-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FfBDvSQzdQQcWa70JpVNNivYmc/qKOA7PTybBbU2bK4BlReR6WacBs5Gg1loSbth XMTRzGRwLHfMc6iVjQCAUA== 0000950134-96-001176.txt : 19960402 0000950134-96-001176.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950134-96-001176 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000316004 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 541025763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10018 FILM NUMBER: 96543377 BUSINESS ADDRESS: STREET 1: 1000 COIT RD CITY: PLANO STATE: TX ZIP: 75075 BUSINESS PHONE: 2145193000 MAIL ADDRESS: STREET 1: 1000 COIT ROAD CITY: PLANO STATE: TX ZIP: 75075-5813 FORMER COMPANY: FORMER CONFORMED NAME: DIGITAL SWITCH CORP DATE OF NAME CHANGE: 19850425 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1995 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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NO. 0-10018 --------------------------- DSC COMMUNICATIONS CORPORATION (Exact Name of Registrant as Specified in Charter) DELAWARE 54-1025763 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1000 COIT ROAD PLANO, TEXAS 75075 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (214) 519-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE 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, 1996, 115,852,134 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 $3,465,222,500. (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 1996 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, 1995 are incorporated by reference in Item 1 of Part I, Items 6, 7, and 8 of Part II, and Item 14 of Part IV of this report. 2 DSC COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1995 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, digital cross-connect products, and optical line transmission systems and related advanced network management systems. The Company develops such systems to meet United States and international telecommunications standards, and the specific requirements of the operating companies of the Regional Holding Companies ("RHCs"), independent telephone companies, long-distance carriers, private networks, and companies operating public and private communications networks in other countries. The Company acquired NKT Elektronik A/S (subsequently renamed DSC Communications A/S), a Copenhagen, Denmark-based manufacturer of optical transmission equipment, for approximately Page 1 3 $149 million in cash in November, 1994. The operating results of DSC Communications A/S are reported as part of the Company's Transport Systems Group. The Company supplies products to a domestic and international customer base, including local exchange telephone companies, long-distance carriers, cellular telephone companies, international telephone companies, various Fortune 1000 companies, and utility companies. Its domestic customers include the RHCs and most major domestic independent telephone and long-distance companies, including MCI Communications Corporation, U.S. Sprint Communications Company L.P., GTE Communications Systems Corporation, and LDDS/WorldCom, Inc. (formerly LDDS Communications, Inc.). The Company is also a major manufacturer of high-capacity cellular switches for Motorola, Inc. ("Motorola"), a leading supplier of wireless communication systems throughout the world. International customers include DDI Corporation ("DDI") of Japan, Deutsche Telekom in Germany, Mercury Communications, Ltd., a subsidiary of Cable & Wireless PLC in the United Kingdom, British Telecommunications PLC, Telefonos de Mexico, S.A. de C.V., Tele Danmark and AAP Communications, Pty. Ltd. of Australia. PRODUCTS The percentage of consolidated revenue from the Company's product groups was as follows:
Year Ended December 31, 1995 1994 1993 ---- ---- ---- Switching and Intelligent Network 48% 52% 45% Access 28% 27% 28% Transport 23% 19% 22%
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 Page 2 4 systems for wireless communications including both cellular and personal communications. The Company's primary switching and intelligent network products include: the MegaHub(R) switching equipment marketed as part of the A-INfusion(TM) family of products and other tandem and cellular switching equipment. The MegaHub Product Line. The Company's MegaHub product line includes several switching and switching-related products. These products are all based on a modular, common architecture which allows a platform (a combination of hardware and software) to serve as a foundation for several different types of switching and signaling equipment and also allows carriers to expand, migrate and enhance their network for higher capacity products. Using a MegaHub platform, the Company can create a tandem switch (a switch operated by long-distance companies to route calls over long-distance networks), a signal transfer point (a high-capacity switching element used to route and switch call setup information), a service control point (a central storehouse or database which contains centralized call routing information) or various other switching elements. The MegaHub family of products include: (i) the MegaHub 600E, one of the industry's largest tandem switches, (ii) the MegaHub Signal Transfer Point (the "MegaHub STP"), a high-capacity switching system used to expedite the routing and switching of calls through the Common Channel Signaling No. 7 network ("CCS7") and provide revenue-generating services such as caller ID, call trace, repeat call and information services, (iii) the MegaHub Service Control Point (the "MegaHub SCP"), which acts as a central database for information about calls and callers and is used in applications such as authorizing the use of credit cards and network 911 emergency services and (iv) products based on the Programmable Advanced Intelligent Network Computing Environment ("PACE"), including the MegaHub PACE(TM) SCP and MegaHub PACE Service Management System ("SMS"). In 1995 using the Company's advanced intelligent network products, a Japanese customer, DDI, launched its wireless and microcell based Personal Handyphone System ("PHS"), one of the world's first major personal communication services. Page 3 5 Tandem Switches. The Company is a vendor of tandem switches to non-AT&T long-distance carriers. In addition to its MegaHub 600E tandem switch, the Company also provides a family of switches including the DSC DEX200. The Company's international customer base continues to grow with the increasing demand for tandem switches in foreign countries, such as the Company's new 600 GT Global Tandem switch. Cellular Switches. The Company has developed a family of cellular telephone switches utilizing its tandem switch technology. A cellular switch is used to connect cellular subscribers to the public telecommunications network. The Company's primary customer for cellular switches is Motorola who has sold the Company's cellular switches in its cellular systems since 1985, currently under a non-exclusive marketing agreement. In September 1994, the Company and Motorola expanded their ongoing relationship by agreeing that the Company would provide repackaged, smaller configurations of its existing cellular switching system to Motorola as an alternative to Motorola's line of smaller cellular switching systems. Motorola has incorporated the Company's cellular switches into cellular communications systems in the United States and in numerous other countries including the People's Republic of China and Russia. In addition, orders have been received from Motorola for deliveries of Code Division Multiple Access ("CDMA") switches for various wireless networks, including personal communications services. Broadband Products. Broadband products utilize Asynchronous Transfer Mode ("ATM") technology to enable service providers to offer the most advanced network capabilities, including multimedia, high- speed data, voice and interactive video services. The Company's iMPAX(TM) product is an ATM-based switch that can be located at the premises of a large corporation to enable the corporation to transport a variety of communication services throughout its network. iMPAX can also be deployed in a telephone company's central office or at the site of an independent service provider. Use of iMPAX will give service providers and corporations access to network elements through which they can offer new wideband and broadband services such as LAN-to-LAN inter-networking, video conferencing and supercomputer connectivity. Page 4 6 The ATM-based technology will be incorporated into the Company's switching, access and transport products. The Company's primary competitors in the switching and intelligent network markets are Northern Telecom Ltd. ("Northern Telecom"), Tandem Computers, Inc., AT&T Corporation ("AT&T") and LM Ericsson ("Ericsson"). ACCESS PRODUCTS. The Company designs, manufactures and markets equipment for the local loop, that portion of the public telecommunications network which extends from the local telephone company's central office switch to the individual home or business user. The demand for access equipment has been strong in recent years due primarily to the deployment of fiber optics in many of the networks served by the major service providers in the United States. The Company believes that software-based access products which support fiber optic communications will continue to experience rapid growth in demand and thus, has developed a line of access products to serve telecommunications service carriers in the United States and abroad. Litespan(R)-2000. In 1991, the Company began shipments of Litespan-2000, an access product which enables local exchange carriers and other service providers to utilize fiber optics in the local loop. Over a single pair of optical fibers, Litespan-2000 can transmit voice, data and video on an integrated basis to as many as 2,000 subscribers. The Litespan-2000 is the world's first digital loop carrier to meet North American Synchronous Optical Network ("SONET") standards and related fiber optic interface requirements set forth by the RHCs. The Litespan-2000 allows telecommunications service providers to introduce the high-capacity technology of fiber optics into the local loop, while supporting basic services, in a cost effective manner. The Company believes that the introduction of multi-media services, such as video on demand, will increase the demand for fiber optic-related products. The Company currently has multi-year agreements with six of the seven RHCs for purchases of Litespan-2000 systems. Litespan(R)-120. The Company has evolved the Litespan system to address access applications in international markets. The Litespan-120 is a flexible access multiplexer that may be deployed as a loop carrier using copper, fiber or radio feeders and offers benefits such as integral fiber Page 5 7 optic interfaces, software control and support of a wide range of telephony services in a compact, cost effective package. Deliveries of Litespan-120 began during late 1995, and additional field testing is currently underway in several countries. Airspan(TM). Airspan, which is currently undergoing customer market trials, provides access service over a wireless local loop, thereby providing users access to the public telecommunications network without having to install copper wire or fiber lines. The primary markets for this product are areas where the last link in the subscriber connection is radio rather than copper or fiber lines. Airspan is expected to be popular in developing countries where copper or fiber line access connections can be expensive and time consuming to install. In addition, Airspan and Multiline, an application of Airspan integrated with Litespan-120, are cost effective and quick response alternatives in dense urban environments of developed countries. Since the beginning of 1994, the Company has obtained agreements with Metromedia International Telcell, British Telecom and various other Asian, European, African and Latin American companies for the delivery of Airspan. Switched Digital Video. The Company is also currently developing Switched Digital Video ("SDV") technology to provide an ATM-based, interactive, fiber switched solution capable of delivering video, data, and voice services to residences and businesses. The Company will offer SDV as a migratory path for new and current Litespan customers as they upgrade to interactive broadband full-service networks. These new SDV-based networks will enable carriers to offer a multitude of new revenue-generating services over a single integrated platform. Companion products from the Company's access products portfolio include Starspan(R), which extends the capabilities of the Litespan-2000 to the customer's premises; Metrospan(R), which is used as a broadband transport system within a campus-type setting or a metropolitan communications network; and Mediaspan(TM), which is currently being developed to support the integrated delivery of voice, video and data over hybrid fiber/coax systems. Page 6 8 New access product offerings in 1996 include the OC-12 Transport system which provides delivery of very high rate services such as DS3 and OC3 to end users. The Company's primary competitors in the access market are AT&T, Northern Telecom and Fujitsu, Ltd. TRANSPORT PRODUCTS. Transmission equipment includes a vast array of products that carry signals throughout the telecommunications network. The Company's primary transmission products are its family of digital cross-connects and line transmission systems which handle the tasks of combining and splitting circuits so that voice, data and video traffic can travel to other devices in the network. The Company's digital cross-connect family, comprised of the DEXCS, DEX ECS1 and DEX ECS3 models, has enabled telephone companies to make their central offices more efficient and less labor-intensive. The Company's latest digital cross-connect product is the iMTN(R), a major new transmission platform. iMTN (Integrated Multi-Rate Transport Node). iMTN provides routing and distribution throughout the network. The iMTN provides for the public telecommunications network's evolution to transmission equipment which meets the North American SONET and international Synchronous Digital Hierarchy ("SDH") fiber optic standards. Early applications of iMTN include network video broadcast and high-volume data transfer. The iMTN has been deployed both domestically and internationally. The Company's line transmission equipment, which was acquired as part of the acquisition of DSC Communications A/S, includes the FOCUS 2 to 140 and 2 to 150 multiplexers and line terminals for access networks, and the FOCUS 620 to 2500 terminal multiplexers and regenerators for high-capacity trunk transmission systems. These products incorporate plesiochronous digital hierarchy ("PDH") systems, representing the established embedded base of transmission technology, and SDH systems, representing new emerging transmission technology analogous to SONET in the North American market. In the last half of 1996, the Company plans to begin deliveries of the AC1 and AC4, a new generation of SDH products. These Page 7 9 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. The Company also develops, manufactures, and markets a variety of digital transmission products such as echo cancelers and transcoders, as well as various customer premises products. The Company's primary competitors in the digital cross-connect market are AT&T, Alcatel Network Systems ("Alcatel") and Tellabs, Inc. The primary competitors in the line transmission equipment market are Alcatel, Ericsson and Siemens AG. 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, which prohibited the RHCs from manufacturing telecommunications equipment and providing interexchange or long-distance services. In early 1996, the Telecommunications Act of 1996 (the "1996 Legislation") was passed. The 1996 Legislation contains provisions that would permit the RHCs, subject to satisfying certain conditions, to manufacture telecommunications equipment. It is possible that one or more RHCs may decide to manufacture telecommunications equipment, to design and provide telecommunications software, or to form alliances with other manufacturers. Any of these developments could result in increased competition for the Company and reduce the RHCs' purchases from the Company. The 1996 Legislation also would permit local exchange telephone companies, long-distance carriers, cable television companies and electric utility companies to compete with each other to provide local and long-distance telephone and video services. The Company believes that the 1996 Legislation will increase the demand for systems, software and services as network operators respond to the Page 8 10 changing competitive environment by constructing new or enhancing existing networks. In addition, the FCC and a majority of the states have enacted or are considering regulations based upon alternative pricing methods. Under traditional rate of return pricing, telecommunications service providers were limited to a stated percentage profit on their investment. Under the new method of pricing, many PUCs have entered into agreements with the local exchange carriers where the PUCs have relaxed or eliminated the profit cap in return for the carrier's promise to reduce or hold service prices at current levels. In some states, the PUCs and the carriers have further agreed, in order to win relaxation of profit limits, that the carriers would invest large sums to further upgrade the digital and optical capabilities of the network. The Company believes that the new methods of price regulation could increase the demand for its products which enhance the efficiency of the network or allow the expedited introduction of new revenue-producing services. Outside the United States, telecommunications networks are primarily owned by the government or are strictly regulated by the government. Although potential growth rates of some international markets are higher than those of the United States, access to such markets is often difficult due to the established relationship between the government-owned or -controlled telecommunications operating company and its traditional indigenous suppliers of telecommunications equipment. However, there has been a global trend towards privatization and deregulation of the state-owned telecommunications operations. This trend has found favor in the industrialized world, the emerging markets of the newly-industrialized countries, and various developing market countries which want to both capitalize on the value of the existing network and promote the development of the telecommunications network as an integral part of the economic infrastructure. The Company believes that the current trend of privatization and deregulation will continue, and that such trend could provide the Company with additional international opportunities. Page 9 11 MARKETING The Company sells products and services on a domestic and international basis to both the public and private network markets through various sales and distribution channels. The Company's internal sales group is a direct sales force, divided into market business segments. The Company also sells through third-party distributors such as original equipment manufacturers ("OEMs"), sales representatives and certain distributors in foreign countries. The Company has separate agreements with Nokia Telecommunications Oy of Finland ("Nokia") and a European subsidiary of 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 use the European telecommunications standards, and a nonexclusive right to market the iMTN system in certain other countries. INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS The information required for this section is set forth in the "International Operations and Major Customers" footnote on page 38 of the Company's 1995 Annual Report to Shareholders, which information is incorporated herein by reference. BACKLOG The Company's backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $688 million and $601 million on December 31, 1995 and December 31, 1994, respectively. Approximately $174 million of orders included in the December 31, 1995 backlog are scheduled for delivery after December 31, 1996. However, all orders are subject to possible rescheduling by customers. While the Company believes that the orders included in the backlog are firm, some orders may be canceled by the customer without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes that it is in the Company's best interest to do so. Page 10 12 RESEARCH AND PRODUCT DEVELOPMENT The industry in which the Company operates is characterized by rapidly-changing technological and market conditions which may shorten product life cycles. The Company's future competitive position will depend not only upon successful production and sales of its existing products, but also upon its ability to develop and produce, on a timely basis, new products to meet existing and anticipated industry demands. The Company is currently engaged in the development of several new products and enhancements to existing products. During the product development process, the Company invests a substantial amount of resources in products which often require extensive field testing and evaluation prior to actual sales to its customers. The Company's research and product development costs charged to expense were $189.8 million, $127.3 million, and $86.6 million for the years ended December 31, 1995, 1994, and 1993, respectively. Additionally, approximately $26.8 million, $24.6 million, and $21.9 million of software development costs were capitalized in the Consolidated Balance Sheets in 1995, 1994, and 1993, respectively. COMPETITION The portions of the telecommunications industry in which the Company competes are intensely competitive and are characterized by continual advances in technology. The Company believes that it enjoys a strong competitive position due to its large installed base, its strong relationship with key customers, and its technological leadership and new product development capabilities. However, many of the Company's foreign and domestic competitors (which are listed in the PRODUCTS section) have more extensive engineering, manufacturing, marketing, financial and personnel resources than those of the Company. The Company's ability to compete is dependent upon several factors, including product features, innovation, quality, reliability, service support, price and the retention and attraction of qualified design and development personnel. Page 11 13 MANUFACTURING AND SUPPLIERS The Company generally uses standard parts and components for its products, and believes that, in most cases, there are a number of alternative, qualified vendors for most of those parts and components. The Company purchases certain custom components and products from single suppliers. The Company believes that the manufacturers of the particular custom components and products should be able to meet expected future demands. Although the Company has not experienced any material adverse effects from the inability to obtain timely delivery of needed components, an unanticipated failure of any significant supplier to meet the Company's requirements for an extended period, or an interruption of the Company's ability to secure comparable components could have an adverse effect on the Company's revenue and profitability. In addition, the Company's products contain a number of subsystems or components acquired from other manufacturers on an OEM basis. These OEM products are often available only from a limited number of manufacturers. In the event that an OEM product was no longer available from a current OEM vendor, second sourcing would be required and could delay customer deliveries which could have an adverse effect on the Company's revenue and profitability. PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION The Company has been awarded patents and has patent applications pending in the United States and certain foreign countries. There can be no assurance that any of these applications will result in the award of a patent, or that the Company would be successful in defending its patent rights in any subsequent infringement actions. Because of the existence of a large number of third-party patents in the telecommunications field and the rapid rate of issuance of new patents, some of the Company's products, or the use thereof, could infringe third-party patents. If any such infringement exists, the Company believes that, based upon historical industry practice, it or its customers should be able to obtain any necessary licenses or rights under such patents upon terms which would not be materially adverse to the Company. In addition to the patent protection described above, the Company protects its software through contractual arrangements with its customers and through copyright protection procedures. Page 12 14 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, 1995, the Company had a total of 5,860 employees. Page 13 15 ITEM 2. PROPERTIES The Company's principal facilities are in the following locations:
Approximate Square Footage --------------------------- Location Owned Leased Description -------- ----- ------ ----------- Plano, 1,295,000 437,000 Corporate offices; administration; Texas engineering, research and development; manufacturing and assembly; and warehouse. Copenhagen, 223,000 --(1) Administration; engineering, research and Denmark development; manufacturing and assembly; and warehouse. Aguadilla, -- 164,000 Manufacturing and assembly. Puerto Rico Petaluma, -- 112,000 Assembly; engineering, research and California development. Feltham and -- 87,000 Assembly; engineering, research and Ashford, development; and warehouse. England
(1) During late 1995 and early 1996, the Company consolidated its Copenhagen, Denmark facilities from multiple leased buildings of approximately 137,000 square feet into two newly constructed buildings owned by the Company. The leases on the previous facilities expire in April 1996. The Company owns approximately 281 acres of land in Plano, Texas and approximately 28 acres of land in Copenhagen, Denmark, Page 14 16 of which 99 acres have been developed for existing facilities and the balance is undeveloped. The undeveloped land is expected to be used for future Company expansion. The Company is currently establishing additional manufacturing facilities in San Jose, Costa Rica in a 48,000 square foot leased facility with operations expected to begin in the second quarter of 1996. The Company also has additional leased facilities, which are primarily sales offices, located in various cities throughout the world. The Company believes that the above- described facilities are suitable and adequate to meet the Company's production requirements. ITEM 3. LEGAL PROCEEDINGS On July 20, 1993, the Company filed suit against Advanced Fibre Communications ("AFC"), a California corporation; Quadrium Corporation ("Quadrium"), a California corporation; and two individuals. The Company seeks a declaratory judgment that the two individuals 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 with the Company. The Company further seeks a declaration that AFC's products are the proprietary property of the Company under the terms of certain Proprietary Information Agreements or certain Consulting Agreements with Quadrium. The Company also seeks unspecified damages for breaches of contract, civil conspiracy, and tortious interference. The individual defendants have both filed counterclaims whereby they claim entitlement to certain stock options and cash payments under several of the Company's stock option plans. AFC has also filed a counterclaim alleging that the Company has violated the Sherman Antitrust Act and certain state antitrust statutes, and 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, (5) committed unfair competition, and (6) committed acts in violation of the Racketeering Influenced Corrupt Organization Act. The Company believes that it has valid and substantial claims against all of the defendants. The Company intends to vigorously defend all of the defendants' counterclaims, and further believes that it has valid defenses to all of the counterclaims. Page 15 17 On January 26, 1994, C.L. Grimes, a stockholder of the Company, filed a derivative suit in Delaware Chancery Court, purportedly on behalf of the Company as the real party in interest and as a stockholder of the Company, seeking a declaration that the Employment Agreement of James L. Donald, his Executive Income Continuation Plan, and the 1990 Long-Term Incentive Compensation Plan as it applies to Mr. Donald and all other benefits of Mr. Donald, including previously granted Company stock options, are null and void. The defendants in the suit are Mr. Donald, all current non-employee directors, and two former directors of the Company. The Company itself is a nominal defendant. The plaintiff contends that Mr. Donald's employment contract contains an improper delegation of Board of Directors' authority to Mr. Donald and excess payments. The suit also contends that the salary and benefits established for Mr. Donald pursuant to the Donald agreements referred to above and approved by the Company's Board of Directors are excessive and constitute a diversion and waste of corporate assets. The suit seeks an injunction restraining Mr. Donald from exercising any stock options, taking any action to implement any of the Donald agreements, or declaring a constructive termination of his employment, and also seeks unspecified damages against the defendants and Grimes' legal fees. On June 1, 1994, the plaintiff filed an amended complaint in which he restated his existing claims and added a new claim contending that the Company's 1994 proxy statement was misleading in its description of the 1994 Long-Term Incentive Compensation Plan ("LTIP"). On this new claim, the plaintiff seeks a decree that the 1994 proxy statement insofar as it relates to the 1994 LTIP and the actions taken pursuant to the proxy statement with respect to the 1994 LTIP are null and void, and seeks to enjoin the Company from implementing the 1994 LTIP. 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. All parties have filed appellate briefs and oral argument Page 16 18 has been conducted by the Court. A ruling is expected by the Court within the next several months. 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 infringed the Company's copyrights on its operating system software for tandem switches and firmware for microprocessor cards. The Company further alleges that DGI has misappropriated the Company's trade secrets regarding several of the Company's cards, including digital trunk interface cards and microprocessor cards. The Company also alleges that DGI has engaged in unfair competition under the Lanham Act and the common law by trading on the Company's reputation, and by misleading customers about DGI's research and development efforts. The Company seeks damages for DGI's prior actions and preliminary and permanent injunctive relief. DGI has brought counterclaims for alleged violations of federal antitrust statutes, tortious interference, industrial espionage, misappropriation of trade secrets, trespass, conversion, and unfair competition. DGI's antitrust counterclaims are based upon allegations that the Company's claims constitute "sham" litigation, that the Company's statements to customers about the impact of their use of DGI products on the Company's warranties are unlawful attempts to exclude competition, and that the Company has unlawfully tied the sale of its microprocessors to the sale of other products. The balance of DGI's counterclaims are based upon certain investigative procedures employed by the Company in connection with this controversy. DGI asks the Court to award actual damages, treble damages under antitrust statutes, punitive damages, injunctive relief, and attorneys' fees. Finally, DGI seeks declaratory relief that DGI's sales of microprocessors do not violate any proprietary rights of the Company or any applicable law. Although the outcome of litigation is inherently uncertain, the Company believes that it has valid and substantial claims against DGI and valid defenses to DGI's counterclaims. On April 10, 1995, the Company filed a lawsuit against Next Level Communications ("NLC") and two former Company employees, alleging breach of contract and the misuse of Company trade secrets. The Company is seeking an injunction prohibiting NLC and the former employees from continued use of Company trade Page 17 19 secrets and opportunities. On March 28, 1996, the Company received a favorable jury verdict in the amount of $369.2 million in damages. The Court is yet to enter a judgment or rule on the issue of injunctive relief. Once the Court enters a judgment, NLC will have 30 days to appeal the award. On February 14, 1996, the Company joined Bell Atlantic in bringing an antitrust action against AT&T. The complaint alleges that AT&T has used its monopoly power in the central office switch market as part of a scheme to gain an unfair competitive advantage in the remote digital terminal market. The Company is seeking to compel AT&T to open up the interfaces to the central office switch so that any manufacturer will have the ability to compete with applications, software, features, and services, and will more rapidly deliver to its customers the enhanced functionality that they have come to expect. The Company is also party to other routine legal proceedings incidental to its business. The Company does not believe the ultimate resolution of the above litigation will have a material adverse effect on its consolidated financial position. 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 1995. 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, 1996, the executive officers of the Company are as follows:
NAME AGE PRESENT POSITION(S) WITH COMPANY ---- --- -------------------------------- Allen R. Adams 46 Group Vice President Charles H. Ansley 50 Senior Vice President James L. Donald 64 Chairman of the Board, President, and Chief Executive Officer
Page 18 20 Gerald F. Montry 57 Senior Vice President, Chief Financial Officer, and Director Philip A. Wilkinson 48 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 February, 1993, Mr. Adams was named Senior Vice President. Mr. Adams currently serves as Group Vice President, Switch Systems Group. Charles H. Ansley joined the Company in 1996 as Senior Vice President, Global Sales and Service. From 1984 to 1996, Mr. Ansley was employed by AT&T Corporation, where his most recent position was that of Vice President of Client Services and Marketing. 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. 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. Philip A. Wilkinson joined the Company in 1995 as Senior Vice President to lead the Transport Systems Group. From 1992 to 1995, Mr. Wilkinson was employed by System Results, Inc. where his most recent position was that of President. From 1981 to 1992, he held various executive positions with AT&T Corporation. 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 Page 19 21 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:
1995: High Low ---- ---- --- 4th Quarter $58 3/4 $31 3rd Quarter 63 45 5/8 2nd Quarter 46 1/2 31 3/4 1st Quarter 39 31 5/8 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
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, 1996, was $30 1/4 per share. As of December 31, 1995, there were 3,768 shareholders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is set forth on page 19 of the Company's 1995 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is set forth in the text on pages 20 through 23 of the Company's 1995 Annual Report to Shareholders, which information is incorporated herein by reference. Page 20 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth on pages 24 through 40 of the Company's 1995 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 1996 Annual Meeting of Stockholders under the heading "ELECTION OF DIRECTORS", and on page 22 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 26 of the definitive proxy statement of the Company, previously filed in connection with its 1996 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information set forth under the headings "EXECUTIVE COMPENSATION" on pages 15 through 22, and "Compensation of Directors" and "Non-Employee Directors Stock Option Plan" on pages 23 and 24 of the definitive proxy statement Page 21 23 of the Company, previously filed in connection with its 1996 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 pages 25 and 26 of the definitive proxy statement of the Company, previously filed in connection with the 1996 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information set forth under the headings "Compensation of Directors" on page 23 and "LITIGATION" on page 24 of the definitive proxy statement of the Company, previously filed in connection with the 1996 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) The following is a list of the consolidated financial statements and the financial statement schedule which are included in this Form 10-K or which are incorporated herein by reference. 1. Financial Statements: As of December 31, 1995 and 1994: Consolidated Balance Sheets For the Years Ended December 31, 1995, 1994, and 1993: - Consolidated Statements of Income - Consolidated Statements of Cash Flows - Consolidated Statements of Changes in Shareholders' Equity Page 22 24 Notes to Consolidated Financial Statements Report of Independent Auditors 2. Financial Statement Schedule: For the Years Ended December 31, 1995, 1994, and 1993: - Schedule II - Valuation and Qualifying Accounts All other financial statements and financial statement schedules have been omitted because they are not applicable, or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits: 2.0 Stock Purchase Agreement By and Among DSC Communications Corporation, NKT Holding A/S, and NKT Elektronik A/S, Dated October 20, 1994 (10) 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, 1994 (11) 3.1 Certificate of Amendment of Certificate of Incorporation of the Company dated April 27, 1994 (14) 3.2 Certificate of Correction of Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 8, 1995 (14) 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 8, 1995 (14) 3.4 Amended and Restated By-laws of the Company (5) 4.3 Rights Agreement, Dated as of May 12, 1986, Between the Company and The Chase Manhattan Bank, N.A., as Rights Agent (1) 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 (1)
Page 23 25 10.1 Employment Agreement Between the Company and James L. Donald, Dated January 1, 1990 (6) 10.2 Executive Income Continuation Plan, Dated January 1, 1990, Between the Company and James L. Donald (6) 10.3 Insurance Ownership Agreement, Dated January 1, 1990, Between the Company and James L. Donald (6) 10.4 Management Consulting Agreement Among the Company, Nolan Consulting, Inc., and James M. Nolan, Dated March 15, 1982 (2) 10.5 Revolving Credit Agreement, Dated as of February 24, 1994, Between the Company and Certain of its Subsidiaries and Certain Financial Institutions Providing for Unsecured Revolving Credit (9) 10.6 The Company's Amended and Restated 1984 Employee Stock Option Plan (4) 10.7 The Company's Amended and Restated 1988 Employee Stock Option Plan (4) 10.8 The Company's 1993 Employee Stock Option and Securities Award Plan (7) 10.9 The Company's 1993 Non-Employee Directors Stock Option Plan (7) 10.10 Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers (12) 10.11 Schedule to Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers (15) 10.12 The Company's Restoration Plan, Dated July 1, 1988 (3) 10.13 Form of Indemnification Agreement Between the Company and its Directors and Senior Officers as Approved by the Board of
Page 24 26 Directors and Entered Into on or After January 22, 1990, and the Related Trust Agreement, Dated March 1, 1990, Between the Company and Texas Commerce Bank, N.A., as Trustee (4) 10.14 The Company's 1990 Long-Term Incentive Compensation Plan, Effective as of January 1, 1990 (6) 10.15 The 1990 Optilink Stock Option and Cash Payment Plan, Dated May 15, 1990 (6) 10.16 The Company's 1994 Long-Term Incentive Compensation Plan, Effective as of January 1, 1994 (8) 10.17 Noncompetition Agreement By and Among DSC Communications Corporation and NKT Holding A/S, Dated November 15, 1994 (11) 10.18 Escrow Agreement By and Among DSC Communications Corporation, NKT Holding A/S, and Den Danske Bank, Dated November 15, 1994 (11) 10.19 DSC Communications Corporation Executive Deferred Income Plan (12) 10.20 Note Purchase Agreement Between the Company and Certain Financial Institutions, dated April 15, 1995 (13) 10.21 Consulting Agreement Between the Company and Clement M. Brown, Jr., Dated January 23, 1986 (15) 10.22 Consulting Agreement Between the Company and Sir John Fairclough, Dated December 31, 1992 (15) 10.23 Consulting Agreement Between the Company and Frank J. Cummiskey, Dated May 1, 1993 (15) 11.1 Statement re: Computation of Per Share Earnings (15) 13.1 1995 Annual Report to Shareholders (for EDGAR filing purposes only) 21.1 Subsidiaries of the Registrant (15) 23.1 Consent of Ernst & Young LLP (15) 27.1 Financial Data Schedule (for EDGAR filing purposes only)
Page 25 27 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; 10.6 The Company's Amended and Restated 1984 Employee Stock Option Plan; 10.7 The Company's Amended and Restated 1988 Employee Stock Option Plan; 10.8 The Company's 1993 Employee Stock Option and Securities Award Plan; 10.9 The Company's 1993 Non-Employee Directors Stock Option Plan; 10.10 Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers; 10.11 Schedule to Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its 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 Texas Commerce Bank, N.A., as Trustee; 10.14 The Company's 1990 Long-Term Incentive Compensation Plan, Effective as of January 1, 1990; 10.16 The Company's 1994 Long-Term Incentive Compensation Plan, Effective as of January 1, 1994; 10.19 DSC Communications Corporation Executive Deferred Income Plan; 10.21 Consulting Agreement Between the Company and Clement M. Brown, Jr., Dated January 23, 1986; 10.22 Consulting Agreement Between the Company and Sir John Fairclough, Dated December 31, 1992; 10.23 Consulting Agreement Between the Company and Frank J. Cummiskey, Dated May 1, 1993. (b) Reports on Form 8-K: None - ----------------------------------------------------------------- (1) 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 Page 26 28 Commission pursuant to Section 12(g) of the Exchange Act (2) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1981 (3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1988 (4) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1990 Annual Meeting of Stockholders (5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1989 (6) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (7) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1993 Annual Meeting of Stockholders (8) Incorporated by reference from the definitive proxy statement of the Company, filed in connection with the 1994 Annual Meeting of Stockholders (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (11) Incorporated by reference from the Company's Current Report on Form 8-K, dated November 15, 1994 Page 27 29 (12) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (14) Incorporated by reference from the Company's Registration Statement on Form S-8, File No. 33-61423, filed with the Securities and Exchange Commission on July 31, 1995 (15) Filed herewith "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. With the exception of historical information, the matters discussed or incorporated by reference in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties including, but not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development, ability to enforce patents, availability of raw materials and critical manufacturing equipment, new plant startups, the regulatory and trade environment, and other risks indicated in filings with the Securities and Exchange Commission. Page 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, Chief Executive Officer, and Director Pursuant to the requirements of the Securities and 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 29, 1996 - ------------------------------ James L. Donald, Chairman of the Board, President, Chief Executive Officer, and Director (Principal Executive Officer) /s/ Clement M. Brown, Jr. March 29, 1996 - ------------------------------ Clement M. Brown, Jr. Director /s/ Frank J. Cummiskey March 29, 1996 - ------------------------------ Frank J. Cummiskey Director /s/ Sir John Fairclough March 29, 1996 - ------------------------------ Sir John Fairclough Director 31 Signature and Title Date ------------------- ---- /s/ Raymond J. Dempsey - ------------------------------ March 29, 1996 Raymond J. Dempsey Director /s/ James L. Fischer March 29, 1996 - ------------------------------ James L. Fischer Director /s/ Robert S. Folsom March 29, 1996 - ------------------------------ Robert S. Folsom Director /s/ Gerald F. Montry March 29, 1996 - ------------------------------ Gerald F. Montry, Senior Vice President, Chief Financial Officer, and Director (Principal Financial Officer) /s/ James M. Nolan March 29, 1996 - ------------------------------ James M. Nolan Director /s/ Kenneth R. Vines March 29, 1996 - ------------------------------ 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, 1995 $ 4,012 $ 1,233 $ 4,077 (1) $ 2,418 (2) $ 6,904 Year Ended December 31, 1994 3,609 1,222 1,275 (1) 2,094 (2) 4,012 Year Ended December 31, 1993 3,593 942 -- 926 (2) 3,609
(1) Both 1995 and 1994 amounts include amounts related to the acquisition of DSC Communications A/S. Additionally, the 1994 amount includes a transfer from a reserve for customer guarantees, which was included in "Accrued Liabilities", to "Allowance for Doubtful Accounts". (2) Includes accounts written off, net of collections. 33 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.11 Schedule to Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers. 10.21 Consulting Agreement Between the Company and Clement M. Brown, Jr., Dated January 23, 1986. 10.22 Consulting Agreement Between the Company and Sir John Fairclough, Dated December 31, 1992. 10.23 Consulting Agreement Between the Company and Frank J. Cummiskey, Dated May 1, 1993. 11.1 Statement re: Computation of Per Share Earnings. 13.1 1995 Annual Report to Shareholders (for EDGAR filing purposes only). 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young. 27.1 Financial Data Schedule (for EDGAR filing purposes only).
EX-10.11 2 SEVERANCE AGREEMENT 1 Exhibit 10.11 Schedule to Form of Amended and Restated Severance Compensation Agreement Between the Company and Certain of its Officers The Severance Agreement, substantially in the form as previously filed with the Securities and Exchange Commission, was entered on October 13, 1995 with the following officers of the Company: George B. Brunt Philip A. Wilkinson EX-10.21 3 DIGITAL SWITCH CORPORATION CONSULTING AGREEMENT 1 EXHIBIT 10.21 DIGITAL SWITCH CORPORATION LETTERHEAD JAMES L. DONALD President And Chief Executive Officer January 23, 1986 Mr. Clement M. Brown, Jr. Apartment 8B 350 W. 57th Street New York, NY 10019 Dear Clem: This will confirm our agreement relating to the terms under which you will provide consulting services to DSC Communications Corporation and its subsidiaries (collectively "DSC") effective as of the date of this letter. The services to be performed will be as described below. Either you or DSC can terminate the agreement by thirty days written notice to the other. You will provide consulting services to DSC with respect to such matters as may, from time to time, be designated by the President and Chief Executive Officer of DSC (or his designee). It is presently contemplated that such services will normally require approximately ten to twelve hours per month and will be performed at mutually agreeable times. In consideration of the services to be performed by you, DSC will pay you $1,000 per month, on the first day of each month, in advance. In addition, DSC will reimburse you for travel and other out-of-pocket costs incurred by you at the request of DSC. Such reimbursement will be made in accordance with DSC's normal travel and expense procedures as in effect from time to time. You acknowledge that in rendering these consulting services, you are an independent contractor and not an employee of DSC. You will not make any commitment to any third party binding upon DSC. You agree that you will use any of DSC's proprietary information acquired by you solely for purposes consistent with the performance of (i) your obligations under this agreement or (ii) your obligations to DSC arising out of your status as a member of DSC's Board of Directors. 2 Mr. Clement M. Brown, Jr. January 23, 1986 Page Two You have advised DSC that you are free to perform the services contemplated by this letter and that the performance of such services and the transmittal to DSC by you of any information incidental to such services will not conflict with the rights of any third party. This agreement is entered into in Plano, Texas. It supercedes any prior agreements, arrangements or understandings between you and DSC (other than your relationship as a member of DSC's Board of Directors) and constitutes the entire agreement between us relating to the performance by you of consulting services to DSC. It may not be altered or amended except in a writing signed by you and the President and Chief Executive Officer of DSC. If the foregoing is in accordance with your understanding of our agreement, please execute the enclosed copy of this letter and return it to the undersigned. Very truly yours, DSC COMMUNICATIONS CORPORATION By: /s/ JAMES L. DONALD --------------------------------- James L. Donald, President and Chief Executive Officer AGREED AND ACCEPTED /s/ CLEMENT M. BROWN, JR. - ----------------------------- Clement M. Brown, Jr. EX-10.22 4 DSC COMMUNICATIONS CORP. CONSULTING AGREEMENT 1 EXHIBIT 10.22 [DSC COMMUNICATIONS CORPORATION LETTERHEAD] DAVID T. BOYCE VICE PRESIDENT, INTERNATIONAL SALES & SERVICE DECEMBER 31, 1992 Sir John Fairclough "The Old Blue Boar" 25 St. Johns Street Winchester, S023 8HF England Dear Sir John, The purpose of this letter is to confirm our arrangement whereby you will perform consulting services to DSC Communications Corporation ("DSC") and its subsidiaries. Your specific consulting tasks will be assigned to you by DSC's Chairman of the Board or his designee. These tasks will be undertaken by you in accordance with a schedule to be mutually agreed upon and will generally be in the area of technology and United Kingdom Telecommunication trends. It is presently anticipated that you will devote approximately one (1) day per month to providing such consulting services to DSC; however, it is recognized that the actual number of hours will vary by month. You will receive compensation at the rate of L.7,500 per calendar quarter payable quarterly in arrears. It is agreed that no payments made to you pursuant to this letter agreement will be used by you to improperly influence the actions of any other person on DSC's behalf. DSC will reimburse you for reasonable expenses incurred for meals, lodging, and travel incurred by you as a result of any work performed by you at DSC's request. With respect to services performed by you, you will deliver to DSC such written or oral reports in reasonable detail as requested by DSC. The work product of your services, including results, and all ideas, developments and inventions which you conceive or reduce to practice during the course of your performance under this Agreement shall be the exclusive property of DSC. This 2 Sir John Fairclough December 31, 1992 Page 2 information, and material, and any such inventions shall be deemed DSC proprietary information and shall not be disclosed to anyone outside of DSC, or used by you or others without the prior, written consent of DSC. Any article, paper, treatise, computer program, or report prepared by you pursuant to this Agreement, or which discusses the services performed hereunder or the results thereof ("Written Data") and which qualifies as a "work-for-hire" under the copyright laws of the United States, shall be the exclusive property of DSC as a "work-for-hire". All right, title, and interest, including any copyright in and to any Written Data which does not qualify as a "work-for-hire" shall be deemed to have been "work-for-hire" and shall be deemed to have been automatically transferred to DSC from the date of inception thereof. Upon DSC's request, you shall execute any document and render such other assistance as reasonably necessary to perfect the full formal conveyance of copyright. Written Data shall not be published or submitted for publication by you without the prior, written approval of DSC. Further, if any such article, paper, treatise, computer program, or report includes work previously copyrighted by you, you hereby grant DSC a nonexclusive, worldwide, irrevocable, paid-up license under such copyrights to reproduce, distribute, and use the works in any manner. You shall maintain confidential and secret all information which may be identified to you as being confidential or secret in character, and you shall not disclose this information to any other person (including DSC employees in any other division, group or entity), firm, or corporation. You shall also maintain confidential the "know-how" and future plans of DSC relating to the fields of endeavor in which you perform investigations, evaluations, and services for DSC as well as the nature of certain work projects to which you are exposed and the identify of persons working on those projects. The obligations of this paragraph shall survive the expiration or termination of this Agreement. You warrant that you are not a party to any other agreement which would prevent you from entering into this Agreement or which would adversely affect this Agreement. This Agreement shall be effective as of October 1, 1992 and may be terminated for convenience by either party upon not less than thirty (30) days written notice to the other. The terms and conditions of this Agreement and performance hereunder shall be construed in accordance with the laws of the State of Texas and the United States of America. 3 Sir John Fairclough December 31, 1992 Page 3 This Agreement shall not be assignable by you without the written consent of DSC, and any purported assignment, including full or partial assignment or delegation to any agent or subcontractor, not permitted hereunder shall be void. This Agreement and any attachment hereto shall be modified only in a writing signed by both the parties. This document constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes all previous communications, representations, understandings, and agreements, either oral or written, between the parties or any official or representative thereof concerning the subject matter hereof. Please confirm that the foregoing accurately sets forth our agreement by signing the enclosed copy of this letter where indicated below and return it to me. Very truly yours, DSC COMMUNICATIONS CORPORATION /s/ DAVID T. BOYCE David T. Boyce Confirmed, agreed to and accepted: /s/ SIR JOHN FAIRCLOUGH - ------------------------ Sir John Fairclough EX-10.23 5 CONSULTING AGREEMENT 1 EXHIBIT 10.23 CONSULTING AGREEMENT WHEREAS, DSC Communications Corporation, with a principal place of business at 1000 Coit Road, Plano, Texas 75075 (hereinafter "DSC') desires to secure the services of FRANK J. CUMMISKEY as identified herein; and WHEREAS, Frank J. Cummiskey, with a principal place of business at 25 Upland Drive, Greenwich, Connecticut 06831 (hereinafter "Consultant"), desires to perform investigations, evaluations, and services and to provide DSC with his professional expertise in designated fields. NOW, THEREFORE, the parties agree as follows: 1. SCOPE OF WORK. Consultant shall function as Vice Chairman of the Board of Directors of DSC and as Chairman of the Board of Directors or other assignment for the DSC subsidiary, company, or organization which encompasses DSC's international operations, organizations, and business activities, and shall coordinate his work efforts with the person identified in Paragraph 7 of this Agreement who acts as Chairman of the Board and Chief Executive Officer for DSC. 2. TERM OF AGREEMENT. This agreement shall be effective on May 1, 1993, regardless of the date of execution hereof, and shall continue thereafter until terminated by either party upon sixty (60) days prior notice to the other. 3. COMPENSATION. A. DSC shall pay Consultant at the rate of SIXTEEN THOUSAND SEVEN HUNDRED DOLLARS ($16,700) in twelve (12) consecutive monthly payments on the first (1st) day of every month for a maximum cumulative compensation of TWO HUNDRED THOUSAND FOUR HUNDRED DOLLARS ($200,400.00) for his performance of this Agreement. During the term of this agreement, Consultant shall provide DSC the appropriate number of hours of professional services necessary to accomplish his assignment. B. Payments made under this Agreement shall not include any amount which will be used improperly by Consultant to influence the actions of another person on DSC's behalf. 4. REIMBURSABLE EXPENSES. DSC shall reimburse Consultant for reasonable expenses incurred for meals, lodging, and travel by DSC and incurred as a result of the work performed by Consultant at DSC's request. 2 Consultant shall invoice DSC for these expenses, and DSC shall pay Consultant within fifteen (15) days after receipt of invoice. 5. SUPPLIES AND EQUIPMENT. DSC shall supply Consultant samples, materials, supplies equipment, services, or the like, as deemed necessary by DSC in order for Consultant to perform his services according to this Agreement. If it is not appropriate or convenient for DSC to supply Consultant directly, Consultant may, with the prior written authorization of DSC, obtain these items from other sources, whereupon DSC shall reimburse Consultant. Upon request by DSC, all samples, materials, supplies, and equipment supplied or paid for by DSC shall be returned by Consultant upon expiration or termination of this Agreement. 6. REPORTS. With respect to the services performed by Consultant, according to this Agreement, Consultant shall deliver to DSC detailed reports and documentation as may be periodically required by DSC, in such reasonable form as DSC shall specify. Consultant's reports to DSC shall disclose all work or services completed to date, including any results, ideas, development, or inventions derived, conceived, or reduced to practice during the course of Consultant's performance under this Agreement, and shall be supported by appropriate documentation such as graphs, computer programs, formulae sketches, drawings, summaries, and the like. 7. COMMUNICATIONS AND ADMINISTRATION. For and on behalf of DSC, the person designated below shall have cognizance of the services provided pursuant to this Agreement, and liaison and general administration of the Agreement for DSC shall be through him. All invoices, statements, reports, and loaned supplies and equipment shall be sent directly to this individual or his designee: James L. Donald DSC Communications Corporation 1000 Coit Road Plano, TX 75075 8. RIGHT IN WORK PRODUCT. The work product of Consultant's services, including results, and all ideas, developments, and inventions which Consultant conceives or reduces to practice during the course of his performance under this Agreement shall be the exclusive property of DSC. This information, and material, and any such inventions shall be deemed DSC proprietary information and shall not be disclosed to anyone outside of DSC, or used by Consultant or others without the prior written consent of DSC. Any article, paper, treatise, computer program, or report prepared by Consultant pursuant to this Agreement, or which discuses the services performed hereunder or the results thereof ("Written Data") and which qualifies as a "work-for-hire" 2 3 under the copyright laws of the United States, shall be the exclusive property of DSC as a "work-for-hire". All right, title, and interest, including any copyright in and to any Written Data which does not qualify as a "work-for-hire" shall be deemed to have been "work-for-hire" and shall be deemed to have been automatically transferred to DSC from the date of inception thereof. Upon DSC's request, Consultant shall execute any document and render such other assistance as reasonably necessary to perfect the full right, title, and interest worldwide in the Written Data, including formal conveyance of copyright. Written Data shall not be published or submitted for publication by Consultant without the prior, written approval of DSC. Further, if any such article, paper, treatise, computer program, or report includes work previously copyrighted by Consultant, Consultant hereby grants DSC a nonexclusive, worldwide, irrevocable, paid-up license under such copyrights to reproduce, distribute, and use the works in any manner. 9. ADDITIONAL IDEAS. In the event Consultant, during or after this Agreement but prior to Consultant's execution of a similar agreement with a third party, develops additional ideas not investigated hereunder but within the scope of this Agreement, Consultant shall communicate the ideas to DSC and allow DSC the right of first refusal to utilize Consultant's services to develop these additional ideas for DSC. 10. INSURANCE. A. In addition to such other insurance as may be required by law, Consultant shall, during the performance of the services required under this Agreement, purchase and maintain with such insurers and under such policies of insurance as are acceptable to DSC, the following minimum coverage: (1) Comprehensive General Liability all on an occurrence basis, with Personal Injury and broad form Property Damage coverage. $1,000,000.00; (a) Personal Injury (Each Person) $1,000,000.00 (b) Bodily Injury (Each Occurrence) $1,000,000.00 (c) Property Damage (Each Accident) $1,000,000.00 (d) Combined Single Limit and $1,000,000.00 (e) Business Pursuits Endorsement (2) Comprehensive Automobile Liability 3 4 $1,000,000.00 (a) Bodily Injury (Each Person) and $1,000,000.00 Bodily Injury (Each Occurrence) (b) Property Damage: $1,000,000.00 and Each Occurrence: $1,000,000.00; and (c) Combined Single Limit: $1,000,000.00 B. If required by DSC, Consultant shall, prior to the commencement date, provide DSC with a Certificate of Insurance. Said certificate shall contain a provision that coverage afforded under the policies will not be canceled until at least thirty (30) days prior written notice has been given to DSC at the address shown in Paragraph 7. 11. WARRANTIES AND INDEMNITY. Consultant warrants that the services provided to DSC will be performed in a professional and competent manner. Further, Consultant warrants that he will not deliver to DSC work product which infringes any patent, trademark, copyright, or other property right of any third party relating to proprietary or trade secret information. 12. CONFIDENTIAL INFORMATION. The obligations of this paragraph shall survive the expiration or termination of this Agreement. Consultant shall maintain confidential and secret all information which may be disclosed to Consultant as being confidential or secret in character, and Consultant shall not disclose this information to any other person (including DSC employees in any other division, group or entity), firm, or corporation. Consultant shall also maintain confidential the "know-how" and future plans of DSC relating to the fields of endeavor in which Consultant is exposed and the identity of persons working on those projects. 13. CONSULTING AGREEMENTS. Consultant warrants that he is not a party to any other existing agreement which would prevent Consultant from entering into this Agreement or which would adversely affect this Agreement. Except with the prior consent of DSC, Consultant shall not engage in work of the same type and with respect to products of the same type as the subject matter of this Agreement for a competitor of DSC during the period of this Agreement or prior to DSC's public commercial sale of any products studied by Consultant hereunder whichever occurs later. 14. INDEPENDENT CONTRACTOR. It is understood and agreed that Consultant shall be acting as an independent contractor and not as an employee 4 5 of DSC. Accordingly, Consultant assumes all risks and hazards encountered in his performance of the Agreement and, further, Consultant shall be solely responsible for all injuries, including death, to all persons and all loss or damage to property which are attributed to Consultant's performance under this Agreement or that of any agent, employee or subcontractor engaged by Consultant. 15. BINDING AGREEMENT. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of DSC and shall be binding upon and inure to the benefit of Consultant's heirs, legal representatives, successors, and assigns. 16. GOVERNING LAW. The terms and conditions of this Agreement and performance hereunder shall be construed in accordance with the laws of the State of Texas. 17. ASSIGNMENT. This Agreement shall not be assignable by Consultant without the written consent of DSC, and any purported assignment, including full or partial assignment or delegation to any agent or subcontractor, not permitted hereunder shall be void. 18. MODIFICATION. This Agreement and any attachment hereto shall be modified only by an instrument in writing and signed by duly authorized representatives of the parties. 19. MERGER OF AGREEMENT. This document constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes all previous communications, representations, understandings, and agreements, either oral or written, between the parties or any official or representative thereof concerning the subject matter hereof. DSC COMMUNICATIONS CORPORATION By: ---------------------------- ---------------------------- James L. Donald Frank J. Cummiskey 5 EX-11.1 6 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, 1995, 1994 and 1993. All 1993 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:
1995 1994 1993 --------------------- ---------------------- -------------------- Fully Fully Fully Primary Diluted (A) Primary Diluted (A) Primary Diluted (A) ------- ----------- ------- ----------- ------- ----------- Weighted average shares outstanding during the year.........114,681 -- 112,254 -- 99,418 -- Common share equivalents outstanding: Options and warrants issued and contingently issuable. 5,271 -- 6,104 -- 8,942 -- Assumed purchase of treasury shares....... (1,826) -- (1,469) -- (1,710) -- ------- ------- ------- ------- ------- ------- Weighted average shares used in calculation.....118,126 -- 116,889 -- 106,650 -- ======= ======= ======= ======= ======= =======
(A) Fully diluted income per share is not shown since the dilutive effect is less than three percent. EX-13.1 7 1995 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 DSC Communications Corporation and Subsidiaries ITEM 6. SELECTED FINANCIAL DATA
1995(A) 1994(A) 1993 1992 1991(B) ---------- ----------- -------- ---------- ----------- (Dollars in thousands, except per share data) SUMMARY OF OPERATIONS FOR THE YEAR: Revenue............................ $1,422,018 $ 1,003,125 $730,774 $ 536,319 $ 461,455 Gross profit....................... 685,899 490,392 317,969 202,776 123,082 Operating income (loss)............ 279,418 213,999 110,176 42,431 (81,905) Interest income.................... 27,147 16,306 5,691 4,132 4,190 Interest expense................... (18,599) (2,075) (6,256) (21,347) (25,457) Net income (loss).................. $ 192,680 $ 162,626 $ 81,660 $ 11,594 $ (108,328) ========== =========== ======== ========== =========== Income (loss) per share (C)........ $ 1.63 $ 1.39 $ 0.77 $ 0.12 $ (1.31) ========== =========== ======== ========== =========== FINANCIAL POSITION AT YEAR END: Cash and marketable securities....................... $ 569,264 $ 271,322 $313,808 $ 69,839 $ 26,366 Working capital.................... 738,965 393,034 406,752 79,010 4,991 Property and equipment, net............................... 370,522 282,963 179,783 149,209 165,952 Total assets....................... 1,865,275 1,268,536 900,417 547,669 599,914 Short-term and long-term debt.............................. 326,977 82,369 70,412 140,409 281,715 Shareholders' equity (D)........... 1,124,079 851,100 617,800 202,627 174,686 OTHER FINANCIAL INFORMATION: Shareholders' equity per share of common stock outstanding (C)............. $ 9.72 $ 7.50 $ 5.61 $ 2.30 $ 2.10 Return on average shareholders' equity.............. 19.5% 22.1% 19.9% 6.1% (47.7%) Ratio of current assets to current liabilities............... 2.5 2.1 3.1 1.4 1.0 Ratio of short-term and long-term debt to shareholders' equity.............. 29.1% 9.7% 11.4% 69.3% 161.3%
(Continued) 2 DSC Communications Corporation and Subsidiaries ITEM 6. SELECTED FINANCIAL DATA
1995(A) 1994(A) 1993 1992 1991(B) ------- ------- ------- ------ ------ (Dollars in thousands, except per share data) OTHER DATA: Shares used to compute income (loss) per share (in thousands) (C).............. 118,126 116,889 106,650 93,198 82,678 Shareholders of record at year end........................ 3,768 3,611 3,462 4,948 6,110 Total employees at year end............................. 5,860 5,414 4,041 3,301 3,262 - ----------------------------------------------------------------------------------------------
(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 year ended December 31, 1991, the Company recorded special charges of $48.1 million related to asset write-downs and restructuring costs. (C) In April 1994, the Board of Directors declared a two-for-one stock split, effected in the form of a 100% stock dividend, for shareholders of record on May 11, 1994. All per share amounts prior to 1994 have been restated to retroactively reflect the stock split. (D) Since inception, the Company has not declared or paid a cash dividend. 3 DSC Communications Corporation and Subsidiaries ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During 1995, DSC Communications Corporation continued its excellent trend of financial performance over the past several years with record revenue and record net income. Additionally, shareholders' equity at the end of 1995 exceeded $1 billion for the first time in the Company's history. Revenue for 1995 increased 42% to $1,422.0 million, and net income increased to $192.7 million, or $1.63 per share, from $162.6 million, or $1.39 per share, in 1994. In addition, the Company maintained its strong financial position with over $565 million in cash and short-term investments, working capital of $739 million, and short-term and long-term debt to equity of less than 30%. The Company acquired DSC Communications A/S in November 1994. Accordingly, the Company's consolidated results for 1995 include the financial results of DSC Communications A/S for the full year while 1994's consolidated results include DSC Communications A/S for only one month. FINANCIAL CONDITION AND LIQUIDITY The Company ended 1995 and 1994 with the following:
December 31, ---------------------- 1995 1994 ---- ---- (in millions) Cash and cash equivalents ...................... $ 258.6 $ 52.9 Marketable securities .......................... 310.7 218.4 Non-debt working capital, excluding cash and cash equivalents and marketable securities ........................ 286.2 178.8 Short-term debt ................................ 83.4 39.8 Long-term debt, including current portion ...... 243.5 42.6
Overall, the Company's financial position remained strong in 1995. Cash generated from operating activities was approximately $228 million. Additionally, the Company received proceeds from a $225 million unsecured, long-term loan in April 1995, with the majority of these proceeds invested in cash equivalents and marketable securities at the end of 1995. The $149 million acquisition of DSC Communications A/S in November 1994 was funded with approximately $87 million in cash and $62 million in short-term borrowings. The short-term borrowings were paid down to $39.8 million at the end of 1994 with the balance repaid in early 1995. The $228.0 million of cash generated by operating activities during the year was positively impacted by the Company's record earnings and an increase of $67.2 million in non-debt liabilities, while receivables and inventories increased by $33.1 million and $129.2 million, respectively. The increase in both receivables and inventories was due primarily to an increase in the overall business activities of the Company. In addition, inventories increased in 1995 as a result of existing and anticipated customer requirements for 1996, including new product introductions. See 4 "Receivables" in Notes to Consolidated Financial Statements for a discussion of certain receivables sold during 1995 with recourse. At December 31, 1995, the Company has a net deferred tax asset of $31.9 million which the Company expects to be realized through future taxable earnings. Capital expenditures were $154.7 million for 1995, which included approximately $42.8 million for the purchase of land and construction costs incurred on new facilities in Copenhagen, Denmark. These new facilities will consolidate the operations of the Company's Danish subsidiary, with one building completed in 1995 and another building expected to be completed in early 1996. The expected future business growth will require additional capital expenditures both domestically and at various international locations, including manufacturing equipment and leasehold improvements for a planned manufacturing facility in Costa Rica which was leased in 1995 and is scheduled for completion in the first half of 1996. The timing and extent of additional facilities and other capital requirements are dependent upon future business growth. However, the Company anticipates that capital expenditures in 1996 could be in the range of approximately $150 million. As noted previously, the Company entered into a $225.0 million unsecured, long-term loan in April 1995 which bears interest at 9%. Interest payments will be made semi-annually, and principal payments will be made in eight equal annual installments beginning in the second quarter of 1996. The proceeds from the loan are being used for general corporate purposes, with the majority of the proceeds currently being invested in short-term investments. In addition, a foreign subsidiary borrowed $16.0 million under a long-term loan facility. Annual maturities of long-term debt for the next five years range from approximately $30 to $33 million. See "Credit Agreements and Short-Term Debt" and "Long-Term Debt" in Notes to Consolidated Financial Statements for further discussion. The Company and certain of its foreign subsidiaries have entered into unsecured credit facilities providing for borrowings up to $148.1 million. These credit facilities include a domestic facility which expires in February 1998 and provides for borrowings up to $50.0 million, reduced by the value of outstanding letters of credit. At December 31, 1995, outstanding letters of credit totaled $33.0 million, including $27.0 million issued to support a portion of the outstanding foreign borrowings. At December 31, 1995, outstanding borrowings under the foreign facilities were $83.4 million, and there were no borrowings under the domestic facility during 1995. The foreign facilities are being used to fund working capital requirements and facilities expansion and are repayable in foreign currencies. The Company expects to convert the short-term arrangement used to fund facilities expansion in Denmark, under which $42.0 million was outstanding at December 31, 1995, into a long-term agreement during the next several months. The Company also expects to replace the existing domestic and certain foreign credit facilities with a new, unsecured $160.0 million credit facility with several banks. The new facility would provide for borrowings and issuances of letters of credit in multiple currencies. Interest would be at a floating rate based on LIBOR. This new facility is expected to be completed in the next few months. The Company is party to certain litigation, as disclosed in "Litigation" under "Commitments and Contingencies" in Notes to Consolidated 5 Financial Statements, the outcome of which the Company believes will not have a material adverse effect on its consolidated financial position. The Company believes that its existing cash and short-term investments and available credit facilities will be adequate to support the Company's financial resource needs, including working capital requirements, capital expenditures, operating lease obligations, and debt payments. In order to be competitive in the future, the Company believes that it will become increasingly necessary to offer financing alternatives to both domestic and international customers. To the extent such financing becomes significant, additional borrowings could become necessary. 6 RESULTS OF OPERATIONS 1995 Compared to 1994 Revenue for 1995 increased 42% to $1,422.0 million compared to $1,003.1 million in 1994. Net income for 1995 was $192.7 million, or $1.63 per share, compared to net income of $162.6 million, or $1.39 per share, in 1994. The Company's revenue growth for 1995 was the result of increased product deliveries across all of the Company's major product lines as well as the inclusion of revenue from the Company's Danish subsidiary, DSC Communications A/S, which was acquired in November 1994. Switching products revenue increased 31% over 1994 and represented 48% of consolidated revenue in 1995 as compared to 52% of consolidated revenue in 1994. This revenue increase was due primarily to an increase in deliveries of the Company's cellular and wireless switching products. Access products revenue increased 49% over the prior year as customer demand for the Litespan product continued to grow, which resulted in access products accounting for 28% of consolidated revenue in 1995 compared to 27% in 1994. Transmission products revenue represented 23% of consolidated revenue in 1995 as compared to 19% of consolidated revenue in 1994. Revenue from transmission products increased 66% due to the inclusion of revenue from DSC Communications A/S in addition to revenue from the Company's new iMTN product. DSC Communications A/S, which accounted for 9% of consolidated revenue in 1995, incurred an operating loss during the year due principally to the delayed introduction of a new generation of optical transmission equipment. While it is anticipated that development will be completed and product deliveries will begin during the first half of 1996, future near-term profitability of the Company's Danish operation is dependent upon the successful completion and market acceptance of these products. Gross profit of $685.9 million in 1995 represented 48% of revenue compared to 49% of revenue in 1994. This decline was due primarily to a change in the mix of products sold during 1995 as compared to 1994. Certain of the Company's products, including software, typically produce gross margin content greater than other Company products. As a result, the Company's gross margin percentage in future periods could vary significantly due to changes in the relative mix of product deliveries. Research and development expenses increased to $189.8 million in 1995 compared to $127.3 million in 1994, representing 13% of revenue for both 1995 and 1994. This growth included the development activities of DSC Communications A/S as well as the Company's increasing research and development investment consistent with its ongoing commitment to the development of new products and to the enhancements of existing products across all strategic product lines. Selling, general and administrative expenses for 1995 were $207.2 million, or 15% of revenue, compared to $141.9 million, or 14% of revenue, in 1994. This growth was due primarily to the inclusion of expenses of DSC Communications A/S in 1995, increased international selling and marketing activities, and a growth in legal expenses. The Company is actively pursuing claims primarily related to its intellectual property rights and, as this litigation progresses, legal expenses may continue to increase. 7 See "Litigation" under "Commitments and Contingencies" in Notes to Consolidated Financial Statements for further discussion. Depreciation and amortization expense grew from $53.7 million in 1994 to $81.2 million in 1995. Capital additions in 1995 of $154.7 million, along with expected capital additions in the range of approximately $150 million in 1996, will continue to increase depreciation and amortization expense in 1996 and future years. Both interest income and interest expense have increased in 1995 due primarily to the $225.0 million loan entered into in April 1995 which bears interest at 9%. As discussed previously, the majority of the proceeds from this loan are currently being invested in short-term investments. Interest expense has also increased as a result of borrowings under several new foreign subsidiary borrowing arrangements entered into during 1995. The Company's effective income tax rate was 34% for 1995 as compared to 27% in 1994. The higher rate was due primarily to a reduced amount of tax loss and credit carryforwards in 1995 as compared to 1994. The Company's effective tax rate is expected to increase in 1996 due to the full utilization of the Company's net operating loss and tax credit carryforwards in 1995, increased foreign taxes, and a reduction in the U.S. tax benefits received from the Company's Puerto Rican subsidiary. See "Income Taxes" in Notes to Consolidated Financial Statements for further discussion. The Company manages its exposure to fluctuations in foreign currency exchange rates through the use of forward foreign exchange contracts. These forward foreign exchange contracts are primarily entered into to hedge certain receivables and firm contracts for deliveries of products and services as well as anticipated future business transactions denominated in foreign currencies. At December 31, 1995, the U.S. dollar equivalent of forward foreign exchange contracts outstanding was approximately $54.3 million, of which $7.0 million are hedges of anticipated business transactions. The total forwards outstanding at December 31, 1995 represent a $50.9 million decrease from the amount outstanding at the end of 1994. The decrease was primarily the result of the completion of a major contract denominated in Japanese Yen in 1995 which was entered into in the fourth quarter of 1994. Future earnings could be impacted by forward contracts related to anticipated transactions which are marked-to-market each period. Such mark-to-market adjustments were immaterial to the Company in 1995 and 1994. See "Forward Foreign Exchange Contracts" under "Summary of Significant Accounting Policies" 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; product costs; manufacturing lead times; significant fluctuations in foreign currency exchange rates; and changes in general worldwide economic conditions, any of which could have an adverse impact on operations. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which establishes a fair value based method of accounting for stock-based compensation plans. As allowed under FAS 123, the Company has chosen, upon adoption in 1996, to continue to 8 apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provide supplemental pro forma footnote disclosures. Also during 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which must be implemented in the first quarter of 1996. The Company believes that the implementation of this standard will not have a material financial impact to the Company in 1996. 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. 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 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. 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 represents the Company's ongoing commitment to develop new products and to enhance existing products across the high-growth product areas. 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 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 was 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. 9 Other income (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. The Company's effective income tax rate was 27% for 1994 as compared to 25% in 1993. See "Income Taxes" in Notes to Consolidated Financial Statements for further discussion. 10 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, ------------------------------------------ 1995 1994 1993 -------------- ------------ ------------ Revenue.................................... $ 1,422,018 $ 1,003,125 $ 730,774 Cost of revenue............................ 736,119 512,733 412,805 -------------- ------------ ------------ Gross profit............................. 685,899 490,392 317,969 -------------- ------------ ------------ Operating costs and expenses: Research and product development......... 189,751 127,303 86,620 Selling, general and administrative...... 207,188 141,934 112,723 Other operating costs.................... 9,542 7,156 8,450 -------------- ------------ ------------ Total operating costs and expenses..... 406,481 276,393 207,793 -------------- ------------ ------------ Operating income........................... 279,418 213,999 110,176 Interest income............................ 27,147 16,306 5,691 Interest expense........................... (18,599) (2,075) (6,256) Other income (expense), net................ 1,984 (5,040) (155) -------------- ------------ ------------ Income before income taxes............... 289,950 223,190 109,456 Income taxes............................... 97,270 60,564 27,796 -------------- ------------ ------------ Net income............................. $ 192,680 $ 162,626 $ 81,660 ============== ============ ============ Income per share........................... $ 1.63 $ 1.39 $ 0.77 ============== ============ ============ Average shares used in per share computation......................... 118,126 116,889 106,650 ============== ============ ============
See accompanying Notes to Consolidated Financial Statements. 11 DSC Communications Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, ------------------------------- 1995 1994 ------------- --------------- Assets CURRENT ASSETS Cash and cash equivalents............................... $ 258,565 $ 52,942 Marketable securities................................... 310,699 218,380 Receivables............................................. 277,006 239,740 Inventories............................................. 303,962 180,674 Other current assets.................................... 70,315 46,718 ------------- --------------- Total current assets.................................. 1,220,547 738,454 ------------- --------------- PROPERTY AND EQUIPMENT, NET............................... 370,522 282,963 LONG-TERM RECEIVABLES..................................... 17,557 25,691 CAPITALIZED SOFTWARE DEVELOPMENT COSTS.................... 43,821 38,583 COST IN EXCESS OF NET ASSETS OF BUSINESSES AQUIRED, NET... 155,102 152,396 OTHER..................................................... 57,726 30,449 ------------- --------------- Total assets....................................... $ 1,865,275 $ 1,268,536 ============= =============== Liabilities and Shareholders' Equity CURRENT LIABILITIES Short-term debt......................................... $ 83,438 $ 39,791 Accounts payable........................................ 115,137 91,054 Accrued liabilities..................................... 220,679 175,108 Income taxes payable.................................... 29,230 22,219 Current portion of long-term debt....................... 33,098 17,248 ------------- --------------- Total current liabilities............................. 481,582 345,420 ------------- --------------- LONG-TERM DEBT, NET OF CURRENT PORTION ................... 210,441 25,330 NONCURRENT INCOME TAXES AND OTHER LIABILITIES............. 49,173 46,686 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value, issued - 120,591 in 1995 and 118,514 in 1994; outstanding - 115,602 in 1995 and 113,525 in 1994 .......................... 1,206 1,185 Additional capital...................................... 703,448 631,729 Unrealized gains (losses) on securities, net of income taxes................................... 391 (3,764) Accumulated translation adjustment...................... 4,404 -- Retained earnings....................................... 457,741 265,061 ------------- --------------- 1,167,190 894,211 Treasury stock, at cost, 4,989 shares in 1995 and 1994.. (43,111) (43,111) ------------- --------------- Total shareholders' equity............................ 1,124,079 851,100 ------------- --------------- Total liabilities and shareholders' equity.......... $ 1,865,275 $ 1,268,536 ============= ===============
See accompanying Notes to Consolidated Financial Statements. 12 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, ----------------------------------- 1995 1994 1993 ---------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................ $ 192,680 $ 162,626 $ 81,660 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 81,218 53,698 44,334 Amortization of capitalized software development costs..................... 21,591 19,460 17,545 Deferred income taxes........................... (31,888) -- -- Income tax benefit related to stock options........................................ 49,987 24,055 5,800 Utilization of preacquisition net operating loss carryforwards................... -- -- 8,300 Other........................................... 938 4,772 (2,888) Changes in operating assets and liabilities: Increase in current and long-term receivables.......................... (33,149) (89,616) (51,084) Increase in inventories......................... (129,234) (33,188) (31,444) Increase in other current assets......................................... (1,603) (9,265) (3,966) Increase in current payables and accruals................................... 67,178 74,402 1,101 Increase in noncurrent income taxes and other liabilities............................. 10,241 15,393 9,961 ---------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 227,959 222,337 79,319 ---------- --------- ---------
(Continued) 13 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
Years ended December 31, ------------------------------------- 1995 1994 1993 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Business acquisition, net of acquired cash......... -- (135,696) -- Purchases of property and equipment................ (154,748) (141,177) (71,028) Additions to capitalized software development costs................................. (26,829) (24,558) (21,947) Purchases of marketable securities................. (1,014,304) (312,297) (178,635) Proceeds from sales and maturities of marketable securities............................. 927,234 246,569 19,715 Purchase of long-term investment security.......... (17,500) (12,500) -- Other.............................................. (341) (2,980) 5,449 ----------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES.................................. (286,488) (382,639) (246,446) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term debt........................ 43,647 39,791 -- Borrowings under long-term debt arrangements...................................... 241,019 19,919 19,975 Payments on long-term debt......................... (42,249) (14,770) (18,471) Proceeds from public offering of common stock............................................. -- -- 231,149 Proceeds from the sale of common stock under stock programs.............................. 20,481 13,211 20,116 Other.............................................. 1,254 205 (593) ----------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 264,152 58,356 252,176 ----------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... 205,623 (101,946) 85,049 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................................ 52,942 154,888 69,839 ----------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................ $ 258,565 $ 52,942 $ 154,888 =========== ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid...................................... $ 12,691 $ 1,114 $ 7,459 =========== ========= ========= Income taxes paid.................................. $ 64,289 $ 11,930 $ 4,359 =========== ========= =========
See accompanying Notes to Consolidated Financial Statements. 14 DSC Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Accumu- Common Stock Unrealized lated -------------------- Gains Trans- Shares Par Addi- (Losses) lation Cost of Out- Value tional on Adjust- Retained Treasury standing $.01 Capital Securities ment Earnings Shares Total -------- -------- --------- ---------- ------- -------- -------- ---------- 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 gains (losses) on securi- ties, net of income taxes.. -- -- -- (3,764) -- -- -- (3,764) Net income.................. -- -- -- -- -- 162,626 -- 162,626 -------- -------- --------- ------- ------ -------- --------- ---------- BALANCES, December 31, 1994... 113,525 1,185 631,729 (3,764) -- 265,061 (43,111) 851,100 Shares issued upon exercise of options........ 1,500 15 10,283 -- -- -- -- 10,298 Shares issued under stock purchase plans............. 467 5 10,178 -- -- -- -- 10,183 Income tax benefit related to stock options........... -- -- 49,987 -- -- -- -- 49,987 Restricted shares issued to employees, net of unearned compensation ..... 110 1 1,271 -- -- -- -- 1,272 Net change in unrealized gains (losses) on securi- ties net of income taxes... -- -- -- 4,155 -- -- -- 4,155 Translation adjustment...... -- -- -- -- 4,404 -- -- 4,404 Net income.................. -- -- -- -- -- 192,680 -- 192,680 -------- -------- --------- ------- ------ -------- --------- ---------- BALANCES, December 31, 1995... $115,602 $ 1,206 $ 703,448 $ 391 $4,404 $457,741 $ (43,111) $1,124,079 ======== ======== ========= ======= ====== ======== ========= ==========
See accompanying Notes to Consolidated Financial Statements. 15 DSC Communications Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DSC Communications Corporation (the "Company") is a leading designer, developer, manufacturer and marketer of digital switching, transmission, access and private network system products for the worldwide telecommunications marketplace. Certain prior years' financial statement information has been reclassified to conform with the current year financial statement presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company and all its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated. Revenue Recognition Revenue is generally recognized when the Company has completed substantially all manufacturing and/or software development to customer specifications, factory testing has been completed and the product has been shipped. Additionally, for systems where installation requirements are the responsibility of the Company and payment terms are related to installation completion, revenue is generally recognized when the system has been shipped to the customer's final site for installation. Revenue under contracts with customers for development and customization of software and for certain installation projects is accounted for using the percentage-of-completion method as certain contractual milestones are completed. Revenue from technical assistance service contracts is recognized ratably over the period the services are performed. Warranty Costs The Company provides for estimated future warranty costs at the time revenue is recognized. Cash and Cash Equivalents Cash equivalents are primarily short-term, interest bearing, high credit quality investments with major financial institutions and are subject to minimal risk. These investments have maturities at the date of purchase of three months or less. 16 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" ("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 (Expense), Net in the Consolidated Statements of Income. 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, -------------------- 1995 1994 -------- -------- Raw Material................. $137,002 $ 66,466 Work in Process.............. 20,015 18,618 Finished Goods............... 146,945 95,590 -------- -------- $303,962 $180,674 ======== ========
17 Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives as follows: Buildings.......................................... 20-40 Years Leasehold improvements............................. 1-20 Years Manufacturing, development and test equipment...... 3-10 Years Office furniture, equipment and other.............. 3-10 Years
Included in Office furniture, equipment and other are computer equipment and related purchased software which are generally depreciated over three to five years. Capital leases and equipment leased to customers under operating leases are amortized on a straight-line basis over the term of the lease. Amortization of these leases is included in depreciation expense. Capitalized Interest Interest costs related to certain qualifying assets (including 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, 1995, 1994 and 1993, the Company capitalized $2.6 million, $1.6 million and $0.9 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. When indications of a possible impairment in carrying value are present, the Company reviews the original assumptions and rationale utilized in the establishment of the carrying value and estimated life. The carrying value would be adjusted to fair value if significant facts and circumstances altered the Company's original assumptions and rationale. Cost in Excess of Net Assets of Businesses Acquired, Net was $155.1 million and $152.4 million at December 31, 1995 and 1994, 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 $24.9 million and $16.0 million at December 31, 1995 and 1994, respectively. See "Business Acquisition" for further discussion. Research and Development Expenditures Certain software development costs are capitalized when incurred. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, 18 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 $43.8 million and $38.6 million at December 31, 1995 and 1994, respectively, net of accumulated amortization costs of $22.5 million and $18.2 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 those foreign subsidiaries which have a functional currency other than the U.S. dollar, assets and liabilities are translated using year-end exchange rates, and revenue and expense items are translated at the average exchange rates in effect during the year. The resulting translation adjustments for these subsidiaries are included in Shareholders' Equity. For the Company's foreign subsidiaries which have the U.S. dollar as their functional currency, monetary assets and liabilities are translated at year-end exchange rates while non-monetary items are translated at historical rates. Revenue and expense items are translated at the average exchange rates in effect during the year, except for depreciation and cost of revenue, which are translated at historical rates. The resulting translation adjustments and transaction gains and losses are included in Other Income (Expense), Net in the Consolidated Statements of Income and were not material in 1995, 1994 or 1993. 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 19 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 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, 1995, the U.S. dollar equivalent of the forward foreign exchange contracts outstanding was $54.3 million. Of the contracts held at December 31, 1995, the following is a summary by currency: Pound Sterling - $19.7 million; Deutsche Mark - $11.6 million; Australian Dollar - $6.0 million; Japanese Yen - $5.3 million; and other - $11.7 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. 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 prior to 1994 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 consolidated results include the operations of DSC Communications A/S from the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Accordingly, a portion of the purchase price has been allocated to the net assets acquired based on their estimated fair values with the balance of the purchase price, $117.3 million in 1995 ($105.6 million in 1994), included in Cost in Excess of Net Assets of Businesses 20 Acquired, Net. The cost in excess of net assets of business acquired is being amortized over 20 years. 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 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 expense and decreased interest income associated with acquisition funding, and the estimated related income tax effects. This pro forma financial information for the year ended December 31, 1994 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, nor is it necessarily indicative of the results of operations which may occur in the future (in thousands except per share data). Revenue............................. $1,085,216 Net income.......................... 151,533 Income per share.................... $ 1.30
INVESTMENTS IN DEBT AND EQUITY SECURITIES The following is a summary of the investments in debt securities classified as current assets (in thousands):
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value -------- ------- --------- -------- December 31, 1995 ----------------- Available for sale securities: U.S. Treasury securities and obligations of U.S. government agencies ........ $198,078 $ 459 $ (28) $198,509 Corporate debt securities ... 103,290 269 (22) 103,537 Asset-backed securities ..... 8,728 -- (75) 8,653 -------- ------- --------- -------- $310,096 $ 728 $ (125) $310,699 ======== ======= ========= ======== December 31, 1994 ----------------- 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 ======== ======= ========= ========
Gross realized gains and gross realized losses on sales of available for sale securities were immaterial in 1995 and 1994. 21 The amortized cost and estimated fair value of available for sale securities by contractual maturity at December 31, 1995 is as follows (in thousands):
Estimated Fair Cost Value --------- --------- Due in one year or less...................... $ 152,068 $ 152,209 Due after one year through three years ...... 147,296 147,822 Due after three years ....................... 10,732 10,668 --------- --------- $ 310,096 $ 310,699 ========= =========
Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Investments in debt securities classified as held to maturity consisted of collateralized bank obligations with an amortized cost of $30.0 million and $12.5 million at December 31, 1995 and 1994, respectively. The gross unrealized gain or loss on these investments, which mature in March 1999 and December 2000, was an unrealized gain of approximately $0.2 million at December 31, 1995 and an unrealized loss of approximately $0.9 million at December 31, 1994. These investments are included in Other Noncurrent Assets on the Consolidated Balance Sheets. 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 were not recorded. Instead, the liabilities to repurchase the securities sold under these agreements, which totaled $39.7 million at December 31, 1994, were reported as Short-Term Debt. The securities were repurchased during 1995. See "Credit Agreements and Short-Term Debt" for further discussion. 22 RECEIVABLES Receivables consisted of the following (in thousands):
December 31, -------------------- 1995 1994 -------- --------- Current: Trade............................ $277,521 $ 230,108 Leases and notes................. 5,355 12,525 -------- --------- 282,876 242,633 Allowance for doubtful accounts.. (5,870) (2,893) -------- --------- $277,006 $ 239,740 ======== ========= Long-term: Leases, notes and other.......... $ 18,591 $ 26,810 Allowance for doubtful accounts.. (1,034) (1,119) -------- --------- $ 17,557 $ 25,691 ======== =========
To meet market competition, the Company finances sales of equipment to certain of its customers through sales-type and operating leases and notes receivable. The repayment terms vary from one to seven years. In December 1995, the Company sold certain trade and lease receivables with recourse for $50.1 million. A portion of the proceeds from the sale of these receivables was used to repay $9.1 million of long-term installment notes payable which had been secured by certain of the receivables sold. See "Contingent Liabilities" under "Commitments and Contingencies" for further discussion. The components of the receivables from sales-type leases and notes receivable are as follows (in thousands):
December 31, --------------------- 1995 1994 ------- -------- Total minimum lease payments receivable............. $25,589 $ 46,857 Less: Unearned income............ (4,705) (8,040) ------- -------- Total receivables................. 20,884 38,817 Less: Current receivables........ (5,355) (12,079) ------- -------- Total long-term receivables....... $15,529 $ 26,738 ======= ========
Future minimum lease payments to be received on sales-type leases and notes receivable are as follows (in thousands): 1996 ..................................... $ 7,124 1997 ..................................... 4,936 1998 ..................................... 4,242 1999 ..................................... 3,933 2000 ..................................... 5,354 ------- $25,589 =======
23 PROPERTY AND EQUIPMENT The Company's property and equipment consisted of the following (in thousands):
December 31, ---------------------- 1995 1994 --------- --------- Land............................................ $ 49,052 $ 36,832 Buildings and leasehold improvements ............................. 167,178 110,730 Manufacturing, development and test equipment ........................... 268,115 215,677 Office furniture, equipment and other ................................ 191,380 163,009 --------- --------- 675,725 526,248 Less: Accumulated depreciation and amortization ......................... (305,203) (243,285) --------- --------- $ 370,522 $ 282,963 ========= =========
ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands):
December 31, ------------------- 1995 1994 -------- -------- Warranty and related.......................... $ 61,839 $ 44,023 Payroll and related .......................... 59,894 38,755 Taxes other than income ...................... 18,787 21,277 Customer advances ............................ 9,378 21,834 Other ........................................ 70,781 49,219 -------- -------- $220,679 $175,108 ======== ========
CREDIT AGREEMENTS AND SHORT-TERM DEBT In February 1994, the Company entered into an unsecured revolving credit facility, which expires in February 1998, 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. 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 1995. Letters of credit issued by the banks under this agreement on behalf of the Company were $33.0 million at December 31, 1995, including $27.0 million issued to support various foreign subsidiary credit arrangements. During 1995, two of the Company's foreign subsidiaries entered into short-term credit agreements providing for borrowings denominated in foreign currencies of up to $98.1 million, of which $83.4 million were outstanding at December 31, 1995. The interest rates on these agreements are floating market rates which ranged from 4.5% to 7.5% at December 31, 24 1995. The weighted average interest rate on borrowings under these agreements for the period outstanding during 1995 was 5.9%. Short-term debt 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. This short-term debt bore 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%. These obligations were repurchased during 1995. LONG-TERM DEBT Total long-term debt consisted of the following (in thousands):
December 31, ------------------ 1995 1994 -------- ------- Unsecured 9.0% notes, due 1996 - 2003...................... $225,000 $ -- Unsecured 8.75% note, due 1995 - 2000 ..................... 13,973 -- Unsecured 9.5% note .................. -- 12,500 Secured installment notes, Interest at one-month LIBOR plus 1.25% to 1.75% ................... -- 26,420 Other ................................ 4,566 3,658 -------- ------- Total ............................. 243,539 42,578 Less: Current maturities ............. 33,098 17,248 -------- ------- Total long-term debt............... $210,441 $25,330 ======== =======
The aggregate maturities of long-term debt for the next five years are as follows: 1996 - $33.1 million; 1997 - $32.2 million; 1998 - $31.8 million; 1999 - $31.8 million; 2000 - $30.3 million; thereafter - $84.3 million. The installment notes were secured by certain lease receivables and were due in installments through 1997. During 1995, the lease receivables securing these installment notes were sold, and the proceeds from the sale were applied to the installment notes. The 9.0% notes contain various financial covenants, including among other things, minimum net worth, maintenance of certain fixed charge ratios and maximum allowable indebtedness to net worth. 25 INCOME TAXES Income tax expense was composed of the following (in thousands):
Years ended December 31, ------------------------------ 1995 1994 1993 --------- ------- ------- Current: Federal ................................... $ 115,193 $45,189 $16,872 Puerto Rico and State ..................... 9,057 7,450 4,556 Foreign ................................... 4,908 7,925 6,368 --------- ------- ------- Total current ......................... 129,158 60,564 27,796 --------- ------- ------- Deferred: Federal ................................... (27,202) -- -- Puerto Rico and State ..................... -- -- -- Foreign ................................... (4,686) -- -- --------- ------- ------- Total deferred ........................ (31,888) -- -- --------- ------- ------- Total tax expense...................... $ 97,270 $60,564 $27,796 ========= ======= =======
The income tax benefits related to the exercise of stock options of $50.0 million, $24.1 million, and $5.8 million in 1995, 1994, and 1993, respectively, reduced taxes currently payable and was credited to Additional Capital. Included in the $50.0 million benefit recognized in 1995 is $36.0 million of benefits related to exercises prior to 1995. 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 Businesses Acquired, Net. 26 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, --------------------------------- 1995 1994 1993 --------- -------- -------- Income tax charge (credit): At statutory rate......................... $ 101,483 $ 78,117 $ 38,309 Tax related to foreign jurisdictions ........................... 4,714 5,696 5,691 Tax credit utilization .................... (4,606) (3,810) -- Tax benefit of Puerto Rican subsidiary ........................ (3,977) (1,950) (5,432) Net operating losses utilized ................................ (3,500) (40,615) (12,269) State income taxes, net of federal tax effect .............................. 2,530 2,015 464 Foreign tax rate differential ............................ 626 367 1,033 Federal alternative minimum tax ............................. -- 20,744 -- --------- -------- -------- $ 97,270 $ 60,564 $ 27,796 ========= ======== ========
27 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, 1995 and 1994 were as follows (in thousands):
December 31, ----------------------- 1995 1994 ----------- -------- Deferred Tax Assets Asset valuation reserves not yet deductible for tax........................ $ 15,453 $ 15,385 Accrued liabilities not yet deductible for tax ....................... 37,087 29,077 Federal and foreign loss carryforwards ..... 6,437 7,168 Tax credit carryforwards ................... 5,740 36,459 Other ...................................... 3,474 2,285 ----------- -------- Deferred asset ......................... 68,191 90,374 ----------- -------- Deferred Tax Liabilities Deferred revenue ........................... (8,101) (16,557) Capitalized software development costs .................................... (20,227) (19,056) Depreciation ............................... (4,464) (3,086) Other ...................................... (3,511) (4,002) ----------- -------- Deferred liability ..................... (36,303) (42,701) ----------- -------- Deferred tax asset, net of deferred liability ............................. 31,888 47,673 Less valuation allowance ................... -- (47,673) Net deferred tax asset ................. $ 31,888 $ -- =========== ========
During 1995, the Company's taxable earnings allowed the Company to realize the benefits of a substantial portion of the deferred tax asset at December 31, 1994, including tax benefits for net operating loss carryforwards and tax credits. In addition, the Company expects to have sufficient taxable earnings in the future to realize its net deferred tax asset at December 31, 1995, and as a result, the Company believes that a deferred tax asset valuation allowance is no longer required at December 31, 1995. Included in Noncurrent Income Taxes and Other Liabilities at December 31, 1995 and 1994 are $36.6 million and $30.1 million, respectively, for noncurrent taxes related primarily to foreign jurisdictions. At December 31, 1995, the Company had foreign net operating loss carryforwards of approximately $31.0 million which expire in the year 2000. Also, the Company has approximately $3.0 million foreign tax credit carryforwards and $5.7 million alternative minimum tax credits. The foreign tax credits expire from 1996 to 2000 if not utilized. Alternative minimum tax credits do not expire. 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. 28 INCENTIVE COMPENSATION The Company has an Incentive Awards Plan (the "Plan") administered by the Compensation Committee of the Board of Directors which provides for payment of cash and stock awards to officers and key employees based upon achievement of specific goals by the Company and the participating executives. In 1995, cash of approximately $6.4 million and approximately 74,000 shares of restricted stock were awarded under the Plan. The restricted shares, valued at approximately $2.5 million at the date of award, will vest in equal annual increments over two years. See "Restricted Stock" under "Common and Preferred Stock" for further information. For 1994 and 1993, cash awards of approximately $7.0 million and $6.1 million, respectively, were charged to income under the Plan. The Company also has a 1990 Long-Term Incentive Compensation Plan ("LTIP") which awards performance units to certain key executives. Certain officers were awarded units in 1990 under the Company's 1990 LTIP by the Compensation Committee of the Board of Directors. The units vested to the officers over six years through December 31, 1995, and the value of a unit was determined annually based on the Company's operating performance, as defined in the plan. The total value of the units included amounts payable in cash which were charged to income in 1995, 1994, and 1993 (approximately $7.2 million, $6.9 million, and $2.3 million, respectively) and approximately 146,000 shares of restricted stock issued in January 1996. The restricted shares, which will vest in equal annual increments over two years, were valued at $5.4 million at the date of award. Also, during 1995 and early 1996, 177,000 units were awarded by the Compensation Committee of the Board of Directors to certain key executives under the Company's 1994 LTIP. The units vest to the officers over five years beginning in 1996, and the value of a unit will be determined annually beginning in 1996 based on the Company's operating performance, as defined in the plan. COMMON AND PREFERRED STOCK Description and Dividends At the April 26, 1995 Annual Shareholders' Meeting, the shareholders of the Company approved an increase in the number of authorized shares of common stock, $.01 par value, from 250 million to 500 million. The Company is also authorized to issue 5 million shares of preferred stock, $1.00 par, none of which has been issued to date. 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 prior to 1994 were restated to retroactively reflect the stock split. Since inception, the Company has not declared or paid a cash dividend. In May 1986 and subsequently amended in April 1991, the Company declared a dividend distribution of one preferred stock purchase right on 29 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 At the April 26, 1995 Annual Shareholders' Meeting, the shareholders approved an increase of 1 million shares of common stock authorized for issuance under the Company's stock purchase plans. In addition, the Board of Directors approved a new stock purchase plan for the Company's international employees which began during 1995 and provided for the issuance of up to 750,000 shares. Under provisions of the Company's employee stock purchase plans, employees can purchase the Company's common stock at a specified price through payroll deductions during an offering period, currently established on an annual basis. In August 1995, approximately 467,000 shares were issued to employees under the employee stock purchase plan. At December 31, 1995, approximately $4.8 million had been contributed by employees that will be used to purchase shares at the end of the offering period in August 1996. At December 31, 1995, the Company could issue up to 6,979,000 shares under the employee stock purchase plans of which approximately 4,456,000 shares had been purchased and issued and approximately 311,000 shares were subscribed for issuance in August 1996 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. At December 31, 1995, plan options covering 5,065,000 shares had been granted and were outstanding, options granted under the plans covering 10,375,000 shares had been exercised, 758,000 restricted shares had been issued (net of forfeitures), 533,000 shares had expired and options covering 1,513,000 shares were available for grant. On December 20, 1995, the Board of Directors approved a grant of 2,000,000 options to one of the Company's executive officers with an exercise price at the market price at the close of business on December 20, 1995. This grant has been issued subject to shareholder approval of an increase in the number of shares of common stock authorized for issuance under the Company's stock option plans at the April 25, 1996 Annual Shareholders' Meeting and has not been reflected in option activity as of December 31, 1995. 30 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 by the Company, at its option, based on the vesting terms in the option agreements. Other options at December 31, 1995 include 20,000 options granted to various current members of the Company's Board of Directors. Outstanding warrants and options are summarized as follows:
Options ----------------------------------- Warrants Plans Other ----------- ----------- -------------- 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 $6.06-$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 1995 Transactions Issuances and grants.................. -- 1,380,000 -- Price per share....................... -- $29.25-$52.25 -- Exercises and forfeitures......................... -- 1,577,000 -- Price per share....................... -- $.01-$52.25 -- December 31, 1995-- Shares issuable upon exercise ...................... -- 5,065,000 20,000 Price per share....................... -- $.01-$52.25 $8.50 Average price per share........................... -- $17.94 $8.50 Expiration............................ -- 1996-2005 1997
31 Restricted Stock The Company's Board of Directors authorized the issuance of restricted shares of the Company's common stock to certain key employees under its 1993, 1988 and 1984 employee stock option plans. Holders of restricted stock retain all rights of a shareholder, except the shares cannot be sold until they are vested. Upon employee termination other than retirement, all unvested shares are forfeited to the Company. The shares vest annually through 1998. The Company issued 110,000, 6,000 and 255,000 shares of restricted stock to employees in 1995, 1994 and 1993, respectively, and increased common stock and additional capital by the fair market value of the stock at the date of issuance ($3.8 million, $0.2 million and $7.3 million in 1995, 1994 and 1993, respectively), net of unearned compensation. At December 31, 1995, 1994 and 1993, unearned compensation related to the restricted shares was $4.3 million, $1.8 million and $3.3 million, respectively. The unearned compensation will be charged to expense ratably over the vesting period. Approximately 2,000 and 14,000 restricted shares were forfeited in 1995 and 1994, respectively, totaling $.03 million and $0.2 million, respectively. Reserved Stock Common stock has been reserved for the following purposes (in thousands):
December 31, ------------- 1995 1994 ----- ----- Options outstanding ........... 5,085 5,282 Options available for grant under the stock option plans. 1,513 2,938 Stock purchase plans .......... 2,523 1,240 ----- ----- 9,121 9,460 ===== =====
OTHER OPERATING COSTS The agreement to acquire Optilink Corporation ("Optilink") in 1990 required the Company to pay certain former employees of Optilink up to $7.9 million if certain revenue targets were 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 and $4.1 million in 1993. Such amounts are included in Other Operating Costs on the Consolidated Statements of Income. RELATED PARTIES The Company has agreements to pay consulting fees, which amounted to $0.5 million in 1995, 1994 and 1993, respectively, to non-employee members of the Company's Board of Directors. 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 32 approximately $0.9 million, which was included in Other Income (Expense), Net. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, short-term debt, accounts payable and accrued liabilities are reflected in the financial statements at fair value. Investments in debt and equity securities classified as available for sale have been recorded in the financial statements at current market values. Current market values of investments in debt securities classified as held to maturity are disclosed in the "Investments in Debt and Equity Securities" footnote. The carrying amount of the Company's long-term debt approximated its fair value at December 1994 due to the debt agreements containing market interest rates. At December 31, 1995, the fair value of the Company's long-term debt was approximately $265.2 million. 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, 1995 and 1994. See "Commitments and Contingencies" for the carrying amounts of the Company's off-balance-sheet financial instruments. 33 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, 1995 (in thousands): 1996.......................... $ 21,034 1997.......................... 17,598 1998.......................... 12,356 1999.......................... 8,985 2000.......................... 8,643 Thereafter.................... 26,563 ------------ $ 95,179 ============
Operating lease rental expense was $28.9 million, $24.6 million and $19.3 million for the years ended December 31, 1995, 1994 and 1993, respectively. Contingent Liabilities During 1995, the Company sold certain customer receivables and operating leases under agreements which contain recourse provisions. At December 31, 1995, approximately $10.3 million of the receivables sold during 1995 were outstanding and subject to recourse provisions which would require the Company to repurchase up to 100% of the receivable balance upon customer default. Additionally, the Company could be obligated to repurchase a portion of the sales-type and operating lease receivables sold in 1995 on a partial recourse basis, the terms of which allow the Company to limit its risk of loss to approximately $7.8 million at December 31, 1995. The Company also has guarantees of approximately $32.6 million outstanding at December 31, 1995, supporting Company and third-party performance bonds to customers and others, of which approximately $6.0 million was collateralized by letters of credit issued under the Company's domestic credit facility. The Company believes it has adequate reserves for any ultimate losses associated with these contingencies. At December 31, 1995, the Company had forward foreign exchange contracts of $54.3 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"), a California corporation; Quadrium Corporation ("Quadrium"), a California corporation; and two individuals. The Company 34 seeks a declaratory judgment that the two individuals 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 with the Company. The Company further seeks a declaration that AFC's products are the proprietary property of the Company under the terms of certain Proprietary Information Agreements or certain Consulting Agreements with Quadrium. The Company also seeks unspecified damages for breaches of contract, civil conspiracy and tortious interference. The individual defendants have both filed counterclaims whereby they claim entitlement to certain stock options and cash payments under several of the Company's stock option plans. AFC has also filed a counterclaim alleging that the Company has violated the Sherman Antitrust Act and certain state antitrust statutes, and 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, (5) committed unfair competition and (6) committed acts in violation of the Racketeering Influenced Corrupt Organization Act. The Company believes that it has valid and substantial claims against all of the defendants. The Company intends to vigorously defend all of the defendants' counterclaims, and further believes it has valid defenses to all of the counterclaims. In April 1995, the Company filed a lawsuit against Next Level Corporation ("Next Level") and two former Company employees alleging breach of contract and the misuse of Company trade secrets. The Company is seeking an injunction prohibiting Next Level and the former employees from continued use of Company trade secrets and opportunities. The Company is also seeking to recover damages. On February 14, 1996, the Company joined Bell Atlantic in bringing an antitrust action against AT&T Corporation ("AT&T"). The complaint alleges that AT&T has used its monopoly power in the central office switch market as part of a scheme to gain an unfair competitive advantage in the remote digital terminal market. The Company is seeking to compel AT&T to open up the interfaces to the central office switch so that any manufacturer will have the ability to compete with applications, software, features and services and will more rapidly deliver to its customers the enhanced functionality that they have come to expect. The Company is also party to other routine legal proceedings incidental to its business. The Company does not believe the ultimate resolution of the above litigation will have a material adverse effect on its consolidated financial position. 35 INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS International Operations The Company operates in a single industry segment, the telecommunications equipment marketplace. A summary of the Company's operations by geographic area is presented below (in thousands):
December 31, -------------------------- 1995 1994 ----------- ----------- Revenue from unaffiliated customers: United States ........................... $ 1,188,357 $ 908,664 Europe .................................. 155,562 47,287 Other International ..................... 78,099 47,174 Eliminations ............................ -- -- ----------- ----------- Consolidated ............................ $ 1,422,018 $ 1,003,125 =========== =========== Intercompany revenue between geographic areas: United States ........................... $ 65,856 $ 63,871 Europe .................................. 15,357 11,473 Other International ..................... 5,373 4,301 Eliminations ............................ (86,586) (79,645) ----------- ----------- Consolidated ............................ $ -- $ -- =========== =========== Operating income (loss): United States ........................... $ 284,525 $ 215,280 Europe .................................. (14,090) 2,509 Other International ..................... 4,139 505 Eliminations ............................ 4,844 (4,295) ----------- ----------- Consolidated ............................ $ 279,418 $ 213,999 =========== =========== Identifiable assets at December 31: United States ........................... $ 1,546,378 $ 1,012,006 Europe .................................. 296,157 234,983 Other International ..................... 22,916 27,715 Eliminations ............................ (176) (6,168) ----------- ----------- Consolidated ............................ $ 1,865,275 $ 1,268,536 =========== ===========
The information presented above may not be indicative of results if the geographic areas were independent organizations. Intercompany transactions are made at established transfer prices. Revenue from foreign operations and identifiable assets of foreign operations were less than 10% of consolidated revenue and assets in 1993. Revenue generated from export sales was less than 10% of consolidated revenue in 1995, 1994 and 1993. Major Customers The following companies represented the five largest customers of the Company for each of the respective years. The customers and their related percentage of consolidated revenue were as follows: 36
Years ended December 31, ---------------------------- 1995 1994 1993 ---- ---- ---- Motorola, Inc........................... 23% 23% 12% MCI Communications Corporation.......... 10% 12% 18% Ameritech Services, Inc. and subsidiaries...................... 9% 11% 13% NYNEX................................... 8% 8% 11% Bell Atlantic........................... 7% 8% 11%
37 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, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas January 23, 1996 38 DSC Communications Corporation and Subsidiaries QUARTERLY RESULTS (Unaudited) (In thousands, except per share data)
1995 1994 ----------------------------------------------- ------------------------------------------------- Fourth Third Second First Fourth Third Second First ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- Revenue.......... $ 373,891 $ 370,119 $ 360,011 $ 317,997 $ 312,076 $ 260,601 $ 229,574 $ 200,874 Gross profit..... 175,097 174,406 177,726 158,670 154,049 126,461 112,867 97,015 Net income....... $ 49,442 $ 49,367 $ 51,955 $ 41,916 $ 53,545 $ 43,196 $ 36,284 $ 29,601 =========== =========== =========== =========== ============ =========== =========== =========== Income per share........... $ 0.42 $ 0.42 $ 0.44 $ 0.36 $ 0.46 $ 0.37 $ 0.31 $ 0.25 =========== =========== =========== =========== ============ =========== =========== ===========
EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 DSC COMMUNICATIONS CORPORATION
Subsidiaries Incorporated in ------------ --------------- DSC Communications (Asia Pacific) PTE LTD Singapore DSC Communications (Cayman) Ltd. Cayman Islands DSC Communications (Far East) Limited Hong Kong DSC Communications A/S Denmark DSC Communications Canada Inc. Canada DSC Communications Dedicom A/S Denmark DSC Communications Limited United Kingdom DSC Communications Polska Sp.Z.o.o. Poland DSC Communications PTY. Ltd. Australia DSC Communications Technics Ltd. United Kingdom DSC Comunicaciones de Costa Rica, S.A. Costa Rica DSC Comunicaciones de Mexico, S.A. de C.V. Mexico DSC Comunicacoes Ltda. Brazil DSC Finance Corporation Delaware DSC Finance PTY Ltd. Australia DSC Global Export Ltd. Barbados DSC International Corporation Delaware DSC Japan Inc. (1) Japan DSC Kommunikationsdienste GmbH Germany DSC Korea, Inc. Delaware DSC Local Networks (Europe) Limited United Kingdom DSC Marketing Services, Inc. Delaware DSC of Puerto Rico, Inc. Delaware DSC of the Virgin Islands, Inc. Virgin Islands DSC Taiwan, Inc. Delaware DSC Technologies Corporation Delaware DSC Telecom Inc. Nevada DSC Telecommunications Corporation Delaware Fibcom India Limited(2) India Netman A/S(3) Denmark Sildor Investments B.V. (4) TMN A/S(5) Denmark TMN Udvikling I/S Denmark
__________________________________ (1) Jointly-owned with Mitsubishi Corporation (2) Jointly-owned company with Indian Telephone Industries Ltd. and The Industrialization Fund for Developing Countries (3) Jointly-owned company with Digital Equipment Corporation (4) Delaware and The Netherlands (5) Participant in a partnership, TMN Udvikling I/S, with Copenhagen Telephone and Jutland Telephone EX-23.1 9 CONSENT OF ERNST & YOUNG 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of DSC Communications Corporation of our report dated January 23, 1996 included in the 1995 Annual Report to Shareholders of DSC Communications Corporation. Our audit also included the financial statement schedule of DSC Communications Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-83398, 2-95833, 33-17459, 33-22745, 33-38544, 33-65212, 33-65214, 33-64784, 33-49718, 33-61423 and 33-61425) of our report dated January 23, 1996 with respect to the financial statements and schedule of DSC Communications Corporation incorporated by reference in this Annual Report (Form 10-K). ERNST & YOUNG LLP Dallas, Texas March 29, 1996 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 258,565 310,699 277,006 0 303,962 1,220,547 675,725 (305,203) 1,865,275 481,582 210,441 1,206 0 0 1,122,873 1,865,275 1,422,018 1,422,018 736,119 736,119 406,481 0 18,599 289,950 97,270 192,680 0 0 0 192,680 1.63 0
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