-----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, Pm7E7V8QTf2lF7Tkg/8Oa3hoG+laKPrm+OTJTOrON37qoFR6HuXSbYCLfQaGFony DBAJwS3QpZsp51EUHijI7A== 0000950134-97-005638.txt : 19970804 0000950134-97-005638.hdr.sgml : 19970804 ACCESSION NUMBER: 0000950134-97-005638 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970801 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000316004 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 541025763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10018 FILM NUMBER: 97650327 BUSINESS ADDRESS: STREET 1: 1000 COIT RD CITY: PLANO STATE: TX ZIP: 75075 BUSINESS PHONE: 2145193000 MAIL ADDRESS: STREET 1: 1000 COIT ROAD CITY: PLANO STATE: TX ZIP: 75075-5813 FORMER COMPANY: FORMER CONFORMED NAME: DIGITAL SWITCH CORP DATE OF NAME CHANGE: 19850425 10-Q 1 FORM 10-Q PERIOD END JUNE 30, 1997 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number: 0-10018 DSC COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 54-1025763 - --------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1000 Coit Road, Plano, Texas 75075 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (972) 519-3000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Number of Shares Outstanding Title of Each Class as of July 25, 1997 - ----------------------------- ---------------------------- Common Stock, $0.01 Par Value 117,425,394 2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements. DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands)
June 30, December 31, 1997 1996 ----------- ----------- (Unaudited) Assets - ------------------------------------------ CURRENT ASSETS Cash and cash equivalents .............. $ 148,356 $ 155,101 Marketable securities .................. 148,781 178,938 Receivables ............................ 389,733 411,947 Inventories ............................ 369,137 343,566 Deferred income taxes .................. 60,857 61,086 Other current assets ................... 66,314 52,240 ----------- ----------- Total current assets .............. 1,183,178 1,202,878 ----------- ----------- PROPERTY AND EQUIPMENT, at cost .......... 824,199 764,671 Less accumulated depreciation and amortization ...................... (396,658) (361,075) ----------- ----------- 427,541 403,596 ----------- ----------- LONG-TERM RECEIVABLES .................... 41,796 42,965 CAPITALIZED SOFTWARE DEVELOPMENT COSTS ... 61,865 51,634 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET ............... 144,243 146,025 OTHER .................................... 91,948 78,557 ----------- ----------- Total assets .................. $ 1,950,571 $ 1,925,655 =========== =========== Liabilities and Shareholders' Equity - ------------------------------------------ CURRENT LIABILITIES Short-term debt ........................ $ 5,346 $ 906 Accounts payable ....................... 125,257 99,824 Accrued liabilities .................... 255,694 297,101 Income taxes payable ................... 22,095 2,019 Current portion of long-term debt ...... 32,641 33,072 ----------- ----------- Total current liabilities ......... 441,033 432,922 ----------- ----------- LONG-TERM DEBT, net of current portion ... 235,028 274,602 NONCURRENT INCOME TAXES AND OTHER LIABILITIES ................... 70,904 70,495 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $0.01 par value, issued - 122,377 in 1997 and 122,241 in 1996; outstanding - 117,388 in 1997 and 117,252 in 1996 ....................... 1,224 1,222 Additional capital ..................... 734,938 730,743 Unrealized gains (losses) on securities, net of income taxes ................... 106 (147) Accumulated translation adjustment ..... 2,086 8,743 Retained earnings ...................... 508,363 450,186 ----------- ----------- 1,246,717 1,190,747 Treasury stock, at cost, 4,989 shares .. (43,111) (43,111) ----------- ----------- Total shareholders' equity ........ 1,203,606 1,147,636 ----------- ----------- Total liabilities and shareholders' equity ........ $ 1,950,571 $ 1,925,655 =========== ===========
See the accompanying Notes to Condensed Consolidated Financial Statements. Page 2 of 16 3 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Revenue .................................. $ 382,883 $ 356,431 $ 729,086 $ 664,328 Cost of revenue .......................... 226,327 209,412 433,255 387,843 --------- --------- --------- --------- Gross profit ........................... 156,556 147,019 295,831 276,485 --------- --------- --------- --------- Operating costs and expenses: Research and product development ....... 59,545 52,474 114,326 105,619 Selling, general and administrative .... 57,335 57,723 115,386 113,502 Other operating costs .................. 2,462 2,464 4,934 5,046 --------- --------- --------- --------- Total operating costs and expenses ... 119,342 112,661 234,646 224,167 --------- --------- --------- --------- Operating income ....................... 37,214 34,358 61,185 52,318 Interest income .......................... 4,513 6,225 9,551 13,251 Interest expense ......................... (4,988) (6,206) (10,812) (13,292) Other income (expense), net .............. 30,708 (84) 33,910 605 --------- --------- --------- --------- Income before income taxes ........... 67,447 34,293 93,834 52,882 Income taxes ............................. 25,630 13,031 35,657 20,095 --------- --------- --------- --------- Net income ........................... $ 41,817 $ 21,262 $ 58,177 $ 32,787 ========= ========= ========= ========= Income per share ......................... $ 0.35 $ 0.18 $ 0.49 $ 0.28 ========= ========= ========= ========= Average shares used in per share computation ................... 119,301 118,493 119,241 118,442
See the accompanying Notes to Condensed Consolidated Financial Statements. Page 3 of 16 4 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, ---------------------- 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................... $ 58,177 $ 32,787 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization ........................ 48,609 44,517 Amortization of capitalized software development costs ................................. 12,276 12,828 Gain from the sales of stock received from 1996 litigation settlement ........................ (35,494) -- (Increase) decrease in current and long-term receivables .................................. 13,861 (36,748) Increase in inventories .................................. (28,547) (46,506) Other, including changes in other assets, current payables and other liabilities ......... (4,281) (31,856) --------- --------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ............................. 64,601 (24,978) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ...................... (77,850) (68,160) Purchases of marketable securities ....................... (122,244) (883,919) Proceeds from sales and maturities of marketable securities ............................................. 152,447 898,209 Proceeds from sales of stock received from 1996 litigation settlement ............................. 35,494 -- Additions to capitalized software development costs ...................................... (22,507) (18,071) Other .................................................... (11,535) (2,293) --------- --------- NET CASH USED FOR INVESTING ACTIVITIES ............................. (46,195) (74,234) --------- ---------
(Continued) Page 4 of 16 5 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Continued) (In thousands) (Unaudited)
Six Months Ended June 30, ---------------------- 1997 1996 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term debt .............................. 4,440 33,677 Payments on long-term borrowings ......................... (29,443) (29,763) Other .................................................... 619 3,300 --------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ............................. (24,384) 7,214 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ............................ (767) (400) NET DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (6,745) (92,398) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 155,101 258,565 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 148,356 $ 166,167 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid ............................................ $ 9,618 $ 11,674 ========= ========= Income taxes paid ........................................ $ 10,934 $ 48,228 ========= =========
See the accompanying Notes to Condensed Consolidated Financial Statements. Page 5 of 16 6 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 1997 and 1996 and December 31, 1996 (Unaudited) BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows. Such adjustments are of a recurring nature unless otherwise disclosed herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations promulgated by the Securities and Exchange Commission. However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. Quarterly consolidated financial results may not be indicative of annual consolidated financial results. The Company has not paid or declared a cash dividend on its common stock since its organization. Certain prior year's financial statement information has been reclassified to conform with the current year financial statement presentation. These unaudited financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company's 1996 Annual Report to Shareholders for the year ended December 31, 1996. INVENTORIES Inventories consisted of the following (in thousands):
June 30, December 31, 1997 1996 --------- ----------- Raw Materials . . . . . . . . . . . . . . . $ 120,858 $ 127,495 Work in Process . . . . . . . . . . . . . . . 29,263 25,724 Finished Goods . . . . . . . . . . . . . . . 219,016 190,347 --------- --------- $ 369,137 $ 343,566 ========= =========
Page 6 of 16 7 CREDIT AGREEMENTS AND SHORT-TERM DEBT The Company has a five-year, unsecured $160.0 million revolving credit facility with several banks. This facility provides for borrowings and issuances of letters of credit in various currencies. The maximum borrowings available under the facility are reduced by the value of outstanding letters of credit issued by the banks on behalf of the Company. The letters of credit issued by the banks under this agreement at June 30, 1997 totaled $7.4 million, including $5.0 million issued to support various foreign subsidiary credit agreements. This facility contains various financial covenants, and there have been no borrowings under this agreement during the six months ended June 30, 1997. Two of the Company's foreign subsidiaries also have credit agreements providing for borrowings of up to $13.7 million with local banks, of which $5.3 million was outstanding at June 30, 1997. OTHER INCOME (EXPENSE), NET Other income (expense), net in the first and second quarters of 1997 included gains of approximately $4.0 million and $31.5 million, respectively, from sales of common stock received from a settlement of litigation in 1996. INCOME TAX EXPENSE The Company's estimated effective income tax rate is 38%. The income tax expense included federal, foreign, and state (including Puerto Rico) income taxes. COMMITMENTS AND CONTINGENCIES Contingent Liabilities The Company periodically sells customer receivables and leases under agreements which contain recourse provisions. The Company could be obligated to repurchase a portion of the sales-type and operating lease receivables which were previously sold on a partial recourse basis, the terms of which allow the Company to limit its risk of loss to approximately $7.8 million at June 30, 1997. The Company also has guarantees of $45.0 million outstanding at June 30, 1997 supporting bid and performance bonds to customers and others, of which $2.4 million were collateralized by letters of credit issued under the Company's credit facility. The Company believes it has adequate reserves for any ultimate losses associated with these contingencies. Page 7 of 16 8 The Company, in management of its exposure to fluctuations in foreign currency exchange rates, enters into forward foreign exchange contracts to hedge firm commitments which are denominated in foreign currencies. The contracts generally have maturities of one year or less and contain an element of risk that the counterparty may be unable to meet the terms of the agreement. However, the Company minimizes such risk by limiting the counterparty to major financial institutions. Management believes the risk of incurring such losses is remote, and any losses therefrom would not be material. At June 30, 1997, the Company had forward foreign exchange contracts of $87.1 million outstanding. Litigation On June 11, 1996, a federal district court entered a $137.7 million judgment in the Company's favor and against Next Level Corporation ("Next Level") and two former Company employees. The Company had filed suit in 1995 alleging theft of trade secrets and diversion of corporate opportunities. On February 28, 1997, the Fifth Circuit Court of Appeals upheld the judgment. The Company and Next Level appealed to an En Banc panel of judges in the Fifth Circuit. Both appeals were denied, and the case has been remanded to the federal district court for entry of judgment. In August 1996, the Company filed suit against Samsung Information Systems America, Inc., Samsung Electronics Co., Ltd. and several former employees of the Company (collectively the "Defendants") alleging claims for breach of contract, theft of trade secrets, unfair competition and tortious interference with contract and prospective contractual relations related to the Company's development of a next generation switching system. The Company is seeking unspecified damages. The Company is also seeking an injunction against the Defendants to prevent them from using the Company's trade secrets. In late December 1996, the Defendants filed a counterclaim against the Company, alleging claims for declaratory judgment, wrongful injunction, tortious interference with actual and prospective contractual relations, misappropriation of trade secrets, unfair competition, exclusion from telephony switch market, civil conspiracy, fraud and negligent misrepresentation, breach of fiduciary or confidential relationship, defamation and intentional infliction of emotional distress. These allegations arise primarily out of the filing and prosecution of the Company's suit against the Defendants. In October 1996, the Company filed suit against Pulse Communications, Inc. ("Pulsecom") alleging contributory copyright infringement and misappropriation of trade secrets relating to the manufacture and sale of a POTS line card advertised as compatible with the Company's Litespan-2000 system. The Company sought damages and an injunction barring further infringement of the Company's intellectual property rights by Pulsecom and its agents. Pulsecom has filed a counterclaim alleging that the Universal Voice Grade line card manufactured by the Company for the Litespan-2000 system infringes a patent assigned to Pulsecom. On May 7, 1997, the Federal District Court for the Eastern District of Virginia denied the Company's claims. The Company intends to file an Page 8 of 16 9 appeal. Pulsecom's patent infringement claims against the Company will be heard in a separate trial expected to take place during the third quarter of 1997. On May 25, 1994, the Company filed suit against DGI Technologies, Inc. ("DGI"), alleging that DGI misappropriated the Company's trade secrets regarding digital trunk interface cards and microprocessor cards. The Company seeks damages and permanent injunctive relief. DGI brought counterclaims for damages and injunctive and declaratory relief for alleged violations of federal antitrust statutes, tortious interference, industrial espionage, misappropriation of trade secrets, trespass, conversion, and unfair competition, based upon allegations that the Company's claims constitute "sham" litigation, that the Company's statements to customers about the impact of their use of DGI products on the Company's warranties are unlawful attempts to exclude competition, and that the Company has unlawfully tied the sale of its microprocessors to the sale of other products. The case was tried in January 1997, and the jury returned a verdict. The Court sealed the verdict pending entry of judgment. 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. COMMON STOCK At the April 30, 1997 Annual Shareholders' Meeting, the shareholders approved an amendment to increase the total number of authorized shares of common stock available for grant under the DSC Communications Corporation 1993 Employee Stock Option and Securities Award Plan from 10.0 million shares to 15.75 million shares. Page 9 of 16 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q herein, including the matters relating to future performance, are forward looking statements that are dependent upon a number of risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. These risks and uncertainties include, but are not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, research and new product development, protection of intellectual property, patents, and technology, ability to attract and retain highly qualified personnel, availability of components and critical manufacturing equipment, facility construction and startups, the regulatory and trade environment, and other risks indicated from time to time in the Company's filings with the Securities and Exchange Commission. Results of Operations For the three months ended June 30, 1997, the Company reported revenue of $382.9 million, an increase of $26.5 million from $356.4 million in the 1996 period. Net income for the 1997 second quarter was $41.8 million, or $0.35 per share. Excluding a pre-tax gain of approximately $31.5 million (after-tax gain of $19.5 million, or $0.16 per share) from a sale of stock received from a 1996 litigation settlement, net income was $22.3 million, or $0.19 per share. Net income for the second quarter of 1996 was $21.3 million, or $0.18 per share. For the six months ended June 30, 1997, the Company recorded revenue of $729.1 million and net income of $58.2 million, or $0.49 per share, which includes a pre-tax gain of approximately $35.5 million (after-tax gain of $22.0 million, or $0.18 per share) from sales of stock in both the first and second quarters. For the first half of 1996, revenue was $664.3 million and net income was $32.8 million, or $0.28 per share. Revenue in the second quarter and first half of 1997 increased 7% and 10%, respectively, compared to the same periods of the prior year due primarily to higher volumes of switching and access product deliveries, net of lower levels of transport product revenues. Gross profit as a percentage of revenue was 41% for both the quarter and six month periods ended June 30, 1997 as compared to 41% and 42%, respectively, in the same periods of 1996. As experienced in the past, the Company's gross margin percentage and operating performance could vary significantly from period to period in the future due to changes in the relative mix of product deliveries and software content. Page 10 of 16 11 DSC Communications A/S, the Company's Danish subsidiary, continued to incur operating losses in the first half of 1997 due primarily to the delayed introduction of a new generation of optical transmission equipment. Deliveries of certain of these products have begun. However, future near-term profitability of the Company's Danish operations is dependent upon the successful market acceptance of these products. Research and product development expense was $59.5 million, or 16% of revenue, in the second quarter of 1997 compared to $52.5 million, or 15% of revenue, in the same period of 1996. Research and development expense for the first half of 1997 and 1996 was $114.3 million and $105.6 million, respectively, or 16% of revenue in both periods. The industry in which the Company operates requires substantial investment in product development, capital and, at times, inventory prior to customer acceptance of new products or enhancements to existing products. One of the keys to the Company's overall success has been anticipating the appropriate timing of such activities. Delays in product completion and/or slower than expected market acceptance of certain products, including iMTN, Airspan, and newer products of the Company's Danish operations, have in the past negatively impacted the Company's operating performance and also, in certain cases, resulted in adjustments to carrying values of assets. Future operating performance could be impacted should timing of further product development and/or market acceptance be delayed. Selling, general and administrative expenses totaled $57.3 million and $115.4 million for the three months and six months ended June 30, 1997, respectively, compared to $57.7 million and $113.5 million, respectively, for the same periods in 1996. As a percentage of revenue, selling, general and administrative expense was 15% for the second quarter of 1997 and 16% for the first half of 1997 as compared to 16% and 17%, respectively, for the comparable periods of 1996. The Company continues to actively pursue claims related to its intellectual property rights and, as a result, legal expenses may continue at a high level as this litigation progresses. See "Litigation" under "Commitment and Contingencies" in Notes to Condensed Consolidated Financial Statements for further discussion. As noted previously, the Company recorded pretax gains included in Other income (expense), net of $4.0 million and $31.5 million during the first and second quarter of 1997, respectively, resulting from sales of stock received as part of a litigation settlement in 1996. Page 11 of 16 12 The Company's estimated effective income tax rate was 38% for the first half of 1997. The estimated effective income tax rate is based upon estimates for the full year for a number of variables including, among other things, forecasted income in the United States and foreign jurisdictions. The effective tax rate could change as estimates of these and other variables change throughout the year. The Company believes that its existing deferred tax assets on the Condensed Consolidated Balance Sheet will be realizable based on the Company's profitable operating history and an assessment that the Company will generate taxable earnings in domestic and foreign tax jurisdictions in the future. The Company's future quarterly and annual operating results may be affected by a number of factors, including the introduction and market acceptance of new products on a timely basis as previously discussed; mix of products sold; the timing and ultimate receipt of orders from certain customers which continue to constitute a large portion of the Company's revenue; the successful enhancement of existing products; product costs; manufacturing lead times; significant fluctuations in foreign currency exchange rates; and changes in general worldwide economic conditions, any of which could have an adverse impact on operating results. The Company continues to evaluate its computer software used internally and also its external product offerings to determine to what extent modifications will be required to ensure year 2000 compliance. It is not possible to estimate the cost of compliance and its effect on the Company until the evaluation process is completed. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share", ("FAS 128"). FAS 128 simplifies the standards for computing earnings per share and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. The adoption of FAS 128 is not expected to have a significant impact on the Company's earnings per share. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("FAS 131") which supersedes existing accounting standards related to disclosure of operating segment information beginning in 1998. The Company has yet to determine the impact of this new standard on its financial statement disclosures for the 1998 annual financial statements. Page 12 of 16 13 Financial Condition and Liquidity The Company's cash and cash equivalents at June 30, 1997 were $148.4 million compared to $155.1 million at December 31, 1996, and marketable securities were $148.8 million at June 30, 1997 compared to $178.9 million at December 31, 1996. Cash of $64.6 million was generated from operating activities in the first half of 1997. This was primarily the result of improved earnings and a decrease in accounts receivable, partially offset by an increase in inventories as a result of existing and anticipated customer demand for the Company's products. Investing activities during the six months ended June 30, 1997 included additions to property and equipment of $77.9 million. The Company anticipates that capital expenditures for the full year 1997 could be in the range of $150 million to $170 million. Capital expenditures in 1998, which may include expansion of facilities on the Plano campus, could equal or exceed amounts of capital expenditures in 1997. However, the timing and extent of any future capital expenditures is dependent upon future business growth. The Company received proceeds of approximately $35.5 million in the first half of 1997 from the sales of common stock received as part of a litigation settlement in 1996. In April 1997, the Company made a scheduled annual principal payment of $28.1 million on the $225 million loan entered into during 1995. As discussed in "Credit Agreements and Short-Term Borrowings" in Notes to Condensed Consolidated Financial Statements, the Company has an unsecured $160.0 million revolving credit agreement. The Company had no borrowings under this credit facility in the first half of 1997. Outstanding letters of credit, which totaled $7.4 million at June 30, 1997, reduce the amount of available borrowings. Two of the Company's foreign subsidiaries also have credit agreements providing for borrowings of up to $13.7 million with local banks, of which $5.3 million was outstanding at June 30, 1997. The Company is party to certain litigation, as disclosed in "Litigation" under "Commitment and Contingencies" in Notes to Condensed Consolidated Financial Statements, the outcome of which the Company believes will not have a material adverse effect on its consolidated financial position. As discussed in Notes to Condensed Consolidated Financial Statements, a federal district court entered a $137.7 million judgment in the Company's favor associated with the Next Level litigation. On February 28, 1997, the Fifth Circuit Court of Appeals upheld the judgment. The Company and Next Level appealed to an En Banc panel of judges in the Fifth Circuit. Both appeals were denied, and the case has been remanded to the federal district court for entry of judgment. In the absence of any further appeals, the Company believes that it should receive the proceeds in the second half of 1997. Page 13 of 16 14 The Company believes that its existing cash and short-term investments and credit facilities and, to the extent necessary, available financing alternatives 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 or other business requirements arise, additional financing could become necessary. Page 14 of 16 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. A. Exhibits. 11. Computation of Income Per Share. 27. Financial Data Schedule (for EDGAR filing purposes only). B. Reports on Form 8-K. No reports on Form 8-K have been filed during the three months ended June 30, 1997. Page 15 of 16 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DSC COMMUNICATIONS CORPORATION Dated: August 1, 1997 By: /s/ Kenneth R. Vines -------------------- Kenneth R. Vines Vice President, Finance, duly authorized officer and principal accounting officer Page 16 of 16 17 INDEX TO EXHIBITS
Exhibit Number Exhibit - ------- ------- 11 Computation of Income Per Share 27 Financial Data Schedule
EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Computation of Income per Share (In thousands) (Unaudited) The following table sets forth the computation of shares used in the calculation of income per share for the three and six months ended June 30, 1997 and 1996. Average Shares Used in Income per Share Calculation:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1997 1996 1997 1996 ------- ------- -------- ------- Weighted average shares outstanding during the period.............. 117,363 116,040 117,344 115,927 Common share equivalents outstanding: Options and warrants issued and contingently issuable........ 5,735 3,843 5,710 3,915 Assumed purchase of treasury shares.............. (3,797) (1,390) (3,813) (1,400) ------- ------ ------- ------- Weighted average shares used in calculation............ 119,301 118,493 119,241 118,442 ======= ======= ======= =======
Fully diluted income per share is not shown since the dilutive effect is less than three percent for the three and six months ended June 30, 1997 and 1996. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 148,356 148,781 389,733 0 369,137 1,183,178 824,199 396,658 1,950,571 441,033 235,028 0 0 1,224 1,202,382 1,950,571 729,086 729,086 433,255 433,255 119,260 0 10,812 93,834 35,657 35,657 0 0 0 58,177 .49 0
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