-----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, VlW391j2fU6IiDP2va5eBDIddooVJxR96/ZvO1T06n56imGny41RcSa0zf0R9pSh Qi9G7q45kLBMfE8BG9vPog== 0000950134-97-008550.txt : 19971117 0000950134-97-008550.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950134-97-008550 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-10018 FILM NUMBER: 97719319 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 FOR QUARTER ENDED SEPTEMBER 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 September 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 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 October 31, 1997 - ------------------------------ ------------------------------ Common Stock, $0.01 Par Value 117,946,625 Page 1 of 16 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
September 30, December 31, 1997 1996 ------------- ------------- (Unaudited) Assets - ---------------------------------------------------- CURRENT ASSETS Cash and cash equivalents......................... $ 409,341 $ 155,101 Marketable securities............................. 268,768 178,938 Receivables....................................... 406,174 411,947 Inventories....................................... 370,338 343,566 Deferred income taxes............................. 60,429 61,086 Other current assets.............................. 72,911 52,240 ------------- ------------- Total current assets......................... 1,587,961 1,202,878 ------------- ------------- PROPERTY AND EQUIPMENT, at cost..................... 858,129 764,671 Less accumulated depreciation and amortization................................. (414,465) (361,075) ------------- ------------- 443,664 403,596 ------------- ------------- LONG-TERM RECEIVABLES............................... 46,321 42,965 CAPITALIZED SOFTWARE DEVELOPMENT COSTS.............. 66,900 51,634 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET.......................... 141,906 146,025 OTHER............................................... 119,404 78,557 ------------- ------------- Total assets............................. $ 2,406,156 $ 1,925,655 ============= ============= Liabilities and Shareholders' Equity - ---------------------------------------------------- CURRENT LIABILITIES Accounts payable.................................. $ 117,037 $ 100,730 Accrued liabilities............................... 264,449 297,101 Income taxes payable.............................. 30,558 2,019 Current portion of long-term debt................. 32,497 33,072 ------------- ------------- Total current liabilities.................... 444,541 432,922 ------------- ------------- LONG-TERM DEBT, net of current portion.............. 632,825 274,602 NONCURRENT INCOME TAXES AND OTHER LIABILITIES.............................. 84,528 70,495 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $0.01 par value, issued - 122,906 in 1997 and 122,218 in 1996; outstanding - 117,917 in 1997 and 117,229 in 1996.................................. 1,229 1,222 Additional capital................................ 748,330 730,743 Unrealized gains (losses) on securities, net of income taxes.............................. 265 (147) Accumulated translation adjustment................ 930 8,743 Retained earnings................................. 536,619 450,186 ------------- ------------- 1,287,373 1,190,747 Treasury stock, at cost, 4,989 shares............. (43,111) (43,111) ------------- ------------- Total shareholders' equity..................... 1,244,262 1,147,636 ------------- ------------- Total liabilities and shareholders' equity................... $ 2,406,156 $ 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 Operations (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ------------ ------------- ------------ ------------ Revenue......................................... $ 401,288 $ 326,003 $ 1,130,374 $ 990,331 Cost of revenue Special charges related to inventories and associated assets....................... -- 82,500 -- 82,500 Other......................................... 228,162 215,046 661,417 602,889 ------------- ------------- ------------ ------------ Total cost of revenue........................ 228,162 297,546 661,417 685,389 ------------- ------------- ------------ ------------ Gross profit.................................. 173,126 28,457 468,957 304,942 ------------- ------------- ------------ ------------ Operating costs and expenses: Research and product development.............. 67,526 49,705 181,852 155,324 Selling, general and administrative........... 57,199 57,927 172,585 171,429 Special charges for excess facilities and equipment............................... -- 13,500 -- 13,500 Other operating costs......................... 2,775 2,464 7,709 7,510 ------------- ------------- ------------ ------------ Total operating costs and expenses.......... 127,500 123,596 362,146 347,763 ------------- ------------- ------------ ------------ Operating income (loss)....................... 45,626 (95,139) 106,811 (42,821) Interest income................................. 7,289 5,658 16,840 18,909 Interest expense................................ (8,522) (6,514) (19,334) (19,806) Other income, net............................... 104 2,624 34,014 3,229 ------------- ------------- ------------ ------------ Income (loss) before income taxes........... 44,497 (93,371) 138,331 (40,489) Income taxes.................................... 16,241 (35,481) 51,898 (15,386) ------------- ------------- ------------ ------------ Net income (loss)........................... $ 28,256 $ (57,890) $ 86,433 (25,103) ============= ============= ============ ============ Income (loss) per share......................... $ 0.24 $ (0.49) $ 0.73 $ (0.22) ============= ============= ============ ============ Average shares used in computation.............. 119,655 116,964 119,169 116,269
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)
Nine Months Ended September 30, --------------------------------------- 1997 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................................ $ 86,433 $ (25,103) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Special charges.............................. -- 96,000 Depreciation and amortization................ 74,363 68,884 Amortization of capitalized software development costs......................... 20,779 18,641 Gain from the sales of stock received from 1996 litigation settlement................ (35,494) -- Deferred income taxes........................ (7,221) (59,471) Increase in current and long-term receivables.... (7,623) (76,935) Increase in inventories.......................... (32,089) (83,273) Other, including changes in other current payables and other current assets.............. (1,394) (14,301) Increase in noncurrent income taxes and other liabilities.......................... 5,783 26,836 ------------- ------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES..................... 103,537 (48,722) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment.............. (113,956) (96,181) Purchases of marketable securities............... (353,483) (1,069,760) Proceeds from sales and maturities of marketable securities..................................... 263,795 1,094,814 Proceeds from sales of stock received from 1996 litigation settlement..................... 35,494 -- Additions to capitalized software development costs.............................. (36,045) (28,117) Other............................................ (14,672) (9,936) ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES..................... (218,867) (109,180) ------------ ------------
(Continued) Page 4 of 16 5 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Continued) (In thousands) (Unaudited)
Nine Months Ended September 30, --------------------------------- 1997 1996 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term debt ............................... -- (43,992) Net proceeds from issuance of convertible subordinated notes ...................................... 389,237 -- Borrowings under long-term debt arrangements .............. -- 95,709 Payments on long-term borrowings .......................... (30,301) (30,275) Proceeds from the sale of common stock under stock plans ....................................... 13,198 12,351 Other ..................................................... (1,603) (442) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES .............................. 370,531 33,351 ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ............................. (961) (360) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... 254,240 (124,911) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 155,101 258,565 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 409,341 $ 133,654 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid ............................................. $ 15,824 $ 12,249 =========== =========== Income taxes paid ......................................... $ 22,180 $ 54,376 =========== ===========
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 September 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. 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):
September 30, December 31, 1997 1996 ------------- ------------ Raw Materials.............................................. $ 124,798 $ 127,495 Work in Process............................................ 33,563 25,724 Finished Goods............................................. 211,977 190,347 ------------- ------------ $ 370,338 $ 343,566 ============= ============
CREDIT AGREEMENTS AND CONVERTIBLE SUBORDINATED NOTES The Company has an unsecured $160.0 million revolving credit facility with several banks which expires in May 2001. 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 Page 6 of 16 7 agreement at September 30, 1997 totaled $7.0 million, including $4.7 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 nine months ended September 30, 1997. Three of the Company's foreign subsidiaries also have credit agreements providing for short- term borrowings of up to $8.2 million with local banks. In August 1997, the Company issued $400.0 million principal amount of 7.0% Convertible Subordinated Notes ("the Notes") due August 1, 2004. Interest on the Notes is payable semi-annually on February 1 and August 1 of each year, commencing February 1, 1998. The Notes are convertible into shares of the Company's common stock at $49.725 per share. The Notes are redeemable at the Company's option, in whole or in part, at any time on or after August 1, 2000 at a premium of 104% of par value which declines annually to par value at the maturity date. At September 30, 1997, deferred expenses associated with the offering of approximately $10.8 million were included in other assets and are being amortized to interest expense over the term of the Notes. OTHER INCOME, NET In June 1996, the Company settled certain litigation. The Company received cash proceeds of approximately $10.0 million ($3.0 million and $7.0 million was received in the second and third quarters of 1996, respectively), which was included in other income, net of associated costs in the respective periods in 1996. Additionally, in the first and second quarters of 1997, the Company sold shares of common stock received in the litigation settlement resulting in a gain of approximately $35.5 million which is included in other income, net for the nine months ended September 30, 1997. INCOME TAX EXPENSE The Company's income tax expense includes federal, foreign, and state (including Puerto Rico) income taxes. 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. In the 1997 third quarter, the estimated effective tax rate for the full year 1997 was reduced to 37% from the previous estimate of 38% to reflect the most current estimate. As a result, the effective tax rate for the third quarter and first nine months of 1997 was 36.5% and 37.5%, respectively. 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 September 30, 1997. The Company also has guarantees of $45.3 million outstanding at September 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 counterparties to major financial institutions. Management believes the risk of incurring such losses is remote, and any losses therefrom would not be material. At September 30, 1997, the Company had forward foreign exchange contracts of $82.9 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 Communications ("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 was remanded to the federal district court for entry of judgment. In the fourth quarter of 1997, judgment was entered in the Company's favor for the full amount and the Company received the proceeds from the judgment. See "Subsequent Events" for further discussion. 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 appeal. Pulsecom's patent infringement claims against the Company were heard in a separate trial and the Company prevailed in that litigation. Page 8 of 16 9 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. SUBSEQUENT EVENTS In October 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the Company will acquire all of the outstanding capital stock of Celcore, Inc. ("Celcore"), and Celcore will become a wholly-owned subsidiary of the Company ("the Merger"). Under the terms of the Merger Agreement, the Company would issue shares of its common stock in exchange for all of the outstanding shares of Celcore and assume substantially all of the stock options of Celcore. The purchase price, including acquisition costs, is estimated at approximately $167 million. The Company currently estimates that approximately $135 million of the purchase price paid for Celcore will be allocated to in-process research and development and will be an after-tax charge to operating results in the period in which the Merger is consummated, currently estimated to be the fourth quarter of 1997. The Merger has been approved by the respective Boards of Directors of the Company and Celcore, and it is subject to the receipt of various governmental approvals and other closing conditions. In the fourth quarter of 1997, a U.S. District Court issued a final judgment in favor of the Company in a lawsuit against Next Level Communications and two former Company employees related to the theft of Company trade secrets. As a result, the Company received proceeds of approximately $140.7 million which will be recorded in the Company's results, net of legal and other associated costs, in the fourth quarter of 1997. See "Litigation" under "Commitments and Contingencies" for further discussion. 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, quarterly earnings fluctuations from factors such as a shift in the mix of products delivered including the amount of software content and the impact of sales price changes, 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 September 30, 1997, the Company reported revenue of $401.3 million, an increase of $75.3 million from $326.0 million in the 1996 period. Net income for the 1997 third quarter was $28.3 million, or $0.24 per share. For the third quarter of 1996, the Company recorded a net loss of $57.9 million, or $0.49 per share, which included pre-tax special charges totaling $96.0 million. Excluding the effects of the special charges in the third quarter of 1996, the Company would have recorded net income of $1.6 million, or $0.01 per share. For the nine months ended September 30, 1997, the Company recorded revenue of $1.13 billion and net income of $86.4 million, or $0.73 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 received from a 1996 litigation settlement. For the first nine months of 1996, revenue was $990.3 million and net income, excluding the $96.0 million of special charges, was $34.4 million, or $0.29 per share. Including the effects of the special charges, the Company recorded a net loss of $25.1 million, or $0.22 per share in the first nine months of 1996. Revenue in the third quarter and first nine months of 1997 grew 23% and 14%, respectively, compared to the same periods of the prior year resulting primarily from higher revenue levels in the Company's core businesses, particularly access and switching products, net of lower levels of transport product revenues. Gross profit as a percentage of revenue was 43% and 41% for the third quarter and nine months ended September 30, 1997, respectively, compared to 34% and 39%, excluding the effects of the special charges, for the same periods in 1996, respectively. The gross margin was impacted by a number of factors including, but not limited to, increased contributions from higher margin products and improved software revenues. As experienced in the past, the Company's gross margin percentage and operating performance could vary significantly from period to period in the Page 10 of 16 11 future due to changes in the relative mix of product deliveries, software content and the impact of sales price changes. DSC Communications A/S, the Company's Danish subsidiary, continued to incur operating losses in the first nine months of 1997 due primarily to the delayed market acceptance and deployment of a new generation of optical transmission equipment. Deliveries of certain of these products have begun. However, near-term profitability of the Company's Danish operations is dependent upon the successful market acceptance and deployment of these products. Research and product development expense was $67.5 million, or 17% of revenue, in the third quarter of 1997 compared to $49.7 million, or 15% of revenue, in the same period of 1996. Research and development expense for the first nine months of 1997 and 1996 was $181.9 million and $155.3 million, respectively, or 16% of revenue in both periods. The increase is primarily a result of the Company's increasing investment in the development of its advanced intelligent network products. Selling, general and administrative expenses of $57.2 million and $172.6 million for the three months and nine months ended September 30, 1997, respectively, were comparable to the same periods in 1996. The Company is continuing to focus on controlling expenses, particularly international selling expenses and certain general and administrative costs. In addition, 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 "Commitments and Contingencies" in Notes to Condensed Consolidated Financial Statements for further discussion. Interest income and interest expense were higher in third quarter of 1997 compared to the same period in 1996 due to the issuance of the $400.0 million, 7% convertible subordinated notes in August 1997. See "Credit Agreements and Convertible Subordinated Notes" in Notes to Condensed Consolidated Financial Statements for further discussion. Other income, net for the nine-month period ended September 30, 1997 and the three and nine-month periods ended September 30, 1996 included gains related to a litigation settlement, net of applicable costs associated with this litigation. See "Other Income, Net" in Notes to Condensed Consolidated Financial Statements for further discussion. Page 11 of 16 12 As discussed in "Subsequent Events" in Notes to Condensed Consolidated Financial Statements, the Company received proceeds of approximately $140.7 million from the conclusion of litigation which will be recorded in other income, net of legal and other associated costs, in the fourth quarter 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. In the 1997 third quarter, the estimated effective tax rate for the full year 1997 was reduced to 37% from the previous estimate of 38% to reflect the most current estimate. As a result, the effective tax rate for the third quarter and first nine months of 1997 was 36.5% and 37.5%, respectively. 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 discussed below; mix of products sold; the impact of sales price changes; 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 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. Additionally, the success of the planned merger, as discussed in "Subsequent Events" in Notes to Condensed Consolidated Financial Statements, is dependent upon the development and market acceptance of Celcore's new GSM switch. Also, it is anticipated that the merger will be completed in the fourth quarter of 1997, at which time the results of the Company will be impacted by an after-tax charge of approximately $135 million related to in-process research and development as discussed in "Subsequent Events" in Notes to Condensed Consolidated Financial Statements. 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. The Company has targeted early 1998 as the completion date for this evaluation process. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", ("FAS 128") which 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 FASB issued Statement of SFAS No. 130, "Reporting Comprehensive Income", ("FAS 130") which establishes standards for reporting and display of comprehensive income and its components. The required disclosures for FAS 130 will be included in the Company's quarterly report on Form 10-Q for the first quarter of 1998. Page 12 of 16 13 In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes existing accounting standards related to disclosure of operating segment information beginning annually in 1998. The Company is in the process of evaluating what impact this new standard may have on its financial statement disclosures. Financial Condition and Liquidity The Company's cash and marketable securities have increased $344.1 million during the nine months ended September 30, 1997 to $678.1 million. The increase resulted primarily from the net proceeds of $389.2 million from the $400 million convertible subordinated debt offering completed in August 1997 as discussed in "Credit Agreements and Convertible Subordinated Notes" in Notes to Condensed Consolidated Financial Statements. Subsequent to September 30, 1997, the Company's cash and marketable securities position was further enhanced with the receipt of approximately $140.0 million of proceeds from the conclusion of certain litigation. See "Subsequent Events" and "Litigation" under "Commitments and Contingencies" in Notes to Condensed Consolidated Financial Statements for further discussion. Cash of $103.5 million was generated from operating activities in the first nine months of 1997. This was primarily the result of improved earnings offset by growth in inventories. Inventory growth of $32.1 million was a result of existing and anticipated customer demand for the Company's products. Investing activities during the nine months ended September 30, 1997 included additions to property and equipment of $114.0 million. The Company anticipates that capital expenditures for the full year 1997 should be in the range of $150 million to $160 million. Capital expenditures in 1998, which will include construction of a new building for approximately $25 million on the Plano campus, are expected to be similar to that of 1997. However, the timing and extent of any future capital expenditures is dependent upon future business growth. The $400.0 million convertible subordinated notes are due August 1, 2004 and interest of 7% per annum is payable semi-annually on February 1 and August 1 of each year, commencing February 1, 1998. The notes are convertible into shares of the Company's common stock at $49.725 per share. As discussed in "Credit Agreements and Convertible Subordinated Notes" in Notes to Condensed Consolidated Financial Statements, the Company has an unsecured $160.0 million revolving credit agreement which expires in May 2001. The Company had no borrowings under this credit facility in the first nine months of 1997. Outstanding letters of credit, which totaled $7.0 million at September 30, 1997, reduce the amount of available borrowings. Three of the Company's foreign subsidiaries also have credit agreements providing for short- term borrowings of up to $8.2 million with local banks. Page 13 of 16 14 The Company believes that its existing cash and short-term investments and 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. As a result of its current liquidity position, the Company is evaluating various alternative uses for a portion of its cash in excess of projected requirements, including, but not limited to, business acquisitions, repayment of certain senior debt issues and long-term customer financing opportunities. Page 14 of 16 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. A. Exhibits. 11. Computation of Income (Loss) Per Share. 27. Financial Data Schedule (for EDGAR filing purposes only). B. Reports on Form 8-K. Form 8-K, dated August 26, 1997 Item 5. Other Events - press release announcing the sale of convertible subordinated notes. Item 7. Financial Statements and Exhibits - Purchase Agreement, Indenture Agreement, Registration Rights Agreement, Press Release Item 9. Sales of Equity Securities Pursuant to Regulation S Form 8-K, dated October 29, 1997 Item 5. Other Events - press release announcing an agreement and plan of merger between the Company and Celcore, Inc. Item 7. Financial Statements and Exhibits - Press Release Form 8-K, dated November 13, 1997 Item 5. Other Events - press release announcing the receipt of proceeds from Next Level Corporation litigation. Item 7. Financial Statements and Exhibits - Press Release 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: November 14, 1997 By: /s/ Kenneth R. Vines ---------------------------- Kenneth R. Vines Vice President, Finance, duly authorized officer and principal accounting officer Page 16 of 16 17 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 11 Computation of Income (Loss) Per Share 27 Financial Data Schedule EX-11 2 STMT RE: COMPUTATION OF INCOME (LOSS) PER SHARE 1 Exhibit 11 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES Computation of Income (Loss) per Share (In thousands) (Unaudited) The following table sets forth the computation of shares used in the calculation of income (loss) per share for the three and nine months ended September 30, 1997 and 1996.
Average Shares Used in Income (Loss) per Share Calculation: Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 1997 1996 1997 1996 ------- ------- ------- -------- Weighted average shares outstanding during the period........................ 117,697 116,964 117,463 116,269 Common share equivalents outstanding: Options and warrants issued and contingently issuable.................. 5,811 -- (A) 5,436 -- (A) Assumed purchase of treasury shares........................ (3,853) -- (A) (3,730) -- (A) ------- ------- ------- ------- Weighted average shares used in calculation...................... 119,655 116,964 119,169 116,269 ======= ======= ======= =======
(A) Common stock equivalents are not included in the income (loss) per share calculation in a period in which a net loss is incurred since their inclusion would be antidilutive. Fully diluted income (loss) per share is not shown since the dilutive effect is less than three percent for the three and nine months ended September 30, 1997 and 1996. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 409,341 268,768 406,174 0 370,338 1,587,961 858,129 414,465 2,406,156 444,541 632,825 0 0 1,229 1,243,033 2,406,156 1,130,374 1,130,374 661,417 661,417 189,561 0 19,334 138,331 51,898 86,433 0 0 0 86,433 .73 0
-----END PRIVACY-ENHANCED MESSAGE-----