<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission File Number: 0-10018
DSC COMMUNICATIONS CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1025763
- ------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Coit Road, Plano, Texas 75075
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 519-3000
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of Shares Outstanding
Title of Each Class as of October 31, 1997
- ------------------------------ ------------------------------
Common Stock, $0.01 Par Value 117,946,625
Page 1 of 16
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
Assets
- ----------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $ 409,341 $ 155,101
Marketable securities............................. 268,768 178,938
Receivables....................................... 406,174 411,947
Inventories....................................... 370,338 343,566
Deferred income taxes............................. 60,429 61,086
Other current assets.............................. 72,911 52,240
------------- -------------
Total current assets......................... 1,587,961 1,202,878
------------- -------------
PROPERTY AND EQUIPMENT, at cost..................... 858,129 764,671
Less accumulated depreciation
and amortization................................. (414,465) (361,075)
------------- -------------
443,664 403,596
------------- -------------
LONG-TERM RECEIVABLES............................... 46,321 42,965
CAPITALIZED SOFTWARE DEVELOPMENT COSTS.............. 66,900 51,634
COST IN EXCESS OF NET ASSETS OF
BUSINESSES ACQUIRED, NET.......................... 141,906 146,025
OTHER............................................... 119,404 78,557
------------- -------------
Total assets............................. $ 2,406,156 $ 1,925,655
============= =============
Liabilities and Shareholders' Equity
- ----------------------------------------------------
CURRENT LIABILITIES
Accounts payable.................................. $ 117,037 $ 100,730
Accrued liabilities............................... 264,449 297,101
Income taxes payable.............................. 30,558 2,019
Current portion of long-term debt................. 32,497 33,072
------------- -------------
Total current liabilities.................... 444,541 432,922
------------- -------------
LONG-TERM DEBT, net of current portion.............. 632,825 274,602
NONCURRENT INCOME TAXES
AND OTHER LIABILITIES.............................. 84,528 70,495
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, issued -
122,906 in 1997 and 122,218 in 1996;
outstanding - 117,917 in 1997 and
117,229 in 1996.................................. 1,229 1,222
Additional capital................................ 748,330 730,743
Unrealized gains (losses) on securities,
net of income taxes.............................. 265 (147)
Accumulated translation adjustment................ 930 8,743
Retained earnings................................. 536,619 450,186
------------- -------------
1,287,373 1,190,747
Treasury stock, at cost, 4,989 shares............. (43,111) (43,111)
------------- -------------
Total shareholders' equity..................... 1,244,262 1,147,636
------------- -------------
Total liabilities and
shareholders' equity................... $ 2,406,156 $ 1,925,655
============= =============
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
Page 2 of 16
<PAGE> 3
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue......................................... $ 401,288 $ 326,003 $ 1,130,374 $ 990,331
Cost of revenue
Special charges related to inventories
and associated assets....................... -- 82,500 -- 82,500
Other......................................... 228,162 215,046 661,417 602,889
------------- ------------- ------------ ------------
Total cost of revenue........................ 228,162 297,546 661,417 685,389
------------- ------------- ------------ ------------
Gross profit.................................. 173,126 28,457 468,957 304,942
------------- ------------- ------------ ------------
Operating costs and expenses:
Research and product development.............. 67,526 49,705 181,852 155,324
Selling, general and administrative........... 57,199 57,927 172,585 171,429
Special charges for excess facilities
and equipment............................... -- 13,500 -- 13,500
Other operating costs......................... 2,775 2,464 7,709 7,510
------------- ------------- ------------ ------------
Total operating costs and expenses.......... 127,500 123,596 362,146 347,763
------------- ------------- ------------ ------------
Operating income (loss)....................... 45,626 (95,139) 106,811 (42,821)
Interest income................................. 7,289 5,658 16,840 18,909
Interest expense................................ (8,522) (6,514) (19,334) (19,806)
Other income, net............................... 104 2,624 34,014 3,229
------------- ------------- ------------ ------------
Income (loss) before income taxes........... 44,497 (93,371) 138,331 (40,489)
Income taxes.................................... 16,241 (35,481) 51,898 (15,386)
------------- ------------- ------------ ------------
Net income (loss)........................... $ 28,256 $ (57,890) $ 86,433 (25,103)
============= ============= ============ ============
Income (loss) per share......................... $ 0.24 $ (0.49) $ 0.73 $ (0.22)
============= ============= ============ ============
Average shares used in computation.............. 119,655 116,964 119,169 116,269
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
Page 3 of 16
<PAGE> 4
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................ $ 86,433 $ (25,103)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Special charges.............................. -- 96,000
Depreciation and amortization................ 74,363 68,884
Amortization of capitalized software
development costs......................... 20,779 18,641
Gain from the sales of stock received from
1996 litigation settlement................ (35,494) --
Deferred income taxes........................ (7,221) (59,471)
Increase in current and long-term receivables.... (7,623) (76,935)
Increase in inventories.......................... (32,089) (83,273)
Other, including changes in other current
payables and other current assets.............. (1,394) (14,301)
Increase in noncurrent income taxes
and other liabilities.......................... 5,783 26,836
------------- -------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES..................... 103,537 (48,722)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.............. (113,956) (96,181)
Purchases of marketable securities............... (353,483) (1,069,760)
Proceeds from sales and maturities of marketable
securities..................................... 263,795 1,094,814
Proceeds from sales of stock received from
1996 litigation settlement..................... 35,494 --
Additions to capitalized software
development costs.............................. (36,045) (28,117)
Other............................................ (14,672) (9,936)
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES..................... (218,867) (109,180)
------------ ------------
</TABLE>
(Continued)
Page 4 of 16
<PAGE> 5
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term debt ............................... -- (43,992)
Net proceeds from issuance of convertible
subordinated notes ...................................... 389,237 --
Borrowings under long-term debt arrangements .............. -- 95,709
Payments on long-term borrowings .......................... (30,301) (30,275)
Proceeds from the sale of common stock
under stock plans ....................................... 13,198 12,351
Other ..................................................... (1,603) (442)
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .............................. 370,531 33,351
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ............................. (961) (360)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................... 254,240 (124,911)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 155,101 258,565
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 409,341 $ 133,654
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................. $ 15,824 $ 12,249
=========== ===========
Income taxes paid ......................................... $ 22,180 $ 54,376
=========== ===========
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
Page 5 of 16
<PAGE> 6
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1997 and 1996 and
December 31, 1996
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements reflect,
in the opinion of management, all adjustments necessary to present fairly the
Company's financial position, results of operations and cash flows. Such
adjustments are of a recurring nature unless otherwise disclosed herein. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations promulgated by the
Securities and Exchange Commission. However, the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. Quarterly consolidated financial results may not be indicative of
annual consolidated financial results.
The Company has not paid or declared a cash dividend on its common stock since
its organization.
These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1996 Annual Report to Shareholders for the year ended December 31, 1996.
INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw Materials.............................................. $ 124,798 $ 127,495
Work in Process............................................ 33,563 25,724
Finished Goods............................................. 211,977 190,347
------------- ------------
$ 370,338 $ 343,566
============= ============
</TABLE>
CREDIT AGREEMENTS AND CONVERTIBLE SUBORDINATED NOTES
The Company has an unsecured $160.0 million revolving credit facility with
several banks which expires in May 2001. This facility provides for borrowings
and issuances of letters of credit in various currencies. The maximum borrowings
available under the facility are reduced by the value of outstanding letters of
credit issued by the banks on behalf of the Company. The letters of credit
issued by the banks under this
Page 6 of 16
<PAGE> 7
agreement at September 30, 1997 totaled $7.0 million, including $4.7 million
issued to support various foreign subsidiary credit agreements. This facility
contains various financial covenants, and there have been no borrowings under
this agreement during the nine months ended September 30, 1997. Three of the
Company's foreign subsidiaries also have credit agreements providing for short-
term borrowings of up to $8.2 million with local banks.
In August 1997, the Company issued $400.0 million principal amount of 7.0%
Convertible Subordinated Notes ("the Notes") due August 1, 2004. Interest on the
Notes is payable semi-annually on February 1 and August 1 of each year,
commencing February 1, 1998. The Notes are convertible into shares of the
Company's common stock at $49.725 per share. The Notes are redeemable at the
Company's option, in whole or in part, at any time on or after August 1, 2000 at
a premium of 104% of par value which declines annually to par value at the
maturity date. At September 30, 1997, deferred expenses associated with the
offering of approximately $10.8 million were included in other assets and are
being amortized to interest expense over the term of the Notes.
OTHER INCOME, NET
In June 1996, the Company settled certain litigation. The Company received cash
proceeds of approximately $10.0 million ($3.0 million and $7.0 million was
received in the second and third quarters of 1996, respectively), which was
included in other income, net of associated costs in the respective periods in
1996. Additionally, in the first and second quarters of 1997, the Company sold
shares of common stock received in the litigation settlement resulting in a gain
of approximately $35.5 million which is included in other income, net for the
nine months ended September 30, 1997.
INCOME TAX EXPENSE
The Company's income tax expense includes federal, foreign, and state (including
Puerto Rico) income taxes. The estimated effective income tax rate is based upon
estimates for the full year for a number of variables including, among other
things, forecasted income in the United States and foreign jurisdictions. In the
1997 third quarter, the estimated effective tax rate for the full year 1997 was
reduced to 37% from the previous estimate of 38% to reflect the most current
estimate. As a result, the effective tax rate for the third quarter and first
nine months of 1997 was 36.5% and 37.5%, respectively.
COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
The Company periodically sells customer receivables and leases under agreements
which contain recourse provisions. The Company could be obligated to repurchase
a portion of the sales-type and operating lease receivables which were
previously sold on a partial recourse basis, the terms of which allow the
Company to limit its risk of loss to approximately $7.8 million at September 30,
1997. The Company also has guarantees of $45.3 million outstanding at September
30, 1997 supporting bid and performance bonds to customers and others, of which
$2.4 million were collateralized by letters of credit issued under the Company's
credit facility. The Company believes it has adequate reserves for any ultimate
losses associated with these contingencies.
Page 7 of 16
<PAGE> 8
The Company, in management of its exposure to fluctuations in foreign currency
exchange rates, enters into forward foreign exchange contracts to hedge firm
commitments which are denominated in foreign currencies. The contracts generally
have maturities of one year or less and contain an element of risk that the
counterparty may be unable to meet the terms of the agreement. However, the
Company minimizes such risk by limiting the counterparties to major financial
institutions. Management believes the risk of incurring such losses is remote,
and any losses therefrom would not be material. At September 30, 1997, the
Company had forward foreign exchange contracts of $82.9 million outstanding.
Litigation
On June 11, 1996, a federal district court entered a $137.7 million judgment in
the Company's favor and against Next Level Communications ("Next Level") and two
former Company employees. The Company had filed suit in 1995 alleging theft of
trade secrets and diversion of corporate opportunities. On February 28, 1997,
the Fifth Circuit Court of Appeals upheld the judgment. The Company and Next
Level appealed to an En Banc panel of judges in the Fifth Circuit. Both appeals
were denied, and the case was remanded to the federal district court for entry
of judgment. In the fourth quarter of 1997, judgment was entered in the
Company's favor for the full amount and the Company received the proceeds from
the judgment. See "Subsequent Events" for further discussion.
In August 1996, the Company filed suit against Samsung Information Systems
America, Inc., Samsung Electronics Co., Ltd. and several former employees of the
Company (collectively the "Defendants") alleging claims for breach of contract,
theft of trade secrets, unfair competition and tortious interference with
contract and prospective contractual relations related to the Company's
development of a next generation switching system. The Company is seeking
unspecified damages. The Company is also seeking an injunction against the
Defendants to prevent them from using the Company's trade secrets. In late
December 1996, the Defendants filed a counterclaim against the Company, alleging
claims for declaratory judgment, wrongful injunction, tortious interference with
actual and prospective contractual relations, misappropriation of trade secrets,
unfair competition, exclusion from telephony switch market, civil conspiracy,
fraud and negligent misrepresentation, breach of fiduciary or confidential
relationship, defamation and intentional infliction of emotional distress. These
allegations arise primarily out of the filing and prosecution of the Company's
suit against the Defendants.
In October 1996, the Company filed suit against Pulse Communications, Inc.
("Pulsecom") alleging contributory copyright infringement and misappropriation
of trade secrets relating to the manufacture and sale of a POTS line card
advertised as compatible with the Company's Litespan-2000 system. The Company
sought damages and an injunction barring further infringement of the Company's
intellectual property rights by Pulsecom and its agents. Pulsecom has filed a
counterclaim alleging that the Universal Voice Grade line card manufactured by
the Company for the Litespan-2000 system infringes a patent assigned to
Pulsecom. On May 7, 1997, the Federal District Court for the Eastern District of
Virginia denied the Company's claims. The Company intends to file an appeal.
Pulsecom's patent infringement claims against the Company were heard in a
separate trial and the Company prevailed in that litigation.
Page 8 of 16
<PAGE> 9
On May 25, 1994, the Company filed suit against DGI Technologies, Inc. ("DGI"),
alleging that DGI misappropriated the Company's trade secrets regarding digital
trunk interface cards and microprocessor cards. The Company seeks damages and
permanent injunctive relief. DGI brought counterclaims for damages and
injunctive and declaratory relief for alleged violations of federal antitrust
statutes, tortious interference, industrial espionage, misappropriation of trade
secrets, trespass, conversion, and unfair competition, based upon allegations
that the Company's claims constitute "sham" litigation, that the Company's
statements to customers about the impact of their use of DGI products on the
Company's warranties are unlawful attempts to exclude competition, and that the
Company has unlawfully tied the sale of its microprocessors to the sale of other
products. The case was tried in January 1997, and the jury returned a verdict.
The Court sealed the verdict pending entry of judgment.
The Company is also party to other routine legal proceedings incidental to its
business.
The Company does not believe the ultimate resolution of the above litigation
will have a material adverse effect on its consolidated financial position.
COMMON STOCK
At the April 30, 1997 Annual Shareholders' Meeting, the shareholders approved an
amendment to increase the total number of authorized shares of common stock
available for grant under the DSC Communications Corporation 1993 Employee Stock
Option and Securities Award Plan from 10.0 million shares to 15.75 million
shares.
SUBSEQUENT EVENTS
In October 1997, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which the Company will acquire all of the
outstanding capital stock of Celcore, Inc. ("Celcore"), and Celcore will become
a wholly-owned subsidiary of the Company ("the Merger"). Under the terms of the
Merger Agreement, the Company would issue shares of its common stock in
exchange for all of the outstanding shares of Celcore and assume substantially
all of the stock options of Celcore. The purchase price, including acquisition
costs, is estimated at approximately $167 million. The Company currently
estimates that approximately $135 million of the purchase price paid for
Celcore will be allocated to in-process research and development and will be an
after-tax charge to operating results in the period in which the Merger is
consummated, currently estimated to be the fourth quarter of 1997. The Merger
has been approved by the respective Boards of Directors of the Company and
Celcore, and it is subject to the receipt of various governmental approvals and
other closing conditions.
In the fourth quarter of 1997, a U.S. District Court issued a final judgment in
favor of the Company in a lawsuit against Next Level Communications and two
former Company employees related to the theft of Company trade secrets. As a
result, the Company received proceeds of approximately $140.7 million which
will be recorded in the Company's results, net of legal and other associated
costs, in the fourth quarter of 1997. See "Litigation" under "Commitments and
Contingencies" for further discussion.
Page 9 of 16
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Except for the historical information contained herein, the matters discussed or
incorporated by reference in this Quarterly Report on Form 10-Q herein,
including the matters relating to future performance, are forward looking
statements that are dependent upon a number of risks and uncertainties that
could cause actual results to differ materially from those in the forward
looking statements. These risks and uncertainties include, but are not limited
to, economic conditions, product demand and industry capacity, competitive
products and pricing, manufacturing efficiencies, research and new product
development, protection of intellectual property, patents, and technology,
ability to attract and retain highly qualified personnel, quarterly earnings
fluctuations from factors such as a shift in the mix of products delivered
including the amount of software content and the impact of sales price changes,
availability of components and critical manufacturing equipment, facility
construction and startups, the regulatory and trade environment, and other risks
indicated from time to time in the Company's filings with the Securities and
Exchange Commission.
Results of Operations
For the three months ended September 30, 1997, the Company reported revenue of
$401.3 million, an increase of $75.3 million from $326.0 million in the 1996
period. Net income for the 1997 third quarter was $28.3 million, or $0.24 per
share. For the third quarter of 1996, the Company recorded a net loss of $57.9
million, or $0.49 per share, which included pre-tax special charges totaling
$96.0 million. Excluding the effects of the special charges in the third quarter
of 1996, the Company would have recorded net income of $1.6 million, or $0.01
per share. For the nine months ended September 30, 1997, the Company recorded
revenue of $1.13 billion and net income of $86.4 million, or $0.73 per share,
which includes a pre-tax gain of approximately $35.5 million (after-tax gain of
$22.0 million, or $0.18 per share) from sales of stock received from a 1996
litigation settlement. For the first nine months of 1996, revenue was $990.3
million and net income, excluding the $96.0 million of special charges, was
$34.4 million, or $0.29 per share. Including the effects of the special charges,
the Company recorded a net loss of $25.1 million, or $0.22 per share in the
first nine months of 1996.
Revenue in the third quarter and first nine months of 1997 grew 23% and 14%,
respectively, compared to the same periods of the prior year resulting primarily
from higher revenue levels in the Company's core businesses, particularly access
and switching products, net of lower levels of transport product revenues. Gross
profit as a percentage of revenue was 43% and 41% for the third quarter and nine
months ended September 30, 1997, respectively, compared to 34% and 39%,
excluding the effects of the special charges, for the same periods in 1996,
respectively. The gross margin was impacted by a number of factors including,
but not limited to, increased contributions from higher margin products and
improved software revenues. As experienced in the past, the Company's gross
margin percentage and operating performance could vary significantly from period
to period in the
Page 10 of 16
<PAGE> 11
future due to changes in the relative mix of product deliveries, software
content and the impact of sales price changes.
DSC Communications A/S, the Company's Danish subsidiary, continued to incur
operating losses in the first nine months of 1997 due primarily to the delayed
market acceptance and deployment of a new generation of optical transmission
equipment. Deliveries of certain of these products have begun. However,
near-term profitability of the Company's Danish operations is dependent upon the
successful market acceptance and deployment of these products.
Research and product development expense was $67.5 million, or 17% of revenue,
in the third quarter of 1997 compared to $49.7 million, or 15% of revenue, in
the same period of 1996. Research and development expense for the first nine
months of 1997 and 1996 was $181.9 million and $155.3 million, respectively, or
16% of revenue in both periods. The increase is primarily a result of the
Company's increasing investment in the development of its advanced intelligent
network products.
Selling, general and administrative expenses of $57.2 million and $172.6 million
for the three months and nine months ended September 30, 1997, respectively,
were comparable to the same periods in 1996. The Company is continuing to focus
on controlling expenses, particularly international selling expenses and certain
general and administrative costs. In addition, the Company continues to actively
pursue claims related to its intellectual property rights and, as a result,
legal expenses may continue at a high level as this litigation progresses. See
"Litigation" under "Commitments and Contingencies" in Notes to Condensed
Consolidated Financial Statements for further discussion.
Interest income and interest expense were higher in third quarter of 1997
compared to the same period in 1996 due to the issuance of the $400.0 million,
7% convertible subordinated notes in August 1997. See "Credit Agreements and
Convertible Subordinated Notes" in Notes to Condensed Consolidated Financial
Statements for further discussion.
Other income, net for the nine-month period ended September 30, 1997 and the
three and nine-month periods ended September 30, 1996 included gains related to
a litigation settlement, net of applicable costs associated with this
litigation. See "Other Income, Net" in Notes to Condensed Consolidated Financial
Statements for further discussion.
Page 11 of 16
<PAGE> 12
As discussed in "Subsequent Events" in Notes to Condensed Consolidated Financial
Statements, the Company received proceeds of approximately $140.7 million from
the conclusion of litigation which will be recorded in other income, net of
legal and other associated costs, in the fourth quarter of 1997.
The estimated effective income tax rate is based upon estimates for the full
year for a number of variables including, among other things, forecasted income
in the United States and foreign jurisdictions. In the 1997 third quarter, the
estimated effective tax rate for the full year 1997 was reduced to 37% from the
previous estimate of 38% to reflect the most current estimate. As a result, the
effective tax rate for the third quarter and first nine months of 1997 was 36.5%
and 37.5%, respectively. The Company believes that its existing deferred tax
assets on the Condensed Consolidated Balance Sheet will be realizable based on
the Company's profitable operating history and an assessment that the Company
will generate taxable earnings in domestic and foreign tax jurisdictions in the
future.
The Company's future quarterly and annual operating results may be affected by
a number of factors, including the introduction and market acceptance of new
products on a timely basis as discussed below; mix of products sold; the impact
of sales price changes; the timing and ultimate receipt of orders from certain
customers which continue to constitute a large portion of the Company's
revenue; the successful enhancement of existing products; product costs;
manufacturing lead times; significant fluctuations in foreign currency exchange
rates; and changes in general worldwide economic conditions, any of which could
have an adverse impact on operating results. The industry in which the Company
operates requires substantial investment in product development, capital and,
at times, inventory prior to customer acceptance of new products or
enhancements to existing products. One of the keys to the Company's overall
success has been anticipating the appropriate timing of such activities. Delays
in product completion and/or slower than expected market acceptance of certain
products, including iMTN, Airspan, and newer products of the Company's Danish
operations, have in the past negatively impacted the Company's operating
performance and also, in certain cases, resulted in adjustments to carrying
values of assets. Future operating performance could be impacted should timing
of further product development and/or market acceptance be delayed.
Additionally, the success of the planned merger, as discussed in "Subsequent
Events" in Notes to Condensed Consolidated Financial Statements, is dependent
upon the development and market acceptance of Celcore's new GSM switch. Also,
it is anticipated that the merger will be completed in the fourth quarter of
1997, at which time the results of the Company will be impacted by an after-tax
charge of approximately $135 million related to in-process research and
development as discussed in "Subsequent Events" in Notes to Condensed
Consolidated Financial Statements.
The Company continues to evaluate its computer software used internally and also
its external product offerings to determine to what extent modifications will be
required to ensure year 2000 compliance. It is not possible to estimate the cost
of compliance and its effect on the Company until the evaluation process is
completed. The Company has targeted early 1998 as the completion date for this
evaluation process.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", ("FAS 128") which simplifies the standards for computing earnings per
share and is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The adoption of FAS 128 is not expected to have a significant impact on the
Company's earnings per share.
In June 1997, the FASB issued Statement of SFAS No. 130, "Reporting
Comprehensive Income", ("FAS 130") which establishes standards for reporting and
display of comprehensive income and its components. The required disclosures for
FAS 130 will be included in the Company's quarterly report on Form 10-Q for the
first quarter of 1998.
Page 12 of 16
<PAGE> 13
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes existing accounting
standards related to disclosure of operating segment information beginning
annually in 1998. The Company is in the process of evaluating what impact this
new standard may have on its financial statement disclosures.
Financial Condition and Liquidity
The Company's cash and marketable securities have increased $344.1 million
during the nine months ended September 30, 1997 to $678.1 million. The increase
resulted primarily from the net proceeds of $389.2 million from the $400 million
convertible subordinated debt offering completed in August 1997 as discussed in
"Credit Agreements and Convertible Subordinated Notes" in Notes to Condensed
Consolidated Financial Statements. Subsequent to September 30, 1997, the
Company's cash and marketable securities position was further enhanced with the
receipt of approximately $140.0 million of proceeds from the conclusion of
certain litigation. See "Subsequent Events" and "Litigation" under "Commitments
and Contingencies" in Notes to Condensed Consolidated Financial Statements for
further discussion.
Cash of $103.5 million was generated from operating activities in the first nine
months of 1997. This was primarily the result of improved earnings offset by
growth in inventories. Inventory growth of $32.1 million was a result of
existing and anticipated customer demand for the Company's products.
Investing activities during the nine months ended September 30, 1997
included additions to property and equipment of $114.0 million. The Company
anticipates that capital expenditures for the full year 1997 should be in the
range of $150 million to $160 million. Capital expenditures in 1998, which will
include construction of a new building for approximately $25 million on the
Plano campus, are expected to be similar to that of 1997. However, the timing
and extent of any future capital expenditures is dependent upon future business
growth.
The $400.0 million convertible subordinated notes are due August 1, 2004 and
interest of 7% per annum is payable semi-annually on February 1 and August 1 of
each year, commencing February 1, 1998. The notes are convertible into shares of
the Company's common stock at $49.725 per share.
As discussed in "Credit Agreements and Convertible Subordinated Notes" in
Notes to Condensed Consolidated Financial Statements, the Company has an
unsecured $160.0 million revolving credit agreement which expires in May 2001.
The Company had no borrowings under this credit facility in the first nine
months of 1997. Outstanding letters of credit, which totaled $7.0 million at
September 30, 1997, reduce the amount of available borrowings. Three of the
Company's foreign subsidiaries also have credit agreements providing for short-
term borrowings of up to $8.2 million with local banks.
Page 13 of 16
<PAGE> 14
The Company believes that its existing cash and short-term investments and
credit facilities will be adequate to support the Company's financial resource
needs, including working capital requirements, capital expenditures, operating
lease obligations and debt payments. As a result of its current liquidity
position, the Company is evaluating various alternative uses for a portion of
its cash in excess of projected requirements, including, but not limited to,
business acquisitions, repayment of certain senior debt issues and long-term
customer financing opportunities.
Page 14 of 16
<PAGE> 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
11. Computation of Income (Loss) Per Share.
27. Financial Data Schedule (for EDGAR filing purposes only).
B. Reports on Form 8-K.
Form 8-K, dated August 26, 1997
Item 5. Other Events - press release announcing the sale of
convertible subordinated notes.
Item 7. Financial Statements and Exhibits - Purchase Agreement,
Indenture Agreement, Registration Rights Agreement, Press
Release
Item 9. Sales of Equity Securities Pursuant to Regulation S
Form 8-K, dated October 29, 1997
Item 5. Other Events - press release announcing an agreement and
plan of merger between the Company and Celcore, Inc.
Item 7. Financial Statements and Exhibits - Press Release
Form 8-K, dated November 13, 1997
Item 5. Other Events - press release announcing the receipt of
proceeds from Next Level Corporation litigation.
Item 7. Financial Statements and Exhibits - Press Release
Page 15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSC COMMUNICATIONS CORPORATION
Dated: November 14, 1997 By: /s/ Kenneth R. Vines
----------------------------
Kenneth R. Vines
Vice President, Finance,
duly authorized officer
and principal accounting
officer
Page 16 of 16
<PAGE> 17
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
11 Computation of Income (Loss) Per Share
27 Financial Data Schedule
<PAGE> 1
Exhibit 11
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Computation of Income (Loss) per Share
(In thousands)
(Unaudited)
The following table sets forth the computation of shares used in the calculation
of income (loss) per share for the three and nine months ended September 30,
1997 and 1996.
<TABLE>
<CAPTION>
Average Shares Used in Income (Loss) per Share Calculation:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
during the period........................ 117,697 116,964 117,463 116,269
Common share equivalents outstanding:
Options and warrants issued and
contingently issuable.................. 5,811 -- (A) 5,436 -- (A)
Assumed purchase of
treasury shares........................ (3,853) -- (A) (3,730) -- (A)
------- ------- ------- -------
Weighted average shares
used in calculation...................... 119,655 116,964 119,169 116,269
======= ======= ======= =======
</TABLE>
(A) Common stock equivalents are not included in the income (loss) per share
calculation in a period in which a net loss is incurred since their
inclusion would be antidilutive.
Fully diluted income (loss) per share is not shown since the dilutive effect is
less than three percent for the three and nine months ended September 30, 1997
and 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 409,341
<SECURITIES> 268,768
<RECEIVABLES> 406,174
<ALLOWANCES> 0
<INVENTORY> 370,338
<CURRENT-ASSETS> 1,587,961
<PP&E> 858,129
<DEPRECIATION> 414,465
<TOTAL-ASSETS> 2,406,156
<CURRENT-LIABILITIES> 444,541
<BONDS> 632,825
0
0
<COMMON> 1,229
<OTHER-SE> 1,243,033
<TOTAL-LIABILITY-AND-EQUITY> 2,406,156
<SALES> 1,130,374
<TOTAL-REVENUES> 1,130,374
<CGS> 661,417
<TOTAL-COSTS> 661,417
<OTHER-EXPENSES> 189,561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,334
<INCOME-PRETAX> 138,331
<INCOME-TAX> 51,898
<INCOME-CONTINUING> 86,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,433
<EPS-PRIMARY> .73
<EPS-DILUTED> 0
</TABLE>
