<PAGE> 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.
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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
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$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:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Switching and Intelligent
Network 48% 52% 45%
Access 28% 27% 28%
Transport 23% 19% 22%
</TABLE>
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
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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.
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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.
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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
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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.
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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
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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
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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.
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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.
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RESEARCH AND PRODUCT DEVELOPMENT
The industry in which the Company operates is characterized by
rapidly-changing technological and market conditions which may shorten product
life cycles. The Company's future competitive position will depend not only
upon successful production and sales of its existing products, but also upon
its ability to develop and produce, on a timely basis, new products to meet
existing and anticipated industry demands. The Company is currently engaged in
the development of several new products and enhancements to existing products.
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.
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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.
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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.
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ITEM 2. PROPERTIES
The Company's principal facilities are in the following locations:
<TABLE>
<CAPTION>
Approximate Square
Footage
---------------------------
Location Owned Leased Description
-------- ----- ------ -----------
<S> <C> <C> <C>
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
</TABLE>
(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,
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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.
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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
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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
<PAGE> 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:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION(S) WITH COMPANY
---- --- --------------------------------
<S> <C> <C>
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
</TABLE>
Page 18
<PAGE> 20
<TABLE>
<S> <C> <C>
Gerald F. Montry 57 Senior Vice President, Chief
Financial Officer, and Director
Philip A. Wilkinson 48 Group Vice President
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1995: High Low
---- ---- ---
<S> <C> <C>
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
---- ---- ---
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<S> <C>
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)
</TABLE>
Page 23
<PAGE> 25
<TABLE>
<S> <C>
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
</TABLE>
Page 24
<PAGE> 26
<TABLE>
<S> <C>
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)
</TABLE>
Page 25
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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)
<PAGE> 32
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged Deductions Balance at
Beginning Charged to to Other from End of
Receivables of Period Income Accounts Reserves Period
----------- --------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
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).
</TABLE>
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------- ---------------------- --------------------
Fully Fully Fully
Primary Diluted (A) Primary Diluted (A) Primary Diluted (A)
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 --
======= ======= ======= ======= ======= =======
</TABLE>
(A) Fully diluted income per share is not shown since the dilutive effect is
less than three percent.
<PAGE> 1
EXHIBIT 13.1
DSC Communications Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995(A) 1994(A) 1993 1992 1991(B)
---------- ----------- -------- ---------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
(Continued)
<PAGE> 2
DSC Communications Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995(A) 1994(A) 1993 1992 1991(B)
------- ------- ------- ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
(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.
<PAGE> 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:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---- ----
(in millions)
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1995 1994 1993
-------------- ------------ ------------
<S> <C> <C> <C>
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
============== ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 11
DSC Communications Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
------------- ---------------
<S> <C> <C>
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
============= ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 12
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
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
---------- --------- ---------
</TABLE>
(Continued)
<PAGE> 13
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
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
=========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 14
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
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
-------- -------- --------- ---------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ========= ======= ====== ======== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 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.
<PAGE> 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):
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Raw Material................. $137,002 $ 66,466
Work in Process.............. 20,015 18,618
Finished Goods............... 146,945 95,590
-------- --------
$303,962 $180,674
======== ========
</TABLE>
<PAGE> 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:
<TABLE>
<S> <C>
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
</TABLE>
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,
<PAGE> 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
<PAGE> 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
<PAGE> 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).
<TABLE>
<S> <C>
Revenue............................. $1,085,216
Net income.......................... 151,533
Income per share.................... $ 1.30
</TABLE>
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The following is a summary of the investments in debt securities
classified as current assets (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ------- --------- --------
<S> <C> <C> <C> <C>
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
======== ======= ========= ========
</TABLE>
Gross realized gains and gross realized losses on sales of available
for sale securities were immaterial in 1995 and 1994.
<PAGE> 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):
<TABLE>
<CAPTION>
Estimated
Fair
Cost Value
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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.
<PAGE> 22
RECEIVABLES
Receivables consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
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):
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
------- --------
<S> <C> <C>
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
======= ========
</TABLE>
Future minimum lease payments to be received on sales-type leases and
notes receivable are as follows (in thousands):
<TABLE>
<C> <C>
1996 ..................................... $ 7,124
1997 ..................................... 4,936
1998 ..................................... 4,242
1999 ..................................... 3,933
2000 ..................................... 5,354
-------
$25,589
=======
</TABLE>
<PAGE> 23
PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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,
<PAGE> 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):
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
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.
<PAGE> 25
INCOME TAXES
Income tax expense was composed of the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1995 1994 1993
--------- ------- -------
<S> <C> <C> <C>
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
========= ======= =======
</TABLE>
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.
<PAGE> 26
The effective income tax rate on pretax income differed from the
federal income tax statutory rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
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
========= ======== ========
</TABLE>
<PAGE> 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):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
----------- --------
<S> <C> <C>
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 $ --
=========== ========
</TABLE>
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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
Options
-----------------------------------
Warrants Plans Other
----------- ----------- --------------
<S> <C> <C> <C>
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
</TABLE>
<PAGE> 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):
<TABLE>
<CAPTION>
December 31,
-------------
1995 1994
----- -----
<S> <C> <C>
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
===== =====
</TABLE>
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
<PAGE> 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.
<PAGE> 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):
<TABLE>
<C> <C>
1996.......................... $ 21,034
1997.......................... 17,598
1998.......................... 12,356
1999.......................... 8,985
2000.......................... 8,643
Thereafter.................... 26,563
------------
$ 95,179
============
</TABLE>
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
<PAGE> 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.
<PAGE> 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):
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<PAGE> 36
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
<PAGE> 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
<PAGE> 38
DSC Communications Corporation and Subsidiaries
QUARTERLY RESULTS
(Unaudited) (In thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------- -------------------------------------------------
Fourth Third Second First Fourth Third Second First
----------- ----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== ============ =========== =========== ===========
</TABLE>
<PAGE> 1
Exhibit 21.1
DSC COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
Subsidiaries Incorporated in
------------ ---------------
<S> <C>
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
</TABLE>
__________________________________
(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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 258,565
<SECURITIES> 310,699
<RECEIVABLES> 277,006
<ALLOWANCES> 0
<INVENTORY> 303,962
<CURRENT-ASSETS> 1,220,547
<PP&E> 675,725
<DEPRECIATION> (305,203)
<TOTAL-ASSETS> 1,865,275
<CURRENT-LIABILITIES> 481,582
<BONDS> 210,441
<COMMON> 1,206
0
0
<OTHER-SE> 1,122,873
<TOTAL-LIABILITY-AND-EQUITY> 1,865,275
<SALES> 1,422,018
<TOTAL-REVENUES> 1,422,018
<CGS> 736,119
<TOTAL-COSTS> 736,119
<OTHER-EXPENSES> 406,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,599
<INCOME-PRETAX> 289,950
<INCOME-TAX> 97,270
<INCOME-CONTINUING> 192,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,680
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 0
</TABLE>
