DEFR14A 1 REVISED DEFINITIVE NOTICE AND PROXY STATEMENT 1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the registrant /X/ Filed by a party other than the registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) */X/ Definitive Proxy Statement (As Amended) / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 DSC Communications Corporation -------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) DSC Communications Corporation -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement) Payment of filing fee (Check the appropriate box): / / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rules 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: -------------------------------------------------------------------------------- (5) Total fee paid: -------------------------------------------------------------------------------- /X/ Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: -------------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: -------------------------------------------------------------------------------- (3) Filing Party: -------------------------------------------------------------------------------- (4) Date Filed: -------------------------------------------------------------------------------- 2 DSC (LOGO) March 27, 1995 Dear Fellow Stockholder: This year's Annual Meeting of Stockholders will be held at the Doubletree Hotel -- Santa Rosa, 3555 Round Barn Blvd, Santa Rosa, California 95403, on April 26, 1995, at 10:00 AM local time. You are cordially invited to attend. The matters you are asked to consider are described in the attached Proxy Statement and Notice of Annual Meeting. The Company's Board of Directors recommends (i) election of management's three nominees for the Board of Directors; (ii) approval of an amendment to the Company's Restated Certificate of Incorporation increasing the authorized number of shares of Common Stock, $.01 par value, from 250,000,000 to 500,000,000; and (iii) approval of the proposal to add an additional 1,000,000 shares of Common Stock to the DSC Communications Corporation 1990 Employee Stock Purchase Plan. To be certain that your shares are voted at the meeting, whether or not you plan to attend in person, please sign, date and return the enclosed proxy card as soon as possible. Your vote is important. At the meeting, I will review the Company's activities during the past year and its plans and prospects for the future. An opportunity will be provided for questions by the stockholders. I hope you will be able to join us. Sincerely, /s/ JAMES L. DONALD JAMES L. DONALD Chairman of the Board, President and Chief Executive Officer 3 DSC (LOGO) NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 26, 1995 Notice is hereby given that the Annual Meeting of Stockholders of DSC Communications Corporation, a Delaware corporation (the "Company"), will be held at the Doubletree Hotel -- Santa Rosa, 3555 Round Barn Blvd, Santa Rosa, California 95403, on Wednesday, April 26, 1995, at 10:00 AM local time for the following purposes: 1. To elect three Class II Directors for terms expiring in 1998. 2. To approve an amendment to the Company's Restated Certificate of Incorporation increasing the authorized number of shares of Common Stock, $.01 par value, from 250,000,000 to 500,000,000. 3. To approve a proposal to add an additional 1,000,000 shares of Common Stock to the DSC Communications Corporation 1990 Employee Stock Purchase Plan. 4. To transact such other business as may properly come before the meeting or any adjournments thereof. The accompanying Proxy Statement contains information regarding the business to be considered at the meeting. Only stockholders of record at the close of business on February 27, 1995, are entitled to notice of, and to vote at, the Annual Meeting of Stockholders or any adjournment thereof. A list of stockholders will be made available at the firm of Achor, Miller, Culver & Mailliard located at 100 B Street, Suite 200, Santa Rosa, California at least 10 days prior to such meeting for examination by any stockholder for any purpose germane to the meeting. You are cordially invited to attend the meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. If you attend the meeting, you may vote in person if you wish, whether or not you have returned your proxy. A proxy may be revoked at any time before it is exercised. By Order of the Board of Directors GEORGE B. BRUNT Vice President, Secretary and General Counsel Plano, Texas March 27, 1995 4 DSC COMMUNICATIONS CORPORATION 1000 COIT ROAD PLANO, TEXAS 75075 PROXY STATEMENT ANNUAL MEETING OF STOCKHOLDERS The accompanying proxy, mailed with this Proxy Statement, is solicited on behalf of DSC Communications Corporation, a Delaware corporation (the "Company"), for use at the Annual Meeting of Stockholders of the Company to be held Wednesday, April 26, 1995, at 10:00 AM local time, at the Doubletree Hotel -- Santa Rosa, 3555 Round Barn Blvd, Santa Rosa, California 95403. This Proxy Statement and accompanying form of proxy will first be mailed to stockholders of record on or about March 27, 1995. ELECTION OF DIRECTORS The Company's Restated Certificate of Incorporation provides that the Company's Board of Directors shall consist of not less than seven nor more than fifteen persons and that the Board shall be divided into three classes serving staggered three year terms with each class to consist as nearly as possible of one-third of the directors; provided, that once elected, no director's term shall be reduced. The Board currently consists of nine members. Three Class II directors, to serve until the 1998 Annual Meeting, will be elected at the Annual Meeting. Management's three nominees for election as Class II Directors listed below are currently members of the Board of Directors.
AGE AS OF DIRECTOR OF PRINCIPAL OCCUPATION FEBRUARY 27, COMPANY OR EMPLOYMENT 1995 SINCE ------------------------------------------ ------------ ----------- Clement M. Brown, Jr. ..... Retired; former President of Squibb Europe 74 1981 (SEV) S.A. Sir John Fairclough........ Chairman, Rothschild Venture Ltd. since 64 1992 1990; Chief Scientific Adviser, Cabinet Office, U.K. 1986-1990; Director of N.M. Rothschild & Sons (banking); Lucas Industries PLC (aerospace); Oxford Instruments Group PLC (scientific instruments). Gerald F. Montry........... Senior Vice President and Chief Financial 56 1989 Officer of the Company since 1986; Director of InterVoice, Inc. (computer controlled voice automation systems) since 1994.
VOTE REQUIRED FOR ELECTION OF DIRECTORS To be elected as a Director, each nominee must receive the favorable vote of a plurality of the total number of shares of Common Stock represented and entitled to vote at the Annual Meeting or any adjournment thereof. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE THREE NOMINEES NAMED ABOVE. 5 PROPOSAL TO AMEND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED CAPITAL STOCK The Company's Restated Certificate of Incorporation provides for 250,000,000 shares of Common Stock having a par value of $.01 per share ("Common Stock"). The proposed amendment to the Company's Restated Certificate of Incorporation would amend Subsection (a) of Article Fourth to increase the authorized shares of the Company's Common Stock from 250,000,000 to 500,000,000 shares. The text of this amended Subsection is set forth below: "(a) the total number of shares of Common Stock which the Corporation shall have authority to issue shall be five hundred million (500,000,000) shares of the par value of $.01 each." At February 27, 1995, 122,984,865 shares of Common Stock were issued and outstanding or were reserved for issuance under the Company's existing compensation plans, leaving a balance of 127,015,135 shares of Common Stock available for other purposes. The Company has not made any decision respecting the issuance of additional shares of Common Stock. However, management deems it wise to increase the number of authorized shares of Common Stock at this time, because, in its opinion, it is important that management have available to it the means and flexibility to take advantage of any opportunities that may occur without incurring the expense or delay involved with holding a special meeting of stockholders to increase the number of authorized shares. Some or all of such additional shares would be available for issuance in connection with a stock split or stock dividend (such as the two-for-one stock split declared on April 27, 1994), for sale to raise additional equity for the Company or for issuance in the event the Company acquired a business for consideration which was payable in whole or in part in shares of the Company's Common Stock. Further authorization for the issuance of such Common Stock by a vote of security holders would not be solicited prior to such issuance unless required by law. In the event shares of such Common Stock were issued, other than pursuant to a stock split or stock dividend, the percentage ownership of the Company of each stockholder would be proportionately reduced. No other rights of stockholders would be affected. Stockholders have no pre-emptive right to subscribe for or purchase any additional shares issued by the Company. Upon effectiveness of the proposed amendment, the Company will have 377,015,135 shares of the 500,000,000 total authorized shares available for issuance. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ADOPTION OF THE PROPOSED AMENDMENT. PROPOSAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK SUBJECT TO THE DSC COMMUNICATIONS CORPORATION 1990 EMPLOYEE STOCK PURCHASE PLAN The Board of Directors has determined that it is in the best interest of the Company and the stockholders to add 1,000,000 shares of the Company's Common Stock to the DSC Communications Corporation 1990 Employee Stock Purchase Plan (the "1990 Purchase Plan"). The Board of Directors believes that the 1990 Purchase Plan benefits the Company and its stockholders by encouraging employees to acquire a proprietary interest in the Company. ADMINISTRATION The 1990 Purchase Plan is administered by a Committee (the "Purchase Plan Committee") appointed by the Board of Directors of the Company. The Purchase Plan Committee shall consist of at least two persons, at least one of which shall be a member of the Board. EFFECTIVE TIME AND DURATION The 1990 Purchase Plan became effective upon its approval by the Board of Directors of the Company on January 22, 1990, subject to stockholder approval. The stockholders approved 950,000 shares of Common Stock for issuance under the 1990 Purchase Plan on April 23, 1990. On April 26, 1993, the stockholders 2 6 authorized an additional 2,000,000 shares of Common Stock for issuance under the 1990 Purchase Plan. The Board of Directors has adopted a resolution authorizing an additional 1,000,000 shares of Common Stock for issuance under the 1990 Purchase Plan, subject to stockholder approval (the "Additional Shares"). Offerings of the Company's Common Stock under the 1990 Purchase Plan may be made from time to time until the earlier of the date all shares are issued or December 31, 1999. OFFERINGS UNDER THE 1990 PURCHASE PLAN The Board of Directors has approved a total of 4,728,517 shares of Common Stock for issuance under the 1990 Purchase Plan, including an increase of 778,517 shares for the effect of a two-for-one stock split effective in May 1994. The stockholders must approve the Additional Shares before they are available for issuance under the 1990 Purchase Plan. Of the existing 3,728,517 shares which have been previously approved by the stockholders, 2,985,624 shares have been issued or have been subscribed for and 742,893 are available for issuance. ELIGIBILITY All full-time employees of the Company or any of its subsidiaries designated by the Purchase Plan Committee to be participating subsidiaries in the 1990 Purchase Plan are eligible to purchase the Company's Common Stock under the terms and conditions of any offering of such Common Stock under the 1990 Purchase Plan, except (a) employees whose customary employment is less than 32 hours per week or less than five months during any calendar year, or (b) employees, who immediately after a right to purchase the Company's Common Stock under the 1990 Purchase Plan is granted, own stock possessing 5% or more of the total combined voting power of all classes of stock of the Company or any of its subsidiaries. For purposes of determining stock ownership pursuant to subparagraph (b) above, any stock which an employee may purchase under outstanding options shall be treated as owned by the employee and the attribution rules of Section 424 of the Internal Revenue Code of 1986, as amended (the "Code"), shall be applicable. In addition, no option shall be granted under the 1990 Purchase Plan to any employee which would permit such employee to purchase shares of the Company's Common Stock pursuant to all unexpired offerings under all existing employee stock purchase plans of the Company accruing at a rate which exceeds, during any calendar year, $25,000 based upon the fair market value of such shares at the time the option is granted. At December 31, 1994, the Company had 4,612 full-time employees eligible to participate in the 1990 Purchase Plan. It is the present policy of the Company to discourage participation by executive officers in the 1990 Purchase Plan. No executive officers of the Company participated in the 1990 Purchase Plan during the year ended December 31, 1994. While it is contemplated that one or more additional offerings will be made under the 1990 Purchase Plan from time to time during the year ending December 31, 1995, and thereafter, it cannot be determined at this time what benefits or amounts will be realized by any individual or group under the 1990 Purchase Plan during the year ending December 31, 1995 and thereafter. SECURITIES SUBJECT TO THE 1990 PURCHASE PLAN If this proposal is adopted, the aggregate number of shares of the Company's Common Stock that may be sold pursuant to all offerings of such Common Stock under the 1990 Purchase Plan shall not exceed 4,728,517 shares, as adjusted for any recapitalization or reorganization of the Company as set forth in the 1990 Purchase Plan. Each offering shall specify the maximum number of shares available thereunder and the method of determining the maximum number of shares which may be purchased by any employee electing to participate in such offering. The maximum number of shares which may be purchased pursuant to any offering by each participating employee shall bear a uniform relationship to the basic or regular rate of compensation of all Company employees on the effective date of the applicable offering, subject to any stated maximum number of shares (such maximum number to be not less than 300) that may be specified by the Purchase Plan Committee and to any other limitations set forth in the 1990 Purchase Plan. 3 7 METHOD OF EMPLOYEE PARTICIPATION IN THE 1990 PURCHASE PLAN An eligible employee may elect to participate in any offering of the Company's Common Stock under the 1990 Purchase Plan by filing an election to purchase such stock pursuant to that offering, together with a payroll deduction authorization, within such time as may be specified in that offering. The Company shall maintain a stock purchase account for each participating employee to which interest may be credited, if any, no less than annually, at a rate, if any, to be specified in the applicable offering. Upon the expiration date of each offering, the funds accumulated in the stock purchase account of each participating employee shall be applied to the purchase of the Company's Common Stock at a price per share equal to the lesser of (a) 85% of the fair market value per share of the Company's Common Stock on the expiration date of the applicable offering; or (b) 85% of the fair market value per share of the Company's Common Stock on the effective date or the applicable offering. Stock certificates shall be issued to each participating employee promptly thereafter. No participating employee shall have any rights as a stockholder of the Company in respect to Common Stock purchased under the 1990 Purchase Plan until the issuance of stock certificates for such shares. DEATH, TERMINATION OF EMPLOYMENT AND ASSIGNABILITY In the event a participating employee dies or ceases to be an employee for any reason, he or she will receive any balance in cash plus accrued interest, if any. In any offering, the Purchase Plan Committee may further provide that in the case of death of an employee, all amounts in his or her account plus interest shall be paid to his or her beneficiary or estate. FEDERAL INCOME TAX CONSEQUENCES If a participant under the 1990 Purchase Plan makes no disposition of the shares purchased by him upon the exercise of such an option within one year after the shares are transferred to him or within two years after the date of the granting of the option, then (i) no income is realized by the participant at the time he purchases such shares; (ii) if he thereafter sells or otherwise disposes of such shares or if he dies while owning such shares, the participant will include in his gross income as ordinary income (and not as gain upon the sale or exchange of a capital asset) for the taxable year in which the date of such disposition occurs or for the taxable year closing with his death, whichever applies, an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition or death over the amount paid for the shares under the option, or (2) the excess of the fair market value of the shares at the time the option was granted over the option price; (iii) upon disposition of such shares by the participant, his basis in such shares will be increased by an amount equal to the amount so includable in his gross income; (iv) any gain realized by the participant upon sale or exchange of such shares in excess of the amount of ordinary income described in (iii) above is taxed to him as capital gain, and any loss sustained by him is a capital loss provided the shares are held as capital assets; (v) if the participant dies before the shares are sold, the basis of the shares in the hands of the participant's heirs or estate shall be equal to the fair market value of the shares on the date of the participant's death; and (vi) as to the granting of such option and the sale of shares pursuant thereto, the Company is allowed no deduction for federal income tax purposes for any portion of the excess of the fair market value of the shares over the cost of the same to the participant. However, if the participant makes a disposition of such shares before the expiration of the requisite holding period above, (a) ordinary income is realized by him in the amount of the difference between the option price and the fair market value of the stock at the time the option was exercised; (b) capital gain is realized by him on the difference between the sale price and fair market value of the shares on the date the option was exercised and he will have a capital loss if the sale price is less than the fair market value of the shares on the date the option was exercised, and (c) the Company will be allowed, for federal income tax purposes, a compensation expense deduction for the difference between the fair market value of the shares at the time of exercise by the participant and the option price. 4 8 MARKET PRICE On February 27, 1995, the closing price of the Company's Common Stock in the National Association of Securities Dealers, Inc. Nasdaq National Market, as reported in the Southwest Edition of The Wall Street Journal was $34.875 per share. Based solely on the closing price of the Company's Common Stock in the Nasdaq National Market on February 27, 1995, the aggregate value of the underlying securities available for issuance including shares for the 1994-1995 offering and the additional 1,000,000 shares approved by the Board of Directors under the 1990 Purchase Plan is $78,109,538, and the aggregate maximum purchase price to be paid by the participants in the 1990 Purchase Plan in connection with the current 1994-1995 offering and all future offerings is $62,014,374. The actual value of the underlying securities and the actual aggregate amount to be paid to the Company by all participants in the 1990 Purchase Plan will be determined by the fair market value of the securities to be offered pursuant to each offering under the 1990 Purchase Plan on the effective date and the expiration date of each offering. AMENDMENTS TO THE PLAN The Board of Directors of the Company may suspend, terminate, reconstitute, amend or revise the 1990 Purchase Plan at any time except that (a) no amendment shall cause any right to purchase the Company's Common Stock under the 1990 Purchase Plan to fail to qualify as a stock purchase option under the Code, (b) without approval of the stockholders, no amendment shall increase the number of shares which may be offered or sold pursuant to any offering of such shares under the 1990 Purchase Plan or make any change in the employees or class of employees eligible to participant in any such offering, or (c) without the approval of a participating employee, no change shall be made in the terms of any outstanding right to purchase the Company's Common Stock under the 1990 Purchase Plan which is adverse to such participating employee. VOTE REQUIRED FOR ADOPTION OF THE PROPOSAL TO ADD THE ADDITIONAL SHARES TO THE 1990 PURCHASE PLAN Adoption of the proposal to add the Additional Shares to the 1990 Purchase Plan will require the affirmative vote of a majority of the total number of shares of Common Stock represented and entitled to vote at the Annual Meeting or any adjournments thereof. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR ADOPTION OF THE PROPOSAL TO ADD THE ADDITIONAL SHARES TO THE DSC COMMUNICATIONS CORPORATION 1990 EMPLOYEE STOCK PURCHASE PLAN. 5 9 PERFORMANCE GRAPH The following Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference the proxy statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. The graph below compares the cumulative total stockholder return on the Company's Common Stock for the last five fiscal years with the cumulative total return on the S&P 500 Index and the S&P High Technology Composite Index over the same period (assuming the investment of $100 in the Company's Common Stock, the S&P 500 Index and the S&P High Technology Composite Index on December 31, 1989 and reinvestment of all dividends). DSC COMMUNICATIONS CORPORATION COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN [GRAPH]
S&P(R) HIGH TECH MEASUREMENT PERIOD S&P "500"(R) COMPOSITE (FISCAL YEAR COVERED) DSC INDEX INDEX 1989 100 100 100 1990 47 97 102 1991 27 126 117 1992 152 136 121 1993 424 150 149 1994 495 148 174
DECEMBER 31, -------------------------------------------------- 1989 1990 1991 1992 1993 1994 ----- ----- ----- ----- ----- ----- DSC $ 100 $ 47 $ 27 $ 152 $ 424 $ 495 S&P "500"(R) Index 100 97 126 136 150 148 S&P(R) High Tech Composite Index 100 102 117 121 149 174
6 10 EXECUTIVE COMPENSATION The following executive compensation disclosures reflect all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers and directors of the Company. The "named executive officers" are the Company's Chief Executive Officer (the "CEO"), regardless of compensation level, and the four most highly compensated executive officers other than the CEO serving as such on December 31, 1994. Where a named executive officer has served during any part of the year ended December 31, 1994, the disclosures reflect compensation for the full year in each of the periods presented. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------------------------------------------- BONUS ($) ------------------------------------- (A) 1990 (B) LONG-TERM OTHER ANNUAL NAME AND SALARY INCENTIVE COMPENSATION PRINCIPAL POSITION YEAR ($) CASH PLAN TOTAL ($) ------------------------- ---- ------- --------- --------- --------- ------------ James L. Donald.......... 1994 740,816 750,048 6,716,000 7,466,048 -- Chairman of the 1993 687,682 1,460,000 2,588,000 4,048,000 411,346 Board, President and 1992 650,004 300,000 -- 300,000 17,546 Chief Executive Officer Gerald F. Montry......... 1994 364,692 374,400 1,007,400 1,381,800 -- Senior Vice President 1993 347,198 170,000 388,200 558,200 160,367 and Chief Financial 1992 314,512 125,000 -- 125,000 4,518 Officer Allen R. Adams........... 1994 261,000 300,300 -- 300,300 -- Group Vice President 1993 226,400 130,000 -- 130,000 126,751 1992 195,258 90,000 -- 90,000 -- Hensley E. West.......... 1994 252,390 286,000 -- 286,000 -- Group Vice President 1993 216,240 130,000 -- 130,000 84,490 1992 161,978 99,426 -- 99,426 -- Michael R. Bernique...... 1994 230,400 285,000 -- 285,000 -- Senior Vice President 1993 197,079 196,001 -- 196,001 -- 1992 * * * * * LONG-TERM COMPENSATION -------------------------------------- AWARDS PAYOUTS ------------------------- ------- (D)(F) (C) SECURITIES RESTRICTED UNDERLYING (E) (B) STOCK OPTIONS/ LTIP ALL OTHER NAME AND AWARDS SARS PAYOUTS COMPENSATION PRINCIPAL POSITION ($) (#) ($) ($) ------------------------- ---------- ---------- ------- ------------ James L. Donald.......... -- 70,000 -- 38,630 Chairman of the 809,375 100,000 -- 50,089 Board, President and 313,500 -- -- 34,515 Chief Executive Officer Gerald F. Montry......... -- 30,000 -- 8,817 Senior Vice President 226,625 60,000 -- 15,595 and Chief Financial 49,500 -- -- 24,445 Officer Allen R. Adams........... -- 20,000 -- 10,937 Group Vice President 395,375 60,000 -- 6,855 49,500 -- -- 4,364 Hensley E. West.......... -- 20,000 -- 6,661 Group Vice President 145,688 60,000 -- 6,351 44,775 -- -- 33,466 Michael R. Bernique...... -- 20,000 -- 6,186 Senior Vice President 286,313 70,000 -- 4,497 * * * *
--------------- * Not applicable as Mr. Bernique became an executive officer during 1993. (A) Represents amounts earned under the Company's 1990 Long-Term Incentive Compensation Plan (the "LTIP"). No amounts earned under the LTIP reflected above were paid in 1994 or 1993. 7 11 (B) Amounts of "Other Annual Compensation" include amounts reimbursed during 1993 and 1992 for the payment of taxes. For 1994, "All Other Compensation" consists of the following for the named executive officers:
COMPANY CONTRIBUTIONS ------------------------------------------------------------ THRIFT RESTORATION SPLIT DOLLAR PLAN PLAN LIFE INSURANCE OTHER TOTAL ------ ----------- -------------- ------ ------- James L. Donald.................. $4,498 $ 9,458 $ 24,674 $ -- $38,630 Gerald F. Montry................. 4,500 2,079 2,238 -- 8,817 Allen R. Adams................... 4,500 2,591 869 2,977 10,937 Hensley E. West.................. 4,498 999 1,164 -- 6,661 Michael R. Bernique.............. 4,500 1,544 -- 142 6,186
(C) The amounts reported in the table represent the market value of the shares of Common Stock at the date of grant. Awards of restricted stock vest in equal annual increments over a three year period with the initial increment vesting on the first anniversary of the date awarded. Holders of the restricted shares retain all rights of a stockholder (including the right to receive dividends if and when paid on Common Stock), except the restricted shares cannot be sold until they are vested. Upon termination of employment of the holder, all unvested shares are forfeited to the Company. No cash dividends have been declared or paid on Common Stock. Aggregate restricted stock holdings at December 31, 1994 consisted of:
MARKET VALUE AT DECEMBER 31, SHARES(F) 1994 --------- ------------ James L. Donald............................................. 44,334 $1,590,482 Gerald F. Montry............................................ 15,334 550,107 Allen R. Adams.............................................. 19,334 693,607 Hensley E. West............................................. 12,000 430,500 Michael R. Bernique......................................... 9,333 334,821
(D) Represents the number of stock options granted to the named executive officer for the year noted. The Company has not made any grants of SARs. (E) No cash payouts have been made under the LTIP. (F) All option and restricted share amounts have been restated to retroactively reflect a two-for-one stock split, effected in the form of a 100% stock dividend, declared by the Board of Directors on April 27, 1994 for stockholders of record on May 11, 1994. 8 12 OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table shows all individual grants of stock options to the named executive officers during the year ended December 31, 1994.
INDIVIDUAL GRANTS ---------------------------------------------------------------------------------- (A)(B)(C) NUMBER OF POTENTIAL REALIZABLE SECURITIES (C) VALUE AT ASSUMED UNDERLYING % OF TOTAL (A) ANNUAL RATES OF STOCK OPTIONS/ OPTIONS/SARS EXERCISE PRICE APPRECIATION SARS GRANTED TO OR BASE FOR OPTION TERM GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------------- NAME (#) FISCAL YEAR ($/SH) DATE 5%($)(D) 10%($)(D) -------------------------- --------- ------------ -------- ---------- ------------ ------------ James L. Donald........... 70,000 15.10% 26.00 3/08/04 1,144,570 2,900,590 Chairman of the Board, President and Chief Executive Officer Gerald F. Montry.......... 30,000 6.47% 26.00 3/08/04 490,530 1,243,110 Senior Vice President and Chief Financial Officer Allen R. Adams............ 20,000 4.31% 26.00 3/08/04 327,020 828,740 Group Vice President Hensley E. West........... 20,000 4.31% 26.00 3/08/04 327,020 828,740 Group Vice President Michael R. Bernique....... 20,000 4.31% 26.00 3/08/04 327,020 828,740 Senior Vice President All Stockholders.......... 1,824,200,263(E) 4,622,921,308(E)
--------------- (A) All option and exercise price amounts have been adjusted to reflect a two-for-one stock split, effected in the form of a 100% stock dividend, declared by the Board of Directors on April 27, 1994 for stockholders of record on May 11, 1994. (B) Options have a ten year life, vest in equal annual increments over three years and are priced at the fair market value on the date of grant. (C) The Company has not made any grants of SARs. (D) These are hypothetical values using assumed growth as prescribed by the Securities and Exchange Commission. (E) The potential realizable value is calculated from $26.00, the exercise price of the options listed above, granted on March 8, 1994, based on the number of outstanding shares of Common Stock on March 8, 1994. Amounts shown have been adjusted to reflect the two-for-one stock split.
9 13 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table shows aggregate exercises of options (or tandem stock appreciation rights) and freestanding stock appreciation rights during the year ended December 31, 1994, by each of the named executive officers.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED OPTIONS/ IN-THE-MONEY SARS AT OPTIONS/SARS AT DECEMBER 31, 1994(#) DECEMBER 31, 1994($) SHARES ACQUIRED (A)(B) (B)(C) ON EXERCISE VALUE EXERCISABLE(E)/ EXERCISABLE(E)/ NAME (#)(A) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U) ---------------------------------------- --------------- ----------- -------------------- -------------------- James L. Donald......................... 600,000 15,618,750 1,233,334 E 39,206,263 E Chairman of the Board, 136,666 U 2,003,737 U President and Chief Executive Officer Gerald F. Montry........................ 233,334 5,887,095 311,333 E 9,512,846 E Senior Vice President and 69,999 U 924,568 U Chief Financial Officer Allen R. Adams.......................... 25,000 603,500 29,847 E 625,562 E Group Vice President 59,999 U 825,818 U Hensley E. West......................... 72,667 2,216,089 13,334 E 103,339 E Group Vice President 63,999 U 793,155 U Michael R. Bernique..................... 15,067 299,626 16,667 E 129,169 E Senior Vice President 77,066 U 1,054,599 U
--------------- (A) Share and option amounts have been adjusted to reflect a two-for-one stock split, effected in the form of a 100% stock dividend, declared by the Board of Directors on April 27, 1994 for stockholders of record on May 11, 1994. (B) The Company has not made any grants of SARs. (C) Amounts shown are based upon the closing price of the Company's Common Stock on December 31, 1994, which was $35.875. EMPLOYMENT AND SEVERANCE AGREEMENTS In July 1994, the Company entered into Amended and Restated Severance Compensation Agreements with Messrs. Montry, Adams and West, and a Severance Compensation Agreement with Mr. Bernique (collectively, the "Severance Agreements"). Each of the Severance Agreements provides that if a Change in Control (as defined below) occurs and within two years of the Change in Control either (i) the officer voluntarily terminates his employment for "good reason" or (ii) the officer's employment is involuntarily terminated other than for cause, death or disability, the Company will pay to the officer a lump sum amount equal to three times the officer's "base amount" income. The Severance Agreements further provide that each of the officers will be reimbursed for excise taxes payable by reason of payments made pursuant to the Severance Agreements. The "base amount" is defined by Section 280G(b) of the Internal Revenue Code of 1986, as amended (the "Code") as the average of all compensation (including compensation from the exercise of stock options) received by the officer in each of the five taxable years preceding the year in which the Change in Control occurs. A "Change in Control" of the Company is defined in the Severance Agreements as any of the following: (i) consummation of a merger in which the Company is not the surviving entity; (ii) sale or transfer of substantially all of the assets of the Company; (iii) liquidation or dissolution of the Company; (iv) acquisition of at least 20% of the Company's Common Stock by a third party; or (v) under certain circumstances, a change of a majority of the members of the Company's Board of Directors during any two-year period. 10 14 "Good Reason" is defined in the Severance Agreements as any reduction in compensation, duties, status or benefits or relocation of more than 50 miles of the Company's principal place of business. No sums have been paid under any of the Severance Agreements. Should payment of severance compensation be triggered in 1995, the maximum aggregate amount payable pursuant to the Severance Agreements, would be as follows: Mr. Montry approximately $6,756,000, Mr. Adams approximately $1,944,000, Mr. West approximately $2,354,000, and Mr. Bernique approximately $1,300,000. These amounts will change during each calendar year and do not take into account any additional tax or other payments which are indeterminable at this time. None of the named executive officers will be entitled to severance pay until a Change in Control has occurred. The officer's right to receive severance pay lapses (i) if he continues to be employed by the Company for a period of two years after the change in Control; or (ii) on July 19, 1999, unless a Change in Control occurs prior to such date. In addition, the Company's stock option plans provide that in the event of a Change in Control, all restrictions on employee stock options and restricted stock grants lapse. DONALD AGREEMENTS In 1990, the Compensation Committee approved an employment agreement (the "Donald Employment Agreement") with Mr. Donald. Term. The term of employment pursuant to the Donald Employment Agreement commenced on January 1, 1990 and continues for a period of six and one-half years. The Donald Employment Agreement renews daily, but in no event will it extend beyond the date Mr. Donald reaches the age of 75, or such earlier date as may be specified in a written notice given by either party to the other and delivered six years and six months prior to such specified date. Mr. Donald may relinquish the office as Chief Executive Officer at any time after July 5, 1996, without terminating his employment under the Donald Employment Agreement. Compensation. Mr. Donald's base salary is reviewed annually and is subject to discretionary increases by the Board of Directors, which increases cannot be less than the average percentage increase during the prior calendar year of the base salaries of those executives reporting directly to Mr. Donald. Pursuant to the Donald Employment Agreement, Mr. Donald will also be eligible to receive annual incentive awards at the discretion of the Board of Directors and will be eligible to participate in any benefit and stock plans the Company maintains for its employees. Termination. If, in the absence of a Change in Control (as defined in the Donald Employment Agreement), Mr. Donald's employment is constructively terminated or terminated without cause, the Company will be required to pay Mr. Donald for each year remaining on the term of the Donald Employment Agreement (i) his then base salary; (ii) annual incentive awards equal to the average of the three highest annual incentive awards he received during the last ten years of his employment; and (iii) all other benefits that were payable to Mr. Donald at the time of his termination. He will also be entitled to continued participation for the remainder of the term of the Donald Employment Agreement in all employee benefit plans in which he was a participant on the date of his termination and to medical benefits for himself and his wife for life and for his children until they reach age 23. Change in Control. If, within two years following a Change in Control, Mr. Donald's employment is constructively terminated or terminated without cause, Mr. Donald will be entitled to receive a lump sum cash payment within 30 days following termination, equal to the sum of (i) his then-base salary for each year remaining on the term of the Donald Employment Agreement; (ii) the average of his three highest annual incentive awards received during the last ten years of his employment multiplied by the number of years remaining on the term of the Donald Employment Agreement; (iii) any accrued incentive awards; (iv) the aggregate difference between the option price and the fair market value of the Company's stock subject to the unexercisable options that Mr. Donald holds at the time of termination; and (v) the fair market value of each share of restricted stock not vested held by Mr. Donald at the time of termination. Mr. Donald will also be entitled to continued participation for the remainder of the term of the Donald Employment Agreement in all 11 15 employee benefits for himself and his wife for life and for his children until they reach age 23. Should the severance compensation be triggered in 1995, the maximum amount payable to Mr. Donald under the Donald Employment Agreement would be approximately $13,792,000. This amount will change during each calendar year and does not take into account any additional tax or other payments which are indeterminable at this time. Additional Payments. If the Internal Revenue Service determines that any payment made to Mr. Donald pursuant to the Donald Employment Agreement or otherwise constitutes an "Excess Parachute Payment" within the meaning of the Code, the Company will make a "gross-up" payment in the amount necessary to pay any excise taxes imposed by Section 4999 of the Code and any income taxes on the payment to him. Any "gross-up" payment made to Mr. Donald would be a non-deductible expense of the Company. Disclosure of Confidential Information and Agreement Not to Compete. Under the terms of the Donald Employment Agreement, Mr. Donald may not disclose at any time confidential information about the Company that he acquires during his employment. In addition, he is subject to an agreement not to compete with the Company during the term of his employment and for one year thereafter. Income Continuation Plan. Effective January 1, 1990, Mr. Donald and the Company entered into an Income Continuation Plan Agreement (the "Continuation Plan"). The Continuation Plan is administered by the Compensation Committee. The Compensation Committee consists of not less than two non-employee directors. If Mr. Donald terminates his employment with the Company on or after his reaching age 65, he will receive an amount equal to 3% of the average of his compensation for the highest three calendar years of his final ten years of employment as the Company's Chief Executive Officer multiplied by the number of years of service (the "Accrued Benefit"). If Mr. Donald terminates his employment with the Company due to disability prior to age 65, he will receive the Accrued Benefit except that his years of service shall be deemed to continue until age 65; provided, however, that in the event of his death following termination of employment due to disability and prior to reaching age 65, no further benefits shall be paid. If Mr. Donald's employment is terminated without cause, other than due to death or disability, the Company will pay Mr. Donald the Accrued Benefit on the date his base salary ceases pursuant to the terms of the Donald Employment Agreement described above provided that Mr. Donald's years of service shall be deemed to continue until his Accrued Benefit becomes payable; and, provided, further, that in the event of Mr. Donald's death following termination of employment and prior to the date the Accrued Benefit would otherwise be payable, no further sums shall be paid. If Mr. Donald voluntarily terminates his employment other than because of his death or disability or if the Company terminates Mr. Donald for cause, Mr. Donald shall receive the Accrued Benefit on his reaching age 65 or his termination of employment, whichever is later. The Accrued Benefit shall be paid in the form of monthly payments for life. However, Mr. Donald may elect to take the Accrued Benefit in the form of a ten-year certain and life annuity. In the event Mr. Donald dies following the commencement of the monthly benefit payment described above, his surviving spouse shall receive 50% of the monthly amount otherwise payable (the "Survivor Benefit"). If neither Mr. Donald nor his spouse survives for ten years after commencement of the monthly benefits then, upon the latter of the date of death of Mr. Donald or his spouse, the Survivor Benefit shall be paid in equal shares to his children until the latter of (1) the tenth anniversary of the date benefits commenced; or (2) the death of the last surviving child of Mr. Donald. The Company has agreed to establish a trust to fund Accrued Benefits payable to Mr. Donald. As of December 31, 1994, no trust fund has been established. At December 31, 1994, the estimated annual Accrued Benefit payable to Mr. Donald under the Income Continuation Plan was approximately $597,000 and at normal retirement date, such Accrued Benefit would be approximately $688,000. Under the terms of the Income Continuation Plan, the benefits will be adjusted to reflect changes in Mr. Donald's compensation. 12 16 Life Insurance. Effective January 1, 1990, the Company and Mr. Donald entered into an agreement pursuant to which the Company will provide Mr. Donald with a $5,000,000 life insurance policy which replaces a previous life insurance policy of $7,000,000. Mr. Donald pays the portion of the premium on the policy that is equal to the amount of economic benefit that would be taxable to him but for such payment. The balance of such premiums is paid by the Company. Dividends attributable to the policy shall be applied to purchase additional insurance. Upon Mr. Donald's death, the Company shall be entitled to receive an amount equal to the cumulative premiums paid by the Company, provided that Mr. Donald's designated beneficiary shall receive not less than $5,000,000. 1990 LONG-TERM INCENTIVE COMPENSATION PLAN The DSC Communications Corporation 1990 Long-Term Incentive Compensation Plan (the "1990 Plan") provides for the award of up to 600,000 Units ("Units") to individuals participating in the 1990 Plan, and to date 520,000 Units have been awarded. There are currently two participants in the 1990 Plan, Mr. Donald and Mr. Montry who hold 400,000 and 60,000 Units, respectively. The 1990 Plan will terminate on December 31, 1995, unless earlier terminated by the Board of Directors. All benefits under the 1990 Plan will be paid in cash. Units awarded under the 1990 Plan vest over a six-year period beginning January 1, 1990, and ending December 31, 1995. Units become fully vested upon (i) the attainment of the Maximum Cumulative Unit Value (as determined by the Committee) with respect to the Units; (ii) the occurrence of certain "change in control" events with respect to the Company; and (iii) the termination of the participant's employment by reason of retirement, death or disability, or termination of the participant's employment other than for "cause." Units that have vested may be exercised at any time during a participant's employment for an amount equal to the then current Cumulative Unit Value (as defined below) of the Units and a corresponding number of Units will be canceled. The Company also will pay the participant an amount equal to the Cumulative Unit Value of the then outstanding Units upon the termination of the 1990 Plan. The "Cumulative Unit Value" of a Unit is determined by a formula which establishes and totals the Incremental Unit Value for each completed Performance Year. The Incremental Unit Value of the Unit for a Performance Year is established by the Committee. Upon the occurrence of a "change in control" of the Company, each participant will be entitled to receive in respect of any Unit then outstanding a lump sum cash payment equal to the greater of (a) the Cumulative Unit Value per outstanding Unit held by the participant (but not more than the amount established by the Committee as the Maximum Cumulative Unit Value of $54.37), $23.26 as of December 31, 1994; or (b) the then fair market value of a share of the Company's Common Stock on the date of the "change of control," multiplied by five times the number of Units held by the participant, or $174.37 per Unit based on the closing sales price of the Company's Common Stock as reported by the Nasdaq National Market on February 27, 1995. In addition, if the Internal Revenue Service determines that such payment constitutes an "Excess Parachute Payment" as defined in the Code, the Company will make a "gross-up" payment to the participant in an amount necessary to pay any excise taxes imposed by Section 4999 of the Code and any income taxes on the payment to the participant. Any "gross-up" payment made to a participant will be a nondeductible expense of the Company. All amounts have been adjusted to reflect the effect of the 1994 two-for-one stock split. ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS The provisions of the Severance Agreements, the 1990 Plan, and the Donald Employment Agreement may be deemed to have an anti-takeover effect and may delay, defer, or prevent a tender offer or takeover attempt that a stockholder may consider to be in that stockholder's best interest, including attempts that might result in a premium over the market price for shares held by stockholders. 13 17 DIRECTORS CONTINUING IN OFFICE
DIRECTOR AGE AS OF OF PRINCIPAL OCCUPATION FEBRUARY 27, COMPANY OR EMPLOYMENT 1995 SINCE ------------------------------------------ ------------ ------- Frank J. Cummiskey(2)....... Vice Chairman of the Company. Retired Vice 68 1987 President of International Business Machines Corporation ("IBM"). Served in a variety of domestic and international executive positions including President and director of IBM Europe, S.A., President and director of IBM World Trade Europe and Middle East, Africa Corporation, and President of IBM's General Business Group/International. Raymond J. Dempsey(2)....... Retired; former president and Chief 59 1992 Executive Officer of European American Bank; Director of Freuhauf Trailer Corp. James L. Donald(1).......... Chairman of the Board, President and Chief 63 1981 Executive Officer; employed by the Company since 1981. James L. Fischer(2)......... Retired; former Executive Vice President, 67 1989 principal financial officer and manager of corporate staff functions of Texas Instruments Incorporated ("TI"). During his 29 years at TI, he held a number of senior management level positions. Robert S. Folsom(1)......... Chairman of the Board, Folsom Properties, 68 1983 Inc. (real estate development) for more than the past five years; Director of BeautiControl Cosmetics, Inc. (cosmetics); FM Properties (real estate). James M. Nolan(1)........... Marketing Consultant to the Company; sole 60 1981 stockholder of Nolan Consulting, Inc. since 1978; Director of Capital Southwest Corporation (investment company).
--------------- (1) Term expires in 1996. (2) Term expires in 1997. MEETING OF THE BOARD OF DIRECTORS AND COMMITTEE During the year ended December 31, 1994, the Board of Directors met four times. The Audit Committee, which currently consists of Messrs. Brown, Fischer and Fairclough, (i) annually recommends selection of the Company's independent auditors to the Board of Directors; (ii) meets with the independent auditors concerning the audit; (iii) evaluates non-audit services and financial statements and accounting developments that may affect the Company; and (iv) meets with management concerning matters similar to those discussed with outside auditors. The Audit Committee met four times during the year ended December 31, 1994. The Compensation Committee, which currently consists of Messrs. Dempsey and Folsom, (i) makes recommendations to the full Board concerning remuneration arrangements for senior management and directors; (ii) administers the Company's stock option and stock purchase plans; (iii) reviews, approves and 14 18 recommends to the Board of Directors new benefit plans or modifications to existing plans; and (iv) makes such reports and recommendations from time to time to the Board of Directors upon such matters as the committee may deem appropriate or as may be requested by the Board. During the year ended December 31, 1994, the Compensation Committee met six times. See "Report of Compensation Committee" on page 19. The Company does not have a Nominating Committee. Nominations for directors of the Company are considered by the entire Board. Stockholders wishing to recommend a candidate for consideration by the Board can do so in writing to the Secretary of the Company at its corporate offices in Plano, Texas, giving the candidate's name, biographical data and qualifications. Any such recommendation must be accompanied by a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as a director. During the year ended December 31, 1994, each member of the Board attended not less than 75% of the aggregate number of (i) board meetings and (ii) meetings of committee of which such person was a member. COMPENSATION OF DIRECTORS Non-employee directors are paid $1,500 per month and $1,000 for each Board of Directors meeting attended. Members of the Audit and Compensation Committees each receive $800 for each committee meeting attended. The Chairmen of the Audit and Compensation Committees each receive an additional $417 per month. The Company has entered into a Management Consulting Agreement with Nolan Consulting, Inc. and James M. Nolan pursuant to which the Company paid Nolan Consulting, Inc. $195,333 for the year ended December 31, 1994. Mr. Nolan is the sole stockholder of Nolan Consulting, Inc. and a member of the Board of Directors of the Company. Additionally, the Company has a consulting agreement with Mr. Brown which pays Mr. Brown $1,000 per month. During the year ended December 31, 1994, Mr. Brown was paid $12,000. The Company has entered into a consulting agreement with Frank J. Cummiskey, a member of the Company's Board of Directors, pursuant to which the Company pays Mr. Cummiskey $16,700 per month. He serves as Vice Chairman of the Company's Board of Directors, Chairman of the Company's Long-Range Strategy Committee and Chairman of the Board of a wholly-owned subsidiary of the Company. During the year ended December 31, 1994, Mr. Cummiskey received $200,400 for consulting services. The Company has entered into a consulting agreement with Sir John Fairclough, a director of the Company, which provides for the payment of approximately $11,475 per quarter. For services rendered during the year ended December 31, 1994, Sir John Fairclough earned $45,900 for consulting services. Messrs. Brown, Cummiskey and Fairclough are also directors of certain European subsidiaries of the Company. During the year ended December 31, 1994, Mr. Brown received $36,750 and Mr. Cummiskey and Mr. Fairclough were each paid $7,650 in these capacities. NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN In 1993 the Board of Directors adopted, and the stockholders approved, the DSC Communications Corporation 1993 Non-Employee Directors Stock Option Plan (the "Directors Plan"). Under the terms of the Directors Plan, on April 27, 1994, Messrs. Brown, Cummiskey, Dempsey, Fairclough, Fischer, Folsom and Nolan each received an option to purchase 10,000 shares of the Company's Common Stock at an exercise price per share of $28.625, the reported closing price per share of the Company's Common Stock on that date. These amounts have been adjusted to reflect the 1994 two-for-one stock split. Each such option is exercisable for a period of not longer than ten years from the date of grant. Each non-employee Director continuing in office will receive a similar option under similar terms following the 1995 annual meeting. 15 19 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION From January 1994 until August 1994, the Compensation Committee of the Board of Directors consisted of Messrs. Dempsey, Folsom and Brown. Mr. Brown resigned from the Compensation Committee in August 1994, and the Compensation Committee currently consists of Messrs. Dempsey and Folsom. On April 23, 1990, the Company granted options to purchase 20,000 shares of Common Stock at an exercise price of $6.0625 per share (the "Exercise Price") to each of seven individuals then serving as directors of the Company, including Messrs. Nolan and Brown. All of the options were to expire on April 22, 1994. As a result of an administrative error by the Company, the options granted to Messrs. Nolan and Brown were not exercised, even though the closing sales price of the Common Stock covered by such options on the date of expiration was $28.625. All of the other options either were exercised timely or terminated as a result of director resignations. Because of the Company's administrative error and in consideration of such individual's long service to the Company, the Company's Board of Directors, excluding Messrs. Nolan and Brown, approved the sale of 20,000 treasury shares of Common Stock to each of Messrs. Nolan and Brown at the exercise price, which sale occurred on August 29, 1994. On such date the closing sales price of the Common Stock was $27.625 per share. All amounts shown above reflect the two-for-one stock split effective in May 1994. LITIGATION On January 26, 1994 C.L. Grimes, a stockholder of the Company, filed a derivative suit in Delaware Chancery Court, purportedly on behalf of the Company as the real party in interest and as a stockholder of the Company, seeking a declaration that the Employment Agreement of James L. Donald, his Executive Income Continuation Plan and the 1990 Long-Term Incentive Compensation Plan as it applies to Mr. Donald and all other benefits of Mr. Donald, including previously granted Company stock options, are null and void. The defendants in the suit are Mr. Donald, all current non-employee directors and two former directors of the Company. The Company itself is a nominal defendant. The plaintiff contends that Mr. Donald's employment contract contains an improper delegation of Board of Directors' authority to Mr. Donald and excess payments. The suit also contends that the salary and benefits established for Mr. Donald pursuant to the Donald agreements referred to above and approved by the Company's Board of Directors are excessive and constitute a diversion and waste of corporate assets. The suit seeks an injunction restraining Mr. Donald from exercising any stock options, taking any action to implement any of the Donald agreements, or declaring a constructive termination of his employment and also seeks unspecified damages against the defendants and Grimes' legal fees. On June 1, 1994, the plaintiff filed an amended complaint in which he restated his existing claims and added a new claim contending that the Company's 1994 proxy statement was misleading in its description of the 1994 Long-Term Incentive Compensation Plan (the "1994 Plan"). On this new claim, the plaintiff seeks a decree that the 1994 proxy statement insofar as it relates to the 1994 Plan and the actions taken pursuant to the proxy statement with respect to the 1994 Plan are null and void and seeks to enjoin the Company from implementing the 1994 Plan. On June 15, 1994, all defendants filed motions to dismiss all of the plaintiff's claims, with the exception of the claim relating to the Company's 1994 proxy statement. On January 11, 1995, the Delaware Chancery Court granted defendants' motions to dismiss. The plaintiff later filed a motion seeking entry of a final judgment of dismissal so that he would be free to pursue an immediate appeal of the Court's decision. In response, the Court directed entry of a final judgment and certified the dismissed claims for appellate review. On March 6, 1995, the plaintiff filed an appeal of the dismissed claims to the Delaware Supreme Court. Defendants will continue to vigorously contest the plaintiff's claims. 16 20 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock as of February 27, 1995, (except as otherwise indicated) by (a) each director and named executive officer of the Company; (b) all current executive officers and directors of the Company as a group; and (c) each person known to the Company who is a beneficial holder of more than five percent of the shares of its Common Stock.
AMOUNT AND NATURE OF PERCENT OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(2) ------------------------------------------------------ ----------------------- ----------- FMR Corp.(3).......................................... 15,206,404 13.10% 82 Devonshire Street Boston, MA 02109-3614 Allen R. Adams........................................ 123,772 * Michael R. Bernique................................... 86,401 * Clement M. Brown, Jr.................................. 46,000 * Frank J. Cummiskey.................................... 52,000 * Raymond J. Dempsey.................................... 20,000 * James L. Donald....................................... 1,935,460 1.67% Sir John Fairclough................................... 40,000 * James L. Fischer...................................... 34,000 * Robert S. Folsom(4)................................... 78,000 * Gerald F. Montry...................................... 374,735 * James M. Nolan(5)..................................... 390,012 * Hensley E. West....................................... 182,728 * All directors and current executive officers as a group (17 persons).................................. 3,472,546 2.99%
--------------- * Ownership of less than 1% of the outstanding Common Stock. (1) Each individual, unless otherwise noted, has sole voting and investment power with respect to all shares owned by such individual. Includes shares that a person has a right to acquire if such right is exercisable within sixty days as follows: Allen R. Adams, 89,846 shares; Michael R. Bernique, 77,066 shares; Clement M. Brown, Jr., 20,000 shares; Frank J. Cummiskey, 20,000 shares; Raymond J. Dempsey, 20,000 shares; James L. Donald, 970,000 shares; Sir John Fairclough, 40,000 shares; James L. Fischer, 20,000 shares; Robert S. Folsom, 20,000 shares; Gerald F. Montry, 347,999 shares; James M. Nolan, 200,000 shares; Hensley E. West, 77,333 shares; and all directors and current executive officers as a group (17 persons), 1,994,910 shares. (2) Based upon 114,063,244 shares of Common Stock outstanding as of February 27, 1995, plus any shares of Common Stock under options of the particular director, executive officer or stockholder, or, in the case of all directors and current executive officers as a group, under options of all directors and current executive officers as a group. (3) Based upon Form 13G dated February 13, 1995, filed with the Securities and Exchange Commission. At December 31, 1994, FMR Corp. had sole voting power for 1,122,112 shares and sole dispositive power for 15,206,404 shares. (4) Includes 4,000 shares held by Mr. Folsom's spouse. (5) Includes 70,000 shares held by Mr. Nolan's spouse. 17 21 COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Executive officers, directors and greater than ten percent stockholders are required by SEC Regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the year ended December 31, 1994, all Section 16(a) filing requirements applicable to the officers, directors and greater than ten percent beneficial owners were complied with. It is the practice of the Company to attend to the filing of Section 16(a) forms on behalf of the officers of the Company. INDEPENDENT PUBLIC ACCOUNTS The Board of Directors of the Company selected the firm of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 1995. A representative of Ernst & Young LLP is expected to attend the Annual Meeting of Stockholders with the opportunity to make a statement if such representative desires to do so and to be available to respond to appropriate questions. STOCKHOLDER PROPOSALS Any stockholder of the Company desiring to present a proposal for action at the Annual Meeting of Stockholders to be held in 1996 must deliver the proposal to the executive offices of the Company no later than December 1, 1995, unless the Company notifies the stockholders otherwise. Only those proposals that are proper for stockholder action and otherwise proper may be included in the Company's Proxy Statement. QUORUM; VOTING The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common Stock entitled to vote is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes are counted for purposes of determining whether a quorum is present. If a quorum is not present or represented by proxy, the stockholders entitled to vote thereat, present in person or represented by proxy, have the power to adjourn the meeting from time to time, without notice other than an announcement at the meeting until a quorum is present or represented. At any such adjourned meeting at which a quorum is presented or represented, any business may be transacted that might have been transacted at the meeting as originally called. On all matters (including election of directors) submitted to a vote of the stockholders at the meeting or any adjournment thereof, each stockholder will be entitled to one vote for each share of Common Stock owned of record by such stockholder at the close of business on February 27, 1995. Abstentions and broker non-votes will be treated as a vote against the proposed amendment to the Company's Restated Certificate of Incorporation. Abstentions and broker non-votes will have no effect in determining the adoption of the proposal to add an additional 1,000,000 shares of Common Stock to the DSC Communications Corporation 1990 Employee Stock Purchase Plan or on the election of the nominees to the Board of Directors. 18 22 ACTIONS TO BE TAKEN UNDER THE PROXY Proxies in the accompanying form which are properly executed and returned will be voted at the meeting and any adjournment thereof and will be voted in accordance with the instructions thereon. Any proxy upon which no instructions have been indicated with respect to a specified matter will be voted as follows with respect to such matters: (1) For election of management's three Class II Directors to serve until 1998; (2) For approval of an amendment to the Company's Restated Certificate of Incorporation increasing the authorized number of shares of Common Stock, $.01 par value, from 250,000,000 to 500,000,000; and (3) For approval of the proposal to add an additional 1,000,000 shares of Common Stock to the DSC Communications Corporation 1990 Employee Stock Purchase Plan. Each of the nominees for election as directors has agreed to serve if elected. The Company knows of no reason why any of the nominees for election as directors would be unable to serve. Should any or all of the nominees be unable to serve, all proxies returned to the Company will be voted in accordance with the best judgment of the persons named as proxies except where a contrary instruction is given. The Company knows of no other matters, other than those stated above, to be presented for consideration at the meeting. If, however, other matters properly come before the meeting or any adjournments thereof, it is the intention of the persons named in the accompanying proxy to vote such proxy in accordance with their judgment on any such matters. The persons named in the accompanying proxy may also, if it is deemed advisable, vote such proxy to adjourn the meeting from time to time. PROXY SOLICITATION The expense of the solicitation of proxies will be borne by the Company. Solicitation of proxies may be in person or by mail, telephone or telegraph by directors, current executive officers and regular employees of the Company. The Company will request banking institutions, brokerage firms, custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of Common Stock of the Company held of record by such persons, and the Company will reimburse the forwarding expense. The Company has retained the services of Kissel-Blake, Inc., 25 Broadway, New York, New York 10004 to solicit proxies by mail, telephone, telegraph or personal contact. The estimated cost of the professional solicitation will be approximately $9,500 plus out-of-pocket expenses. REVOCATION OF PROXY Any stockholder returning the accompanying proxy may revoke such proxy at any time prior to its exercise (a) by giving written notice to the Company of such revocation; (b) by voting in person at the meeting; or (c) by executing and delivering to the Company a later dated proxy. REPORT OF COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors (the "Committee"), which is composed of two independent nonemployee directors (see page 15), develops and oversees the Company's executive compensation strategy. The strategy is implemented through policies and programs designed to support the achievement of the Company's business objectives and the enhancement of stockholder value. The Committee reviews on an ongoing basis all aspects of executive compensation and has retained an independent compensation consulting firm to assist in assessing executive compensation policies and programs. The Committee reviewed the consultant's 1994 study which confirmed the stated compensation strategy. The Committee met six times during 1994. 19 23 The Committee's executive compensation policies and programs support the following objectives: - To reinforce management's concern for enhancing stockholder value. - To align management's compensation with the annual and long-term performance of the Company. - To provide competitive compensation opportunities for exceptional performance. The basic elements of the Company's executive compensation strategy are: Base salary. The Committee annually reviews each executive's base salary. In determining salary adjustments, the Committee considers the Company's growth in earnings and revenues and the executive's performance level, as well as other factors relating to the executive's specific responsibilities. Also considered are the executive's time in position, experience, skills, potential for advancement, responsibility and current salary in relation to the expected level of pay for the position. The expected level of pay for each position is established at between the 50th and 75th percentile of comparable positions of the companies included in the executive compensation surveys in which the Company participates. These surveys included companies with which the Company competes for senior-level executives and, in several instances, included 40 of the 53 companies listed in the S&P High Tech Composite Group, which the Company uses in the Five-Year Performance Comparison graph on page 6. The Committee exercises its judgment based upon the above criteria and does not apply a specific formula or assign a weight to each factor considered. The Committee decided upon the 1994 salary changes for executive officers after reviewing each officer's duties and performance level for the previous year and considering the Chief Executive Officer's recommendations. Annual incentive compensation. At the beginning of each year, the Committee establishes performance goals for the Company for that year, which may include target increases in sales, net income and earnings per share, as well as more subjective goals with respect to quality, product development and manufacturing. Additionally, at the beginning of each year, the Committee establishes incentive award "guidelines" for each executive. In the belief that the executive officers are responsible for the overall financial performance of the Company, the Committee tied their "guideline" incentive awards to targeted earnings per share. If actual earnings per share equals or exceeds the target, the "guideline" incentive awards will range from approximately 32% to 72% of the executive's base compensation. At the end of the year, the Committee (1) determines each executive officer's "guideline" incentive award based upon the level of achievement of the pre-established guidelines and (2) adjusts the amount based upon its own review of the performance of the executive, taking into consideration the individual's responsibilities and the Committee's pre-established goals, as well as, in the case of executives other than the Chief Executive Officer, the recommendations of the Chief Executive Officer. For 1994, actual earnings per share exceeded the pre-established target. Consequently, cash incentive awards totaled approximately 112% of the base salaries of all executive officers, other than the Company's Chief Executive Officer, for 1994. Long-term incentive compensation. The Company's long-term incentive compensation consists of the Company Stock Option Plans and the 1990 and 1994 Long-Term Incentive Compensation Plans. See page 13. The Committee views the granting of stock options and restricted stock awards as a significant method of aligning management's long-term interests with those of the stockholders. The Committee determines awards to executives based on its evaluation of criteria that include responsibilities, compensation, past and expected contributions to the achievement of the Company's long-term performance goals, and current competitive practice as indicated by the compensation surveys in which the Company participates. When making awards, the Committee generally does not consider prior stock option and restricted stock awards. The stock option exercise price is the closing price of the Company's Common Stock on the date of grant. Stock option and restricted stock awards are designed to focus executives on the long-term performance of the Company by enabling executives to share in any increases in value of the Company's stock. Restricted stock grants are used selectively to attract and retain executives and to recognize outstanding performance. The Committee encourages executives, individually and collectively, to maintain a long-term ownership position in the Company's stock. The Committee believes this ownership, combined with a significant 20 24 performance-based incentive compensation opportunity, forges a strong linkage between the Company's executives and its stockholders. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER Mr. James L. Donald is Chief Executive Officer, President and Chairman of the Board of Directors of the Company. The Committee considered the Company's excellent record in all aspects of its business in its annual review of Mr. Donald's performance during 1994. The Committee took note of the fact that the Company's 1994 revenue of over $1 billion and earnings of $163 million grew to record levels, with increases over 1993 of 37 percent and 99 percent, respectively; and backlog grew 88 percent to over $600 million. Additionally, the Company's return on average equity in 1994 was 22 percent. The Company completed the successful acquisition of NKT Elektronik A/S (renamed DSC Communications A/S), a Copenhagen, Denmark-based manufacturer of optical transmission equipment in late 1994. This acquisition will accelerate DSC's entry into new product areas and expand the Company's international presence. The Company's financial condition continues to improve. Cash and marketable securities were $271 million, after spending $149 million on the acquisition of DSC Communications A/S. Stockholders' equity grew 38 percent to $851 million and long-term debt as a percentage of stockholders' equity declined to 5 percent compared to 11 percent at the end of 1993. At the end of 1994, the Company was well positioned from a product portfolio perspective. The Company has a positive acceptance of its products and has in place stringent cost controls. Additionally, the Company continues very active programs in quality improvement, cycle time reduction and introduction of new telecommunications services and applications. Pursuant to an employment agreement between the Company and Mr. Donald, his base salary is reviewed annually and is subject to discretionary increases by the Board of Directors in an amount not less than the average percentage increase during the year of the base salaries of those executives reporting directly to Mr. Donald. The Board approved an increase in Mr. Donald's annual base salary to $750,048 effective February 2, 1994. The Board also granted him an incentive award for 1994 of $750,048 based upon the criteria discussed above for payment of annual incentive compensation. Mr. Donald's incentive award determined under the Company's annual incentive plan was 100% of his 1994 base salary. The Board also granted Mr. Donald stock options for 70,000 shares, which will vest in equal annual increments over a three-year period. These actions were in accordance with the policies and procedures set forth on pages 19, 20 and 21. POLICY ON QUALIFYING COMPENSATION Section 162(m) of the Internal Revenue Code, adopted in 1993, provided that public companies may not deduct in any year compensation in excess of $1 million paid to any of the individuals named in the Summary Compensation Table that is not "performance based," as defined in Section 162(m). The Committee believes that there are circumstances in which the Company's interests are best served by providing compensation that is not fully deductible under Section 162(m). Currently these circumstances relate to the employment of Mr. Donald; in the future, circumstances may require the ability to exercise discretion regarding other executives. 21 25 With regard to Mr. Donald, the Company's paramount concern is to retain and appropriately reward the best qualified CEO for the Company. Also, the Committee believes that its ability to exercise discretion under the Company's compensation plans outweighs the desirability of qualifying these plans under Section 162(m) and outweighs the limited effect of the loss of deductibility. COMPENSATION COMMITTEE RAYMOND J. DEMPSEY, Chairman ROBERT S. FOLSOM The foregoing report of the Compensation Committee shall not be deemed incorporated by reference by any general statement incorporating by reference the Proxy Statement into any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under either Act. OUTSTANDING COMMON STOCK The only outstanding voting securities of the Company are shares of its Common Stock, each share of which entitles the holder thereof to one vote. At February 27, 1995, there were outstanding and entitled to vote 114,063,244 shares of its Common Stock. Only stockholders of record at the close of business on February 27, 1995 are entitled to notice of, and to vote at, the 1995 Annual Meeting of Stockholders and any adjournments thereof. By Order of the Board of Directors GEORGE B. BRUNT Vice President, Secretary and General Counsel Plano, Texas March 27, 1995 22 26 DSC COMMUNICATIONS CORPORATION Proxy Card PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 26, 1995 The undersigned hereby (a) acknowledges receipt of the Notice of Annual Meeting of Stockholders of DSC Communications Corporation (the "Company") to be held on April 26, 1995, and the Proxy Statement in connection therewith, each dated March 27, 1995; (b) appoints James L. Donald, Gerald F. Montry and George B. Brunt as Proxies, or any of them, each with the power to appoint a substitute; (c) authorizes the Proxies to represent and vote, as designated hereon, all the shares of Common Stock of the Company, held of record by the undersigned on February 27, 1995, at such Annual Meeting and at any adjournment(s) thereof; and (d) revokes any proxies heretofore given. (PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE) (SEE REVERSE SIDE) 27 /X/ Please mark your votes votes as in the example. FOR WITHHELD FOR AGAINST ABSTAIN 1. Election of / / / / 2. Approval of an amendment to the Company's / / / / / / Directors: Restated Certificate of Incorporation increasing the authorized number of shares Nominees: of Common Stock, $.01 par value, from Clement M. Brown, Jr., Sir John Fairclough, 250,000,000 to 500,000,000. Gerald F. Montry For, except vote withheld from the following 3. Approval of a proposal to add an / / / / / / nominee(s): additional 1,000,000 shares of Common _____________________________________________ Stock to the DSC Communications Corporation 1990 Employee Stock Purchase Plan. 4. In their discretion, the Proxies are authorized to vote upon such other business as may come before the meeting or any adjournment thereof. Signature(s) ______________________________________________________ DATE ______________________ Signature(s) ______________________________________________________ DATE ______________________ Note: Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.