2.5 2.1 3.1 1.4 Ratio of short-term and long-term debt to shareholders' equity ................. 26.9% 29.1% 9.7% 11.4% 69.3%
(Continued) 2 DSC Communications Corporation and Subsidiaries ITEM 6. SELECTED FINANCIAL DATA (Continued)
1996(A) 1995 1994(B) 1993 1992 ------- ---- ------- ---- ---- (Dollars in thousands, except per share data) OTHER DATA: Shares used to compute income (loss) per share (in thousands) (C) ................... 116,514 118,126 116,889 106,650 93,198 Shareholders of record at year end ............................. 5,242 3,768 3,611 3,462 4,948 Total employees at year end .................................. 6,367 5,860 5,414 4,041 3,301
- ------------------------------------------------------------------------------- (A) For the year ended December 31, 1996, the Company recorded non-cash special charges totaling $96.0 million ($82.5 million reduced gross profit and $13.5 million was charged to operating costs and expenses) related primarily to a reduction in the carrying value of certain assets for several of the Company's products. See Notes to Consolidated Financial Statements and Management's Discussion and Analysis for further discussion. (B) In November 1994, the Company acquired NKT Elektronik A/S (DSC Communications A/S). Accordingly, DSC Communications A/S's results of operations have been included in the Company's consolidated financial data since the acquisition date. See Notes to Consolidated Financial Statements for further discussion. (C) In April 1994, the Board of Directors declared a two-for-one stock split, effected in the form of a 100% stock dividend, for shareholders of record on May 11, 1994. All per share amounts prior to 1994 have been restated to retroactively reflect the stock split. (D) Since inception, the Company has not declared or paid a cash dividend. 3 DSC Communications Corporation and Subsidiaries ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Although the Company ended 1996 with record quarterly revenue and customer orders for the fourth quarter, overall results for the full-year 1996 were lower than in 1995. Revenue for 1996 of $1.4 billion was 2.9% lower than in 1995, and as a result of $96.0 million of special charges, the Company incurred a net loss for 1996 of $7.6 million, or $0.06 per share. Excluding the special charges, net income would have been $52.0 million, or $0.44 per share. The special charges related primarily to a reduction in the carrying value of certain assets for several of the Company's products. The Company's financial position remained strong at the end of 1996. Cash and short-term investments exceeded $334.0 million; current assets exceeded current liabilities by 2.8 times; assets totaled $1.9 billion and debt was only 27% of shareholders' equity. FINANCIAL CONDITION AND LIQUIDITY The Company ended 1996 and 1995 with the following:
December 31, ------------ 1996 1995 ---- ---- (in millions) Cash and cash equivalents $ 155.1 $ 258.6 Marketable securities 178.9 310.7 Non-debt working capital, excluding cash and cash equivalents and marketable securities 469.9 286.2 Short-term debt 0.9 83.4 Long-term debt, including current portion 307.7 243.5
Cash of $64.8 million was used during the year for operating activities. This cash usage was primarily the result of growth in receivables and inventories. Receivables growth of $159.7 million was due primarily to longer payment terms and payment cycles in the international marketplace and a higher level of customer financing in the domestic marketplace. Also, during the fourth quarter of 1995 the Company sold approximately $50 million of trade and lease receivables with recourse. No receivables were sold in the fourth quarter of 1996. See "Receivables" and "Commitments and Contingencies" in Notes to Consolidated Financial Statements for further discussion. Inventories growth, net of the special charges impact, of $39.6 million was primarily the result of existing and anticipated customer demand for the Company's products in 1997. Capital expenditures were $122.4 million during 1996, which included capital investments related to the establishment of manufacturing operations in Costa Rica and the completion of new facilities in Denmark. The Company anticipates that capital expenditures in 1997 could be in the range of $150 million to $170 million. This amount includes expected capital additions related to an expansion of the Costa Rican manufacturing capacity, the establishment of additional manufacturing facilities in 4 Ireland and additional office space at the Plano campus. However, the timing and extent of any future capital expenditures is dependent upon future business growth. During 1996, the Company replaced approximately $95.7 million of short-term borrowings with two unsecured, long-term loans denominated in Danish Kroner. These loans require quarterly interest payments with principal payments beginning in 1999. The interest on the loans is adjustable based upon market interest rates in Denmark and ranged from 4% to 5% at December 31, 1996. Also during 1996, the Company repaid $33.1 million of its long-term borrowings, which included the first $28.1 million scheduled annual principal payment on the $225.0 million loan obtained during 1995. Annual maturities of long-term debt for the next five years range from approximately $33 million to $59 million. See "Long-Term Debt" in Notes to Consolidated Financial Statements for further discussion. The Company has an unsecured $160.0 million revolving credit agreement with several banks which provides for borrowings and issuances of letters of credit in various currencies. The maximum borrowings available under the facility are reduced by the value of outstanding letters of credit issued by the banks on behalf of the Company. At December 31, 1996, outstanding letters of credit issued under the agreement totaled $29.3 million, and there were no borrowings under this agreement during the year. Two of the Company's foreign subsidiaries also have credit agreements providing for borrowings of $9.5 million with local banks, of which $0.9 million was outstanding at December 31, 1996. The Company's debt agreements contain various financial covenants including, among others, minimum net worth, maintenance of certain fixed charge ratios and maximum allowable indebtedness to net worth. The Company believes that it will continue to be in compliance with the provisions of its loan agreements. However, if 1997 capital expenditures significantly exceed 1996 levels and the Company's quarterly net earnings are not higher than 1996 quarterly results (before special charges), waivers or amendments to loan agreements could be required. The Company is party to certain litigation, as disclosed 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. As discussed in Notes to Consolidated Financial Statements, the Federal Court entered a $137.7 million judgment in the Company's favor associated with the Next Level Corporation litigation. This judgment was upheld by the Fifth Circuit Court of Appeals in late February 1997. The Company could receive the proceeds from the judgment in the near future. The Company believes that its existing cash and short-term investments and available credit facilities will be adequate to support the Company's financial resource needs, including working capital requirements, capital expenditures, operating lease obligations and debt payments. In order to be competitive in the future, the Company believes that it could become increasingly necessary to offer financing alternatives to both domestic and international customers. To the extent such customer financing arrangements become significant or other business requirements arise, additional financing could become necessary. 5 RESULTS OF OPERATIONS 1996 Compared to 1995 Revenue for 1996 was $1,380.9 million compared to $1,422.0 million in 1995, and the Company incurred a net loss during 1996 of $7.6 million, or $0.06 per share, which included special charges totaling $96.0 million before income taxes. Excluding the effects of the special charges, the Company would have recorded net income of $52.0 million, or $0.44 per share, compared to $192.7 million, or $1.63 per share, in 1995. During 1996, the Company reassessed the future business prospects for several of its products. Management concluded that while the longer-term outlook for these products was favorable, the forecasted business levels for the near-term would not support the carrying value of certain assets, including inventories and deferred development costs, associated with these products. As a result, the Company recorded non-cash special charges of $96.0 million primarily to reduce the recorded value of these assets to their net realizable values. Although not currently anticipated, delays in development or customer acceptance of products developed in the future could result in adjustments to carrying values of any assets associated with such new products. Although revenue levels were comparable in 1996 and 1995, the Company did experience a shift in the mix of products sold from 1995 to 1996. Switching products revenue declined 15% from the 1995 level and accounted for 42% of total consolidated revenue in 1996 compared to 48% in 1995. This decline was primarily attributable to a reduction in the deliveries of cellular, wireless and certain intelligent network switching products. Access products revenue increased 13% over the prior year due primarily to continued strong demand for the Company's Litespan-2000 product. This increase resulted in access products accounting for 33% of consolidated revenue in 1996 compared to 28% in 1995. Revenue from the Company's transport products was 23% of consolidated revenue in both 1996 and 1995. The Company believes that revenue in 1996 from several of its more mature products was negatively impacted by pending Federal Communications Commission rulemaking procedures, associated court challenges of the recent telecom legislation and mergers and consolidations among the Company's customer base. The Company could continue to experience delays in customer purchasing decisions until the uncertainties created by these situations are resolved. Gross profit in 1996 was $455.1 million compared to $685.9 million in 1995. Included in Cost of Revenue in 1996 was $82.5 million of the special charges discussed above. Excluding this portion of the special charges, gross profit as a percentage of revenue was 39% in 1996 compared to 48% in 1995. This decrease was due to an overall shift in the mix of products sold, including the shift in revenue from higher margin switching products to lower margin access products as discussed above. As was experienced between 1996 and 1995, the Company's gross margin percentage can vary significantly from period to period due to changes in the relative mix of product deliveries and software content. Operating results in future periods could continue to be impacted by these types of product mix changes. 6 DSC Communications A/S, which accounted for 9% of consolidated revenue in 1996 and 1995, incurred additional operating losses during 1996. These operating losses were due primarily to the delayed introduction of a new generation of optical transmission equipment. While deliveries of certain of these new products have begun, the remaining development effort will not be completed until 1997. Future near-term profitability of the Company's Danish operations is dependent upon the successful completion and market acceptance of these products. Research and development expenses in 1996 increased to $210.1 million, or 15% of revenue, compared to $189.8 million, or 13% of revenue, in 1995. The Company continues to make a substantial investment in research and development to maintain the Company's ongoing development of new products and enhancements to existing products across all strategic product areas. Selling, general and administrative expenses totaled $233.6 million, or 17% of revenue, in 1996 compared to $207.2 million, or 15% of revenue, in 1995. This increase was primarily the result of increased international selling activities and increased legal expenses. The Company is actively pursuing claims primarily related to its intellectual property rights, and as a result, legal expenses may continue to increase as this litigation progresses. See "Litigation" under "Commitments and Contingencies" in Notes to Consolidated Financial Statements for further discussion. Depreciation and amortization expense increased from $81.2 million in 1995 to $94.0 million in 1996. Capital expenditures in 1996 of $122.4 million, along with expected capital additions in the range of approximately $150 million to $170 million in 1997, will continue to increase depreciation and amortization expense in 1997 and future years. Interest expense increased in 1996 as a result of the $225.0 million loan entered into in April 1995 which bears interest at 9% as well as borrowings during 1996 under several foreign subsidiary borrowing arrangements. Other Income (Expense), Net in 1996 includes amounts received from a settlement of certain litigation during the year. See "Other Income (Expense), Net" in Notes to Consolidated Financial Statements for further discussion. The Company provided an income tax benefit at a 38% effective rate for 1996. The Company believes that its existing deferred tax assets included on the Consolidated Balance Sheet will be realizable based on the Company's profitable operating history and an assessment that the Company will generate taxable earnings in domestic and foreign tax jurisdictions in the future. Should the Company's Danish subsidiary incur additional tax losses in 1997, the Company's effective tax rate could increase depending on a subsequent review of the realization of the additional tax loss carryforward. The Company manages its exposure to fluctuations in foreign currency exchange rates through the use of forward foreign exchange contracts. These contracts are primarily entered into to hedge certain receivables and firm contracts for deliveries of products and services. At December 31, 1996, the U.S. dollar equivalent of forward foreign exchange contracts outstanding was approximately $42.1 million. See "Forward Foreign Exchange Contracts" under "Summary of Significant Accounting Policies" in Notes to Consolidated Financial Statements for further discussion. 7 As discussed in "Litigation" under "Commitments and Contingencies" in Notes to Consolidated Financial Statements, the litigation between the Company, Bell Atlantic and Lucent Technologies, Inc. was settled on March 13, 1997. In conjunction with the settlements, Bell Atlantic agreed to purchase a significant amount of product from the Company over a five year period beginning in 1998. The agreement requires a minimum annual purchase level substantially above the amount purchased by Bell Atlantic from the Company in 1996 which totaled approximately $120 million. The Company's future operating results may be affected by a number of factors, including introduction and market acceptance of new products on a timely basis; mix of products sold; 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; 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. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which is effective for transactions which occur beginning January 1, 1997. The Company believes that this new standard will not have a material impact on the Company. 1995 Compared to 1994 Revenue for 1995 increased 42% to $1,422.0 million compared to $1,003.1 million in 1994. Net income for 1995 was $192.7 million, or $1.63 per share, compared to net income of $162.6 million, or $1.39 per share, in 1994. The Company's revenue growth for 1995 was the result of increased product deliveries across all of the Company's major product lines as well as the inclusion of revenue from the Company's Danish subsidiary, DSC Communications A/S, which was acquired in November 1994. Switching products revenue increased 31% over 1994 and represented 48% of consolidated revenue in 1995 as compared to 52% of consolidated revenue in 1994. This revenue increase was due primarily to an increase in deliveries of the Company's cellular and wireless switching products. Access products revenue increased 49% over the prior year as customer demand for the Litespan product continued to grow, which resulted in access products accounting for 28% of consolidated revenue in 1995 compared to 27% in 1994. Transport products revenue represented 23% of consolidated revenue in 1995 as compared to 19% of consolidated revenue in 1994. Revenue from transmission products increased 66% due to the inclusion of revenue from DSC Communications A/S in addition to revenue from the Company's new iMTN product. DSC Communications A/S, which accounted for 9% of consolidated revenue in 1995, incurred an operating loss during the year due principally to the delayed introduction of a new generation of optical transmission equipment. Gross profit of $685.9 million in 1995 represented 48% of revenue compared to 49% of revenue in 1994. This decline was due primarily to a change in the mix of products sold during 1995 as compared to 1994. Certain of the Company's products, including software, typically produce gross margin content greater than other Company products. 8 Research and development expenses increased to $189.8 million in 1995 compared to $127.3 million in 1994, representing 13% of revenue for both 1995 and 1994. This growth included the development activities of DSC Communications A/S as well as the Company's increasing research and development investment consistent with its ongoing commitment to the development of new products and to the enhancements of existing products across all strategic product lines. Selling, general and administrative expenses for 1995 were $207.2 million, or 15% of revenue, compared to $141.9 million, or 14% of revenue, in 1994. This growth is due primarily to the inclusion of expenses of DSC Communications A/S in 1995, increased international selling and marketing activities and a growth in legal expenses. Both interest income and interest expense have increased in 1995 due primarily to the $225.0 million loan entered into in April 1995 which bears interest at 9%. The majority of the proceeds from this loan were invested in short-term investments during 1995. Interest expense has also increased as a result of borrowings under several new foreign subsidiary borrowing arrangements entered into during 1995. The Company's effective income tax rate was 34% for 1995 as compared to 27% in 1994. The higher rate was due primarily to a reduced amount of tax loss and credit carryforwards in 1995 as compared to 1994. See "Income Taxes" in Notes to Consolidated Financial Statements for further discussion. 9 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, ------------------------ 1996 1995 1994 ---- ---- ---- Revenue .......................................... $ 1,380,891 $ 1,422,018 $ 1,003,125 Cost of revenue: Special charges related to inventories and associated assets ........................ 82,500 -- -- Other .......................................... 843,247 736,119 512,733 ----------- ----------- ----------- Total cost of revenue ......................... 925,747 736,119 512,733 ----------- ----------- ----------- Gross profit ................................... 455,144 685,899 490,392 ----------- ----------- ----------- Operating costs and expenses: Research and product development ............... 210,091 189,751 127,303 Selling, general and administrative ............ 233,576 207,188 141,934 Special charges for excess facilities and equipment ................................ 13,500 -- -- Other operating costs .......................... 10,020 9,542 7,156 ----------- ----------- ----------- Total operating costs and expenses ........... 467,187 406,481 276,393 ----------- ----------- ----------- Operating income (loss) .......................... (12,043) 279,418 213,999 Interest income .................................. 24,146 27,147 16,306 Interest expense ................................. (26,355) (18,599) (2,075) Other income (expense), net ...................... 2,066 1,984 (5,040) ----------- ----------- ----------- Income (loss) before income taxes .............. (12,186) 289,950 223,190 Income tax expense (benefit) ..................... (4,631) 97,270 60,564 ----------- ----------- ----------- Net income (loss) ............................ $ (7,555) $ 192,680 $ 162,626 =========== =========== =========== Income (loss) per share .......................... $ (0.06) $ 1.63 $ 1.39 =========== =========== =========== Average shares used in per share computation ............................... 116,514 118,126 116,889 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 10 DSC Communications Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, ------------ 1996 1995 ---- ---- Assets CURRENT ASSETS Cash and cash equivalents ................................................ $ 155,101 $ 258,565 Marketable securities .................................................... 178,938 310,699 Receivables .............................................................. 411,947 277,006 Inventories .............................................................. 343,566 303,962 Deferred income taxes .................................................... 61,086 27,202 Other current assets ..................................................... 52,240 43,113 ----------- ----------- Total current assets ................................................... 1,202,878 1,220,547 ----------- ----------- PROPERTY AND EQUIPMENT, NET ................................................ 403,596 370,522 LONG-TERM RECEIVABLES ...................................................... 42,965 17,557 CAPITALIZED SOFTWARE DEVELOPMENT COSTS ..................................... 51,634 43,821 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET ................... 146,025 155,102 OTHER ...................................................................... 78,557 57,726 ----------- ----------- Total assets ......................................................... $ 1,925,655 $ 1,865,275 =========== =========== Liabilities and Shareholders' Equity CURRENT LIABILITIES Short-term debt .......................................................... $ 906 $ 83,438 Accounts payable ......................................................... 99,824 115,137 Accrued liabilities ...................................................... 297,101 220,679 Income taxes payable ..................................................... 2,019 29,230 Current portion of long-term debt ........................................ 33,072 33,098 ----------- ----------- Total current liabilities .............................................. 432,922 481,582 ----------- ----------- LONG-TERM DEBT, NET OF CURRENT PORTION ..................................... 274,602 210,441 NONCURRENT INCOME TAXES AND OTHER LIABILITIES .............................. 70,495 49,173 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value, issued - 122,241 in 1996 and 120,591 in 1995; outstanding - 117,252 in 1996 and 115,602 in 1995 ...................... 1,222 1,206 Additional capital ....................................................... 730,743 703,448 Unrealized gains (losses) on securities, net of income taxes .................................................... (147) 391 Accumulated translation adjustment ....................................... 8,743 4,404 Retained earnings ........................................................ 450,186 457,741 ----------- ----------- 1,190,747 1,167,190 Treasury stock, at cost, 4,989 shares in 1996 and 1995 ................... (43,111) (43,111) ----------- ----------- Total shareholders' equity ............................................. 1,147,636 1,124,079 ----------- ----------- Total liabilities and shareholders' equity ........................... $ 1,925,655 $ 1,865,275 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 11 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) .................................... $ (7,555) $ 192,680 $ 162,626 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Reduction in carrying values of certain assets and other special charges ................. 96,000 -- -- Depreciation and amortization ..................... 93,982 81,218 53,698 Amortization of capitalized software development costs ....................... 24,193 21,591 19,460 Deferred income taxes ............................. (50,359) (31,888) -- Income tax benefit related to stock options .......................................... 6,872 49,987 24,055 Other ............................................. 4,955 938 4,772 Changes in operating assets and liabilities: Increase in current and long-term receivables ............................ (159,747) (33,149) (89,616) Increase in inventories ........................... (95,705) (129,234) (33,188) Increase in other current assets .................. (20,908) (1,603) (9,265) Increase in current payables and accruals ..................................... 23,766 67,178 74,402 Increase in noncurrent income taxes and other liabilities ............................... 19,726 10,241 15,393 --------- --------- --------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES .......................... (64,780) 227,959 222,337 --------- --------- ---------
(Continued) 12 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES Business acquisition, net of acquired cash ......... -- -- (135,696) Purchases of property and equipment ................ (122,419) (154,748) (141,177) Additions to capitalized software development costs ................................. (37,006) (26,829) (24,558) Purchases of marketable securities ................. (1,100,142) (1,014,304) (312,297) Proceeds from sales and maturities of marketable securities ............................. 1,233,847 927,234 246,569 Purchase of long-term investment security .......... -- (17,500) (12,500) Other .............................................. (6,581) (341) (2,980) ----------- ----------- ----------- NET CASH USED FOR INVESTING ACTIVITIES .................................. (32,301) (286,488) (382,639) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term debt ............. (82,532) 43,647 39,791 Borrowings under long-term debt arrangements ...................................... 95,709 241,019 19,919 Payments on long-term debt ......................... (33,065) (42,249) (14,770) Proceeds from the sale of common stock under stock programs .............................. 12,458 20,481 13,211 Other .............................................. 1,047 1,254 205 ----------- ----------- ----------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ........................ (6,383) 264,152 58,356 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... (103,464) 205,623 (101,946) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................ 258,565 52,942 154,888 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................ $ 155,101 $ 258,565 $ 52,942 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid ...................................... $ 23,018 $ 12,691 $ 1,114 =========== =========== =========== Income taxes paid .................................. $ 57,912 $ 64,289 $ 11,930 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 13 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Common Stock ------------ Unrealized Shares Par Gains Accumulated Cost of Out- Value Additional (Losses) on Translation Retained Treasury standing $0.01 Capital Securities Adjustment Earnings Shares Total -------- ----- ------- ---------- ---------- -------- ------ ----- Balances, December 31, 1993 ....... 55,018 $ 600 $558,222 $ -- $ -- $ 102,435 $ (43,457) $ 617,800 Shares issued upon exercise of options ............ 1,503 15 8,533 -- -- -- -- 8,548 Shares issued under stock purchase plans ................. 357 3 5,589 -- -- -- 346 5,938 Income tax benefit related to stock options ............... -- -- 24,055 -- -- -- -- 24,055 Restricted shares issued to employees, net of unearned compensation .......... 6 -- 1,597 -- -- -- -- 1,597 Conversion of 80% subordinated convertible debentures into common stock, net of expenses ....................... 637 7 34,293 -- -- -- -- 34,300 Two-for-one stock split, effected in the form of a 100% stock dividend ....... 56,004 560 (560) -- -- -- -- -- Net change in unrealized gains (losses) on securities, net of income taxes ............ -- -- -- (3,764) -- -- -- (3,764) Net income ...................... -- -- -- -- -- 162,626 -- 162,626 ------- -------- -------- ------- -------- --------- ----------- ----------- Balances, December 31, 1994 ....... 113,525 1,185 631,729 (3,764) -- 265,061 (43,111) 851,100 Shares issued upon exercise of options ............ 1,500 15 10,283 -- -- -- -- 10,298 Shares issued under stock purchase plans ................. 467 5 10,178 -- -- -- -- 10,183 Income tax benefit related to stock options ............... -- -- 49,987 -- -- -- -- 49,987 Restricted shares issued to employees, net of unearned compensation .......... 110 1 1,271 -- -- -- -- 1,272 Net change in unrealized gains (losses) on securities, net of income taxes ............ -- -- -- 4,155 -- -- -- 4,155 Translation adjustment .......... -- -- -- -- 4,404 -- -- 4,404 Net income ...................... -- -- -- -- -- 192,680 -- 192,680 ------- -------- -------- ------- -------- --------- ----------- ----------- Balances, December 31, 1995 ....... 115,602 1,206 703,448 391 4,404 457,741 (43,111) 1,124,079 Shares issued upon exercise of options ............ 1,068 10 7,484 -- -- -- -- 7,494 Shares issued under stock purchase plans ................. 262 3 6,691 -- -- -- -- 6,694 Income tax benefit related to stock options ............... -- -- 6,872 -- -- -- -- 6,872 Restricted shares issued to employees, net of unearned compensation and forfeitures ................ 320 3 6,248 -- -- -- -- 6,251 Net change in unrealized gains (losses) on securities, net of income taxes ............ -- -- -- (538) -- -- -- (538) Translation adjustment .......... -- -- -- -- 4,339 -- -- 4,339 Net loss ........................ -- -- -- -- -- (7,555) -- (7,555) ------- -------- -------- ------- -------- --------- ----------- ----------- Balances, December 31, 1996 ....... 117,252 $ 1,222 $730,743 $ (147) $ 8,743 $ 450,186 $ (43,111) $ 1,147,636 ======= ======== ======== ======= ======== ========= =========== ===========
See accompanying Notes to Consolidated Financial Statements. 14 DSC Communications Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DSC Communications Corporation (the "Company") is a leading designer, developer, manufacturer and marketer of digital switching, transport, access and private network system products for the worldwide telecommunications marketplace. Certain prior years' financial statement information has been reclassified to conform with the current year financial statement presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company and all its majority-owned entities. All significant intercompany transactions and balances are eliminated. 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 and for certain installation projects is accounted for using the percentage-of-completion method as certain contractual milestones are completed. Revenue from technical assistance service contracts is recognized ratably over the period the services are performed. 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. 15 Investments in Debt and Equity Securities Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. 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 any investments in equity securities. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of Shareholders' Equity. The Company has had no investments that qualify as trading. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of asset-backed securities, over the estimated life of the security. Such amortization and accretion as well as interest are included in Interest Income. Realized gains and losses are included in Other Income (Expense), Net in the Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method. The Company's investments in debt and equity securities 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, ------------ 1996 1995 ---- ---- Raw Material .............................. $127,495 $137,002 Work in Process............................ 25,724 20,015 Finished Goods ............................ 190,347 146,945 -------- -------- $343,566 $303,962 ======== ========
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......................................... 20-40 Years Leasehold improvements............................ 1-20 Years Manufacturing, development and test equipment..... 3-10 Years Office furniture, equipment and other............. 3-10 Years
Included in Office furniture, equipment and other are computer equipment and related purchased software which are generally depreciated over three to five 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. 16 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 10 to 20 years. When indications of a possible impairment in carrying value are present, the Company reviews the original assumptions and rationale utilized in the establishment of the carrying value and estimated life. The carrying value would be adjusted to fair value if significant facts and circumstances altered the Company's original assumptions and rationale. Cost in Excess of Net Assets of Businesses Acquired, Net was $146.0 million and $155.1 million at December 31, 1996 and 1995, respectively. This represents the excess of the cost of acquiring businesses over the fair value of net assets received at the date of acquisition, net of accumulated amortization of $34.0 million and $24.9 million at December 31, 1996 and 1995, respectively. See "Business Acquisition" for further discussion. 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, anticipated future 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 revenues for a product to the total of current and anticipated future 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 $51.6 million and $43.8 million at December 31, 1996 and 1995, respectively, net of accumulated amortization costs of $33.4 million and $22.5 million, respectively. All other research and development expenditures are charged to research and development expense in the period incurred. Income Taxes The liability method as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and 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. 17 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. Foreign Currency Translation For those foreign subsidiaries which have a functional currency other than the U.S. dollar, assets and liabilities are translated using year-end exchange rates, and revenue and expense items are translated at the average exchange rates in effect during the year. The resulting translation adjustments for these subsidiaries are included in Shareholders' Equity. For the Company's foreign subsidiaries which have the U.S. dollar as their functional currency, monetary assets and liabilities are translated 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 revenue, which are translated at historical rates. The resulting translation adjustments are included in Other Income (Expense), Net in the Consolidated Statements of Operations and were not material in 1996, 1995 or 1994. Forward Foreign Exchange Contracts The Company is exposed to foreign currency exchange rate risk when the Company or its majority-owned entities enter into transactions denominated in currencies other than their functional currency. The Company, in management of this exposure, enters into forward foreign exchange contracts for firm purchase commitments denominated in a foreign currency. The forward contracts are not held for trading purposes. The 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 by limiting the counterparty to major financial institutions. Management believes the risk of incurring such losses is remote, and any losses therefrom would not be material. Gains and losses on forward contracts are included as part of the value of the underlying transaction being hedged. At December 31, 1996, the U.S. dollar equivalent of the forward foreign exchange contracts outstanding was $42.1 million. Of the contracts held at December 31, 1996, the following is a summary by currency: Japanese Yen - $38.6 million; Australian Dollar - $2.9 million; and other - $0.6 million. 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 adjusted for the assumed repurchase of common stock, at the average market price, from the exercise proceeds. In periods in which a net loss has been incurred, all common stock equivalents are considered antidilutive. The 18 fully diluted per share computation assumes the 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. On April 27, 1994, the Board of Directors declared a two-for-one stock split, effected in the form of a 100% stock dividend, to shareholders of record on May 11, 1994. All income (loss) per share and average shares used in per share computation amounts prior to 1994 have been restated to retroactively reflect the stock split. Employee Stock-Based Compensation The Company accounts for employee stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accounting for the issuance of stock options under the provisions of APB 25 typically does not result in compensation expense for the Company as the exercise price of options are normally established at the market price of the Company's common stock on the date of award. SPECIAL CHARGES During 1996, the Company reassessed the business prospects of certain of its products, including Airspan, Litespan-120 and iMTN. Management concluded that although the longer-term outlook for these products was favorable, forecasted business levels in the near-term would not sustain the carrying values of certain assets. As a result, the Company recorded non-cash special charges totaling $96.0 million, including $82.5 million (Cost of Revenue) related primarily to provisions for excess and obsolete inventories, deferred development costs and associated assets. Additionally, $13.5 million was included in operating expenses for provisions for excess equipment and facilities. INVESTMENTS IN DEBT AND EQUITY SECURITIES The following is a summary of the investments in debt securities classified as current assets (in thousands):
December 31, ------------ 1996 1995 ---- ---- Available for sale securities: U.S. Treasury securities and obligations of U.S. government agencies ....................... $ 90,114 $198,509 Corporate debt securities .................. 74,676 103,537 Asset-backed securities .................... 14,148 8,653 -------- -------- $178,938 $310,699 ======== ========
The amortized cost of available for sale securities approximated their fair value at both December 31, 1996 and 1995. Gross realized gains and losses on sales of available for sale securities were immaterial in 1996, 1995 and 1994. 19 The estimated fair value of available for sale securities by contractual maturity at December 31, 1996 is as follows (in thousands): Due in one year or less ....................... $ 79,910 Due after one year through three years ........ 80,770 Due after three years ......................... 18,258 -------- $178,938 ========
Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Investments in debt securities classified as held to maturity consisted of collateralized bank obligations with an amortized cost of $30.0 million at both December 31, 1996 and 1995. The amortized cost of these investments, which mature in March 1999 and December 2000, approximated their fair market value. These investments are included in Other Noncurrent Assets on the Consolidated Balance Sheets. RECEIVABLES Receivables consisted of the following (in thousands):
December 31, ------------ 1996 1995 ---- ---- Current: Trade................................ $ 402,906 $ 277,521 Leases and notes..................... 14,356 5,355 --------- --------- 417,262 282,876 Allowance for doubtful accounts...... (5,315) (5,870) --------- --------- $ 411,947 $ 277,006 ========= ========= Long-term: Leases, notes and other.............. $ 44,711 $ 18,591 Allowance for doubtful accounts...... (1,746) (1,034) --------- --------- $ 42,965 $ 17,557 ========= =========
20 To meet market competition, the Company finances sales of equipment to certain of its customers through sales-type and operating leases and notes receivable. The repayment terms vary from one to seven years. In December 1995, the Company sold certain trade and lease receivables with recourse for $50.1 million. A portion of the proceeds from the sale of these receivables was used to repay $9.1 million of long-term installment notes payable which had been secured by certain of the receivables sold. See "Contingent Liabilities" under "Commitments and Contingencies" for further discussion. The components of the receivables from sales-type leases and notes receivable are as follows (in thousands):
December 31, ------------ 1996 1995 ---- ---- Total minimum lease payments receivable ...................... $ 73,403 $ 25,589 Less: Unearned income ..................... (14,390) (4,705) -------- -------- Total receivables .......................... 59,013 20,884 Less: Current receivables ................. (14,356) (5,355) -------- -------- Total long-term receivables ................ $ 44,657 $ 15,529 ======== ========
Future minimum lease payments to be received on sales-type leases and notes receivable are as follows (in thousands): 1997 .................................. $ 15,856 1998 .................................. 14,560 1999 .................................. 14,185 2000 .................................. 13,935 2001 .................................. 11,434 Thereafter ............................. 3,433 -------- $ 73,403 ========
PROPERTY AND EQUIPMENT The Company's property and equipment consisted of the following (in thousands):
December 31, ------------ 1996 1995 ---- ---- Land ................................... $ 49,052 $ 49,052 Buildings and leasehold improvements ..................... 190,731 167,178 Manufacturing, development and test equipment ................... 301,576 268,115 Office furniture, equipment and other ........................ 223,312 191,380 --------- --------- 764,671 675,725 Less: Accumulated depreciation and amortization ................. (361,075) (305,203) --------- --------- $ 403,596 $ 370,522 ========= =========
21 ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands):
December 31, ------------ 1996 1995 ---- ---- Warranty and related ........................ $ 76,739 $ 61,839 Payroll and related ......................... 49,137 59,894 Taxes other than income ..................... 31,277 18,787 Customer prepayments and advances ........... 42,489 9,378 Other ....................................... 97,459 70,781 -------- -------- $297,101 $220,679 ======== ========
CREDIT AGREEMENTS AND SHORT-TERM DEBT In May 1996, the Company entered into a five-year, unsecured $160.0 million revolving credit facility with several banks. This new facility, which replaced the existing $50.0 million domestic credit facility, provides for borrowings and issuances of letters of credit in multiple currencies. Borrowings under this facility bear interest at various rates, including the prime rate or 0.25% to 0.70% above the LIBOR rate. A commitment fee of 0.10% to 0.23% on the daily average unused portion of the facility is also assessed. The maximum borrowings available under the facility are reduced by the value of outstanding letters of credit issued by the banks on behalf of the Company. The value of outstanding letters of credit issued under this facility at December 31, 1996 was $29.3 million, including $27.6 million issued to support various foreign subsidiary credit agreements. This facility contains various financial covenants, and there have been no borrowings under this agreement during 1996. During 1996, two of the Company's foreign subsidiaries repaid outstanding borrowings under short-term credit agreements with long-term borrowings totaling $95.7 million. The short-term arrangements were entered into during 1995, and the interest rates on these agreements were floating market rates which ranged from 4.5% to 7.5% at December 31, 1995. Available borrowings under the foreign subsidiary credit agreements totaled approximately $9.5 million at December 31, 1996, of which $0.9 million was outstanding. The weighted average interest rate on borrowings outstanding under these agreements was 5.1% and 5.6% at December 31, 1996 and 1995, respectively. 22 LONG-TERM DEBT Total long-term debt consisted of the following (in thousands):
December 31, ------------ 1996 1995 -------- -------- Fixed rate: Unsecured 9.0% notes, due 1996 - 2003 ..................... $196,875 $225,000 Unsecured 8.75% note, due 1995 - 2000 ..................... 11,988 13,973 Variable rate: Unsecured note, due 2000 - 2001 ..................... 50,649 -- Unsecured note, due 1999 - 2011 ..................... 42,208 -- Other .................................. 5,954 4,566 -------- -------- Total ............................... 307,674 243,539 Less: Current maturities ............... 33,072 33,098 -------- -------- Total long-term debt ................ $274,602 $210,441 ======== ========
The variable rate notes were entered into during 1996 and are denominated in Danish Kroner. The notes bear interest, at the Company's option, at either the lender's base rate or at current market rates in Denmark plus 0.56% to 0.69%. The interest rates are adjusted to market rates at the end of each interest period, as defined. At December 31, 1996, these rates ranged from 4.2% to 5.0%. The aggregate maturities of long-term debt for the next five years are as follows: 1997 - $33.1 million; 1998 - $32.7 million; 1999 - $33.4 million; 2000 - $59.1 million; 2001 - $57.0 million; thereafter - $92.4 million. The majority of the Company's long-term debt agreements contains various financial covenants, including among other things, minimum net worth, maintenance of certain fixed charge ratios and maximum allowable indebtedness to net worth. 23 INCOME TAXES Income tax expense (benefit) consisted of the following (in thousands):
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Current: Federal ........................... $ 35,169 $ 115,193 $ 45,189 Puerto Rico and State ............. 5,656 9,057 7,450 Foreign ........................... 4,903 4,908 7,925 --------- --------- --------- Total current ................. 45,728 129,158 60,564 --------- --------- --------- Deferred: Federal ........................... (33,766) (27,202) -- Foreign ........................... (16,593) (4,686) -- --------- --------- --------- Total deferred ................ (50,359) (31,888) -- --------- --------- --------- Total tax expense (benefit) ... $ (4,631) $ 97,270 $ 60,564 ========= ========= =========
The income tax benefits related to the exercise of stock options of $6.9 million, $50.0 million and $24.1 million in 1996, 1995 and 1994, respectively, reduced taxes currently payable and were credited to Additional Capital. Included in the $50.0 million benefit recognized in 1995 is $36.0 million of benefits related to exercises prior to 1995. Income (loss) before income taxes for the year ending December 31, 1996 includes U.S. pretax income of $34.9 million and foreign pretax losses of $47.1 million. Foreign pretax earnings in 1995 and 1994 were less than five percent of total income before income taxes. 24 The effective income tax rate on pretax income differed from the federal income tax statutory rate for the following reasons (in thousands):
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Income tax charge (credit): At statutory rate ............ $ (4,265) $ 101,483 $ 78,117 Foreign and U.S. tax effects attributable to foreign operations ...... (1,135) 1,363 4,113 Tax credit utilization ....... -- (4,606) (3,810) Net operating losses utilized ................... -- (3,500) (40,615) State income taxes, net of federal tax effect ................. 769 2,530 2,015 Federal alternative minimum tax ................ -- -- 20,744 --------- --------- --------- $ (4,631) $ 97,270 $ 60,564 ========= ========= =========
25 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, 1996 and 1995 were as follows (in thousands):
December 31, ------------ 1996 1995 ---- ---- Deferred Tax Assets Asset valuation reserves not yet deductible for tax ........................... $ 46,752 $ 15,453 Accrued liabilities not yet deductible for tax ........................... 54,384 37,087 Federal and foreign loss carryforwards ......... 19,185 12,961 Tax credit carryforwards ....................... 4,749 5,740 Other .......................................... 3,093 3,474 --------- --------- Deferred asset ............................. 128,163 74,715 --------- --------- Deferred Tax Liabilities Capitalized software development costs ........................................ (25,138) (20,227) Deferred revenue ............................... (4,955) (8,101) Depreciation ................................... (6,580) (4,464) Other .......................................... (9,243) (10,035) --------- --------- Deferred liability ......................... (45,916) (42,827) --------- --------- Net deferred tax asset .................. $ 82,247 $ 31,888 ========= =========
Of the Company's $82.2 million net deferred tax asset at December 31, 1996, $61.1 million is shown separately as part of current assets in the Consolidated Balance Sheet. The balance is included in other noncurrent assets and liabilities. The Company expects to have sufficient taxable earnings in the future to realize its net deferred tax asset at December 31, 1996, and as a result, the Company believes that a deferred tax asset valuation allowance is not required at December 31, 1996. Included in Noncurrent Income Taxes and Other Liabilities at December 31, 1996 and 1995 are $45.9 million and $36.6 million, respectively, for noncurrent taxes related primarily to foreign jurisdictions. At December 31, 1996, the Company had foreign net operating loss carryforwards of approximately $55.0 million which expire in the years 2000 and 2001. Also, the Company has approximately $1.7 million foreign tax credit carryforwards and $4.8 million alternative minimum tax credits. The foreign tax credits expire from 1998 to 2001. Alternative minimum tax credits do not expire. Certain of the Company's subsidiaries operating in non-U.S. jurisdictions have been granted specific tax exemptions from local income taxes. These exemptions vary in amount and expire beginning in the year 2005 through 2008. Undistributed earnings of foreign subsidiaries are not material. 26 INCENTIVE COMPENSATION The Company has an Incentive Awards Plan (the "Plan") administered by the Compensation Committee of the Board of Directors which provides for payment of cash and stock awards to officers and key employees based upon achievement of specific goals by the Company and the participating executives. No payments were made under the Plan in 1996. In 1995, cash of approximately $6.4 million and approximately 74,000 shares of restricted stock (valued at approximately $2.5 million and vesting over two years) were awarded under the Plan. In 1994, cash awards of approximately $7.0 million were charged to income under the Plan. The Company also had a 1990 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 1990 LTIP by the Compensation Committee of the Board of Directors. The units vested to the officers over six years through December 31, 1995, and the value of a unit was determined annually based on the Company's operating performance, as defined in the plan. The total value of the units included amounts payable in cash which were charged to operations in 1995 and 1994 (approximately $7.2 million and $6.9 million, respectively) and approximately 146,000 shares of restricted stock issued in January 1996. The restricted shares, which vest in equal annual increments over two years, were valued at $5.4 million at the date of award, of which $2.7 million was charged to operations during 1996. Also, during 1995 and early 1996, 177,000 units were awarded by the Compensation Committee of the Board of Directors to certain key executives under the Company's 1994 LTIP. The units vest to the officers over five years beginning in 1996, and the value of a unit is determined annually beginning in 1996 based on the Company's operating performance, as defined in the plan. These units had no value as of December 31, 1996, and no amounts were charged to operations during the year. COMMON AND PREFERRED STOCK Description and Dividends At December 31, 1996, the Company was authorized to issue 500 million shares of common stock, $0.01 par value, and 5 million shares of preferred stock, $1.00 par value. Since inception, the Company has not declared or paid a cash dividend. On April 27, 1994, the Board of Directors declared a two-for-one stock split, effected in the form of a 100% stock dividend, to shareholders of record on May 11, 1994. The stock split resulted in the issuance of approximately 56,004,000 new shares of common stock and the transfer of $0.6 million from Additional Capital to Common Stock, representing the par value of the shares issued. All average share and income (loss) per share data prior to 1994 were restated to retroactively reflect the stock split. 27 On April 25, 1996, the Board of Directors declared a dividend of one preferred stock purchase right on each outstanding share and each subsequently issued share of the Company's common stock. The rights will become exercisable only on the close of business ten days following a public announcement that a person or group has acquired 15% 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's acquiring 15% or more of the outstanding shares of common stock of the Company. Once exercisable, each right would entitle a holder to buy 1/1000 of a share of the Company's Series B Junior Participating Preferred Stock at an exercise price of $175.00. The Company may redeem the rights, which expire on April 25, 2006, for $0.01 per right prior to the rights becoming exercisable. These rights replaced the existing stock purchase rights which expired during 1996. 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 August 1996, approximately 262,000 shares were issued to employees under the employee stock purchase plans. At December 31, 1996, approximately $4.4 million had been contributed by employees that will be used to purchase shares at the end of the offering period in August 1997. At December 31, 1996, the Company could issue up to 6,979,000 shares under the employee stock purchase plans of which approximately 4,718,000 shares had been purchased and issued and approximately 504,000 shares were subscribed for issuance in August 1997 assuming no further withdrawals from the plans. Stock Options At the April 25, 1996 Annual Shareholders' Meeting, the shareholders approved an increase of 6 million shares of common stock authorized for issuance under one of the Company's stock option plans. This increase provided additional shares to support the 1995 grant of 2,000,000 options to one of the Company's executive officers. All 1995 information presented has been adjusted to reflect this grant. The plans provide 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 24,244,000 shares of common stock. At December 31, 1996, plan options covering 9,350,000 shares had been granted and were outstanding, options granted under the plans covering 11,423,000 shares had been exercised, 1,078,000 restricted shares had been issued (net of forfeitures), 901,000 shares had expired and options covering 1,492,000 shares were available for grant. The exercise prices of stock options granted were at the market value of the Company's common stock at the date of grant or issuance. Options issued under these plans allow optionees the ability to exercise at any time subsequent to grant. Restricted stock is issued for any such exercises of stock options prior to their vesting date. 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. 28 On October 28, 1996, the Board of Directors approved a plan to reprice a portion of the Company's outstanding stock options, excluding options held by certain executive officers. As a result, 2,957,000 options with exercise prices ranging from $23.88 to $52.25 per share were repriced at $13.50 per share, the fair market value on the date of repricing. For any unvested options included in this repricing, the vesting schedule was amended to coincide with the stock option repricing date. This repricing has been reflected in the table below as part of the options granted and canceled during 1996. 29 Outstanding options are summarized as follows:
Options ------- Plans Other ----- ----- December 31, 1993-- Shares issuable upon exercise ................ 3,382,000 34,000 Price per share ................ $0.01-$67.00 $12.13-$17.00 Average price per share .................... $14.07 $13.56 Expiration ..................... 1994-2003 1994-1997 1994 Transactions Issuances from stock split ..... 3,234,000 20,000 Price per share ................ $0.01-$33.50 $6.06-$8.50 Issuances and grants ........... 333,000 -- Price per share ................ $23.88-$62.88 -- Exercises and forfeitures .................. 1,687,000 34,000 Price per share ................ $0.01-$32.38 $6.06-$12.13 December 31, 1994-- Shares issuable upon exercise ................ 5,262,000 20,000 Price per share ................ $0.01-$33.50 $8.50 Average price per share .................... $10.02 $8.50 Expiration ..................... 1995-2004 1997 1995 Transactions Issuances and grants ........... 3,380,000 -- Price per share ................ $29.25-$52.25 -- Exercises and forfeitures .................. 1,577,000 -- Price per share ................ $0.01-$52.25 -- December 31, 1995-- Shares issuable upon exercise ................ 7,065,000 20,000 Price per share ................ $0.01-$52.25 $8.50 Weighted-average exercise price per share .............. $22.44 $8.50 Expiration ..................... 1996-2005 1997 1996 Transactions Issuances and grants ........... 7,248,000 -- Price per share .............. $13.50-$37.13 -- Weighted-average exercise price per share ............ $21.67 -- Exercises ...................... 1,048,000 20,000 Price per share .............. $0.01-$28.63 $8.50 Weighted-average exercise price per share ............ $5.34 $8.50 Forfeitures and expirations .... 3,915,000 -- Price per share .............. $0.01-$37.88 -- Weighted-average exercise price per share ............ $29.38 -- December 31, 1996-- Shares issuable upon exercise ................ 9,350,000 -- Price per share ................ $2.31-$52.25 -- Weighted-average exercise price per share .............. $20.85 -- Expiration ..................... 1997-2006 --
30 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 other than retirement, all unvested shares are forfeited to the Company. The shares vest annually through 1999. The Company issued 338,000, 110,000 and 6,000 shares of restricted stock to employees in 1996, 1995 and 1994, respectively, and increased common stock and additional capital by the fair market value of the stock at the date of issuance ($11.3 million, $3.8 million and $0.2 million in 1996, 1995 and 1994, respectively), net of unearned compensation. At December 31, 1996, 1995 and 1994, unearned compensation related to the restricted shares was $8.7 million, $4.3 million and $1.8 million, respectively. The unearned compensation will be charged to expense ratably over the vesting period. Approximately 18,000, 2,000 and 14,000 restricted shares were forfeited in 1996, 1995 and 1994, respectively, totaling $0.5 million, $0.03 million and $0.2 million, respectively. Reserved Stock Common stock has been reserved for the following purposes (in thousands):
December 31, ------------ 1996 1995 ---- ---- Options outstanding .................... 9,350 5,085 Options available for grant under the stock option plans ......... 1,492 1,513 Stock purchase plans ................... 2,261 2,523 ------ ------ 13,103 9,121 ====== ======
31 Pro Forma Disclosures Although the Company has elected to continue to apply the provisions of APB 25 for expense recognition purposes, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("FAS 123") requires disclosure of pro forma information which provides the effects on Net Income (Loss) and Income (Loss) Per Share as if the Company had accounted for its employee stock awards under the fair value method prescribed by FAS 123. The fair value of the Company's employee stock awards was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.9% and 6.5%; stock price volatility factors of 56% and 61%; and expected option lives of 3 years and 7 years. The Company does not have a history of paying dividends, and none have been assumed in estimating the fair value of the options. The weighted-average fair value per share of options granted in 1996 was $8.94. The Company does not believe that the pro forma disclosures required by FAS 123 provide meaningful or useful information to financial statement users. In addition, the Company does not believe that the impact on net income (loss) shown in the pro forma disclosures below is indicative of operating performance of the Company. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because the Company's employee stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes that the existing option valuation models do not necessarily provide a reliable measure of the fair value of awards from those plans. Pro Forma Required Disclosures: 1996 1995 ---- ---- (in millions, other than per share data) Net income (loss) $ (25.9) $ 187.4 Income (loss) per share $ (0.22) $ 1.60 As required by FAS 123, only awards granted in 1995 and 1996 have been included in determining the amount of additional compensation expense for those years. As such, the effects of applying FAS 123 on 1996 and 1995 results are not necessarily representative of the additional compensation expense which will be included in future years' pro forma disclosures as more than two years of awards will be considered. At December 31, 1996, approximately 5,425,000 of the Company's outstanding stock options with exercise prices ranging from $2.31 to $18.00 per share had a weighted-average exercise price per share of $12.15 and a weighted-average remaining contractual life of 8 years. The remaining options outstanding had a weighted-average exercise price of $32.88 per share with a weighted-average remaining contractual life of 9 years. 32 OTHER INCOME (EXPENSE), NET Other Income (Expense), Net for the year ended December 31, 1996 included approximately $10 million of proceeds related to the settlement of litigation between the Company and Advanced Fibre Communications, Inc. ("AFC"). Other Income (Expense), Net also included the litigation expenses and applicable costs associated with this litigation. As part of the litigation settlement, the Company also received 719,424 shares of non-marketable AFC common stock in July 1996 which the Company recorded in the Consolidated Balance Sheet at no value due to contractual registration and selling restrictions. 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, short-term debt, accounts payable and accrued liabilities are reflected in the financial statements at fair value. Investments in debt and equity securities classified as available for sale have been recorded in the financial statements at current market values. Current market values of investments in debt securities classified as held to maturity are disclosed in the "Investments in Debt and Equity Securities" footnote. The fair value of the Company's long-term debt at December 31, 1996 and 1995 was approximately $320.6 million and $265.2 million, respectively. The fair values of the Company's off-balance-sheet financial 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). There were no significant differences between the carrying amounts and fair values of any off-balance-sheet financial instruments at December 31, 1996 and 1995. See "Commitments and Contingencies" for the carrying amounts of the Company's off-balance-sheet financial instruments. 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. 33 Future minimum rental commitments under operating leases with noncancelable lease terms in excess of one year were as follows at December 31, 1996 (in thousands): 1997 ....................................... $ 24,225 1998 ....................................... 18,018 1999 ....................................... 13,337 2000 ....................................... 11,538 2001 ....................................... 9,672 Thereafter .................................. 26,140 -------- $102,930 ========
Operating lease rental expense was $27.5 million, $28.9 million and $24.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. Contingent Liabilities The Company periodically sells customer receivables and leases under agreements which contain recourse provisions. The Company could be obligated to repurchase a portion of the sales-type and operating lease receivables which were previously sold on a partial recourse basis, the terms of which allow the Company to limit its risk of loss to approximately $7.8 million at December 31, 1996. The Company also has guarantees of approximately $26.9 million outstanding at December 31, 1996, supporting Company and third-party performance bonds to customers and others, of which approximately $1.7 million 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. At December 31, 1996, the Company had forward foreign exchange contracts of $42.1 million. See "Forward Foreign Exchange Contracts" under "Summary of Significant Accounting Policies" for further discussion. 34 Litigation On February 14, 1996, the Company joined Bell Atlantic in bringing an antitrust action against AT&T Corporation ("AT&T") and Lucent Technologies, Inc. ("Lucent") alleging the use of monopoly power in the central office switch market as part of a scheme to gain an unfair competitive advantage in the remote digital terminal market. In July 1996, Lucent brought a counterclaim against the Company alleging a "false advertising" claim under the Lanham Act. On February 18, 1997, the Company and Bell Atlantic settled their claims against AT&T. The Company, Bell Atlantic and Lucent settled all claims against each other on March 13, 1997. In conjuction with these settlements, Bell Atlantic agreed to purchase a significant amount of product from the Company over a five year period beginning in 1998. The agreement requires a minimum annual purchase level substantially above the amount purchased by Bell Atlantic from the Company in 1996 which totaled approximately $120 million. On June 11, 1996, a federal court entered a $137.7 million judgment in the Company's favor and against Next Level Corporation ("Next Level") and two former Company employees. The Company had filed suit in 1995 alleging theft of trade secrets and diversion of corporate opportunities. On February 28, 1997, the Fifth Circuit of Appeals upheld the judgment. The defendants are enjoined from disclosing the Company's trade secrets until the judgment is satisfied. In August 1996, the Company filed suit against Samsung Information Systems America, Inc., Samsung Electronics Co., Ltd. and several former employees of the Company (collectively the "Defendants") alleging claims for breach of contract, theft of trade secrets, unfair competition and tortious interference with contract and prospective contractual relations related to the Company's development of a next generation switching system. The Company is seeking unspecified damages. The Company is also seeking an injunction against the Defendants to prevent them from using the Company's trade secrets. In late December 1996, the Defendants filed a counterclaim against the Company, alleging claims for declaratory judgment, wrongful injunction, tortious interference with actual and prospective contractual relations, misappropriation of trade secrets, unfair competition, exclusion from telephony switch market, civil conspiracy, fraud and negligent misrepresentation, breach of fiduciary or confidential relationship, defamation and intentional infliction of emotional distress. These allegations arise primarily out of the filing and prosecution of the Company's suit against the Defendants. In October 1996, the Company filed suit against Pulse Communications, Inc. ("Pulsecom") alleging contributory copyright infringement and misappropriation of trade secrets relating to the manufacture and sale of a POTS line card advertised as compatible with the Company's Litespan-2000 system. The Company is seeking damages and an injunction barring further infringement of the Company's intellectual property rights by Pulsecom and its agents. Pulsecom has filed a counterclaim alleging that the Universal Voice Grade line card manufactured by the Company for the Litespan-2000 system infringes a patent assigned to Pulsecom. On May 25, 1994, the Company filed suit against DGI Technologies, Inc. ("DGI"), alleging that DGI misappropriated the Company's trade secrets regarding digital trunk interface cards and microprocessor cards. The Company seeks damages and permanent injunctive relief. DGI brought 35 counterclaims for damages and injunctive and declaratory relief for alleged violations of federal antitrust statutes, tortious interference, industrial espionage, misappropriation of trade secrets, trespass, conversion, and unfair competition, 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 case was tried in January 1997 and the jury returned a verdict. The Court sealed the verdict and postponed entering a judgment pending the outcome of additional mediation. The Company is also party to other routine legal proceedings incidental to its business. The Company does not believe the ultimate resolution of the above litigation will have a material adverse effect on its consolidated financial position. 36 INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS International Operations The Company operates in a single industry segment, the telecommunications equipment marketplace. A summary of the Company's operations by geographic area is presented below (in thousands):
December 31, ------------ 1996 1995 1994 ---- ---- ---- Revenue from unaffiliated customers: United States ............................... $ 1,163,520 $ 1,188,357 $ 908,664 Europe ...................................... 145,850 155,562 47,287 Other International ......................... 71,521 78,099 47,174 Eliminations ................................ -- -- -- ----------- ----------- ----------- Consolidated ................................ $ 1,380,891 $ 1,422,018 $ 1,003,125 =========== =========== =========== Intercompany revenue between geographic areas: United States ............................... $ 73,002 $ 65,856 $ 63,871 Europe ...................................... 30,171 15,357 11,473 Other International ......................... 47,720 5,373 4,301 Eliminations ................................ (150,893) (86,586) (79,645) ----------- ----------- ----------- Consolidated ................................ $ -- $ -- $ -- =========== =========== =========== Operating income (loss): United States ............................... $ 23,674 $ 284,525 $ 215,280 Europe ...................................... (46,292) (14,090) 2,509 Other International ......................... 10,345 4,139 505 Eliminations ................................ 230 4,844 (4,295) ----------- ----------- ----------- Consolidated ................................ $ (12,043) $ 279,418 $ 213,999 =========== =========== =========== Identifiable assets at December 31: United States ............................... $ 1,496,663 $ 1,546,378 $ 1,012,006 Europe ...................................... 362,329 296,157 234,983 Other International ......................... 67,781 22,916 27,715 Eliminations ................................ (1,118) (176) (6,168) ----------- ----------- ----------- Consolidated ................................ $ 1,925,655 $ 1,865,275 $ 1,268,536 =========== =========== ===========
The information presented above may not be indicative of results if the geographic areas were independent organizations. Intercompany transactions are made at established transfer prices. Revenue generated from export sales was less than 10% of consolidated revenue in 1996, 1995 and 1994. 37 Major Customers Three customers accounted for at least 10% of the Company's consolidated revenue in 1996, 1995 and 1994. In the aggregate, the revenue from these customers was 39%, 42% and 46% of consolidated revenue in 1996, 1995 and 1994, respectively. These customers included two major telecommunications service providers and a major electronics manufacturer. BUSINESS ACQUISITION In November 1994, the Company acquired all of the outstanding stock of NKT Elektronik A/S, a Copenhagen, Denmark-based manufacturer of optical transmission equipment, for $149.4 million in cash. The acquisition cost was funded with existing cash and approximately $62 million in short-term borrowings. Following the acquisition, the name of NKT Elektronik A/S was changed to DSC Communications A/S. The Company's consolidated results include the operations of DSC Communications A/S from the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Accordingly, a portion of the purchase price has been allocated to the net assets acquired based on their estimated fair values with the balance of the purchase price ($117.3 million in 1995) included in Cost in Excess of Net Assets of Businesses Acquired, Net. The cost in excess of net assets of business acquired is being amortized over 20 years. 38 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, 1996 and 1995 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, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas January 23, 1997 39 DSC Communications Corporation and Subsidiaries QUARTERLY RESULTS (Unaudited) (In thousands, except per share data)
1996 1995 ------------------------------------------- ------------------------------------------ Fourth Third(A)(B) Second(B) First Fourth Third Second First ------ ----------- --------- ----- ------ ----- ------ ----- Revenue ............... $ 390,560 $ 326,003 $ 356,431 $ 307,897 $ 373,891 $ 370,119 $ 360,011 $ 317,997 Gross profit .......... 150,202 28,457 147,019 129,466 175,097 174,406 177,726 158,670 Net income (loss) ..... $ 17,548 $ (57,890) $ 21,262 $ 11,525 $ 49,442 $ 49,367 $ 51,955 $ 41,916 ========= ========= ========= ========= ========= ========= ========= ========= Income (loss) per share ............ $ 0.15 $ (0.49) $ 0.18 $ 0.10 $ 0.42 $ 0.42 $ 0.44 $ 0.36 ========= ========= ========= ========= ========= ========= ========= =========
- ------------------------------------------------------------------------------- (A) The 1996 third quarter results included non-cash special charges of $96.0 million ($82.5 million reduced gross profit and $13.5 million was charged to operating costs and expenses) related primarily to a reduction in the carrying value of certain assets for several of the Company's products. See "Special Charges" in Notes to Consolidated Financial Statements and Management's Discussion and Analysis for further discussion. (B) In the second and third quarter of 1996, the Company received a total of approximately $10.0 million of proceeds related to the settlement of certain litigation. Approximately $3.0 million was recorded in the second quarter of 1996 with the remaining $7.0 million recorded in the third quarter of 1996. Also included in the second and third quarter of 1996 were the litigation expenses and applicable costs associated with this litigation. See "Other Income (Expense), Net" in Notes to Consolidated Financial Statements for further discussion. EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 DSC COMMUNICATIONS CORPORATION Subsidiaries Incorporated in ------------ --------------- DSC Communications (Asia Pacific) PTE LTD Singapore DSC Communications (Cayman) Ltd. Cayman Islands DSC Communications (Far East) Limited Hong Kong DSC Communications A/S Denmark DSC Communications Canada Inc. Canada DSC Communications Dedicom A/S Denmark DSC Communications France S.A. France DSC Communications (India) Private Limited India DSC Communications Ireland Ireland DSC Communications Ireland Holdings Ltd. Ireland DSC Communications Italia S.r.l. Italy DSC Communications Limited United Kingdom DSC Communications (Nederland) B.V./ (1) Sildor Investments B.V. DSC Communications Polska Sp.Z.o.o. Poland DSC Communications PTY. Ltd. Australia DSC Communications Technics Ltd. United Kingdom DSC Communicaciones de Costa Rica, S.A. Costa Rica DSC Communicaciones de Mexico, S.A. Mexico DSC Communicacoes Ltda. Brazil DSC Finance Corporation Delaware DSC Finance PTY Ltd. Australia DSC Global Export Ltd. Barbados DSC International Corporation Delaware DSC Japan Inc.(2) Japan DSC Kommunikationsdienste GmbH Germany DSC Korea, Inc. Delaware DSC Local Networks (Europe) Limited United Kingdom DSC Marketing Services, Inc. Delaware DSC of Purerto Rico, Inc. Delaware DSC of the Virgin Islands, Inc. Virgin Islands DSC Taiwan, Inc. Delaware DSC Telecom Inc. Nevada DSC Telecommunications Corporation Delaware Fibcom India Limited(3) India Netman A/S(4) Denmark TMN A/S(5) Denmark TMN Udvikling I/S Denmark - ------------- (1) Incorporated in The Netherlands and Delaware; name changed in The Netherlands 10/11/96; name change in Delaware in process (2) Jointly-owned with Mitsubishi Corporation (3) Jointly-owned company with Indian Telephone Industries Ltd. and The Industrialisation Fund for Developing Countries (4) Jointly-owned company with Digital Equipment Corporation (5) Participant in a partnership, TMN Udvikling I/S, with Copenhagen Telephone and Jutland Telephone EX-23.1 8 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of DSC Communications Corporation of our report dated January 23, 1997 included in the 1996 Annual Report to Shareholders of DSC Communications Corporation. Our audit also included the financial statement schedule of DSC Communications Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-83398, 2-95833, 33-17459, 33-22745, 33-38544, 33-65212, 33-65214, 33-64784, 33-49718, 33-61423, and 33-61425) of our report dated January 23, 1997 with respect to the financial statements and schedule of DSC Communications Corporation incorporated by reference in this Annual Report (Form 10-K). Ernst & Young LLP Dallas, Texas March 26, 1997 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 155,101 178,938 411,947 0 343,566 1,202,878 764,671 361,075 1,925,655 432,922 274,602 0 0 1,222 1,146,414 1,925,655 1,380,891 1,380,891 843,247 925,747 233,611 0 26,355 (12,186) (4,631) (7,555) 0 0 0 (7,555) (0.06) 0
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