10-K405
1
FORM 10-K
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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 0-10018
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DSC COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE 54-1025763
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 COIT ROAD
PLANO, TEXAS 75075
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (214) 519-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK,
$.01 PAR VALUE
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 February 27, 1995, 114,063,244 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
$3,926,423,079. (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 1995 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, 1994 are incorporated by reference in 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, 1994
PART I
ITEM 1. BUSINESS
GENERAL
DSC Communications Corporation was incorporated under the laws of the
State of Delaware in 1976. As used herein, the term "Company" refers to DSC
Communications Corporation and, unless the context clearly indicates otherwise,
all of its subsidiaries. The Company's executive offices are located at 1000
Coit Road, Plano, Texas 75075. Its telephone number is (214) 519-3000.
The Company designs, develops, manufactures, and markets digital
switching, transmission, access, and private network system products for the
worldwide telecommunications marketplace. These products allow
telecommunications service providers to build and upgrade their networks to
support a wide range of voice, data, and video services. The Company offers a
comprehensive product line including digital switching systems, intelligent
network products, cellular switching systems, digital loop carrier products,
and digital cross-connect products. The Company develops hardware and software
to meet both United States and international standards, and the specific
requirements of its customers.
The Company supplies products to 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 customers include the
Regional Holding Companies ("RHCs") and most major domestic independent
telephone and long-distance companies, including MCI Communications Corporation
("MCI"), U.S. Sprint Communications
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Company L.P., GTE Communications Systems Corporation, Alltel Supply, Inc., and
LDDS Communications, Inc. The Company is also a manufacturer of high-capacity
cellular switches for Motorola, Inc. ("Motorola"), a leading supplier of
wireless communication systems throughout the world. International customers
include British Telecommunications PLC ("British Telecom"), Mercury
Communications, Ltd. ("Mercury"), a subsidiary of Cable & Wireless PLC ("Cable
& Wireless") in the United Kingdom, Deutsche Telekom ("Deutsche Telekom") in
Germany, DDI Corporation ("DDI") of Japan, and AAP Communications,
Pty. Ltd. ("AAP") of Australia.
In November, 1994, the Company purchased NKT Elektronik A/S
(subsequently renamed DSC Communications A/S), a Copenhagen, Denmark-based
manufacturer of optical transmission equipment, for approximately $149 million.
DSC Communications A/S, which has nearly 700 employees, will become the center
for the Company's European optical transmission business, and is expected to
assist in expanding the Company's operations in other markets in Europe. DSC
Communications A/S has an extensive international customer base, including
customers in Denmark, Norway, Sweden, Finland, The Netherlands, United Kingdom,
Germany, Poland, Hungary, and India through local operations in Copenhagen,
Denmark; Coventry, England; Warsaw, Poland; New Delhi, India; and Vilnius,
Lithuania.
PRODUCTS
GENERAL. The Company's principal products are sophisticated
microprocessor-controlled systems which incorporate advanced hardware and
software technology. The Company develops such systems to meet United States
and international telecommunications standards, and the specific requirements
of the operating companies of the RHCs, independent telephone companies,
long-distance carriers, private networks, and companies operating public and
private communication networks in other countries.
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The percentage of consolidated revenue from the Company's product
groups, which represented ten percent or more of consolidated revenue, was as
follows:
Year Ended December 31,
1994 1993 1992
---- ---- ----
Switching and Intelligent
Network 52% 45% 54%
Access 27% 28% *
Transmission 17% 22% 28%
* - Represented less than ten percent of consolidated
revenue.
SWITCHING AND INTELLIGENT NETWORK PRODUCTS. The Company develops,
manufactures, and markets advanced switching and intelligent network systems
for the worldwide telecommunications marketplace. These systems connect and
route calls through a network, and are generally used in four types of
applications: intelligent network management and signaling; long-distance
switching; switching for the support of high-speed communications such as data,
image, and video (broadband switching); and switching systems for wireless
communications, including both cellular and personal communications. The
Company's switching and advanced intelligent network products are based on the
MegaHub(R) platform. The Company offers a full family of digital tandem switch
products, a full family of, intelligent network products marketed under the
umbrella of A-INfusion(TM) and a broadband control system BASiS(R) (Bandwidth
Allocation System for Integrated Services).
The MegaHub family of products is based upon the Message Transfer
Network ("MTN") architecture. The MTN architecture affords a high degree of
flexibility by interconnecting clusters of independent application processors
over high-speed links, using fast-packet switching technology and
multifunctional software. Because of the MTN's flexible architecture, the
MegaHub platform can serve as a tandem switch, a signal transfer point, a
service control point, or as a platform for a variety of wideband and broadband
services.
One of the Company's first applications of the MegaHub technology was
the MegaHub Signal Transfer Point ("MegaHub STP"), a high-capacity switching
system used to route or switch signaling messages through the Common Channel
Signaling System No. 7 network ("SS7"). The MegaHub STP can be used as an
access facility to information services such as 700, 800, and 900 numbers and
alternate billing arrangements. The Company is
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delivering the MegaHub STP to a majority of the major local telephone companies
in the United States, including the RHCs and several of the RHCs' cellular
subsidiaries, various long-distance carriers in the United States, DDI, a
long-distance service competitor of Nippon Telegraph and Telephone in Japan,
and Deutsche Telekom, the Germany telecommunications carrier.
First introduced in 1989, the MegaHub Service Control Point (the
"MegaHub SCP") combines the functionalities of the Company's MegaHub STP and
standard UNIX-based computing systems. The MegaHub SCP can act as a central
storehouse for information about calls and callers, and can answer network
requests for such information in an expeditious manner. In 1992, the Company
introduced the Programmable Advanced Intelligent Network Computing Environment
(the "MegaHub PACE SCP") which builds upon the Company's initial SCP system by
creating an open, state-of-the-art computing environment. The capabilities of
the MegaHub PACE SCP will provide the user with extremely high transaction
rates needed to support applications like credit and calling card validation
and cellular fraud detection. The Company has provided the MegaHub PACE SCP to
DDI, to a large independent local exchange carrier in the United States, and to
Optus Communications Pty Ltd., a competitive telecommunications service
provider in Australia. In March, 1994, the Company entered into an agreement
with Cable & Wireless, a global telecommunications carrier, who will initially
deploy the MegaHub PACE SCP and related equipment in the network of its
subsidiary, Mercury, the first company licensed to compete against British
Telecom in the United Kingdom.
The newest member of the A-INfusion family is the MegaHub PACE Service
Management System ("MegaHub PACE SMS"). The MegaHub PACE SMS was ordered for
use in the United States by two RHCs and by independent telephone companies in
the United Kingdom and Australia.
These advanced intelligent network products and other products were
selected in 1994 for use in DDI's wireless, microcell-based Personal Handyphone
System following a year-long market trial conducted in Japan.
In 1991, the Company announced the development and testing of the
BASiS switching system. BASiS is a circuit switching platform which allows
telecommunications carriers to provide their customers with bandwidth on
demand. This capability serves as the foundation for numerous high-speed
applications existing in the market today, including video teleconferencing,
medical imaging, high-speed facsimile transmission, local area network
interconnection, and certain residential applications such as
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video-on-demand. The BASiS switching system allows customer-to-customer
connections at data rates ranging from 1.5Mb per second to 45Mb per second.
The BASiS switching system is currently deployed in the nationwide network of a
major long-distance carrier. In addition, BASiS is delivering video services
as part of market trials for Bell Atlantic and for a new customer in Italy.
The Company has developed a group of cellular telephone switches
utilizing its tandem switching technology. A cellular switch is used to
connect callers to the public telecommunications network. The Company has
supplied cellular switches to Motorola since 1985, and currently has an
agreement to license software and sell equipment to Motorola on a nonexclusive
basis. The Company and Motorola have continued to expand their ongoing
relationship by agreeing that the Company would provide repackaged
configurations of its existing cellular switching system to Motorola as an
alternative to Motorola's line of older and smaller cellular switching systems.
The latest of these is a small switch specifically tailored to the China
market. Motorola has incorporated the Company's cellular switches into
cellular communications systems in the United States and in numerous other
countries including the People's Republic of China.
The Company is a vendor of tandem switches to those United States and
Canadian companies which compete with AT&T Corporation ("AT&T") and Bell Canada
as alternate long-distance carriers. In addition, the Company provides tandem
switches to DDI and to AAP, an Australian private network provider of value
added and virtual private network services. Tandem switches are generally used
to route calls over long-distance networks. The MegaHub version of the tandem
switch, the MegaHub 600E, was first placed into service in 1990.
ACCESS PRODUCTS. The Company designs, manufactures, and 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. Such products include the
Litespan(R)-2000, which is the world's first digital loop carrier to meet North
American Synchronous Optical Network ("SONET") fiber optic standards and
related fiber optic interface requirements set forth by the RHCs. The
Litespan-2000 allows telecommunications service providers to introduce the
high-capacity technology of fiber optics into
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the local loop, while supporting basic services, in a cost-effective manner.
The Company has entered into multi-year agreements with six of the seven RHCs
for purchases of Litespan-2000 systems.
The Company's Starspan(R) product is an optical fiber distribution
system which extends the capabilities of the Litespan-2000 through fiber cables
to optical network units at the customer's premises. Starspan is a
cost-effective means of extending the capacity of optical fibers from the
telephone company central office to cover the entire local loop. The Starspan
system is currently being deployed and is carrying traffic with several RHCs.
In addition to improving network reliability, fiber optic technology
will be key to local service providers such as the RHCs as they expand services
for business and residential users to include voice, data, and video. The
Litespan-2000 and Starspan provide high-capacity capability to transmit large
amounts of voice, data, and video simultaneously to and from business or
residential users. The Company believes that the introduction of multi-media
services, such as video-on-demand, will increase the demand for fiber
optics-based products such as the Litespan-2000 and Starspan.
Airspan(TM) is currently being developed by the Company to provide
access service over a wireless local loop. This would give users access to the
public telecommunications network without the deployment of copper wire or
fiber lines. The new product is being developed for 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, unsightly, and time consuming to
install. In addition, Airspan is expected to be a cost-effective and quick
response alternative in dense urban environments of developed countries. Since
the beginning of 1994, the Company has obtained agreements with International
Telcell, British Telecom, and various South American and Asian companies for
the delivery of Airspan.
In 1993, the Company introduced a new product, Metrospan(R), which
extends the capabilities of the Litespan-2000 technology base outside of the
local loop. Metrospan will be used as a broadband transport system within a
campus-type setting or a
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metropolitan communication network. Metrospan is currently being used by a
leading Canadian utility company.
In March, 1994, the Company entered into a cooperative agreement with
General Instrument Corporation ("GI"), a leading supplier of equipment to the
cable television industry. The Company and GI have agreed to combine the
Company's expertise in fiber optics and switching systems with GI's expertise
in cable television equipment to develop Mediaspan(TM), a product which will
support the integrated delivery of voice, video, and data over hybrid
fiber/coax systems.
Additionally, the Company is developing Switched Digital Video ("SDV")
technology to provide an Asynchronous Transfer Mode ("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.
TRANSMISSION PRODUCTS. The Company's digital cross-connect systems
provide switching, multiplexing, and termination of digital transmission
services. The Company's various digital cross-connect products are
distinguished from one another principally by the capacity which each system
handles. Digital cross-connect products are widely deployed in the United
States by the RHCs, long-distance carriers, independent local exchange
carriers, and a number of large corporations.
In 1992, the Company announced the development and testing of a major
new transmission platform, the Integrated Multi-Rate Transport Node
("iMTN(TM)"). Building on the Company's experience with digital cross-connect
systems, the iMTN will provide for the public telecommunications network's
evolution to SONET-based transmission and the deployment of automated
administration functions. The iMTN will enable network service providers to
offer their customers, on an integrated basis, narrowband services such as
voice communications, high-speed wideband data services, and broadband services
such as video-on-demand. The iMTN has been designed to meet the
interconnectivity requirements of SONET in North America and SDH/CCITT in
Europe. In 1993, the Company entered into an agreement to supply the iMTN to
carriers
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in both the local and long-distance marketplace. The iMTN system has been
deployed domestically and internationally, and is being placed into service in
1995.
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.
BROADBAND PRODUCTS. In August, 1994, the Company announced the
formation of its new Broadband Products Division, which is developing the
Company's core ATM technology and a family of ATM products. ATM is a high-speed
technology that will enable service providers to offer the most advanced
network capabilities, including multimedia, high-speed data, voice, and
interactive video services. The Broadband Products Division is responsible for
the Company's Integrated Multiservice ("iMPAX(TM)") product line, and will be
responsible for the development of various ATM-based switching products. iMPAX
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 LAN-to-LAN internetworking, video conferencing, and supercomputer
connectivity. iMPAX uses the common technology of the Broadband Products
Division.
DSC COMMUNICATIONS A/S. The Company purchased DSC Communications A/S
in November, 1994. DSC Communications A/S designs, develops, manufactures,
sells, and services a family of optical line transmission systems and related
advanced network management systems, including plesiochronous digital hierarchy
("PDH") systems, representing the established embedded base of transmission
technology, and synchronous digital hierarchy ("SDH") systems, representing
new, emerging transmission technology, analogous to SONET in the North American
market. Such products include the FOCUS 2 to 140 and 2 to 150 multiplexers and
line terminals for access networks, and the FOCUS 620 and 2500 terminal
multiplexers and regenerators for high-capacity trunk transmission systems. The
combination of both companies' products will enable the offering of end-to-end
systems to meet the rapidly growing demand for turnkey solutions. For example,
prior to its acquisition by the Company, DSC Communications A/S customarily was
required to provide digital cross-connect systems from third parties to offer
as part of a total transmission system bid for public operators. The Company
believes the iMTN will fill that role in the future, ending the requirement of
outside vendor equipment for turnkey solutions. Additionally, DSC
Communications A/S offers a Telecommunications Management Network compliant
network management system which enables sophisticated control of multiple
vendor networks. In 1995, DSC Communications A/S plans to introduce a new
generation of SDH products. The new generation of products will bring enhanced
features such as add-drop mux and cross-connect capability to its SDH product
line, resulting in a comprehensive and economical next-generation product
offering for the rapidly growing worldwide SDH transmission market.
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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, and currently prohibits the RHCs from
manufacturing telecommunications equipment and providing interexchange or
long-distance services. Legislation has been introduced which would lift these
restrictions on manufacturing and interexchange services. Should this
legislation be enacted, the Company cannot predict the impact on its business,
although it is possible that passage of legislation allowing the RHCs to
manufacture telecommunications equipment could create additional competition in
the markets addressed by the Company's products.
In addition, the FCC and a majority of the states have enacted or are
considering regulations based upon alternative pricing methods. Under
traditional rate of return pricing, telecommunications service providers were
limited to a stated percentage profit on their investment. Under the new
method of pricing, many PUCs have entered into agreements with the local
exchange carriers where the PUCs have relaxed or eliminated the profit cap in
return for the carrier's promise to reduce or hold service prices at current
levels. In some states, the PUCs and the carriers have further agreed, in
order to win relaxation of profit limits, that the carriers would invest large
sums to further upgrade the digital and optical capabilities of the network.
The Company believes that the new methods of price regulation could increase
the demand for its products which enhance the efficiency of the network or
allow the expedited introduction of new revenue-producing services.
Outside the United States, telecommunications networks are primarily
owned by the government or are strictly regulated by the government. Although
potential growth rates of some international markets are higher than those of
the United States, access to such markets is often difficult due to the
established relationship between the government-owned or -controlled
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telecommunications operating company and its traditional indigenous suppliers
of telecommunications equipment. However, there has been a global trend
towards privatization and deregulation of the state-owned telecommunications
operations. This trend has found favor in the industrialized world, the
emerging markets of the newly-industrialized countries, and various developing
market countries which want to both capitalize on the value of the existing
network and promote the development of the telecommunications network as an
integral part of the economic infrastructure. The Company believes that the
current trend of privatization and deregulation will continue, and that such
trend could provide the Company with additional international opportunities.
MARKETING
The Company sells products and services on a domestic and
international basis to both the public and private network markets through
various sales and distribution channels. The Company's internal sales group is
a direct sales force, divided into market business segments. The Company also
sells through third-party distributors such as original equipment manufacturers
("OEMs") and sales representatives.
The Company has separate agreements with Nokia Telecommunications Oy
of Finland ("Nokia") and a European subsidiary of Northern Telecom Ltd.
("Northern Telecom") to distribute the iMTN. The agreement with Nokia, a
leading worldwide supplier of wireless communications systems, will allow Nokia
to market the iMTN on a nonexclusive basis in Scandinavia and certain other
countries. The agreement with Northern Telecom grants the European subsidiary
of Northern Telecom the exclusive right to market the iMTN system in certain
countries which are the European telecommunications standards, and a
nonexclusive right to market the iMTN system in certain other countries.
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INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
A summary of the Company's 1994 operations by geographic area is
presented below (in thousands):
United Other
States Europe International Eliminations Consolidated
-------- ------ ------------- ------------ ------------
Revenue from unaffiliated
customers................... $ 908,664 $ 47,287 $ 47,174 $ -- $ 1,003,125
Intercompany revenue between
geographic areas............ 63,871 11,473 4,301 (79,645) --
Operating income.............. 215,280 2,509 505 (4,295) 213,999
Identifiable assets at
December 31, 1994........... $ 1,012,006 $ 234,983 $ 27,715 $ (6,168) $ 1,268,536
Revenue from foreign operations and identifiable assets of foreign
operations were less than ten percent of consolidated revenues and assets,
respectively, in 1993 and 1992.
Revenue generated from export sales was less than ten percent of
consolidated revenue in 1994, 1993, and 1992.
For the year ended December 31, 1994, Motorola, MCI, and Ameritech
Services, Inc. and its subsidiaries accounted for 23 percent, 12 percent, and
11 percent, respectively, of the Company's consolidated revenue. The
termination or material reduction of the purchases of the Company's products by
any of the above-named companies could have a material effect on the Company.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price
of orders received from customers less revenue recognized, was approximately
$601 million and $320 million on December 31, 1994 and December 31, 1993,
respectively. Approximately $81 million of orders included in the December 31,
1994 backlog are scheduled for delivery after December 31, 1995. However, all
orders are subject to possible rescheduling by customers. While the Company
believes that the orders included in the backlog are firm, some orders may be
cancelled by the customer without penalty, and the Company may elect to permit
cancellation of orders without penalty where management believes that it
is in the Company's best interest to do so.
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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,
including the iMTN and certain broadband 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 $127.3 million, $86.6 million, and $68.3 million for the years
ended December 31, 1994, 1993, and 1992, respectively. Additionally,
approximately $24.6 million, $21.9 million, and $18.1 million of software
development costs were capitalized in the Consolidated Balance Sheets in 1994,
1993, and 1992, 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
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.
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Due to its breadth of product offerings, the Company has different
competitors in each of the markets which it serves. The Company's primary
competitors in the tandem switching and intelligent network markets are AT&T
and Northern Telecom. The Company's primary competitors in the digital
cross-connect market are AT&T, Alcatel Network Systems, and Tellabs, Inc. The
Company's primary competitors in the access market are AT&T, R-TEC, a
wholly-owned subsidiary of Reliance Electric Co., Broadband Technologies,
Northern Telecom, and Fujitsu, Ltd.
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 revenues and profitability. In
addition, the Company's products contain a number of subsystems or components
acquired from other manufacturers on an OEM basis. These OEM products are
often available only from a limited number of manufacturers. In the event that
an OEM product was no longer available from a current OEM vendor, second
sourcing would be required and could delay customer deliveries which could have
an adverse effect on the Company's revenues and profitability.
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION
The Company has been awarded patents and has patent applications
pending in the United States and certain foreign countries. There can be no
assurance that any of these applications will result in the award of a patent,
or that the Company would be successful in defending its patent rights in any
subsequent infringement actions. Because of the existence of a large number of
third-party patents in the telecommunications
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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, 1994, the Company had a total of 5,414 employees.
ITEM 2. PROPERTIES
The Company owns three buildings, including a previously leased
facility purchased in 1994, and approximately 255 acres of land in Plano,
Texas, of which 154 acres were acquired in 1994. These three buildings include
a 421,000 square foot manufacturing and assembly facility, a 282,000 square
foot office building, and a 105,000 square foot office building. Construction
on an office building and warehouse began in 1994 on a portion of the Company's
recently acquired land. These new buildings will add approximately 492,000
square feet, and are expected to be completed in mid-1995. As of December 31,
1994, the Company had under lease approximately 887,000 square feet of office,
manufacturing, and warehouse space in suburban Dallas, Texas; Petaluma,
California; Aguadilla, Puerto Rico; and Feltham and Ashford, England, under
leases expiring between March 31, 1995
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and March 9, 2019. In addition, as a result of the purchase of DSC
Communications A/S during 1994, the Company acquired approximately 166,000
square feet of additional leased office, manufacturing, and warehouse space in
Copenhagen, Denmark, as well as smaller facilities in Poland; India; Coventry,
England; and Lithuania. The majority of these leases are on a month-to-month
basis. The Company also has smaller leases, including sales offices, in the
United States, Canada, Japan, Australia, Singapore, Taiwan, Germany, Brazil,
Korea, Mexico, and Italy, with leases expiring between January 31, 1995 and
June 30, 2004. The Company believes that the above-described facilities are
suitable and adequate to meet the Company's production requirements.
ITEM 3. LEGAL PROCEEDINGS
On January 26, 1994, C. L. Grimes, a shareholder 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 shareholder of the Company,
seeking a declaration that the Employment Agreement of James L. Donald, his
Executive Income Continuation Plan, and the 1990 Long-Term Incentive
Compensation Plan, as it applies to Mr. Donald and all other benefits of Mr.
Donald, including previously granted Company stock options, are null and void.
The defendants in the suit are Mr. Donald, all current non-employee directors,
and two former directors of the Company. The Company itself is a nominal
defendant. The plaintiff contends that Mr. Donald's employment contract
contains an improper delegation of the Board of Directors' authority to Mr.
Donald and excess payments. The suit also contends that the salary and
benefits established for Mr. Donald pursuant to the Donald agreements referred
to above and 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
Page 15
17
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.
On July 20, 1993, the Company filed suit against Advanced Fibre
Communications ("AFC"), a California corporation; Quadrium Corporation
("Quadrium"), a California corporation; Alan E. Negrin ("Negrin"); and Henri
Sulzer ("Sulzer") in the United States District Court for the Eastern District
of Texas, Marshall Division. The Company seeks a declaratory judgment that
Negrin and Sulzer are not entitled to any stock options or cash payments under
the Company's 1990 Stock Option and Cash Payment Plan because of these
defendants' alleged breaches of certain employment-related agreements entered
into with the Company. The Company further seeks a declaration that AFC's
products, including the UMC 1000 digital loop carrier, are the proprietary
property of the Company under the terms of certain Proprietary Information
Agreements and certain Consulting Agreements with Quadrium. The Company also
seeks unspecified damages for breaches of contract, civil conspiracy, and
tortious interference. The individual defendants have both filed counterclaims
whereby they claim entitlement to certain stock options and cash payments under
several of the Company's stock option plans. AFC has also filed a counterclaim
alleging that the Company has violated the Sherman Antitrust Act and a
California statutory antitrust act known as the Cartwright Act. AFC further
claims that the Company has (1) tortiously interfered with existing and
prospective contractual relationships, (2) committed industrial espionage and
misappropriation, (3) trespassed on AFC's business premises, (4) converted
certain property of AFC, and (5) committed unfair competition. AFC also seeks
a declaratory judgment that it owns all rights to its
Page 16
18
product, the UMC Digital Loop Carrier. AFC asks that the court award
unspecified actual damages, treble damages under the antitrust statutes,
punitive damages, injunctive relief, and attorneys' fees. During 1994, AFC
amended its counterclaim to include an additional claim under the Racketeering
Influenced Corrupt Organization Act against the Company. On December 1, 1994,
AFC filed a motion to dismiss the case for lack of diversity jurisdiction and,
in the alternative, to transfer the case to the Northern District of California
in San Francisco, California. In anticipation of a dismissal of the Texas
case, AFC also filed on December 2, 1994, a new action in the United States
District Court for the Northern District of California, Oakland Division, in
which AFC, as plaintiff, repeated all of the issues in the counterclaim in the
Texas case. The judge in the Texas case recently denied AFC's Motion to
Transfer Venue. Discovery has closed, and the parties are currently preparing
for trial. The Company believes that it has valid and substantial claims
against all of the defendants. The Company also intends to vigorously defend
all of the defendants' counterclaims, and further believes that it has valid
defenses to all of the counterclaims. The Company has recently filed Motions
for Partial Summary Judgment on all of AFC's counterclaims except its request
for declaratory judgment.
On May 25, 1994, the Company filed suit against DGI Technologies, Inc.
("DGI"), a Texas corporation, in the United States District Court for the
Northern District of Texas, Dallas Division. The Company alleges that DGI has
engaged in unfair competition under the Lanham Act and the common law by
trading on the Company's reputation, and by misleading customers about DGI's
research and development efforts. The Company further alleges that DGI has
misappropriated the Company's trade secrets regarding digital trunk interface
cards and microprocessor cards. The Company seeks damages for DGI's prior
actions and permanent injunctive relief. DGI has brought counterclaims for
alleged violations of federal antitrust statutes, tortious interference,
industrial espionage, misappropriation of trade secrets, trespass, conversion,
and unfair competition. DGI's antitrust counterclaims are based upon
allegations that the Company's claims constitute "sham" litigation, that the
Company's statements to customers about the impact of their use of DGI products
on the Company's warranties are unlawful attempts to exclude competition, and
that the Company has unlawfully tied the sale of its microprocessors to the
sale of other products. The balance of DGI's counterclaims is based upon
certain
Page 17
19
investigative procedures employed by the Company in connection with this
controversy. DGI asks the court to award unspecified actual damages, treble
damages under antitrust statutes, punitive damages, injunctive relief, and
attorneys' fees. Finally, DGI seeks declaratory relief that DGI's sales of
microprocessors do not violate any proprietary rights of the Company or any
applicable law. Although the outcome of litigation is inherently uncertain,
the Company believes that it has valid and substantial claims against DGI, and
valid defenses to DGI's counterclaims. The case is still in discovery, and the
Company intends to vigorously prosecute its claims and to defend all of DGI's
counterclaims.
The Company does not believe that the ultimate resolution of any of
these suits will have a material adverse effect on its consolidated financial
position.
The Company is also a party to other legal proceedings which, in the
opinion of management, are not expected to have a material adverse effect on
the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1994.
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 February 27, 1995, the executive officers of the
Company are as follows:
NAME AGE PRESENT POSITION(S) WITH COMPANY
---- --- --------------------------------
Allen R. Adams 45 Group Vice President
Michael R. Bernique 51 Senior Vice President
James L. Donald 63 Chairman of the Board, President,
and Chief Executive Officer
Page 18
20
Daryl J. Eigen 47 Senior Vice President
Poul Friis 56 Group Vice President
Gerald F. Montry 56 Senior Vice President, Chief
Financial Officer, and Director
Hensley E. West 50 Group Vice President
Allen R. Adams joined the Company in 1979, as Director of Hardware and
Systems Development. Since 1979, Mr. Adams has held a variety of project and
design engineering positions. In May, 1991, Mr. Adams was elected Vice
President. Mr. Adams was named Senior Vice President in February, 1993, and is
currently serving as Group Vice President, Network Systems Group.
Michael R. Bernique joined the Company in 1989, as Vice President,
Sales. Since joining the Company, Mr. Bernique has held a number of
management positions. In 1993, Mr. Bernique was named to the position of
Senior Vice President, North American Sales.
James L. Donald became President and a director of the Company in
March, 1981. He was elected Chief Executive Officer in August, 1981. Mr.
Donald was elected Chairman of the Company's Board of Directors in 1989.
Daryl J. Eigen joined the Company in 1993, as Vice President,
Corporate Marketing and Planning. In 1994, he was named Senior Vice President,
International Sales. Prior to joining the Company, Mr. Eigen was employed by
Siemens Stromberg-Carlson since 1984, where his most recent position was that
of Vice President, Central Region.
Poul Friis joined the Company in 1994, as Group Vice President, in
connection with the acquisition of NKT Elektronik A/S. Mr. Friis was employed
by NKT Elektronik A/S since 1990, where his most recent position was that of
President and Chief Executive Officer. Prior to 1990, Mr. Friis was employed by
Siemens Stromberg-Carlson as Division Director.
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.
Page 19
21
Hensley E. West joined the Company in 1987, as Vice President, Sales.
Since joining the Company, Mr. West has held a variety of management positions
including his present position of Group Vice President, Access Products Group.
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".
The following were the high and low closing prices of the Company's
stock per the Nasdaq National Market:
1994: High Low
---- ---- ---
4th Quarter $36 7/8 $27 1/8
3rd Quarter 31 1/4 19 1/8
2nd Quarter 31 7/16 18 1/8
1st Quarter 34 7/8 24 3/16
1993: High Low
---- ---- ---
4th Quarter 35 3/16 26 15/16
3rd Quarter 33 3/8 24 9/16
2nd Quarter 25 3/8 13 1/16
1st Quarter 14 3/8 10 13/16
Sales prices prior to the second quarter of 1994 have been
retroactively restated 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 shareholders of record on May 11, 1994.
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 February 27, 1995, was $34 7/8 per share. As of December 31, 1994, there
were 3,611 shareholders of record of the Company's common stock.
Page 20
22
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth on page 25 of the
Company's 1994 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 26 through 29 of the Company's 1994 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 30 through
46 of the Company's 1994 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors and
nominees for election to the Board of Directors of the Company is incorporated
by reference from the information set forth on page 1 of the definitive proxy
statement of the Company, previously filed in connection with its 1995 Annual
Meeting of Stockholders under the heading "ELECTION OF DIRECTORS", and on page
14 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 "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934"
on page 18 of the definitive proxy statement of the Company, previously filed
in connection with its 1995 Annual Meeting of Stockholders.
Page 21
23
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 7 through 13, and "Compensation of Directors" and "Non-Employee Directors
Stock Option Plan" on page 15 of the definitive proxy statement of the Company,
previously filed in connection with its 1995 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from the information set forth under the heading "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" on page 17 of the definitive proxy statement
of the Company, previously filed in connection with the 1995 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 COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" and "LITIGATION" on page 16 of the
definitive proxy statement of the Company, previously filed in connection with
the 1995 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following is a list of the consolidated financial statements and
the financial statement schedule which are included in this Form 10-K
or which are incorporated herein by reference.
Page 22
24
1. Financial Statements:
As of December 31, 1994 and 1993: Consolidated Balance Sheets
For the Years Ended December 31, 1994, 1993, and 1992:
- Consolidated Statements of Income
- 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, 1994, 1993, and 1992:
- Schedule II - Valuation and Qualifying Accounts
Report of Independent Auditors
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:
2.0 Stock Purchase Agreement By and Among DSC
Communications Corporation, NKT Holding A/S, and NKT
Elektronik A/S, Dated October 20, 1994 (12)
2.1 Amendment No. 1 to Stock Purchase Agreement By and
Among DSC Communications Corporation, NKT Holding A/S,
and NKT Elektronik A/S, Dated November 15, 1995 (13)
3.1 Amended and Restated Certificate of Incorporation of
the Company (1)
3.2 Amended and Restated By-laws of the Company (6)
Page 23
25
4.3 Rights Agreement, Dated as of May 12, 1986, Between the
Company and The Chase Manhattan Bank, N.A., as Rights
Agent (2)
4.4 Form of Letter to the Company's Stockholders, Dated May
22, 1986, Relating to the Adoption of the Rights
Agreement Described in Exhibit 4.3 (2)
10.1 Employment Agreement Between the Company and James L.
Donald, Dated January 1, 1990 (7)
10.2 Executive Income Continuation Plan, Dated January 1,
1990, Between the Company and James L. Donald (7)
10.3 Insurance Ownership Agreement, Dated January 1, 1990,
Between the Company and James L. Donald (7)
10.4 Management Consulting Agreement Among the Company,
Nolan Consulting, Inc., and James M. Nolan, Dated March
15, 1982 (3)
10.5 Amended and Restated Note Agreement, Dated December 31,
1992, Between the Company and an Institutional Lender
(8)
10.6 Revolving Credit Agreement, Dated as of February 24,
1994, Between the Company and Certain of its
Subsidiaries and Certain Financial Institutions
Providing for Secured Revolving Credit (11)
10.7 The Company's Amended and Restated 1984 Employee Stock
Option Plan (5)
10.8 The Company's Amended and Restated 1988 Employee Stock
Option Plan (5)
10.9 The Company's 1993 Employee Stock Option and Securities
Award Plan (9)
Page 24
26
10.10 The Company's 1993 Non-Employee Directors Stock Option
Plan (9)
10.11 Form of Amended and Restated Severance Compensation
Agreement Between the Company and Certain of its
Executive Officers (14)
10.12 The Company's Restoration Plan, Dated July 1, 1988 (4)
10.13 Form of Indemnification Agreement Between the Company
and its Directors and Senior Officers as Approved by
the Board of Directors and Entered Into on or After
January 22, 1990, and the Related Trust Agreement,
Dated March 1, 1990, Between the Company and First
City, Texas-Dallas, as Trustee (5)
10.14 The Company's Long-Term Incentive Compensation Plan,
Effective as of January 1, 1990 (7)
10.15 The 1990 Optilink Stock Option and Cash Payment Plan,
Dated May 15, 1990 (7)
10.16 The Company's Long-Term Incentive Compensation Plan,
Effective as of January 1, 1994 (10)
10.17 Noncompetition Agreement By and Among DSC
Communications Corporation and NKT Holding A/S, Dated
November 15, 1994 (13)
10.18 Escrow Agreement By and Among DSC Communications
Corporation, NKT Holding A/S, and Den Danske Bank,
Dated November 15, 1994 (13)
10.19 DSC Communications Corporation Executive Deferred
Income Plan (14)
11.1 Statement re: Computation of Per Share Earnings (14)
13.1 1994 Annual Report to Shareholders (for EDGAR filing
purposes only)
Page 25
27
21.1 Subsidiaries of the Registrant (14)
23.1 Consent of Ernst & Young LLP (14)
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; 10.7
The Company's Amended and Restated 1984 Employee Stock Option Plan; 10.8 The
Company's Amended and Restated 1988 Employee Stock Option Plan; 10.9 The
Company's 1993 Employee Stock Option and Securities Award Plan; 10.10 The
Company's 1993 Non-Employee Directors Stock Option Plan; 10.11 Form of Amended
and Restated Severance Compensation Agreement Between the Company and Certain
of its Executive Officers; 10.12 The Company's Restoration Plan, Dated July 1,
1988; 10.13 Form of Indemnification Agreement Between the Company and its
Directors and Senior Officers as Approved by the Board of Directors and Entered
Into on or After January 22, 1990, and the Related Trust Agreement, Dated March
1, 1990, Between the Company and First City, Texas-Dallas, as Trustee; 10.14
The Company's Long-Term Incentive Compensation Plan, Effective as of January 1,
1990; 10.16 The Company's Long-Term Incentive Compensation Plan, Effective as
of January 1, 1994; 10.19 DSC Communications Corporation Executive Deferred
Income Plan.
(b) Reports on Form 8-K:
Form 8-K, dated November 15, 1994
Item 2. Acquisition or Disposition of Assets - Acquisition of
NKT Elektronik A/S
Page 26
28
Item 7. Financial Statements and Exhibits - Historical and
Pro Forma Financial Statements
------------------------------------------------------------------------------
(1) Incorporated by reference from the Company's Amendment to
Application or Report on Form 8, dated July 28, 1989
(2) Incorporated by reference from the Company's Registration
Statement on Form 8-A, dated May 21, 1986, as amended by
Amendment No. 1 on Form 8, dated July 28, 1989, and Amendment
No. 2 on Form 8, dated May 28, 1991, each as filed with the
Securities and Exchange Commission pursuant to Section 12(g)
of the Exchange Act
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1981
(4) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1988
(5) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1990 Annual
Meeting of Stockholders
(6) Incorporated by reference from the Company's Annual Report for
the year ended December 31, 1989
(7) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1990
(8) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1992
(9) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1993 Annual
Meeting of Stockholders
(10) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1994 Annual
Meeting of Stockholders
(11) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
Page 27
29
(12) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994
(13) Incorporated by reference from the Company's Current Report on
Form 8-K, dated November 15, 1994
(14) Filed herewith
Page 28
30
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, and Chief
Executive Officer
31
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, 1995
James L. Donald, Chairman
of the Board, President, Chief
Executive Officer, and Director
(Principal Executive Officer)
/s/ CLEMENT M. BROWN, JR. March 31, 1995
Clement M. Brown, Jr.
Director
/s/ FRANK J. CUMMISKEY March 31, 1995
Frank J. Cummiskey
Director
/s/ SIR JOHN FAIRCLOUGH March 31, 1995
Sir John Fairclough
Director
/s/ RAYMOND J. DEMPSEY March 31, 1995
Raymond J. Dempsey
Director
/s/ JAMES L. FISCHER March 31, 1995
James L. Fischer
Director
/s/ ROBERT S. FOLSOM March 31, 1995
Robert S. Folsom
Director
/s/ GERALD F. MONTRY March 31, 1995
Gerald F. Montry, Senior Vice
President, Chief Financial
Officer, and Director
(Principal Financial Officer)
/s/ JAMES M. NOLAN March 31, 1995
James M. Nolan
Director
/s/ KENNETH R. VINES March 31, 1995
Kenneth R. Vines
Vice President, Finance
(Principal Accounting Officer)
32
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, 1994 $ 3,609 $ 1,222 $ 1,275 (1) $ 2,094 (2) $ 4,012
Year Ended December 31, 1993 3,593 942 -- 926 (2) 3,609
Year Ended December 31, 1992 9,124 1,761 800 (3) 8,092 (2) 3,593
(1) Includes a transfer from a reserve for customer guarantees, which was
included in "Accrued Liabilities", to "Allowance for Doubtful Accounts" and
the "Allowance for Doubtful Accounts" balance included as part of the net
assets of NKT Elektronik A/S purchased during 1994.
(2) Accounts written off, net of collections.
(3) Transfers from a reserve for customer guarantees, which were included in
"Accrued Liabilities", to "Allowance for Doubtful Accounts".
33
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of DSC Communications
Corporation as of December 31, 1994 and 1993, and for each of the three years
in the period ended December 31, 1994, and have issued our report thereon dated
January 23, 1995. Our audits also included the financial statement schedule
listed in Item 14(a) of this Registration Statement. 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.
Ernst & Young LLP
Dallas, Texas
January 23, 1995
34
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
10.11 Form of Amended and Restated Severance Compensation Agreement Between the Company and
Certain of its Executive Officers
10.19 DSC Communications Corporation Executive Deferred Income Plan
11.1 Statement re: Computation of Per Share Earnings
13.1 1994 Annual Report to Shareholders (for EDGAR filing purposes only)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (for EDGAR filing purposes only)
EX-10.11
2
AMENDED & RESTATED SEVERENCE COMPENSATION AGRMNT
1
EXHIBIT 10.11
AMENDED AND RESTATED
SEVERANCE COMPENSATION AGREEMENT
AMENDED AND RESTATED SEVERANCE COMPENSATION AGREEMENT dated as of
________, 1994, between DSC COMMUNICATIONS CORPORATION, a Delaware corporation
(the "Company") and ____________________ (the "Executive").
WHEREAS, the Company's Board of Directors 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 has previously entered into a Severance
Compensation Agreement with the Executive dated as of __, as from time to time
amended (the "Prior Severance Agreement"); and
WHEREAS, the Company's Board of Directors has determined that it is in
the best interest of the Company and its stockholders to clarify and modify the
Prior Severance Agreement and to enter into this Amended and Restated Severance
Compensation Agreement (the "Agreement") incorporating such modifications and
clarifications and replacing and superseding the Prior Severance Agreement.
NOW, THEREFORE, this Agreement sets forth the severance compensation
which the Company agrees it will pay to the Executive if the Executive's
employment with the Company terminates under certain circumstances described
herein following a Change in Control of the Company (as defined herein).
1. TERM.
2
This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of Executive's employment for any reason prior
to a Change in Control; and (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.
2. CHANGE IN CONTROL.
No compensation shall be payable under this Agreement unless and until
(a) there shall have been a Change in Control of the Company while the
Executive is still an employee of the Company and (b) the Executive's
employment by the Company thereafter shall have been terminated in accordance
with Section 3. For purposes of this Agreement, a Change in Control of the
Company shall be deemed to have occurred if (i) there shall be consummated (x)
any consolidation or merger of the company, other than a merger or
consolidation of the Company in which the holders of the Company's common stock
immediately prior to the merger or consolidation (excluding holders of the
Company's common stock who are also holders, directly or indirectly, of the
stock of the parties (other than the Company) to the merger or similar
agreement) own at least 75% of the common stock of the surviving corporation
immediately after the merger or consolidation, or (y) any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, or (ii) the
stockholders of the Company shall approve any plan or proposal for the
liquidation or dissolution of the Company, or (iii) any person [as such term is
used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")], other than the trustee of any employee benefit
plan sponsored by the Company), shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's
outstanding common stock, or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board of
Directors shall cease for any reason to constitute a majority thereof unless
the election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the
directors then still in office who were
3
directors at the beginning of such period (or who were approved by the Board of
Directors in accordance with this clause (iv) or (v) any other event designated
as a Change in Control as determined by the Board of Directors.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) If a Change in Control of the Company shall have occurred while
the Executive is still an employee of the Company, the Executive shall be
entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section 3(b) below; (iii)
the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below.
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his
duties with the Company on a full-time basis for six months and within 30 days
after a Notice of Termination (as defined in Section 3(f) below) is thereafter
given by the Company, the Executive shall not have returned to the full-time
performance of the Executive's duties, the Company may terminate this Agreement
for "Disability". In the event of Executive's termination for Disability,
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 the amount of any salary replacement payments made to Executive
under a disability plan of the Company which is provided at no cost to the
Executive.
(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.
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(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
embezzlement or misappropriation on the part of the Executive to the extent
that there is reasonable evidence that the Executive has engaged in such
conduct and that such conduct would constitute an indictable crime under the
laws of the United States or any political subdivision thereof.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Company's Board of
Directors at a meeting of the Board called and held for the purpose (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board), finding
that in the good faith opinion of the Board the Executive was guilty of fraud,
embezzlement or misappropriation as required in the second sentence of this
Section 3(d) and specifying the particulars thereof in detail.
(e) Good Reason. The Executive may terminate the Executive's
employment for Good Reason at any time following a Change in Control during the
term of this Agreement. 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;
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(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 term of this Agreement or the Company's failure to
increase (within 12 months of the Executive's last increase in base
salary) the Executive's base salary after a Change in Control of the
Company in an amount which at least equals, on a percentage basis, the
greater of (a) the average percentage increase in base salary for all
officers of the Company effected in the preceding 12 months; or (b)
the Consumer Price Index as published by the United States Government
(or, in the event such index is discontinued, any similar index
published by the United States Government as designed in good faith by
the Executive); provided, however, that nothing contained in Section
3(d) (ii) (a) or (b) shall be construed under any circumstances as
permitting the Company to decrease the Executive's base salary;
(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 of any material fringe benefit or perquisite of office
enjoyed by the Executive at the time of 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
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
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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 outside of Plano, Texas, or the Executive's relocation to any
place other than 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 the
number of annual paid vacation days to which the Executive is entitled
for the year in which a Change in Control of the Company occurs;
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(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
(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.
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
8
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. SEVERANCE COMPENSATION
UPON TERMINATION OF EMPLOYMENT
If the Company shall terminate the Executive's employment other than
pursuant to Sections 3(b), 3(c) or 3(d) 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. If the payments made pursuant to this
Section 4, 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 the provisions of this Section 4, 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. The determination of the amount of
reimbursement pursuant to the preceding sentence shall be made by the Executive
in good faith, and such determination shall be conclusive and binding upon the
Company.
5. NO OBLIGATION TO MITIGATE DAMAGES;
NO EFFECT ON OTHER CONTRACTUAL RIGHTS
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(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.
6. OPTIONS.
(a) In the event of a Change in Control of the Company, then
notwithstanding the terms and conditions of any Securities Plan or other plan,
agreement or arrangement, the Company agrees to accelerate, vest, and make
immediately exercisable in full all unexercisable installments of all options
to acquire securities of the Company and to waive any resale or other
restrictions or rights of repurchase applicable to securities underlying such
options, in each case which are held by the Executive on the date of such
Change in Control, including without limitation any options or securities
obtained by the Executive pursuant to any Securities Plan or securities
obtained by the Executive pursuant to any Incentive Plan.
(b) Any options or securities obtained by the Executive pursuant to
any Securities Plan or securities obtained by the Executive pursuant to any
Incentive Plan shall have a limited right of surrender allowing Executive to
surrender such options or securities within the 30-day period following a
Change in Control and to receive a cash payment in exchange for the surrender
of such options or securities. The amount of such payment shall be equal to
the sum of (i) the product of the number of securities multiplied by the
greater of (x) the fair market value of the securities of the Company on the
date prior to the Change in Control or (y) the per share price paid to
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shareholders in connection with such Change in Control (alternatively, the
"Securities Price") and (ii) the product of (a) the number of securities
covered by options multiplied by (b) the Securities Price reduced by the
exercise price. Notwithstanding the foregoing, if any such payment would
result in liability under Section 16 of the Exchange Act, the right of
surrender shall commence upon the earliest date it can be exercised by the
Executive without liability and continue for thirty days thereafter.
7. SUCCESSORS.
(a) The Company will require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation 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 4 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 7 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.
8. NOTICE.
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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 accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9. 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 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
12
governed by and construed in accordance with the laws of the State of Texas,
without giving effect to any principles of conflicts of law.
10. CONFLICT IN BENEFITS.
The provisions of this Agreement modify and supersede the provisions
of the Prior Severance Agreement between the Executive and the Company. Except
as otherwise provided in the preceding sentence, 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.
11. 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.
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12. 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.
13. EFFECTIVE DATE.
This Agreement shall become effective upon execution.
14. 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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
DSC COMMUNICATIONS CORPORATION
Date: ___________ By:_______________________________
James L. Donald
Chairman of the Board, President
and Chief Executive Officer
EXECUTIVE:
Date:____________ __________________________________
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This Severance Agreement was entered into with the following named executive
officers of the Company on July 19, 1994:
Allen R. Adams
Michael R. Bernique
Gerald F. Montry
Hensley E. West
EX-10.19
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EXECUTIVE DEFERRED INCOME PLAN
1
EXHIBIT 10.19
DSC COMMUNICATIONS CORPORATION
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EXECUTIVE DEFERRED INCOME PLAN
2
TABLE OF CONTENTS
DSC Communications Corporation Executive Deferred Income Plan
Article I: Definitions . . . . . . . . . . . . . . 3
Article II: Eligibility and Participation . . . . . 5
Article III: Compensation Deferral . . . . . . . . . 6
Article IV: Deferred Benefit Accounts . . . . . . . 7
Article V: Payment of Deferred Benefits . . . . . 7
Article VI: Plan Administration . . . . . . . . . . 8
Article VII: Participant's Rights . . . . . . . . . 9
Article VIII: Miscellaneous . . . . . . . . . . . . 10
Schedule A . . . . . . . . . . . . . . . . . . . 11
Schedule B . . . . . . . . . . . . . . . . . . . 12
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DSC COMMUNICATIONS CORPORATION EXECUTIVE DEFERRED INCOME PLAN
This DSC Communications Corporation Executive Deferred Income Plan is executed
in Plano, Texas this 13th day of December, 1994, for the benefit of certain
employees of DSC Communications Corporation.
ARTICLE I: DEFINITIONS
For purposes of this DSC Communications Corporation Executive Deferred Income
Plan (the Plan), the following words and phrases shall have the meanings and
applications set forth below.
1.1 BENEFICIARY
A person or entity designated in accordance with the terms and conditions of
this Plan to receive benefits upon the death of a Participant.
1.2 BONUS
The annual compensation incentive, earned by a Participant in the year
preceding a Plan Year and payable to a Participant by the Employer during the
Plan Year in the absence of a Compensation Deferral Election under this Plan.
1.3 COMPENSATION
The total of a Participant's Salary and Bonus payable to the Participant by the
Employer during a Plan Year. Compensation shall be calculated before reduction
for taxes or for compensation deferred pursuant to this Plan or any other
employee benefit plan maintained by the Employer.
1.4 COMPENSATION DEFERRAL ELECTION
Each election made by a Participant to defer receipt of a portion of his or her
Compensation by executing and submitting an Election Form.
1.5 DEFERRAL PERIOD
The period commencing with the date the receipt of compensation is deferred
pursuant to a Compensation Deferral Election and concluding with the date of
its payment after the later of the Participant attaining age 55 or the
Participant's Retirement.
1.6 DEFERRED BENEFIT ACCOUNT
An account maintained pursuant to and in accordance with the terms and
conditions set forth in Article IV hereof on behalf of a Participant for each
Compensation Deferral Election made by such a Participant under this Plan.
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1.7 DEFERRED BENEFITS
The amounts payable to a Participant or to his or her Beneficiary or estate
following the Participant's Deferred Benefit Commencement Date.
1.8 DISTRIBUTION ELECTION
Each election made by a Participant to receive payment from a Participant's
Deferred Benefit Account by executing and submitting a Distribution Form.
1.9 DISTRIBUTION FORM
The Designation of Distribution Option Form, in substantially the same form as
Schedule B attached hereto and incorporated herein by this reference, that will
be completed by a Participant in order to make an election regarding the
distribution of a Deferred Benefit Account.
1.10 ELECTION AMOUNT
The amount of Salary or Bonus to be deferred pursuant to a single Compensation
Deferral Election as indicated on an Election form.
1.11 ELECTION FORM
The Election to Participate and Defer Compensation Form, in substantially the
same form as Schedule A attached hereto and incorporated herein by this
reference, that will be completed by a Participant in order to make a
Compensation Deferral Election for the next Plan Year.
1.12 EMPLOYER
DSC Communications Corporation or any of its majority-owned subsidiaries.
1.13 DEFERRED BENEFIT COMMENCEMENT DATE
The later of the Participant attaining age 55 or the last day of the month
immediately preceding the date of a Participant's Retirement or the
Participant's death or disability.
1.14 PARTICIPANT
An officer employee of the Employer who elects to participate in this Plan.
1.15 PLAN COMMITTEE
The Committee designated by the Board of Directors of DSC Communications
Corporation to administer this Plan as set forth in Article VI hereof.
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1.16 PLAN INTEREST RATE
The annual rate of interest shall be established each year. The rate of
interest beginning January 1, 1995 through December 31, 1995 shall be 7.50%
plus 2%, which is the approximate one-year Treasury yield plus 2%.
1.17 PLAN YEAR
The period beginning on the first day of January and ending on and including
the last day of December of each calendar year. The first Plan Year shall
begin on the day this Plan is executed and will end on December 31, 1994.
1.18 RETIREMENT
The discontinuation of employment with the Employer by a Participant who is 55
years of age or older.
1.19 SALARY
The base salary, including any raises in base salary, earned by a Participant
in connection with his or her employment with Employer and payable to a
Participant by the Employer in a Plan Year in absence of a Compensation
Deferral Election under this plan.
ARTICLE II: ELIGIBILITY AND PARTICIPATION
2.1 ELIGIBILITY
Employees who are officers of DSC Communications Corporation are eligible to
participate in this Plan.
2.2 PARTICIPATION
Eligible employees may participate in this Plan by completing an Election Form
and Distribution Form on or before December 31 immediately preceding the Plan
Year for which he or she wants to make a Compensation Deferral Election. Such
elections shall be effective upon the receipt and acceptance by the Plan
Committee of such Participant's Election Form and Participant's Distribution
Form. For the initial Plan Year 1994, eligible employees may participate in
this Plan by completing an Election Form and a Distribution Form as follows:
(i) For 1995 salary, the election must be executed before Dec. 31, 1994 and
applies to designated salary amounts otherwise payable between Jan. 1, 1995 and
Dec. 31, 1995.
(ii) For bonus, the election must be executed before Dec. 29, 1994 and
applies to any designated bonus amount that might otherwise be payable on Dec.
30, 1994.
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(iii) For awards under the DSC Communications Corp. 1990 Long-Term Incentive
Compensation Plan, the election must be executed before Dec. 29, 1995 and
applies to any award that might be payable on or after Dec. 29, 1995.
ARTICLE III: COMPENSATION DEFERRAL
3.1 COMPENSATION DEFERRAL AND DISTRIBUTION ELECTION
A Participant shall effect a Compensation Deferral Election and a Distribution
Election by executing and submitting an Election Form and a Distribution Form
to the Plan Committee. Subsequently, the Employer shall defer Election Amounts
deferred from the Participant's Salary ratably over each pay period and shall
defer the Election Amounts deferred from the Participant's Bonus at the time
the Bonus is otherwise payable. If an Election Amount is to be deferred from a
Participant's Bonus and the Bonus is less than the Election Amount or the
Participant does not receive a Bonus, then the entire Bonus will be deferred in
that year or there will be no deferral made in that year, as the case may be.
Each Election Amount shall be deferred for the Deferral Period. All
Compensation Deferral Elections shall apply solely to Compensation that will be
paid to a Participant subsequent to the date of such election.
3.2 DISTRIBUTION ELECTION REVISION
Annually, subject to the receipt and acceptance of the Plan Committee and at
least twelve (12) calendar months preceding the Deferred Benefit Commencement
Date, the Participant may revise each of his or her Distribution Elections
("Revised Distribution Election"). If a Deferred Benefit Commencement Date
occurs before twelve (12) calendar months after a Revised Distribution
Election, the Revised Distribution Election shall be void and the previous
Distribution Election shall replace such voided Revised Distribution Election.
3.3 DEFERRED BENEFIT COMMENCEMENT DATE; MANNER OF PAYMENT
The amounts that accumulate in a Deferred Benefit Account as a result of a
Participant's making a Compensation Deferral Election will be paid by the
Employer to the Participant immediately following the Participant's Deferred
Benefit Commencement Date as designated in each Participant's Distribution
Form.
3.4 DESIGNATION OF BENEFICIARIES
A Participant may designate a Beneficiary with respect to each Compensation
Deferral Election and may change the Beneficiary designation with respect to
any Compensation Deferral Election at any time by submitting a Change Form
reflecting the change to the Plan Committee.
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ARTICLE IV: DEFERRED BENEFIT ACCOUNTS
4.1 DEFERRED BENEFIT ACCOUNTS
The Employer shall cause to be established and maintained a separate Deferred
Benefit Account with respect to each Compensation Deferral Election. The
Employer shall credit the Election Amount deferred pursuant to each such
election to the Participant's appropriate Deferred Benefit Account as of the
date deferred from Participant's Compensation as provided in Section 3.1
hereof.
4.2 CALCULATION OF INTEREST
Interest shall be calculated on amounts in a Participant's Deferred Benefit
Accounts and added to the Deferred Benefit Accounts at the Plan Interest Rate
up to the date of all payments.
4.3 ACCRUAL OF INTEREST
Interest shall accrue on any amounts credited to a Deferred Benefit Account
from the date on which the amount is credited and shall be compounded monthly.
4.4 STATEMENT OF ACCOUNTS
Within sixty (60) days after each Plan Year, the Plan Committee shall submit to
each Participant a statement in such form as the Plan Committee shall deem
desirable setting forth a summary of the Compensation Deferral Elections
previously made and the current balances of the Participant's Deferred Benefit
Accounts maintained for the Participant as of the date of the statement.
ARTICLE V: PAYMENT OF DEFERRED BENEFITS
5.1 EMPLOYMENT TERMINATION OTHER THAN BY DEATH
The amount in each of the Participant's Deferred Benefit Accounts shall be paid
to a Participant immediately following the Participant's Deferred Benefit
Commencement Date other than by death as instructed in the Participant's
Distribution Forms.
5.2 PARTICIPANT'S DEATH
Upon a Participant's death, the Employer shall pay and distribute the amount in
each of the Participant's Deferred Benefit Accounts to the Beneficiary
designated by the Participant with respect to each Compensation Deferral
Election and Distribution Election in each of his or her respective Election
Forms and Distributions Forms, or, if the Participant fails to so designate a
Beneficiary, or the Beneficiary does not survive the Participant, the Deferred
Benefit Account shall be paid to the Participant's estate.
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5.3 IN-SERVICE HARDSHIP DISTRIBUTIONS
In the event of a financial hardship (as hereinafter defined), a Participant
may apply in writing to the Plan Committee for a distribution in cash of all or
any portion of the amounts in any of the Participant's Deferred Benefit
Accounts.
A distribution will be on account of "financial hardship" if it is necessary in
light of an immediate and heavy financial need of the Participant. In applying
for a distribution under this Section, 5.3, the Participant must state the
nature of his or her financial hardship and must represent that the
Participant's financial need cannot be satisfied from other resources
(excluding qualified retirement plans) reasonably available to the Participant
and that the amount of the requested distribution does not exceed the amount
required to relieve the Participant's immediate and heavy financial need. The
determination of the existence of a financial hardship and of the amount
required to be distributed to meet the need created by the hardship shall be
made by the Plan Committee in a uniform and nondiscriminatory manner, and the
decision of the Plan Committee in each instance shall be final.
The amounts remaining in a Participant's Deferred Benefit Accounts following a
hardship distribution shall continue to earn interest and be distributed in
accordance with the provisions of the Plan.
5.4 IN-SERVICE PENALTY DISTRIBUTION
A Participant may apply in writing to the Plan Committee for a "penalty
distribution" of any or all of the Participant's Deferred Benefit Accounts. A
"penalty distribution" of a Participant's Deferred Benefit Account consists of
the distribution to the Participant in cash of ninety-four (94) percent of the
value of such an account computed as of the end of the preceding month (subject
to applicable tax withholdings) and the permanent forfeiture of the remaining
six (6) percent of the value of such an account. Such forfeitures become the
sole property of the Company with no further liability to the Participant with
regard to those Deferred Benefit Accounts from which a penalty distribution is
made. Any Deferred Benefit Accounts from which a Participant does not request
a "penalty distribution" continue to earn interest and are to be distributed in
accordance with the provisions of the Plan.
ARTICLE VI: PLAN ADMINISTRATION
6.1 PLAN COMMITTEE
This Plan and all matters related to it shall be administered by the Plan
Committee. The Plan Committee shall have the authority to interpret the
provisions of this Plan and to determine all questions arising in the
administration, interpretation and application of this Plan and dealing with
the eligibility of employees and claims of Participants. Any such
determination by the Plan Committee shall be conclusive and binding on all
persons. In administering this Plan, the Plan Committee may engage the
services of independent actuaries and administrative personnel who shall, from
time to time, certify to the Plan Committee the amounts that will be required
to
8
9
provide for the Employer's obligation to pay all Deferred Benefits that are
payable under this Plan.
6.2 CLAIM PROCEDURES
Any Participant or Beneficiary claiming a benefit, or requesting an
interpretation, any information, or a ruling under this Plan shall present the
request, in writing, to the Plan Committee, which shall respond in writing
within thirty (30) days from the date on which it receives the claims or
request.
Any legal fees incurred by the Participant or his or her Beneficiaries in
successfully enforcing their rights under this Plan shall be reimbursed by the
Company.
ARTICLE VII: PARTICIPANT'S RIGHTS
7.1 PARTICIPANT'S RIGHTS
The right of a Participant or his or her Beneficiary or estate to receive any
benefits under this Plan shall be solely that of an unsecured creditor of the
Employer. Any insurance policy or other asset acquired or held by the Employer
or funds allocated by the Employer in connection with the liabilities assumed
by the Employer pursuant to this Plan shall not be deemed to be held under any
trust for the benefit of any Participant or of any of the Participant's
Beneficiaries or to be security for the performance of the Employer's
obligations hereunder but shall be and remain a general asset of the Employer.
7.2 SPENDTHRIFT PROVISION
Neither a Participant nor any person claiming through a Participant shall have
the right to sell, assign, transfer, pledge, mortgage or otherwise encumber,
transfer, hypothecate or convey any Deferred Benefit payable hereunder or any
part thereof in advance of its actually having been received by a Participant
or other appropriate recipient under this Plan, and the right to receive all
such Deferred Benefits is expressly declared to be unassignable and
non-transferable. Prior to the actual payment thereof, no part of the Deferred
Benefits payable hereunder shall be subject to seizure or sequestration for the
payment of any debts, judgements, alimony or separate maintenance owed by a
Participant or any person claiming through a Participant or be transferable by
operation of law in the event of a Participant's or any such other person's
bankruptcy or insolvency.
7.3 PLAN NOT AN EMPLOYMENT AGREEMENT
This Plan shall not be deemed to constitute an employment agreement between the
Employer and any Participant nor shall any provision hereof restrict the right
of the Employer to discharge a Participant as an employee of the Employer or
the right of a Participant to voluntarily terminate his or her employment with
the Employer.
9
10
ARTICLE VIII: MISCELLANEOUS
8.1 TERMINATION OF PLAN
The Board of Directors of DSC Communications Corporation may authorize
termination of this Plan at any time, and termination of this Plan shall be
effective upon ten (10) days' written notice to all Participants in the Plan.
Upon such termination of this Plan, the Employer shall pay all active
Participants their Deferred Benefits as provided in Section 5.1 as if each such
Participant had actually retired on the date of notice of such termination of
this Plan.
8.2 AMENDMENTS AND MODIFICATIONS
The Board of Directors of DSC Communications Corporation may amend this Plan in
any respect at any time, including, without limitation, with respect to the
value of the Plan Interest Rate and Termination Interest Rate to be applied in
calculating the balances of Deferred Benefit Accounts. Notwithstanding the
foregoing, the Plan Committee may authorize the following types of amendments
to the Plan without Board approval: (a) amendments required by law; (b)
amendments that relate to the administration of the Plan and that do not
materially increase the cost of the Plan; and (c) amendments that are designed
to resolve possible ambiguities, inconsistencies, or omissions in the Plan and
that do not materially increase the cost of the Plan. All authorized
amendments shall be effective upon ten (10) days' written notice to the
Participants. In the event that any such amendment affects a Participant's
Deferred Benefits, such affected Participant may, within ninety (90) days after
the effective date of such amendment, elect to terminate his or her
participation in this Plan. In the event that a Participant terminates his or
her participation in the Plan pursuant to this Section 8.2, the date of notice
of such amendment shall be deemed to be such Participant's Deferred Benefit
Commencement Date and all amounts in such Participant's Deferred Benefit
Accounts shall immediately be paid to the Participant.
8.3 INUREMENT
This Plan shall be binding upon and shall inure to the benefit of the Employer
and each Participant hereto, and their respective beneficiaries, heirs,
executors, administrators, successors and assigns.
8.4 GOVERNING LAW
This Plan is made in accordance with and shall be governed in all respects by
the laws of the State of Texas.
10
11
SCHEDULE A
________________________________________________________________________________
DSC COMMUNICATIONS CORPORATION
ELECTION TO PARTICIPATE IN THE EXECUTIVE DEFERRED INCOME PLAN
I, ___________________________________, an officer of DSC Communications
Corporation, do hereby elect to defer the following amounts of my salary and
bonus that I may earn next year(1), in 199__, and my bonus that I may earn on
_______________________________________________ (2) pursuant to the provisions
of the DSC Communications Corporation Executive Deferred Income Plan.
Salary $ _______________
Bonus $ _______________
_______________________________________ ________________________________
Employee Signature Date
_______________________________________ ________________________________
Plan Committee Member Signature Date
__________________________________
(1) For 1995, this election must be executed before December 31, 1994 and
applies to designated salary and bonus amounts otherwise payable between
January 1, 1995 and December 31, 1995.
(2) For bonus, this election must be executed before December 29, 1994 and
applies to any designated bonus amount that might otherwise be payable on
December 30, 1994.
11
12
SCHEDULE B
________________________________________________________________________________
DSC COMMUNICATIONS CORPORATION
EXECUTIVE DEFERRED INCOME PLAN
DESIGNATION OF DISTRIBUTION OPTION
1994 DEFERRAL ELECTIONS
I hereby designate the following form in which benefits under the DSC
Communications Corporation Executive Deferred Income Plan are to be paid.
RETIREMENT BENEFITS
Retirement benefits designated hereunder will apply for all deferral amounts.
Check the appropriate box below to indicate the method of distribution of the
retirement benefits.
To the extent that I have not elected 100% of my Account to be paid as an
In-Service Distribution, I elect to receive retirement benefits in my Account
as follows:
Retirement benefits to be paid as: Select One
[ ] Lump Sum
[ ] Substantially equal annual installments of principal and
interest over 5 years
[ ] Substantially equal annual installments of principal and
interest over 10 years
_______________________________________ ________________________________
Participant's Signature Witness' Signature
_______________________________________ ________________________________
Print Name Date Signed
_______________________________________
Participant's Social Security Number
12
EX-11.1
4
COMPUTATION OF PER SHARE EARNINGS
1
Exhibit 11.1
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Computation of Income per Share
(In thousands)
The following table sets forth the computation of shares used in the calculation
of income per share for the years ended December 31, 1994, 1993 and 1992. All
1993 and 1992 amounts presented 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 shareholders of record on May
11, 1994.
Average Shares Used in Income per Share Calculation:
1994 1993 1992
--------------------- -------------------- ----------------
Fully Fully Fully
Primary Diluted (A) Primary Diluted (A) Primary Diluted
------- ----------- ------- ----------- ------- -------
Weighted average
shares outstanding
during the year......... 112,254 -- 99,418 -- 84,444 84,444
Common share equivalents
outstanding:
Options and warrants
issued and
contingently issuable. 6,104 -- 8,942 -- 9,638 12,664
Assumed purchase of
treasury shares....... (1,469) -- (1,710) -- (5,622) (3,910)
------- --------- ------- --------- ------- -------
Weighted average shares
used in calculation..... 116,889 == 106,650 == 88,460 93,198
======= ========= ======= ========= ======= =======
(A) Fully diluted income per share is not shown since the dilutive effect is
less than three percent.
EX-13.1
5
1994 ANNUAL REPORT
1
Exhibit 13.1
DSC Communications Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
1994(A) 1993 1992 1991(B) 1990(B)(C)
---------- --------- --------- ---------- -----------
(Dollars in thousands, except per share data)
SUMMARY OF OPERATIONS FOR THE
YEAR:
Revenue......................... $1,003,125 $ 730,774 $ 536,319 $ 461,455 $ 519,298
Gross profit.................... 490,392 317,969 202,776 123,082 191,667
Operating income (loss)......... 213,999 110,176 42,431 (81,905) 43,572
Interest income................. 16,306 5,691 4,132 4,190 4,412
Interest expense................ (2,075) (6,256) (21,347) (25,457) (20,666)
Net income (loss)............... $ 162,626 $ 81,660 $ 11,594 $ (108,328) $ 20,122
========== ========= ========= ========== ===========
Income (loss) per share (D)..... $ 1.39 $ 0.77 $ 0.12 $ (1.31) $ 0.23
========== ========= ========= ========== ===========
FINANCIAL POSITION AT YEAR END:
Cash and marketable
securities..................... $ 271,322 $ 313,808 $ 69,839 $ 26,366 $ 34,974
Working capital................. 393,034 406,752 79,010 4,991 153,331
Property and equipment,
net............................ 282,963 179,783 149,209 165,952 189,782
Total assets.................... 1,268,536 900,417 547,669 599,914 759,424
Short-term and long-term
debt........................... 82,369 70,412 140,409 281,715 315,714
Shareholders' equity (E)........ 851,100 617,800 202,627 174,686 279,221
OTHER FINANCIAL INFORMATION:
Shareholders' equity
per share of common
stock outstanding (D).......... $ 7.50 $ 5.61 $ 2.30 $ 2.10 $ 3.43
Return on average
shareholders' equity........... 22.1% 19.9% 6.1% (47.7%) 7.5%
Ratio of current assets to
current liabilities............ 2.1 3.1 1.4 1.0 1.6
Ratio of short-term and
long-term debt to
shareholders' equity........... 9.7% 11.4% 69.3% 161.3% 113.1%
(Continued)
2
DSC Communications Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
1994(A) 1993 1992 1991(B) 1990(B)(C)
--------- --------- -------- -------- ---------
(Dollars in thousands, except per share data)
OTHER DATA:
Shares used to compute
income (loss) per share
(in thousands) (D)............. 116,889 106,650 93,198 82,678 85,748
Shareholders of record at
year end....................... 3,611 3,462 4,948 6,110 6,001
Total employees at year
end............................ 5,414 4,041 3,301 3,262 4,043
---------------
(A) 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
and Management's Discussion and Analysis of Financial Condition and Results
of Operations for further discussion.
(B) For the years ended December 31, 1991 and 1990, the Company recorded
special charges of $48.1 million and $7.5 million, respectively, related to
asset write-downs and restructuring costs.
(C) In July 1990, the Company acquired Optilink Corporation (Optilink).
Accordingly, Optilink's results of operations have been included in the
Company's consolidated financial data beginning in August 1990.
(D) 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.
(E) 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
DSC Communications Corporation's financial performance in 1994 had the
following significant highlights:
- Revenue exceeded $1 billion for the first time in the Company's
history, a growth of 37% compared to 1993.
- Record net income of $162.6 million, or $1.39 per share, was achieved.
- Total assets grew to over $1.2 billion.
- Shareholders' equity increased to $851.1 million at the end of 1994.
- Total debt to equity ratio was reduced to 10%.
- Return on average shareholders' equity was 22%.
Additionally, in November 1994, the Company acquired NKT Elektronik
A/S (subsequently renamed DSC Communications A/S), a Copenhagen, Denmark-based
manufacturer of optical transmission equipment with a strong customer base
throughout Western Europe. The acquisition for $149 million in cash should
significantly enhance the Company's international presence in the future.
FINANCIAL CONDITION AND LIQUIDITY
The Company ended 1994 and 1993 with the following:
December 31,
--------------------------
1994 1993
--------- ---------
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 52.9 $ 154.9
Marketable securities . . . . . . . . . . . . . . . . . . . 218.4 158.9
Non-debt working capital, excluding
cash and cash equivalents and
marketable securities . . . . . . . . . . . . . . . . . . 178.8 106.6
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 39.8 --
Senior debt, including current portion . . . . . . . . . . . 42.6 34.0
Subordinated convertible debentures. . . . . . . . . . . . . -- 36.4
Two events had a major impact on the Company's financial position
during 1994. The Company funded the $149 million acquisition of DSC
Communications A/S with approximately $87 million in cash and approximately $62
million in short-term borrowings, which were paid down to $39.8 million at year
end. The acquired business included working capital of $35.4 million, of which
$13.7 million was cash, and the cost in excess of net assets acquired was
$105.6 million. In early 1994, the Company's debt was reduced by $36.4 million
when $34.7 million of the remaining outstanding subordinated convertible debt
was converted into shares of the Company's common stock and $1.7 million was
redeemed for cash.
Non-debt working capital, excluding cash and cash equivalents and
marketable securities, increased $72.2 million over the prior year due
4
primarily to an overall increase in business activities and the inclusion of
DSC Communications A/S balances in the year end amounts.
Cash of $222.3 million was generated by operating activities during the
year. In addition to record earnings, non-debt liabilities grew by $89.8
million, while receivables and inventories grew by $89.6 million and $33.2
million, respectively. The growth in inventories, which excludes inventories
related to the DSC Communications A/S acquisition, was to support a higher
order backlog and anticipated business levels in the first half of 1995.
Capital expenditures of $141.2 million during 1994 included the
purchase of 148 acres of land for approximately $16.4 million near the
Company's present campus location for future expansion, partial construction of
a warehouse and office building on a portion of this land and the purchase of a
previously leased building for approximately $5 million. When completed in
mid-1995, these two new buildings will cost approximately $50 million. The
expected future business growth will require additional significant capital
expenditures both domestically and at various international locations. The
timing and extent of additional facilities expansion and other capital
requirements are dependent upon future business growth; however, the Company
anticipates that capital expenditures in 1995 could range from $180 million to
$200 million.
The Company's other 1994 financing activities included additional
long-term borrowings of $19.9 million, scheduled payments on long-term debt of
$14.8 million and proceeds of $13.2 million from the issuance of the Company's
common stock under stock purchase programs. The Company periodically finances
facilities and equipment requirements under operating leases. During 1994, the
Company's total future minimum rentals under operating leases with
noncancellable lease terms in excess of one year increased by $36.4 million to
$99.1 million at December 31, 1994. This increase was due primarily to the
Company's expansion into new facilities under long-term leases in California
and the United Kingdom.
In February 1994, the Company entered into a new unsecured revolving
credit facility, which expires in February 1997, providing for borrowings up to
$50.0 million, reduced by the value of outstanding letters of credit not to
exceed $25.0 million. At year end, the Company could borrow up to $42.0 million
under the credit agreement. See "Credit Agreement and Notes Payable" in Notes
to Consolidated Financial Statements for further discussion. There were no
borrowings under the agreement during 1994.
In January 1995, the Company received commitments for a $225 million
loan from several insurance companies, subject to final due diligence, credit
approval and mutually satisfactory documentation. The loan will bear interest
at 9% with interest payments to be made semi-annually. Principal payments will
be made annually in eight equal installments beginning on the first anniversary
of funding. Funding is expected to occur in the second quarter of 1995. The
loan will contain various financial covenants and will be an unsecured
obligation of the Company. The proceeds from the loan are expected to be used
for general corporate purposes, including expected capital expenditures.
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.
5
The Company believes that its existing cash and marketable securities,
available credit facilities and the anticipated $225 million loan in 1995 will
be adequate to support the Company's short and long-term financial resource
needs, including working capital requirements, capital expenditures, operating
lease obligations and debt payments.
RESULTS OF OPERATIONS
1994 Compared to 1993
Revenue for 1994 increased 37% to $1,003.1 million compared to $730.8
million in 1993. Net income for 1994 was $162.6 million, or $1.39 per share,
compared to net income of $81.7 million, or $0.77 per share, for 1993. All
prior year income per share amounts presented have been restated to
retroactively reflect a two-for-one stock split. See "Common and Preferred
Stock" in Notes to Consolidated Financial Statements for further discussion.
DSC Communications A/S is expected to have a greater impact on consolidated
results in future years. However, their results are only included in the
Company's results of operations from the date of acquisition and were not
significant to the Company's 1994 results.
The revenue growth was the result of continuing strong demand for a
broad range of the Company's products, including switching products such as
wireless and intelligent network systems and access products. Switching
products revenue increased 57% over 1993 and represented 52% of consolidated
revenue in 1994 as compared to 45% of consolidated revenue in 1993. This
increase was the result of higher deliveries across the majority of the
switching products, including tandem, wireless and intelligent network
products. Revenue from access product shipments increased 32% over the prior
year accounting for 27% of consolidated revenue in 1994 as compared to 28% in
1993 due primarily to a higher shipment level of the Company's Litespan
product. The balance of revenue primarily consisted of transmission products
which increased in 1994 from 1993 but declined as a percentage of revenue due
to the significant revenue growth of other products.
Gross profit of $490.4 million in 1994 represented 49% of revenue
compared to 44% of revenue in 1993. The Company benefited from product volume
efficiencies, cost reduction activities and increased shipments of higher
margin software and other switching products. Certain of the Company's
products typically produce gross margin content greater than other Company
products. As a result, the Company's gross margin percentage can vary
significantly from year to year due to changes in the relative mix of product
deliveries.
Research and development expenses increased to $127.3 million in 1994,
or 13% of revenue, compared to $86.6 million, or 12% of revenue, in 1993. This
increase in research and product development represents the Company's ongoing
commitment to develop new products, such as iMTN and certain broadband
products, and to enhance existing products across the high-growth product
areas, all of which are expected to contribute to revenue in the future.
Selling, general and administrative expenses were $141.9 million in
1994, or 14% of revenue, compared to $112.7 million, or 15% of revenue, in
1993. The higher expense level reflects increased domestic and international
selling and marketing activities as well as an increased level of commissions
and performance-based incentive compensation. See "Incentive Compensation" in
Notes to Consolidated Financial Statements for further discussion.
Income before income taxes for 1994 was favorably impacted by increased
interest income and lower interest expense. Interest income
6
increased by $10.6 million to $16.3 million during 1994 due to a higher
average level of investments in marketable securities. Interest expense
declined from $6.3 million in 1993 to $2.1 million in 1994. This is primarily
the result of the conversion of substantially all of the Company's outstanding
subordinated convertible debentures in 1993 and early 1994 into shares of the
Company's common stock. As discussed previously, the Company has received
commitments from several lenders to loan $225 million to the Company during the
first half of 1995. If the loan is finalized as expected, interest expense and
interest income will both increase as proceeds from the loan will be invested
in marketable securities until required for future business purposes. The 9%
per annum interest rate on the loan will be higher than the rate earned on the
marketable securities.
Other expense, net in 1994 increased by $4.9 million to $5.0 million.
This increase was primarily the result of a $2.2 million gain recorded in 1993
relating to the sale of securities acquired several years ago as part of
financing provided to a customer.
At December 31, 1994, the U.S. dollar equivalent of the forward foreign
exchange contracts outstanding was approximately $105.2 million, which
represents an $82.9 million increase over the prior year amount. The increase
was primarily the result of additional forward exchange contracts denominated
in Japanese Yen and the inclusion of the forward exchange contracts of DSC
Communications A/S. The Company has historically managed its exposure to
fluctuations in foreign currency exchange rates through the use of forward
foreign exchange contracts. These forward foreign exchange contracts were
entered into to hedge certain receivables and firm contracts for delivery of
products and services which are denominated in foreign currencies. Through the
acquisition of DSC Communications A/S, the Company assumed certain forward
exchange contracts which were based on anticipated future business transactions
in various foreign countries, primarily the United Kingdom and Germany, which
totaled approximately $27.1 million at December 31, 1994. Although the Company
is currently evaluating whether to continue this practice as current forward
exchange contracts expire, future earnings could be affected since forward
contracts related to anticipated transactions are marked-to-market each period.
Such mark-to-market adjustments have been immaterial to DSC Communications A/S
during the last several years. See "Forward Foreign Exchange Contracts" in
Notes to Consolidated Financial Statements for further discussion.
The Company's effective income tax rate was 27% for 1994 as compared to
25% in 1993. The Company's effective income tax rate will increase toward the
U.S. statutory rate of 35% in 1995 and future years as the net operating loss
carryforwards from prior years are fully utilized. See "Income Taxes" in Notes
to Consolidated Financial Statements for further discussion.
The Company's future operating results may be affected by a number of
factors, including the timing and ultimate receipt of orders from certain
customers which continue to constitute a large portion of the Company's
revenue; the successful enhancement of existing products; introduction and
market acceptance of new products on a timely basis; mix of products sold; and
changes in general economic conditions, any of which could have an adverse
impact on operations.
1993 Compared to 1992
7
Revenue for 1993 increased 36% to $730.8 million compared to $536.3
million in 1992. Net income was $81.7 million, or $0.77 per share, compared to
a net income of $11.6 million, or $0.12 per share, for the year ended December
31, 1992.
The Company's 1993 revenue growth was due to a higher volume of
switching and access product shipments. Switching products revenue increased
13% over 1992 and represented 45% of consolidated revenue compared to 54% in
1992. The increase in switching products revenue was due, in part, to a higher
volume of hardware and software deliveries for customer expansion and upgrades
of existing switching systems. This more than offset a reduction in signal
transfer point (STP) system product deliveries from the volume achieved in 1992
when several domestic customers populated their networks with the Company's
STPs.
Access products revenue accounted for approximately 28% of consolidated
revenue in 1993 compared to 8% in 1992 as the Company began delivery on several
major customer orders received in 1992 and 1993. While the access products
group achieved profitability in the last half of 1993, a loss was recorded for
the full year. Revenue of transmission products grew slightly in 1993 over
1992 and represented 22% of 1993 revenue compared to 28% of 1992 revenue.
During 1994, the customer premises products group was realigned to be a part of
the transmission products group.
Gross profit of $318.0 million in 1993 represented 44% of total
revenue, compared to 38% in 1992. The Company benefited from cost reduction
activities, increased operating efficiencies and production efficiencies due to
the higher business volumes, while the higher volume of lower margin access
products revenue impacted product cost as a percentage of revenue.
Research and product development expenses increased in 1993 to $86.6
million, or 12% of revenue, compared to $68.3 million in 1992, or 13% of
revenue.
Selling, general and administrative expenses were $112.7 million in
1993, or 15% of revenue, compared to $87.0 million, or 16% of revenue, in 1992.
The higher expense level reflects increased domestic and international selling
and marketing activities, expansion of the Company's customer base and an
increased level of incentive compensation. See "Incentive Compensation" in
Notes to Consolidated Financial Statements for further information.
Interest expense declined $15.1 million in 1993 compared to the 1992
period. This reduction was due to the repayment of over $134.0 million of
senior unsecured debt during the last half of 1992 and conversion of $71.5
million of 7 3/4% Subordinated Convertible Debentures into approximately 3.8
million shares of the Company's common stock during the 1993 first quarter.
Other expense, net in 1993 declined by $8.2 million from $8.3 million
in 1992. The 1993 amount included a $2.2 million gain from the sale of
securities acquired several years ago as part of financing provided to a
customer. The 1992 amount included provisions for litigation, senior unsecured
debt restructuring costs, certain facilities costs and higher cash discounts
taken by customers in the first half of 1992 for early payment on receivables.
8
The Company's effective income tax rate was 25% for the year ended
December 31, 1993. See "Income Taxes" in Notes to Consolidated Financial
Statements for further information.
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for Post
Retirement Benefits Other Than Pensions". The implementation of this standard
had no financial impact to the Company since post retirement benefits currently
provided are reimbursed by the retirees.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years ended December 31,
--------------------------------------
1994 1993 1992
----------- ---------- ---------
Revenue.................................... $ 1,003,125 $ 730,774 $ 536,319
Cost of revenue............................ 512,733 412,805 333,543
----------- ---------- ---------
Gross Profit............................. 490,392 317,969 202,776
----------- ---------- ---------
Operating costs and expenses:
Research and product development......... 127,303 86,620 68,303
Selling, general and administrative...... 141,934 112,723 86,951
Other operating costs.................... 7,156 8,450 5,091
----------- ---------- ---------
Total operating costs and expenses..... 276,393 207,793 160,345
----------- ---------- ---------
Operating income........................... 213,999 110,176 42,431
Interest income............................ 16,306 5,691 4,132
Interest expense........................... (2,075) (6,256) (21,347)
Other expense, net......................... (5,040) (155) (8,322)
----------- ---------- ---------
Income before income taxes............... 223,190 109,456 16,894
Income taxes............................... 60,564 27,796 5,300
----------- ---------- ---------
Net income........................... $ 162,626 $ 81,660 $ 11,594
=========== ========== =========
Income per share........................... $ 1.39 $ 0.77 $ 0.12
=========== ========== =========
Average shares used in per
share computation......................... 116,889 106,650 93,198
=========== ========== =========
See accompanying Notes to Consolidated Financial Statements.
10
DSC Communications Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
---------------------------
1994 1993
---------- -----------
Assets
CURRENT ASSETS
Cash and cash equivalents.................................. $ 52,942 $ 154,888
Marketable securities...................................... 218,380 158,920
Receivables................................................ 239,740 139,962
Inventories................................................ 180,674 122,869
Contract development costs................................. 14,202 5,978
Other current assets....................................... 32,516 19,414
---------- -----------
Total current assets..................................... 738,454 602,031
---------- -----------
PROPERTY AND EQUIPMENT, NET.................................. 282,963 179,783
LONG-TERM RECEIVABLES........................................ 25,691 16,515
CAPITALIZED SOFTWARE DEVELOPMENT COSTS....................... 38,583 33,485
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET..... 152,396 50,317
OTHER........................................................ 30,449 18,286
---------- -----------
Total assets............................................. $1,268,536 $ 900,417
========== ===========
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Notes payable.............................................. $ 39,791 $ --
Accounts payable........................................... 91,054 48,450
Accrued liabilities........................................ 153,274 112,993
Customer advances.......................................... 21,834 15,712
Income taxes payable....................................... 22,219 4,460
Current portion of long-term debt.......................... 17,248 13,664
---------- -----------
Total current liabilities................................ 345,420 195,279
---------- -----------
LONG-TERM DEBT, NET OF CURRENT PORTION ...................... 25,330 56,748
NONCURRENT INCOME TAXES AND OTHER LIABILITIES................ 46,686 30,590
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, issued - 118,514
in 1994 and 60,047 in 1993; outstanding - 113,525
in 1994 and 55,018 in 1993 .............................. 1,185 600
Additional capital......................................... 631,729 558,222
Unrealized losses on securities,
net of income taxes...................................... (3,764) --
Retained earnings.......................................... 265,061 102,435
---------- -----------
894,211 661,257
Treasury stock, at cost, 4,989 shares in 1994 and
5,029 shares in 1993 .................................... (43,111) (43,457)
---------- -----------
Total shareholders' equity............................... 851,100 617,800
---------- -----------
Total liabilities and shareholders' equity............. $1,268,536 $ 900,417
========== ===========
See accompanying Notes to Consolidated Financial Statements.
11
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
----------------------------------------
1994 1993 1992
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................... $ 162,626 $ 81,660 $ 11,594
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization..................... 53,698 44,334 43,628
Amortization of capitalized
software development costs....................... 19,460 17,545 18,577
Income tax benefit related to stock
options.......................................... 24,055 5,800 1,860
Utilization of preacquisition net
operating loss carryforwards..................... -- 8,300 --
Other............................................. 4,772 (2,888) 1,217
Changes in operating assets and
liabilities:
(Increase) decrease in current and
long-term receivables............................ (89,616) (51,084) 22,370
(Increase) decrease in inventories................ (33,188) (31,444) 41,127
(Increase) decrease in contract
development costs................................ (8,224) 58 5,280
(Increase) decrease in other current
assets........................................... (1,041) (4,024) 4,814
Increase in current payables
and accruals..................................... 74,555 36,331 16,955
Increase (decrease) in customer
advances......................................... (153) (35,230) 45,468
Increase in noncurrent income taxes
and other liabilities............................... 15,393 9,961 6,217
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................................... 222,337 79,319 219,107
----------- ---------- -----------
(Continued)
12
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years ended December 31,
----------------------------------------
1994 1993 1992
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisition, net of acquired cash........... (135,696) -- --
Purchases of property and equipment.................. (141,177) (71,028) (25,814)
Additions to capitalized software
development costs................................... (24,558) (21,947) (18,097)
Purchases of marketable securities................... (312,297) (178,635) --
Proceeds from sales and maturities of
marketable securities............................... 246,569 19,715 --
Purchase of long-term investment security............ (12,500) -- --
Other................................................ (2,980) 5,449 3,614
----------- ---------- -----------
NET CASH USED FOR INVESTING
ACTIVITIES.................................... (382,639) (246,446) (40,297)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable............................ 39,791 -- --
Borrowings under long-term debt
arrangements........................................ 19,919 19,975 --
Payments of short and long-term debt................. (14,770) (18,471) (147,060)
Proceeds from public offering of common
stock............................................... -- 231,149 --
Proceeds from the sale of common stock
under stock programs................................ 13,211 20,116 10,454
Other................................................ 205 (593) 1,269
----------- ---------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES.......................... 58,356 252,176 (135,337)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (101,946) 85,049 43,473
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.............................................. 154,888 69,839 26,366
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.............................................. $ 52,942 $ 154,888 $ 69,839
=========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................ $ 1,114 $ 7,459 $ 22,955
=========== ========== ===========
Income taxes paid.................................... $ 11,930 $ 4,359 $ 204
=========== ========== ===========
See accompanying Notes to Consolidated Financial Statements.
13
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Common Stock
----------------
Shares Par Unrealized Cost of
Out- Value Additional Losses Retained Treasury
standing $.01 Capital on Securities Earnings Shares Total
------- ------ --------- --------- ----------- ---------- -----------
BALANCES, December 31, 1991............. 41,675 $ 466 $ 206,991 $ -- $ 9,181 $ (41,952) $ 174,686
Shares purchased for
treasury............................. (98) -- -- -- -- (1,505) (1,505)
Shares issued upon
exercise of options.................. 2,221 22 14,343 -- -- -- 14,365
Shares issued under stock
purchase plans....................... 226 2 912 -- -- -- 914
Income tax benefit related
to stock options..................... -- -- 1,860 -- -- -- 1,860
Restricted shares issued
to employees, net of
unearned compensation and
forfeitures.......................... 90 1 694 -- -- -- 695
Conversion of 7.75%
subordinated convertible
debentures into
common stock......................... 1 -- 18 -- -- -- 18
Net income............................ -- -- -- -- 11,594 -- 11,594
------- ------ --------- --------- ----------- ---------- -----------
BALANCES, December 31, 1992............. 44,115 491 224,818 -- 20,775 (43,457) 202,627
Shares issued by public
offering, net of expenses............ 3,450 35 231,114 -- -- -- 231,149
Shares issued upon
exercise of options.................. 1,809 18 15,890 -- -- -- 15,908
Shares issued under stock
purchase plans....................... 1,543 15 6,296 -- -- -- 6,311
Income tax benefit related
to stock options..................... -- -- 5,800 -- -- -- 5,800
Restricted shares issued
to employees, net of
unearned compensation ............... 255 3 5,586 -- -- -- 5,589
Conversion of 7.75%
subordinated convertible
debentures into
common stock, net of
expenses............................. 3,842 38 68,523 -- -- -- 68,561
Conversion of 8.0%
subordinated convertible
debentures into
common stock......................... 4 -- 195 -- -- -- 195
Net income............................ -- -- -- -- 81,660 -- 81,660
------- ------ --------- --------- ----------- ---------- -----------
BALANCES, December 31, 1993............. 55,018 600 558,222 -- 102,435 (43,457) 617,800
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 8.0%
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
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
======= ====== ========= ========= =========== ========== ===========
See accompanying Notes to Consolidated Financial Statements.
14
DSC Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
DSC Communications Corporation (the "Company") is a leading designer,
developer, manufacturer and marketer of digital switching, transmission, access
and private network system products for the worldwide telecommunications
marketplace.
The consolidated financial statements of the Company include the
accounts of the Company and all its majority-owned subsidiaries. All
significant intercompany transactions and balances are eliminated.
Certain prior years' financial statement information has been
reclassified to conform with the current year financial statement presentation.
Revenue Recognition
Revenue is generally recognized when the Company has completed
substantially all manufacturing and/or software development to customer
specifications, factory testing has been completed and the product has been
shipped. Additionally, for systems where installation requirements are the
responsibility of the Company and payment terms are related to installation
completion, revenue is generally recognized when the system has been shipped to
the customer's final site for installation.
Revenue under contracts with customers for development and
customization of software 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.
Investments in Debt and Equity Securities
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
15
(FAS 115), in 1993. In accordance with FAS 115, prior years' financial
statements have not been restated to reflect the change in accounting method.
There was no cumulative effect as a result of adopting FAS 115 in 1993.
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
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
interest are included in interest income. Realized gains and losses are
included in other income or expense. The cost of securities sold is based on
the specific identification method.
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,
-----------------------
1994 1993
----------- --------
Raw Material . . . . . . . . . . . . . . . . . . . . . . . $ 66,466 $ 47,845
Work in Process . . . . . . . . . . . . . . . . . . . . . 18,618 12,471
Finished Goods . . . . . . . . . . . . . . . . . . . . . . 95,590 62,553
----------- --------
$ 180,674 $122,869
=========== ========
Contract Development Costs
Costs incurred in the development of software and hardware which
pertain to specific contracts with customers are capitalized at the lower of
cost or net realizable value and charged to cost of revenue when the related
revenue is recognized.
16
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
Capital leases and equipment leased to customers under operating leases
are amortized on a straight-line basis over the term of the lease.
Amortization of these leases is included in depreciation expense.
Capitalized Interest
Interest costs related to certain qualifying assets (primarily
capitalized software development costs) are capitalized during their
construction or development period and amortized over the economic life of the
related assets. For the years ended December 31, 1994, 1993 and 1992, the
Company capitalized $1.6 million, $0.9 million and $1.1 million, respectively,
of such interest costs.
Cost in Excess of Net Assets of Businesses Acquired, Net
Cost in excess of net assets of businesses acquired generally is
amortized on a straight-line basis over 10 to 20 years. The Company
periodically reviews the original assumptions and rationale utilized in the
establishment of the carrying value and estimated life when indications of a
possible impairment in carrying value are present. 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 $152.4
million and $50.3 million at December 31, 1994 and 1993, 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 $16.0 million and $12.4 million at December 31, 1994 and 1993,
respectively. Additionally, the carrying value was reduced in 1993 by $8.3
million as a result of utilization of preacquisition net operating loss
carryforwards.
See "Business Acquisition" and "Income Taxes" 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 $38.6 million and $33.5 million at
December 31, 1994 and 1993, respectively, net
17
of accumulated amortization costs of $18.2 million and $18.6 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.
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 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 and transaction gains and losses are included in Other Expense, Net
in the Consolidated Statements of Income and were not material in 1994, 1993 or
1992.
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 and
were immaterial in 1994, 1993 and 1992.
Forward Foreign Exchange Contracts
The Company, in management of its exposure to fluctuations in foreign
currency exchange rates, enters into forward foreign exchange contracts for
both firm commitments and anticipated transactions of sales and purchases which
are denominated in foreign currencies. The forward contracts are not held for
trading purposes.
The agreements 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 agreements. 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 be
immaterial.
Gains and losses on these forward contracts are recognized as part of
the cost of the underlying transaction being hedged, with the exception of
18
unrealized gains and losses on contracts designed to hedge anticipated foreign
currency transactions which are recognized in net income in the period during
which they occur. The net gains and losses on the contracts designed to hedge
anticipated transactions have been immaterial.
At December 31, 1994 and 1993, the U.S. dollar equivalents of the
forward foreign exchange contracts outstanding were $105.2 million and $22.3
million, respectively. Of the contracts held at December 31, 1994, the
following is a summary by currency: Yen - $60.4 million; Pound Sterling - $21.8
million; Deutschemark - $19.1 million; and Other - $3.9 million.
Income Per Share
Income per share is based upon weighted average common shares
outstanding and common stock equivalents. Common stock equivalents have been
determined assuming the exercise of all dilutive stock options and warrants
adjusted for the assumed repurchase of common stock, at the average market
price, from the exercise proceeds. The fully diluted per share computation
also assumes the conversion of the convertible subordinated debentures, when
dilutive, and the assumed repurchase of common stock at the ending market
price. Primary and fully diluted income per share are essentially the same
for all periods presented except for 1992 when primary income per share was
$0.13 and fully diluted income per share was $0.12. 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
per share and average shares used in per share computation amounts have been
restated to retroactively reflect the stock split.
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 1994 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
preliminarily allocated to the net assets acquired based on their estimated
fair values with the balance of the purchase price, $105.6 million, 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. Amortization
expense related to the DSC Communications A/S acquisition was not material in
1994.
The following unaudited pro forma summary combines the consolidated
results of operations of the Company and DSC Communications A/S as if the
acquisition had occurred at the beginning of 1994 and 1993 after giving effect
to certain pro forma adjustments, including, among others, adjustments to
reflect the appropriate divisions and/or subsidiaries of DSC Communications A/S
which were purchased by the Company, the amortization of cost in excess of net
assets of business acquired, increased interest
19
expense and decreased interest income associated with acquisition funding, and
the estimated related income tax effects. This pro forma financial information
is presented for informational purposes only and may not be indicative of the
results of operations as they would have been if the Company and DSC
Communications A/S had been a single entity during 1994 and 1993, nor is it
necessarily indicative of the results of operations which may occur in the
future. Anticipated efficiencies from the consolidation of DSC Communications
A/S and the Company are not fully determinable and therefore have been excluded
from the amounts included in the pro forma summary presented below.
Years ended December 31,
------------------------
1994 1993
---- ----
(in thousands, except per share data)
(unaudited)
Revenue........................ $ 1,085,216 $ 827,851
Net income..................... 151,533 79,337
Income per share............... $ 1.30 $ 0.74
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, 1994 Gross Estimated
----------------- Unrealized Fair
Cost Loss Value
------------- ---------------- ----------------
Available for sale securities:
U.S. Treasury securities
and obligations of U.S.
government agencies........ $ 119,245 $ 2,000 $ 117,245
Certificates of deposit..... 16,999 136 16,863
Mortgage-backed and
asset-backed securities.... 57,599 1,170 56,429
Corporate debt securities... 28,301 458 27,843
------------- ---------------- ----------------
$ 222,144 $ 3,764 $ 218,380
============= ================ ================
December 31, 1993
-----------------
Available for sale securities:
U.S. Treasury obligations............. $ 112,243
Mortgage-backed securities............ 29,090
Corporate debt securities............. 17,587
-------------
$ 158,920
=============
The estimated fair value of each investment approximated the amortized cost at
December 31, 1993.
20
Gross realized gains and gross realized losses on sales of available
for sale securities were immaterial in 1994.
The amortized cost and estimated fair value of available for sale
securities by contractual maturity at December 31, 1994 is as follows (in
thousands):
Estimated
Fair
Cost Value
------------ -----------
Due in one year or less...................... $ 67,745 $ 67,269
Due after one year through three years ...... 115,002 112,568
Due after three years ....................... 39,397 38,543
------------ -----------
$ 222,144 $ 218,380
============ ===========
Expected maturities will 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 a collateralized bank obligation with an amortized cost of $12.5
million at December 31, 1994. The gross unrealized loss on this investment,
which has a maturity date in March 1999, was approximately $0.9 million at
December 31, 1994. This investment is included in Other Noncurrent Assets on
the Consolidated Balance Sheet.
During 1994, the Company entered into agreements to sell and
repurchase certain U.S. Treasury securities to fund a portion of the DSC
Communications A/S acquisition. Due to the agreements to repurchase these
securities, the sales of these securities are not recorded. Instead, the
liabilities to repurchase the securities sold under these agreements, which
totaled $39.7 million at December 31, 1994, are reported as notes payable. See
"Credit Agreements and Notes Payable" for further discussion.
21
RECEIVABLES
Receivables consisted of the following (in thousands):
December 31,
----------------------
1994 1993
---------- ---------
Current:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . $ 230,108 $ 132,595
Leases, notes and other . . . . . . . . . . . . . . . . 12,525 8,457
---------- ---------
242,633 141,052
Allowance for doubtful accounts . . . . . . . . . . . . . (2,893) (1,090)
---------- ---------
$ 239,740 $ 139,962
========== =========
Long-term:
Leases, notes and other . . . . . . . . . . . . . . . . $ 26,810 $ 19,034
Allowance for doubtful accounts . . . . . . . . . . . . (1,119) (2,519)
---------- ---------
$ 25,691 $ 16,515
========== =========
To meet market competition, the Company finances sales of equipment to
certain of its customers through sales-type and operating leases. The
repayment terms vary from one to seven years.
The components of the receivables from sales-type leases are as
follows (in thousands):
December 31,
-------------------------
1994 1993
---------- --------
Total minimum lease
payments receivable . . . . . . . . . . . . . . . . . . . . . . $ 46,857 $ 34,460
Less: Unearned income . . . . . . . . . . . . . . . . . . . . . (8,040) (7,149)
----------- --------
Total receivables . . . . . . . . . . . . . . . . . . . . . . . . 38,817 27,311
Less: Current receivables . . . . . . . . . . . . . . . . . . . (12,079) (8,378)
----------- --------
Total long-term receivables . . . . . . . . . . . . . . . . . . . $ 26,738 $ 18,933
=========== ========
Future minimum lease payments to be received on sales-type leases are
as follows (in thousands):
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,858
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,724
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,464
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,253
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,558
-------
$46,857
=======
22
PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following (in
thousands):
December 31,
----------------------------------
1994 1993
------------- --------------
Land . . . . . . . . . . . . . . . . . . . . . . . . $ 36,832 $ 19,640
Buildings and leasehold
improvements . . . . . . . . . . . . . . . . . . . 110,730 71,920
Manufacturing, development and
test equipment . . . . . . . . . . . . . . . . . . 215,677 176,117
Office furniture, equipment
and other . . . . . . . . . . . . . . . . . . . . . 163,009 112,803
------------- --------------
526,248 380,480
Less: Accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . (243,285) (200,697)
------------- --------------
$ 282,963 $ 179,783
============= ==============
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
December 31,
------------------------------
1994 1993
-------------- -----------
Warranty and related . . . . . . . . . . . . . . . . . . $ 44,023 $ 30,865
Payroll and related . . . . . . . . . . . . . . . . . . . 38,755 27,090
Taxes other than income . . . . . . . . . . . . . . . . . 21,277 15,671
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 49,219 39,367
-------------- -----------
$ 153,274 $ 112,993
============== ===========
CREDIT AGREEMENT AND NOTES PAYABLE
In February 1994, the Company entered into an uncollateralized
revolving credit facility, which expires in February 1997, with two banks
providing for borrowings up to $50.0 million. The maximum borrowings available
are reduced by the value of outstanding letters of credit issued by the banks
on behalf of the Company up to $25.0 million. Borrowings under the facility
bear interest at the prime rate or at 0.75% to 1.50% above the LIBOR rate. A
commitment fee of 0.35% on the daily average unused portion of the facility is
also assessed. The agreement contains various financial covenants. There have
been no borrowings under the credit facility during 1994. Letters of credit
issued by the banks under this agreement on behalf of the Company were $8.0
million at December 31, 1994.
Notes payable of $39.8 million at December 31, 1994 consisted of
obligations to repurchase certain U.S. Treasury securities sold in November
1994 to fund a portion of the DSC Communications A/S acquisition. See
"Business Acquisition" and "Investments in Debt and Equity Securities" for
further discussion. These notes bear interest at a floating interest rate which
was 5.875% at December 31, 1994. The weighted average interest rate on the
notes for the period outstanding during 1994 was 5.51%.
23
LONG-TERM DEBT
Total long-term debt consisted of the following (in thousands):
December 31,
------------------------------
1994 1993
------------- -------------
Senior debt:
Unsecured 9.5% note,
due 1993 - 1996 . . . . . . . . . . . . . . . . . . . $ 12,500 $ 18,750
Secured installment notes:
Interest at one-month LIBOR plus
1.25% to 1.75%, due 1993 - 1997 . . . . . . . . . . . 26,420 14,514
Other . . . . . . . . . . . . . . . . . . . . . . . . 3,658 732
------------- -------------
Total senior debt . . . . . . . . . . . . . . . . . 42,578 33,996
------------- -------------
8% Subordinated convertible debentures . . . . . . . . . . -- 36,416
------------- -------------
Total debentures . . . . . . . . . . . . . . . . . -- 36,416
------------- -------------
Total debt . . . . . . . . . . . . . . . . . . . . 42,578 70,412
Less: Current maturities . . . . . . . . . . . . . . . 17,248 13,664
------------- -------------
Total long-term debt . . . . . . . . . . . . . . . $ 25,330 $ 56,748
============= =============
The one-month LIBOR interest rate at December 31, 1994 was 6.0%.
The aggregate maturities of long-term debt for the next five years are
as follows: 1995 - $17.2 million; 1996 - $13.0 million; 1997 - $5.1 million;
1998 - $4.5 million; 1999 - $2.4 million; thereafter - $0.4 million.
The installment notes are secured by certain lease and notes receivable
and are due in installments through 1997. Amounts outstanding at December 31,
1993, which bore interest at prime plus 0.5%, were rolled into a new loan
agreement together with additional borrowings in 1994 of $19.9 million.
Primarily all of the senior debt contains various financial convenants,
including among other things, minimum working capital levels, maintenance of
certain ratios of assets to liabilities and maximum allowable indebtedness to
tangible net worth.
In January 1995, commitments were received from lenders to loan $225
million to the Company, subject to final due diligence, credit approval and
mutually satisfactory documentation. The loan will be a senior unsecured
obligation of the Company and will bear interest at 9%. Principal payments
will be made in eight equal annual installments beginning on the first
anniversary of funding. Funding is expected to occur during the second quarter
of 1995.
24
8% Subordinated Convertible Debentures
On January 14, 1994, the Company called for the redemption of all the
outstanding 8% subordinated convertible debentures. In February 1994, $34.7
million of debentures were converted into approximately 637,000 shares of
common stock, and $1.7 million of debentures were redeemed for cash.
INCOME TAXES
At December 31, 1994 and 1993, the Company had a net deferred tax asset
of $47.7 million and $66.4 million, respectively, reflecting the tax benefits
of U.S. and foreign subsidiary net operating loss carryforwards, tax credit
carryforwards and net future tax deductions. Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," requires a valuation reserve
be established if it is "more likely than not" that realization of the tax
benefits will not occur. In recent years, the Company had taxable losses or
was subject to alternative minimum tax within its U.S. consolidated tax group
which is evidence that could require a valuation reserve. In addition, certain
foreign jurisdictions have cumulative losses. As a result, a valuation
allowance equal to the net deferred tax asset was maintained at December 31,
1994 and 1993.
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, 1994 and 1993 are as follows (in thousands):
December 31,
------------------------------
1994 1993
------------ -------------
Deferred Tax Assets
Asset valuation reserves not yet
deductible for tax . . . . . . . . . . . . . . . . . . . $ 15,385 $ 12,593
Accrued liabilities not yet
deductible for tax . . . . . . . . . . . . . . . . . . . 29,077 25,757
Federal and foreign
loss carryforwards . . . . . . . . . . . . . . . . . . . 7,168 37,835
Tax credit carryforwards . . . . . . . . . . . . . . . . . 36,459 14,500
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,285 4,812
------------ -------------
Deferred asset . . . . . . . . . . . . . . . . . . . . 90,374 95,497
------------ -------------
Deferred Tax Liabilities
Deferred revenue . . . . . . . . . . . . . . . . . . . . . (16,557) (6,271)
Capitalized software development
costs . . . . . . . . . . . . . . . . . . . . . . . . . (19,056) (15,422)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . (3,086) (5,390)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (4,002) (1,991)
------------ -------------
Deferred liability . . . . . . . . . . . . . . . . . . (42,701) (29,074)
------------ -------------
Deferred tax asset, net of
deferred liability . . . . . . . . . . . . . . . . . . . . . . 47,673 66,423
Less valuation allowance . . . . . . . . . . . . . . . . . (47,673) (66,423)
------------ -------------
Net deferred tax asset . . . . . . . . . . . . . . . $ -- $ --
============ =============
Included in Noncurrent Income Taxes and Other Liabilities at December
31, 1994 and 1993 are $30.1 million and $25.2 million, respectively, for
noncurrent taxes related primarily to foreign jurisdictions.
The deferred tax asset for Federal and foreign loss and tax credit
carryforwards at December 31, 1994 shown previously include approximately $36.0
million of tax benefits related to the exercise of employee stock
25
options which, when recognized, will increase Additional Capital on the
Consolidated Balance Sheet.
Income tax expense was composed of the following (in thousands):
Years ended December 31,
-----------------------------------------------
1994 1993 1992
----------- ---------- -----------
Federal . . . . . . . . . . . . . . . . . . $ 45,189 $ 16,872 $ 1,964
Puerto Rico and State . . . . . . . . . . . 7,450 4,556 3,142
Foreign . . . . . . . . . . . . . . . . . . 7,925 6,368 194
----------- ---------- -----------
Total tax expense . . . . . . . . . . . . . $ 60,564 $ 27,796 $ 5,300
=========== ========== ===========
No deferred tax expense was provided in 1994, 1993 or 1992.
The Federal tax expense included $24.1 million, $5.8 million and $1.9
million for 1994, 1993 and 1992, respectively, representing the tax benefits of
stock option deductions credited to Additional Capital. In addition, $8.3
million of Federal tax expense in 1993 represented the utilization of
preacquisition net operating loss carryforwards and was credited to Cost in
Excess of Net Assets of Business Acquired, Net.
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,
-----------------------------------------------
1994 1993 1992
----------- ---------- -----------
Income tax charge (credit):
At statutory rate . . . . . . . . . . $ 78,117 $ 38,309 $ 5,712
Unbenefitted/(utilized)
net operating losses . . . . . . . . (40,615) (12,269) 2,463
Federal alternative
minimum tax . . . . . . . . . . . . 20,744 -- 173
Tax related to foreign
jurisdictions . . . . . . . . . . . 5,696 5,691 --
Tax credit utilization . . . . . . . . (3,810) -- --
State income taxes,
net of Federal
tax effect . . . . . . . . . . . . . 2,015 464 66
Tax benefit of Puerto
Rican subsidiary . . . . . . . . . . (1,950) (5,432) (3,751)
Foreign tax rate
differential . . . . . . . . . . . . 367 1,033 637
----------- ---------- ------------
$ 60,564 $ 27,796 $ 5,300
=========== ========== ============
26
At December 31, 1994, the Company had consolidated regular tax net
operating loss carryforwards for Federal tax purposes of approximately $10.1
million available to be carried to future periods. The loss carryforwards
expire from 2004 to 2008 if not used. Also, a foreign subsidiary of the
Company had approximately $10.6 million of net operating and capital loss
carryforwards available to be carried to future periods which do not expire.
The Company has general business and other regular tax credit
carryforwards of approximately $14.0 million which expire from 1995 to 2005.
The Company also has alternative minimum tax credits of approximately $22.5
million which can be utilized against regular taxes in the future.
DSC's Puerto Rican subsidiary has been granted a 90% tax exemption from
Puerto Rican income taxes. The tax grant expires in 2005. Undistributed
earnings of foreign subsidiaries are not material.
INCENTIVE COMPENSATION
The Company has an Incentive Awards Plan administered by the
Compensation Committee of the Board of Directors which provides for payment of
cash awards to officers and key employees based upon achievement of specific
goals by the Company and the participating executives. For the years ended
1994, 1993 and 1992, provisions of approximately $7.0 million, $6.1 million and
$2.9 million, respectively, were charged against income related to the plan.
The Company also has a Long-Term Incentive Compensation Plan (LTIP) which
awards performance units to certain key executives. Certain officers were
awarded units in 1990 under the Company's LTIP by the Compensation Committee of
the Board of Directors. The units vest to the officers over six years through
December 31, 1995, and the value of a unit is determined annually based on the
Company's operating performance, as defined in the plan. The value of the
units charged to income in 1994 and 1993 was approximately $6.9 million and
$2.3 million, respectively. Prior to 1993, the units awarded had no value.
COMMON AND PREFERRED STOCK
Description and Dividends
On April 27, 1994, the shareholders approved an increase in the number
of authorized shares of common stock from 100 million to 250 million shares.
In addition, 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 par value of common stock remained $.01 per share.
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 per share data have been restated to retroactively reflect the
stock split. Since inception, the Company has not declared or paid a cash
dividend. The Company is also authorized to issue 5 million shares of
preferred stock, $1.00 par. No preferred stock has been issued to date.
27
In October 1993, the Company issued 3,450,000 shares of the Company's
common stock in a public offering for which the Company received net proceeds
of approximately $231.1 million.
In May 1986 and subsequently amended in April 1991, the Company
declared a dividend distribution of one preferred stock purchase right on each
outstanding share and each subsequently issued share of the Company's common
stock. The rights will not become exercisable until the close of business ten
days after a public announcement that a person or group has acquired 20% or
more of the common stock of the Company, or a public announcement or
commencement of a tender or exchange offer which would result in the offeror's
acquiring 30% or more of the common stock of the Company. Once exercisable,
each right would entitle a holder to buy 1/200 of a share of the Company's
Series A Junior Participating preferred stock at an exercise price of $22.50.
The Company may redeem the rights for 2.5 cents per right prior to the close of
business on the tenth day following the announcement that a person or group has
acquired 20% or more of the outstanding common stock of the Company. The
rights will expire in 1996 unless redeemed or exercised at an earlier date.
Stock Purchase Plans
Under provisions of the Company's employee stock purchase plans,
employees can purchase the Company's common stock at a specified price through
payroll deductions during an offering period, currently established on an
annual basis. In July 1994, approximately 317,000 shares were issued to
employees under the employee stock purchase plan. At December 31, 1994,
approximately $3.8 million had been contributed by employees that will be used
to purchase shares at the end of the offering period in August 1995. At
December 31, 1994, the Company could issue up to 5,229,000 shares under the
employee stock purchase plans of which approximately 3,989,000 shares had been
purchased and issued and approximately 497,000 shares were subscribed for
issuance in August 1995 assuming no further withdrawals from the plan.
Warrants and Options
The Company has stock option plans providing for the issuance of both
incentive stock options and nonqualified stock options exercisable for a period
of ten years, as well as restricted stock issuances. The plans cover
18,244,000 shares of common stock including increases for the impact of the May
1994 stock split. At December 31, 1994, plan options covering 5,262,000 shares
had been granted and were outstanding, options granted under the plans covering
8,873,000 shares had been exercised, 650,000 restricted shares had been issued
(net of forfeitures), 521,000 shares had expired and options covering 2,938,000
shares were available for grant. The exercise prices of stock options granted
and warrants issued were at the market value of the Company's common stock at
the date of grant or issuance. 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
28
by the Company, at its option, based on the vesting terms in the option
agreements.
Other options at December 31, 1994 include 20,000 options granted to
various current or prior members of the Company's Board of Directors.
Outstanding warrants and options are summarized as follows:
Options
------------------------------------
Warrants Plans Other
------------ ------------ --------------
December 31, 1991--
Shares issuable
upon exercise . . . . . . . . . 300,000 6,417,000 142,000
Price per share . . . . . . . . . $3.33-$9.23 $.01-$39.50 $2.00-$14.88
Average price
per share . . . . . . . . . . . $6.28 $7.04 $8.91
Expiration . . . . . . . . . . . . 1995 1992-2001 1992-1995
1992 Transactions
Issuances and grants . . . . . . . -- 32,000 10,000
Price per share . . . . . . . . . -- $4.63-$18.13 $5.50
Exercises and
forfeitures . . . . . . . . . . -- 2,268,000 50,000
Price per share . . . . . . . . . -- $.01-$32.67 $2.00-$14.88
December 31, 1992--
Shares issuable
upon exercise . . . . . . . . . 300,000 4,181,000 102,000
Price per share . . . . . . . . . $3.33-$9.23 $.01-$39.50 $4.19-$12.13
Average price
per share . . . . . . . . . . . $6.28 $8.06 $9.80
Expiration . . . . . . . . . . . . 1995 1993-2002 1993-1996
1993 Transactions
Issuances and grants . . . . . . . -- 710,000 10,000
Price per share . . . . . . . . . -- $26.13-$67.00 $17.00
Exercises and
forfeitures . . . . . . . . . . 300,000 1,509,000 78,000
Price per share . . . . . . . . . $3.33-$9.23 $.01-$38.75 $4.19-$12.13
December 31, 1993--
Shares issuable
upon exercise . . . . . . . . . -- 3,382,000 34,000
Price per share . . . . . . . . . -- $.01-$67.00 $12.13-$17.00
Average price
per share . . . . . . . . . . . -- $14.07 $13.56
Expiration . . . . . . . . . . . . -- 1994-2003 1994-1997
1994 Transactions
Issuances from stock split . . . . -- 3,234,000 20,000
Price per share . . . . . . . . . -- $.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 . . . . . . . . . -- $.01-$32.38 $12.13
December 31, 1994--
Shares issuable
upon exercise . . . . . . . . . -- 5,262,000 20,000
Price per share . . . . . . . . . -- $.01-$33.50 $8.50
Average price
per share . . . . . . . . . . . -- $10.02 $8.50
Expiration . . . . . . . . . . . . -- 1995-2004 1997
Restricted Stock
The Company's Board of Directors authorized the issuance of restricted
shares of the Company's common stock to certain key employees under its 1993,
1988 and 1984 employee stock option plans. Holders of restricted stock retain
all rights of a shareholder, except the shares cannot be sold until they are
vested. Upon employee termination, all
29
unvested shares are forfeited to the Company. The shares vest annually through
1997.
The Company issued 6,000, 255,000 and 104,000 shares of restricted
stock to employees in 1994, 1993 and 1992, respectively, and increased common
stock and additional capital by the fair market value of the stock at the date
of issuance ($0.2 million, $7.3 million and $0.8 million in 1994, 1993 and
1992, respectively), net of unearned compensation. At December 31, 1994, 1993
and 1992, unearned compensation related to the restricted shares was $1.8
million, $3.3 million and $1.5 million, respectively. The unearned
compensation will be charged to expense ratably over the vesting period.
Approximately 14,000 restricted shares were forfeited in both 1994 and 1992
totaling $0.2 million and $0.1 million, respectively.
Reserved Stock
Common stock has been reserved for the following purposes (in
thousands):
December 31,
----------------------------
1994 1993
---- ----
Options outstanding . . . . . . . . . . . . . . . . . . . 5,282 3,416
Options available for grant
under the stock option plans . . . . . . . . . . . . . 2,938 1,787
Subordinated convertible
debentures . . . . . . . . . . . . . . . . . . . . . . -- 668
Stock purchase plans . . . . . . . . . . . . . . . . . . 1,240 778
----- -----
9,460 6,649
===== =====
OTHER OPERATING COSTS
The agreement to acquire a company (Optilink) in 1990 required the
Company to pay certain former employees of Optilink up to $7.9 million if
certain revenue targets are achieved through December 31, 1995. During 1994,
these revenue targets were fully achieved and all payments related to this
agreement have been expensed, including $2.3 million in 1994, $4.1 million in
1993 and $0.9 million in 1992. Such amounts are included in Other Operating
Costs on the Consolidated Statements of Income.
OTHER EXPENSE, NET
Other expense, net for the year ended December 31, 1993 included a gain
of $2.2 million from the sale of securities acquired several years ago as part
of financing provided to a customer.
Other expense, net for the year ended December 31, 1992 included
provisions of approximately $1.5 million for legal and related costs associated
with litigation activities and approximately $2.0 million for costs related to
the restructuring of the Company's senior unsecured debt.
30
RELATED PARTIES
The Company has agreements to pay consulting fees, which amounted to
$0.5 million in 1994, $0.5 million in 1993 and $0.4 million in 1992 to
non-employee members of the Company's Board of Directors.
The Company paid legal fees of $0.2 million in 1992 to a legal firm
with a shareholder who became a member of the Company's Board of Directors
during 1989 and subsequently resigned during 1992.
During 1992, the Company purchased approximately 98,000 shares of its
outstanding common stock from various employees and an officer of the Company,
who is also a member of the Board of Directors, at the existing market price at
the date of the transactions.
During 1994, the Company sold 40,000 shares of treasury stock to two
members of the Board of Directors at below market prices. The difference
between the market value of the shares sold and the issue price was
approximately $0.9 million which was charged to income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are reflected in the financial
statements at fair value. 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 carrying amounts of the Company's borrowings
under its debt agreements approximate their fair value at December 1994 and
1993 due to the debt agreements containing market interest rates. 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, 1994 and 1993. See "Commitments and Contingencies"
for the carrying amounts of the Company's off-balance-sheet financial
instruments.
31
COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain facilities and equipment which require
future rental payments. These rental arrangements do not impose any financing
or dividend restrictions on the Company or contain contingent rental
provisions. Certain of these leases have renewal and purchase options
generally at the fair value at the renewal or purchase option date.
Future minimum rental commitments under operating leases with
noncancellable lease terms in excess of one year were as follows at December
31, 1994 (in thousands):
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,402
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,263
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,182
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,097
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,420
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 28,784
-------
$99,148
=======
Operating lease rental expense was $24.6 million, $19.3 million and
$17.3 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Contingent Liabilities
The Company periodically sells customer receivables and operating
leases under agreements which contain recourse provisions. The Company could
be obligated to repurchase receivables and operating leases which were
previously sold on a partial recourse basis, the terms of which allow the
Company to limit its risk of loss to approximately $2.6 million at December 31,
1994. The Company has guarantees of approximately $34.9 million outstanding at
December 31, 1994, supporting Company and third party performance bonds to
customers and others, of which approximately $8.0 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, 1994, the Company had forward foreign exchange
contracts of $105.2 million. See "Forward Foreign Exchange Contracts" under
"Summary of Significant Accounting Policies" for further discussion.
Litigation
On July 20, 1993, the Company filed suit against Advanced Fibre
Communications ("AFC"), Quadrium Corporation and two former employees in the
United States District Court for the Eastern District of Texas. The Company
seeks: (i) a declaratory judgment that the two former employees are not
entitled to any stock options or cash payments under certain employee plans due
to alleged breaches of certain employment related agreements; (ii) a
declaration that AFC's products are proprietary property of the
32
Company; and (iii) unspecified damages for breach of contract, civil conspiracy
and tortious interference. Counterclaims have been filed by the former
employees claiming entitlement to certain stock options, cash payments and
punitive damages. Additionally, AFC has filed counterclaims including various
tort claims and claims based on alleged violations of various Federal and State
antitrust and unfair competition laws. AFC also seeks a declaratory judgment
that it owns all rights to its products and seeks unspecified damages,
including treble damages under antitrust statutes and punitive damages. During
1994, AFC amended its counterclaim to include an additional claim under the
Racketeering Influenced Corrupt Organization Act. On December 1, 1994, AFC
filed a motion to dismiss the case for lack of diversity jurisdiction and in
the alternative to transfer the case to the Northern District of California in
San Francisco, California. In anticipation of a dismissal of the Texas case,
AFC also filed on December 2, 1994 a new action in the U.S. District Court for
the Northern District of California, Oakland Division, in which AFC, as
Plaintiff, repeated all of the issues in the counterclaim in the Texas case.
The judge in the Texas case recently denied AFC's motion to transfer the Texas
case to the Northern District of California. Discovery has now been completed
and the parties are currently preparing for trial. The Company intends to
vigorously prosecute its claims and defend all of the defendants'
counterclaims. The Company believes that it has valid and substantial claims
against all of the defendants and valid defenses to all of the counterclaims
and does not believe the ultimate resolution of this matter will have a
material adverse effect on the Company's consolidated financial position.
The Company is a party to other routine legal proceedings incidental to
its business which, in the opinion of management, are not expected to have a
material adverse effect on the Company's consolidated financial position.
INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
International Operations
The Company operates in a single industry segment, the
telecommunications equipment marketplace.
A summary of the Company's 1994 operations by geographic area is
presented below (in thousands):
United Other
States Europe International Eliminations Consolidated
-------- ------ ------------- ------------ ------------
Revenue from unaffiliated
customers................... $ 908,664 $ 47,287 $47,174 $ -- $1,003,125
Intercompany revenue between
geographic areas............ 63,871 11,473 4,301 (79,645) --
Operating income.............. 215,280 2,509 505 (4,295) 213,999
Identifiable assets at
December 31, 1994........... $1,012,006 $234,983 $27,715 $ (6,168) $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 from foreign operations and
identifiable assets of foreign operations were less than 10% of consolidated
revenues and assets, respectively, in 1993 and 1992.
Revenue generated from export sales was less than 10% of consolidated
revenue in 1994, 1993 and 1992.
Major Customers
Customers that accounted for 10% or more of consolidated revenue and
their related percentage of consolidated revenue were as follows:
Years ended December 31,
--------------------------
1994 1993 1992
---- ---- ----
Motorola, Inc . . . . . . . . . . . . . . . . . . . . . . . . . 23% 12% 13%
MCI Communications Corporation . . . . . . . . . . . . . . . . 12% 18% 15%
Ameritech Services, Inc.
and subsidiaries . . . . . . . . . . . . . . . . . . . . . . 11% 13% *
Bell Atlantic . . . . . . . . . . . . . . . . . . . . . . . . . * 11% 10%
NYNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * 11% *
*Represented less than 10% of consolidated revenue.
33
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of DSC Communications Corporation:
We have audited the accompanying consolidated balance sheets of DSC
Communications Corporation and subsidiaries (the "Company") as of December 31,
1994 and 1993 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. 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, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
January 23, 1995
34
DSC Communications Corporation and Subsidiaries
QUARTERLY RESULTS
(Unaudited) (In thousands, except per share data)
1994 1993
----------------------------------------- -----------------------------------------
Fourth Third Second First Fourth Third (A) Second First
-------- -------- -------- -------- -------- -------- -------- --------
Revenue............. $312,076 $260,601 $229,574 $200,874 $217,934 $187,971 $168,676 $156,193
Gross profit........ 154,049 126,461 112,867 97,015 96,050 81,559 73,119 67,241
Net income.......... $ 53,545 $ 43,196 $ 36,284 $ 29,601 $ 28,764 $ 23,288 $ 18,236 $ 11,372
======== ======== ======== ======== ======== ======== ======== ========
Income per
share (B).......... $ 0.46 $ 0.37 $ 0.31 $ 0.25 $ 0.25 $ 0.22 $ 0.17 $ 0.12
======== ======== ======== ======== ======== ======== ======== ========
---------------
(A) The 1993 third quarter includes a gain of approximately $2.2 million from
the sale of securities acquired several years ago as part of financing
provided to a customer.
(B) 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 per share data presented prior to 1994
has been restated to retroactively reflect the stock split.
EX-21.1
6
SUBSIDIARIES OF THE REGISTRANT
1
Exhibit 21.1
DSC COMMUNICATIONS CORPORATION
Subsidiaries Incorporated In
------------ ---------------
DSC Communications (Asia/Pacific) Pte Ltd Singapore
DSC Communications Canada Inc. Canada
DSC Finance Corporation Delaware
DSC Korea, Inc. Delaware
DSC International Corporation Delaware
DSC Marketing Services, Inc. Delaware
DSC Technologies Corporation Delaware
DSC Taiwan, Inc. Delaware
DSC Communications Limited United Kingdom
DSC of Puerto Rico, Inc. Delaware
DSC of the Virgin Islands, Inc. US Virgin Islands
DSC Communications Pty. Ltd. Australia
DSC Japan Inc.** Japan
Granger Associates, Inc. Delaware
DSC Telecomunicacoes, Ltda. Brazil
DSC Finance (Pty) Ltd. Australia
DSC Communications (Nederland) B.V. The Netherlands
DSC Kommunikationsdienste GmbH Germany
DSC Communications A/S Denmark
DSC Local Networks (Europe) Ltd. United Kingdom
NKT Dedicom A/S Denmark
NKT Technics Ltd. United Kingdom
NKT Polska sp. zo.o. Poland
Netman A/S**** Denmark
Fibcom Ltd.***** India
NE TMN A/S****** Denmark
--------------------------------------------------------------------------------
**Jointly-owned Japanese subsidiary of DSC Communications Corporation
and Mitsubishi Corporation.
****Jointly-owned company with Digital Equipment Corporation
*****Jointly-owned company with Indian Telephone Industries Ltd. and
The Industrialisation Fund For Developing Countries
******Participant in a partnership, TMN Udvikling I/S, with
Cophenhagen Telephone and Jutland Telephone
EX-23.1
7
CONSENT OF ERNST & YOUNG LLP
1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements File
Nos. 2-83398 (Amendment No. 2), 2-95833, 33-17459, 33-38544, 33-22745,
33-49718, 33-65212, 33-65214, and 33-64784 of DSC Communications Corporation
and in the related Prospectuses of our report dated January 23, 1995, with
respect to the consolidated financial statements and schedule of DSC
Communications Corporation included in or incorporated by reference in this
Annual Report (Form 10-K) for the year ended December 31, 1994.
Ernst & Young LLP
Dallas, Texas
March 30, 1995
EX-27.1
8
FINANCIAL DATA SCHEDULE
5
1,000
YEAR
DEC-31-1994
JAN-01-1994
DEC-31-1994
52,942
218,380
239,740
0
180,674
738,454
526,248
(243,285)
1,268,536
345,420
0
1,185
0
0
849,915
1,268,536
1,003,125
1,003,125
512,733
512,733
276,393
0
2,075
223,190
60,564
162,626
0
0
0
162,626
1.39
0