<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 4, 1997
DSC COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-10018 54-1025763
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1000 Coit Road
Plano, Texas 75075
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (972) 519-3000
<PAGE> 2
The undersigned Registrant hereby amends Item 7. "Financial Statements and
Exhibits" of its Current Report on Form 8-K dated December 19, 1997 as set
forth in the pages attached hereto.
ITEM 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following audited consolidated financial statements of Celcore, Inc.
and the accompanying notes are incorporated herein by reference to Exhibit 99.2
of this Current Report on Form 8-K/A:
1. Audited Financial Statements of Celcore, Inc. as of December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994.
The following unaudited interim financial statements of Celcore, Inc. are
incorporated herein by reference to Exhibit 99.3 of this Current Report on
Form 8-K/A:
1. Balance Sheet as of September 30, 1997.
2. Statements of Operations for the nine months ended September 30,
1997 and 1996.
3. Statements of Cash Flows for the nine months ended September 30,
1997 and 1996.
4. Notes to the Unaudited Financial Statements.
(b) Pro Forma Financial Statements.
The following pro forma financial statements are incorporated herein by
reference to Exhibit 99.4 of this Current Report on Form 8-K/A:
1. Unaudited Pro Forma Combined Financial Statements Introduction.
2. Unaudited Pro Forma Combined Statement of Operations for the nine
months ended September 30, 1997.
3. Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1996.
4. Unaudited Pro Forma Combined Balance Sheet as of September 30,
1997.
5. Notes to Unaudited Pro Forma Combined Financial Statements.
(c) Exhibits.
Exhibit No. Description.
----------- ------------
2
<PAGE> 3
*2.1 Amended and Restated Agreement and Plan of Merger among DSC
Communications Corporation, CI Acquisition Company and Celcore,
Inc.
23.1 Consent of KPMG Peat Marwick LLP
*99.1 Press Release, dated December 4, 1997, issued by DSC
Communications Corporation
99.2 Audited financial statements of Celcore, Inc. as of December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994
99.3 Unaudited interim financial statements of Celcore, Inc.:
1. Balance Sheet as of September 30, 1997
2. Statements of Operations for the nine months ended September
30, 1997 and 1996
3. Statements of Cash Flows for the nine months ended September
30, 1997 and 1996
4. Notes to the Unaudited Financial Statements
99.4 Pro forma financial statements:
1. Unaudited Pro Forma Combined Financial Statements
Introduction
2. Unaudited Pro Forma Combined Statement of Operations for
the nine months ended September 30, 1997
3. Unaudited Pro Forma Combined Statement of Operations for
the year ended December 31, 1996
4. Unaudited Pro Forma Combined Balance Sheet as of September
30, 1997
5. Notes to Unaudited Pro Forma Combined Financial Statements
- ------------------
* Previously filed
3
<PAGE> 4
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, hereunto duly authorized.
DSC COMMUNICATIONS CORPORATION
Date: December 23, 1997 By: /s/ KENNETH R. VINES
---------------------------
Kenneth R. Vines
Vice President, Finance
4
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description.
- ----------- ------------
*2.1 Amended and Restated Agreement and Plan of Merger among DSC
Communications Corporation, CI Acquisition Company and Celcore,
Inc.
23.1 Consent of KPMG Peat Marwick LLP
*99.1 Press Release, dated December 4, 1997, issued by DSC
Communications Corporation
99.2 Audited financial statements of Celcore, Inc. as of December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994
99.3 Unaudited interim financial statements of Celcore, Inc.:
1. Balance Sheet as of September 30, 1997
2. Statements of Operations for the nine months ended September
30, 1997 and 1996
3. Statements of Cash Flows for the nine months ended September
30, 1997 and 1996
4. Notes to the Unaudited Financial Statements
99.4 Pro forma financial statements:
1. Unaudited Pro Forma Combined Financial Statements
Introduction
2. Unaudited Pro Forma Combined Statement of Operations for
the nine months ended September 30, 1997
3. Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1996
4. Unaudited Pro Forma Combined Balance Sheet as of September
30, 1997
5. Notes to Unaudited Pro Forma Combined Financial Statements
- --------------------
* Previously filed.
5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(No.s 2-83398, 2-95833, 33-17459, 33-22745, 33-38544, 33-65212, 33-65214,
33-64784, 33-49718, 33-61423, 33-61425, 333-31215, 333-39469, 333-41957,
333-41951, 333-41929, 333-41963) on Form S-8 and in the Registration Statement
(No. 333-39917) on Form S-3 of DSC Communications Corporation of our report
dated February 10, 1997, with respect to the balance sheets of Celcore, Inc. as
of December 31, 1995 and 1996, and the related statements of operations,
redeemable preferred stock, stockholders' equity (deficit) and partners' capital
and cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the Form 8-K of DSC Communications Corporation
dated December 23, 1997.
/s/ KPMG Peat Marwick LLP
Memphis, Tennessee
December 19, 1997
<PAGE> 1
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Celcore, Inc.:
We have audited the accompanying balance sheets of Celcore, Inc., as of
December 31, 1995 and 1996, and the related statements of operations, redeemable
preferred stock, shareholders' equity (deficit) and partners' capital and cash
flows for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of Celcore'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 financial position of Celcore, Inc. as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
February 10, 1997
<PAGE> 2
CELCORE, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 14,467,858 $ 12,056,065
Accounts receivable, less allowances of $100,000 and
$400,000 in 1995 and 1996, respectively (note 11)...... 3,388,943 1,765,249
Inventories (note 3)...................................... 1,157,862 3,766,222
Prepaid expenses and other current assets................. 138,166 457,574
------------ ------------
TOTAL CURRENT ASSETS.............................. 19,152,829 18,045,110
------------ ------------
Furniture and equipment (note 4)............................ 1,993,243 5,444,866
Less accumulated depreciation and amortization.............. (317,688) (1,150,331)
------------ ------------
NET FURNITURE AND EQUIPMENT....................... 1,675,555 4,294,535
------------ ------------
Other assets................................................ 81,587 487,282
------------ ------------
$ 20,909,971 $ 22,826,927
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current installments of long-term debt (note 5)........... $ -- $ 331,667
Accounts payable.......................................... 1,579,531 1,113,926
Accrued expenses and other liabilities.................... 249,950 586,513
Accrued relocation and recruiting......................... 310,511 345,753
Unearned revenue.......................................... 454,338 362,758
------------ ------------
TOTAL CURRENT LIABILITIES......................... 2,594,330 2,740,617
Long-term debt (note 5)..................................... -- 497,500
Other....................................................... 77,730 64,187
------------ ------------
TOTAL LIABILITIES................................. 2,672,060 3,302,304
------------ ------------
REDEEMABLE PREFERRED STOCK, cumulative and convertible, $.10
par value, aggregate liquidation and redemption value of
$24,228,270 in 1995 and $40,262,086 in 1996 Shares
authorized -- 7,000,000 in 1995 and 9,500,000 in 1996;
shares issued and outstanding -- 6,038,045 in 1995 and
8,042,272 in 1996 (note 7)................................ 23,188,966 39,292,597
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY (DEFICIT) (NOTES 8 AND 10):
Series A preferred stock, cumulative and convertible $.10
par value, aggregate liquidation value of $2,250,000.
4,500,000 shares authorized, issued and outstanding.... 450,000 450,000
Common stock, $.10 par value; shares
authorized -- 50,000,000; shares issued and
outstanding -- 5,500,000 in 1995 and 5,507,500 in
1996................................................... 550,000 550,750
Accumulated deficit....................................... (5,951,055) (20,768,724)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (4,951,055) (19,767,974)
------------ ------------
$ 20,909,971 $ 22,826,927
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
CELCORE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues (notes 11 and 12).................... $ 2,166,050 $ 4,907,855 $ 3,680,032
Cost of revenues.................................. 709,404 1,762,013 1,350,854
------------ ------------ ------------
Gross profit.................................... 1,456,646 3,145,842 2,329,178
------------ ------------ ------------
Operating expenses:
Research and development........................ 1,033,315 3,261,607 6,700,300
Sales and marketing............................. 546,974 2,104,720 4,207,391
General and administrative...................... 595,571 2,288,190 6,560,377
------------ ------------ ------------
2,175,860 7,654,517 17,468,068
------------ ------------ ------------
Operating loss............................... (719,214) (4,508,675) (15,138,890)
Other income, net (note 13)....................... 5,098 235,576 507,451
------------ ------------ ------------
Net loss..................................... $ (714,116) $ (4,273,099) $(14,631,439)
============ ============ ============
Net loss per common share (note 2)........... $ (0.81) $ (2.69)
============ ============
Weighted average common shares outstanding... 5,500,000 5,501,567
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
CELCORE, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK,
SHAREHOLDERS' EQUITY (DEFICIT) AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT) PARTNERS' CAPITAL
------------------------------------------------ (NOTE 1)
REDEEMABLE PREFERRED ADDITIONAL -------------------
PREFERRED STOCK COMMON PAID-IN ACCUMULATED GENERAL LIMITED
STOCK SERIES A STOCK CAPITAL DEFICIT PARTNER PARTNERS
----------- --------- -------- ---------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993............. $ -- $ -- $ -- $ -- $ -- $ 2,195 $ 217,262
Net loss through November 13, 1994..... -- -- -- -- -- (4,635) (458,909)
Issuance of 4,500,000 shares of Series
A preferred stock.................... -- 450,000 -- -- (691,647) -- 241,647
Issuance of 5,500,000 shares of common
stock................................ -- -- 550,000 -- (552,440) 2,440 --
Sale of 1,625,000 shares of Series B
preferred stock...................... 3,150,446 -- -- -- -- -- --
Accretion of redeemable preferred
stock................................ 12,413 -- -- -- (12,413) -- --
Net loss from inception of corporation
to December 31, 1994................. -- -- -- -- (250,572) -- --
----------- -------- -------- ------- ------------ ------- ---------
Balance at December 31, 1994............. 3,162,859 450,000 550,000 -- (1,507,072) -- --
Sale of 1,375,000 shares of Series B
preferred stock...................... 2,732,342 -- -- -- -- -- --
Sale of 3,038,046 shares of Series C
preferred stock...................... 17,122,881 -- -- -- -- -- --
Accretion of redeemable preferred
stock................................ 170,884 -- -- -- (170,884) -- --
Net loss for the year ended December
31, 1995............................. -- -- -- -- (4,273,099) -- --
----------- -------- -------- ------- ------------ ------- ---------
Balance at December 31, 1995............. 23,188,966 450,000 550,000 -- (5,951,055) -- --
Exercise of options for 7,500 shares of
common stock......................... -- -- 750 7,125 -- -- --
Sale of 2,004,227 shares of Series D
preferred stock...................... 15,910,276 -- -- -- -- -- --
Accretion of redeemable preferred
stock................................ 193,355 -- -- (7,125) (186,230) -- --
Net loss for the year ended December
31, 1996............................. -- -- -- -- (14,631,439) -- --
----------- -------- -------- ------- ------------ ------- ---------
Balance at December 31, 1996............. $39,292,597 $450,000 $550,750 $ -- $(20,768,724) $ -- $ --
=========== ======== ======== ======= ============ ======= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 5
CELCORE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (714,116) $ (4,273,099) $(14,631,439)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 51,905 272,534 853,649
Loss on sale of equipment.................... -- -- 26,812
Changes in operating assets and liabilities:
Accounts receivable........................ (403,260) (2,985,683) 1,623,694
Inventories................................ (166,262) (973,335) (2,608,360)
Prepaids and other assets.................. (23,934) (112,955) (319,408)
Accounts payable........................... 137,604 1,425,333 (465,605)
Accrued expenses and other liabilities..... 180,114 320,350 377,609
Unearned revenue........................... (16,740) 151,078 (91,580)
------------ ------------ ------------
TOTAL ADJUSTMENTS....................... (240,573) (1,902,678) (603,189)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES... (954,689) (6,175,777) (15,234,628)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment............ (269,258) (1,488,976) (3,510,578)
Proceeds from disposal of equipment............. -- -- 19,974
Purchase of treasury bill....................... -- -- (414,532)
Other........................................... (41,029) -- --
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES... (310,287) (1,488,976) (3,905,136)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock..................... 3,150,446 19,855,223 15,918,151
Proceeds from issuance of long-term debt........ -- -- 995,000
Principal payments on long-term debt............ -- -- (165,833)
Other........................................... -- (37,635) (19,347)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................ 3,150,446 19,817,588 16,727,971
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 1,885,470 12,152,835 (2,411,793)
Cash and cash equivalents at beginning of year.... 429,553 2,315,023 14,467,858
------------ ------------ ------------
Cash and cash equivalents at end of year.......... $ 2,315,023 $ 14,467,858 $ 12,056,065
============ ============ ============
Supplemental disclosure:
Interest paid for 1996 was $71,066. Capital
lease
obligations of $155,664 and $20,461 were
incurred in
1995 and 1996, respectively
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 6
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE BUSINESS
Celcore, Inc. (the "Company" or "Celcore"), a Delaware corporation, was
incorporated in September 1992, and acted as the general partner of Celcore LP
until November 1994, when it succeeded to the business of Celcore LP as a result
of a reorganization. The reorganization was affected by the exchange of
convertible preferred stock to the Class B limited partners and common stock to
the Class A limited partners and the general partner. The Partnership was
liquidated, and all of the Partnership's assets were transferred to the Company
and all of the liabilities of the Partnership were assumed by the Company; such
assets and liabilities were recorded in the Company's financial statements at
the Partnership's carrying value.
The Company designs, assembles and installs cost-effective wireless
telecommunications systems for cellular, PCS and wireless local loop
applications in low teledensity markets. The Company's "Target Markets" are
rural locations and areas in developing countries with low teledensities and
where wireline or traditional wireless infrastructure is not readily available
or economically feasible.
Since inception of operations (March 1993), the Company has not generated
revenues sufficient to cover its operating expenses. The activities of the
Company continue to require significant amounts of working capital to finance
its operations. During 1994, 1995, and 1996, the Company raised additional
capital of $3,150,446, $19,855,223 and $15,918,151, respectively, to support
operations. The Company may require additional cash infusions until such time as
operations become self-sustaining.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents of approximately $14,200,000 and $11,259,000 at December
31, 1995 and 1996, respectively, consisted of overnight repurchase agreements,
treasury bills and securities of federal agencies with an initial term of less
than 90 days. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of 90 days
or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Furniture and Equipment
Furniture and equipment are stated at cost. Furniture under capital leases
is stated at the present value of minimum lease payments. Depreciation and
amortization of furniture and equipment is calculated on a straight-line basis
over the estimated useful lives of the respective assets which are principally 7
years for furniture, 5 years for computer hardware, and 3 years for computer
software.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments recorded on the
accompanying balance sheets approximate fair value due to the short-term nature
of the financial instruments.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets to be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
<PAGE> 7
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
If such amounts are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount of fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position, results of
operations, or liquidity.
Income Taxes
The Company is subject to income taxes under the provisions of SFAS 109,
Accounting for Income Taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. In assessing the realizability of the deferred tax
assets, management considers whether it is more likely than not that the
deferred tax assets will be realized through the generation of future taxable
income.
Revenue Recognition
For contracts involving new technologies, revenues and profits or parts
thereof are deferred until technological feasibility is established, the
products are delivered and customer acceptance is obtained. For other product
sales, revenue is recognized at the time of shipment. Revenue from system
installation and training is recognized as services are provided.
Unearned Revenue
The Company received payments in 1994, 1995 and 1996 relating to sales
commitments to customers for future shipment of the Company's products. These
payments have been recorded as unearned revenue and recognized as revenue in
accordance with the Company's revenue recognition policy.
Research and Development
Research and development costs are expensed as incurred.
Loss Per Common Share
The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding for each period. Common
shares issuable upon conversion of the Company's preferred stock or common
equivalent shares issuable, using the treasury stock method, upon the exercise
of options to purchase common stock have not been included as the effect on net
loss per common share would be antidilutive. Net loss per common share has been
adjusted for the accretion of the Company's preferred stock to its redemption
value, which accretion has been included in Shareholders' deficit. The Company
has not paid dividends to holders of the Company's common or preferred stock
since its inception.
The Company operated as a limited partnership during most of 1994;
therefore, net loss per common share during 1994 is not applicable.
Concentrations of Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company sells its products and services throughout the world to places such
as Asia, Africa, Europe and South America. The Company performs an ongoing
credit evaluation
<PAGE> 8
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of its customers' financial condition and has established an allowance for
non-collection of accounts receivable based upon the collectibility of all
accounts receivable.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB Opinion 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion 25 and
provide the pro forma disclosure provisions of SFAS 123.
(3) INVENTORIES
Inventories at December 31, 1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,085,128 $ 517,709
Work in process............................................. 44,797 20,850
Finished goods.............................................. 27,937 3,227,663
---------- ----------
$1,157,862 $3,766,222
========== ==========
</TABLE>
(4) FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1995 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Furniture................................................... $ 285,779 $ 372,116
Computer hardware........................................... 1,220,417 3,885,192
Computer software........................................... 487,047 1,187,558
---------- ----------
$1,993,243 $5,444,866
========== ==========
</TABLE>
(5) LONG-TERM DEBT
On August 27, 1996, the Company entered into a loan and security agreement
for a $3,000,000 working capital line of credit, a $3,000,000 export/import
working capital line of credit and a $1,000,000 equipment line of credit. The
lines of credit are secured by substantially all assets of the Company and bear
interest at a rate of prime plus 1% for the working capital line of credit and
prime plus 1 1/2% for the export/import working
<PAGE> 9
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capital line of credit and the equipment line of credit. At December 31, 1996,
the lines of credit had no outstanding balances.
Long-term debt at December 31, 1996 consisted of a note payable for
$829,167 due in monthly principal payments of $27,639 plus interest at prime
plus 1 1/2% (9.75% at December 31, 1996), with final payment due June 1999; the
note was secured by substantially all assets of the Company.
The Company's loan agreements contain various debt covenants including
tangible net worth, certain financial ratios and restrictions on dividends.
Aggregated maturities of long-term debt as of December 31, 1996 are as
follows: 1997, $331,667; 1998, $331,667 and 1999, $165,833.
(6) COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases, primarily for
office space. Total rental expense for operating leases was $40,673, $187,722
and $600,237 for the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C> <C>
1997...................................................... $ 575,080
1998...................................................... 575,385
1999...................................................... 260,625
2000...................................................... 45,393
----------
$1,456,483
==========
</TABLE>
(7) REDEEMABLE PREFERRED STOCK
Series B Preferred Stock
The 3,000,000 issued shares of Series B preferred stock have a liquidation
value of $2.00 per share and are participating and voting. Each share of Series
B preferred stock is convertible into shares of common stock at a conversion
rate of one share of common stock for each share of preferred stock. The Company
shall redeem one-third of the outstanding preferred shares on each of December
1, 2000, 2001 and 2002. The redemption price shall be $2.00 per share plus all
declared dividends (note to date) and accrued dividends up to the redemption
dates.
Series C Preferred Stock
The 3,038,046 issued shares of Series C preferred stock have a liquidation
value of $6.00 per share and are participating and voting. Each share of Series
C preferred stock is convertible into shares of common stock at a conversion
rate of one share of common stock for each share of preferred stock. The Company
shall redeem one-third of the outstanding preferred shares on each of December
1, 2000, 2001 and 2002. The redemption price shall be $6.00 per share plus all
declared dividends (none to date) and accrued dividends up to the redemption
dates.
Series D Preferred Stock
The 2,004,227 issued shares of Series D preferred stock have a liquidation
value of $8.00 per share and are participating and voting. Each share of Series
D preferred stock is convertible into shares of common stock at a conversion
rate of one share of common stock for each share of preferred stock. The Company
shall
<PAGE> 10
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
redeem one-third of the outstanding preferred shares on each of December 1,
2000, 2001 and 2002. The redemption price shall be $8.00 per share plus all
declared dividends (none to date) and accrued dividends up to the redemption
dates.
The Company is recording accretion to increase the carrying value of the
redeemable preferred stock to the redemption value of $40,262,086 by December 1,
2002.
(8) SHAREHOLDERS' EQUITY
Common Stock
Of the authorized but unissued shares as of December 31, 1996, 12,542,273
have been reserved for conversion rights of preferred stockholders.
Series A Preferred Stock
The 4,500,000 issued shares of Series A preferred stock have a liquidation
value of $0.50 per share and are participating and voting. Each share of Series
A preferred stock is convertible into shares of common stock at a conversion
rate of one share of common stock for each share of preferred stock.
(9) INCOME TAXES
The tax effect of temporary differences at December 31, 1995 and 1996 is
presented below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net difference in capitalized start-up, organization and
patent expenses...................................... $ 42,000 $ 66,000
Cash deposits recognized in taxable income.............. 173,000 138,000
Inventories, principally due to adjustment for tax
purposes............................................. 21,000 24,000
Accruals, principally for warranties and moving
expenses............................................. 156,000 157,000
Accounts receivable, principally for sales deductions... 38,000 152,000
Federal and state loss carryforwards.................... 1,444,000 7,041,000
----------- -----------
Total gross deferred tax assets................. 1,874,000 7,578,000
Less valuation allowance................................ (1,808,000) (7,357,000)
----------- -----------
Net deferred tax assets......................... 66,000 221,000
Deferred tax liabilities -- furniture and equipment,
principally due to depreciation......................... (66,000) (221,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which those temporary
differences become deductible. Due to the historical net operating losses,
management cannot reliably predict when the deferred assets can be realized.
Consequently, a valuation allowance of $195,000, $1,808,000 and $7,357,000 has
been provided at December 31, 1994, 1995 and 1996, respectively. At December 31,
1996, the Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $18,500,000 which are available to offset
future federal and state income, if any, through 2012.
(10) STOCK OPTIONS
The 1995 Stock Option Plan (the "1995 Plan") provides for the granting of
stock options to employees, directors or consultants to the Company. Under the
1995 Plan, the Board of Directors is authorized to issue up
<PAGE> 11
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to 2,000,000 shares of common stock. The Board has the authority to select the
individuals to receive options and determine the number of shares and terms of
the options granted.
In December 1996, the 1995 Plan was frozen with the simultaneous adoption
of the 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan provides for
the granting of awards of shares of common stock, awards of derivative
securities related to the value of common stock, and certain cash awards to
employees, directors, and consultants of the Company. Awards under the 1996 Plan
are determined by a committee of no less than two members of the Board of
Directors. The Board of Directors has reserved 3,000,000 shares of Company
common stock for issuance pursuant to awards that may be made under the 1996
Plan, and has adopted a policy that shares of common stock issuable pursuant to
options outstanding under the 1995 Plan will be deducted from the number of
shares of common stock issuable pursuant to options outstanding under the 1996
Plan. The number of shares available under the 1996 Plan will be redetermined
each succeeding fiscal year to equal the greater of 3,000,000 or 15% of the
issued and outstanding shares of common stock on a fully diluted basis. The term
of the 1996 Plan is indefinite. Substantially all stock options under both plans
have 10 year terms and shall be exercisable as to 25% of the shares covered by
the options on the first, second, third and fourth anniversary of the dates of
the grant.
As of December 31, 1996, options for 848,250 shares were available to be
awarded under the 1996 Plan.
The per share weighted-average minimum value of the stock options granted
during 1995 and 1996 was $.027 and $.055, respectively, on the date of grant
using the minimum value method with the following weighted-average assumptions:
risk free interest rate of 7% and an expected life of 2 years after vesting.
The Company applies APB Opinion No. 25 in accounting for the plans. The
exercise price of options at their respective grant dates is equal to the
estimated fair market value, and accordingly, no compensation cost has been
recognized for the stock options in the financial statements. Had the Company
determined compensation cost based on the minimum value at the grant date for
its stock options under SFAS 123, the Company's net loss for the years ended
December 31, 1995 and 1996 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
NET LOSS
-----------------------------
1995 1996
----------- ------------
<S> <C> <C>
As reported........................................ $(4,273,099) $(14,631,439)
Pro forma.......................................... $(4,335,326) $(14,872,257)
Pro forma per share................................ $ (0.82) $ (2.74)
</TABLE>
In 1995 and 1996 the Board of Directors granted options to officers and
employees at various prices which were believed to approximate the fair market
value of the shares at the grant date. Activity with respect to these options
during the period indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Balance at December 31, 1994................... -- --
Granted...................................... 1,099,500 $1.02
Canceled..................................... (87,000) 1.05
---------- ------
Balance at December 31, 1995................... 1,012,500 1.02
Granted...................................... 1,245,250 2.10
Exercised.................................... (7,500) 1.05
Canceled..................................... (106,000) 1.84
---------- ------
Balance at December 31, 1996................... 2,144,250 $1.61
========== ======
</TABLE>
<PAGE> 12
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, the range of exercise prices and weighted average
contractual life of outstanding options was $0.50 to $2.10 and 9 years.
At December 31, 1996, the number of options exercisable was 260,250 and the
weighted average exercise price of those options was $1.00.
(11) SIGNIFICANT CUSTOMERS
The Company's sales and trade accounts receivable are concentrated among a
small number of customers. For the year ended December 31, 1994, sales to two
customers aggregated approximately 78% and 16%, respectively, of total net
revenues. For the year ended December 31, 1995, sales to two customers
represented approximately 20% and 21%, respectively, of total net revenues. For
the year ended December 31, 1996, sales to five customers aggregated
approximately $2,500,000 representing approximately 72% of the Company's total
net revenues. Sales to these customers ranged from 10% to 17% of total net
revenues.
(12) GEOGRAPHIC INFORMATION
Net Revenues from product sales and services provided outside the United
States for the years ended December 31, 1995 and 1996 (none in 1994) were as
follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Asia........................................................ $469,435 $ 21,583
Europe...................................................... -- 580,202
Africa...................................................... 530,035 387,576
-------- --------
$999,470 $989,361
======== ========
</TABLE>
(13) OTHER INCOME, NET
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Interest Income..................................... $10,705 $255,381 $608,995
Interest Expense.................................... (5,607) (9,429) (71,066)
Other, net.......................................... -- (10,376) (30,478)
------- -------- --------
$ 5,098 $235,576 $507,451
======= ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 99.3
CELCORE, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 619,279
Accounts receivable, less allowances of $477,336.......... 4,153,989
Finance receivables, current (note 2)..................... 614,989
Inventories (note 3)...................................... 5,629,406
Prepaid expenses and other current assets................. 817,238
------------
TOTAL CURRENT ASSETS.............................. 11,834,901
------------
Furniture and equipment..................................... 7,192,574
Less accumulated depreciation and amortization.............. (2,175,177)
------------
NET FURNITURE AND EQUIPMENT....................... 5,017,397
------------
Finance receivables, long-term (note 2)..................... 638,796
Other assets................................................ 481,274
------------
$ 17,972,368
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt (note 4).................................. $ 450,000
Current installments of long-term debt (note 4)........... 2,385,972
Accounts payable.......................................... 4,840,740
Accrued expenses and other liabilities.................... 2,316,945
Unearned revenue.......................................... 741,686
------------
TOTAL CURRENT LIABILITIES......................... 10,735,343
------------
REDEEMABLE PREFERRED STOCK, cumulative and convertible,
$.10 par value, aggregate liquidation and redemption
value of $40,262,086
Authorized 9,500,000 shares; 8,042,272 shares issued
and outstanding....................................... 39,438,766
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' EQUITY (DEFICIT):
Series A preferred stock, cumulative and convertible $.10
par value, aggregate liquidation value of $2,250,000.
4,500,000 shares authorized, issued and outstanding.... 450,000
Common stock, $.10 par value; 50,000,000 shares
authorized; 5,591,250 shares issued and outstanding.... 559,125
Accumulated deficit....................................... (33,210,866)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (32,201,741)
------------
$ 17,972,368
============
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 2
CELCORE, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Net revenues (notes 5 and 6)................................ $ 2,755,992 $ 9,485,096
Cost of revenues............................................ 918,568 5,719,315
------------ ------------
Gross profit.............................................. 1,837,424 3,765,781
------------ ------------
Operating expenses:
Research and development.................................. 4,764,698 6,931,944
Sales and marketing....................................... 2,882,354 4,518,004
General and administrative................................ 4,560,438 4,669,148
------------ ------------
12,207,490 16,119,096
------------ ------------
Operating loss............................................ (10,370,066) (12,353,315)
Other income (expense), net................................. 342,102 (24,320)
------------ ------------
Net loss.................................................. $(10,027,964) $(12,377,635)
============ ============
Net loss per common share................................. $ (1.85) $ (2.26)
============ ============
Weighted average common shares outstanding................ 5,500,238 5,532,839
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
CELCORE, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(10,027,964) $(12,377,635)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 499,566 1,034,123
Loss on disposal of equipment.......................... 26,812 100,085
Changes in operating assets and liabilities:
Accounts receivable.................................. 1,812,584 (2,388,739)
Finance receivables.................................. -- (1,253,785)
Inventories.......................................... (1,031,549) (1,863,183)
Prepaids and other assets............................ (148,592) (375,023)
Accounts payable..................................... (728,601) 3,726,811
Accrued expenses and other liabilities............... 719,887 1,320,490
Unearned revenue..................................... (326,922) 378,929
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES............. (9,204,779) (11,697,927)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment...................... (2,238,870) (1,847,795)
Proceeds from disposal of equipment....................... 19,974 --
Purchase of treasury bill................................. -- (2,507,908)
Proceeds from sale of treasury bill....................... -- 2,520,000
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES............. (2,218,896) (1,835,703)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock............................... 15,828,351 90,038
Increase in short-term debt............................... -- 450,000
Proceeds from issuance of long-term debt.................. 995,000 2,000,000
Principal payments on long-term debt...................... (82,917) (443,194)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 16,740,434 2,096,844
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 5,316,759 (11,436,786)
Cash and cash equivalents at beginning of period............ 14,467,858 12,056,065
------------ ------------
Cash and cash equivalents at end of period.................. $ 19,784,617 $ 619,279
============ ============
Supplemental disclosure:
Interest paid for 1997 and 1996 was $162,733 and $42,375,
respectively.
A capital lease obligation of $20,740 was incurred in
1996.
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF THE BUSINESS
The accompanying unaudited 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 information presented not misleading. Nine
month financial results may not be indicative of annual financial results.
These unaudited financial statements and notes should be read in
conjunction with the audited financial statements and accompanying notes.
The Company designs, assembles and installs cost-effective wireless
telecommunications systems for cellular, PCS and wireless local loop
applications in low teledensity markets. The Company's "Target Markets" are
rural locations and areas in developing countries with low teledensities and
where wireline or traditional wireless infrastructure is not readily available
or economically feasible.
Since inception of operations (March 1993), the Company has not generated
revenues from operations sufficient to cover its operating expenses. The
activities of the Company continue to require significant amounts of working
capital to finance its operations. The Company has not raised additional capital
to support operations during 1997. The Company will require additional cash
infusions until such time as operations become self-sustaining.
(2) FINANCE RECEIVABLES
The Company began extending long-term credit in 1997 to certain of its
customers at interest rates commensurate with the credit and prepayment risks
involved. At September 30, 1997, total finance receivables were $1,253,785.
Aggregate maturities of finance receivables for each twelve month period
subsequent to September 30, 1997, are $614,989 and $638,796 in 1998 and 1999,
respectively.
(3) INVENTORIES
Inventories at September 30, 1997 consisted of the following:
<TABLE>
<S> <C>
Raw materials............................................ $ 542,453
Finished goods........................................... 5,086,953
----------
$5,629,406
==========
</TABLE>
(4) LONG-TERM DEBT
As of September 30, 1997, the Company had outstanding borrowings of
$450,000 under a working capital line and had utilized $375,000 to collateralize
a standby letter of credit. Interest on the outstanding borrowings are at prime
plus 1 and 1/2%. Additionally, the Company had outstanding borrowings of
$2,385,972 under a term loan. This term loan bears interest at prime plus 1 and
1/2%. All of the borrowings are secured by all of the assets of the Company. As
of September 30, 1997, the Company was in default of certain financial covenants
contained in the term loan agreement and has not repaid the outstanding line of
credit balance which expired in August 1997. As a result, all outstanding
borrowings have been classified as current at September 30, 1997. (See note 7)
<PAGE> 5
CELCORE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of 1997, the Company entered into a $10,000,000
revolving credit agreement with DSC Communications Corporation (DSC) to fund
working capital requirements. Borrowings under the Agreement will be unsecured,
bear interest at 11.5% per annum and will mature on January 15, 1998. At October
31, 1997, the Company had borrowed $4,400,000 under the revolving credit
agreement. (See note 7)
(5) SIGNIFICANT CUSTOMERS
The Company's net revenues and trade accounts receivable are concentrated
among a small number of customers. For the nine months ended September 30, 1997,
sales to eight customers aggregated $8,492,173 representing approximately 90% of
the Company's total net revenues. For the nine months ended September 30, 1996,
sales to eight customers aggregated $1,984,651 representing approximately 72% of
the Company's total net revenues.
For the nine months ended September 30, 1997, net revenues of approximately
$5.1 million were attributable to two customers located in South America.
(6) RELATED PARTY TRANSACTION
During the third quarter of 1997, CELCORE recorded an approximate $250,000
special sales allowance provision related to the expected return of certain
equipment with an original selling price of approximately $764,000. The
equipment was sold in 1997 to a customer who is an affiliate of a 11.05% owner
of the Company's Capital Stock.
(7) SUBSEQUENT EVENT
In October 1997, the Company entered into a merger agreement with DSC. The
merger, valued at approximately $167,000,000 (including transaction costs), will
be consummated with the issuance of DSC common stock in exchange for all the
outstanding common and preferred shares of the Company. DSC will assume
substantially all of the Company's outstanding stock options. The merger is
subject to a number of items including governmental approval and should be
completed prior to the end of 1997.
Should the merger be consummated, the Company's short-term and long-term
cash requirements would be funded by DSC. It is anticipated that DSC would
advance the Company the necessary funds to repay all outstanding borrowings with
its bank. However, if the merger is not consummated, it would be necessary for
the Company to find alternative financing, which may include extending terms
with its bank, a debt or equity offering or other lending sources. There can be
no assurance that the Company would be able to raise the necessary funds to
sustain future operations.
(8) COMMITMENTS AND CONTINGENCIES
The Company is a party to routine legal proceedings incidental to its
business. The Company does not believe the ultimate resolution of these legal
proceedings will have a material adverse effect on its financial position and
results of operations.
<PAGE> 1
EXHIBIT 99.4
DSC COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined statements of operations combine
DSC Communications Corporation's ("DSC") historical consolidated results of
operations and Celcore, Inc.'s ("CELCORE") historical results of operations for
the nine-month period ended September 30, 1997 and for the year ended December
31, 1996, giving effect to the acquisition as if it had occurred January 1,
1996. The unaudited pro forma combined balance sheet combines DSC's historical
consolidated balance sheet as of September 30, 1997 with CELCORE's historical
balance sheet as of September 30, 1997, giving effect to the acquisition as if
it had occurred on September 30, 1997. Of the estimated total purchase price of
approximately $167 million, approximately $135 million represented the value of
in-process research and development. The excess of the purchase price of CELCORE
(exclusive of the amount allocated to in-process research and development) over
the net identifiable tangible and intangible assets and liabilities of CELCORE
is reported as Acquired Technology and Costs in Excess of Net Assets of
Businesses Acquired, Net. The carrying values of CELCORE's net assets are
assumed to equal their fair values for purposes of these unaudited pro forma
financial statements, unless indicated otherwise in the Notes to Unaudited Pro
Forma Combined Financial Statements. These values are subject to revision.
However, management believes that any resulting adjustments from purchase price
allocation will not have a material effect on the financial position or results
of operations.
The historical financial information of DSC has been derived from the
unaudited consolidated financial statements for the nine-month period ended
September 30, 1997 and the audited consolidated financial statements for the
year ended December 31, 1996 and should be read in conjunction with such
financial information and the notes thereto. The historical financial
information of CELCORE has been derived from the unaudited financial statements
for the nine-month period ended September 30, 1997 and the audited financial
statements for the year ended December 31, 1996 and should be read in
conjunction with such financial information and the notes thereto.
The Unaudited Pro Forma Combined Statements of Operations and
Unaudited Pro Forma Combined Balance Sheet were prepared based upon the
purchase method of accounting. The unaudited pro forma adjustments are described
in the accompanying notes. The unaudited pro forma adjustments represent DSC's
preliminary determination of the necessary adjustments and are based upon
certain assumptions DSC considers reasonable under the circumstances. Final
amounts may differ from those set forth in the unaudited pro forma combined
financial statements.
The unaudited pro forma financial information presented herein may not be
indicative of the results of operations as they would have been if DSC and
CELCORE had been a single entity during 1996 and the nine months ended September
30, 1997, nor is it necessarily indicative of the results of operations which
may occur in the future. Anticipated efficiencies from the consolidation of DSC
and CELCORE are not fully determinable and have been excluded from the amounts
included in the pro forma amounts presented herein.
<PAGE> 2
DSC COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
----------------------------------------------------
DSC CELCORE ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue.................................... $1,130,374 $ 9,485 $ -- $1,139,859
Cost of revenue............................ 661,417 5,719 -- 667,136
---------- ---------- ---------- ----------
Gross profit............................. 468,957 3,766 -- 472,723
---------- ---------- ---------- ----------
Operating costs and expenses:
Research and product development......... 181,852 6,932 -- 188,784
Selling, general and administrative...... 172,585 9,187 -- 181,772
Other operating costs.................... 7,709 -- 2,558(e) 10,267
---------- ---------- ---------- ----------
Total operating costs and expenses.... 362,146 16,119 2,558 380,823
---------- ---------- ---------- ----------
Operating income (loss).................. 106,811 (12,353) (2,558) 91,900
Interest income............................ 16,840 249 (5,985)(f) 11,104
Interest expense........................... (19,334) (173) -- (19,507)
Other income (expense), net................ 34,014 (101) -- 33,913
---------- ---------- ---------- ----------
Income (loss) before income taxes..... 138,331 (12,378) (8,543) 117,410
Income tax expense (benefit)............... 51,898 -- (2,214)(g) 49,684
---------- ---------- ---------- ----------
Net income (loss)..................... $ 86,433 $ (12,378) $ (6,329) $ 67,726
========== ========== ========== ==========
Income (loss) per share............... $ 0.73 $ (2.26) $ 0.57
========== ========== ==========
Average shares used in per share
computation.............................. 119,169 5,533 119,859
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
<PAGE> 3
DSC COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
----------------------------------------------------
DSC CELCORE ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue.................................... $1,380,891 $ 3,680 $ -- $1,384,571
Cost of revenue:
Special charges related to inventories
and associated assets................. 82,500 -- -- 82,500
Other.................................... 843,247 1,351 -- 844,598
---------- ---------- ---------- ----------
Total cost of revenue ................ 925,747 1,351 -- 927,098
---------- ---------- ---------- ----------
Gross profit............................. 455,144 2,329 -- 457,473
---------- ---------- ---------- ----------
Operating costs and expenses:
Research and product development......... 210,091 6,700 -- 216,791
Selling, general and administrative...... 233,576 10,768 -- 244,344
Special charges for excess facilities and
equipment............................. 13,500 -- -- 13,500
Other operating costs.................... 10,020 -- 3,411(e) 13,431
---------- ---------- ---------- ----------
Total operating costs and expenses.... 467,187 17,468 3,411 488,066
---------- ---------- ---------- ----------
Operating loss........................... (12,043) (15,139) (3,411) (30,593)
Interest income............................ 24,146 605 (7,980)(f) 16,771
Interest expense........................... (26,355) (71) -- (26,426)
Other income (expense), net................ 2,066 (26) -- 2,040
---------- ---------- ---------- ----------
Loss before income taxes.............. (12,186) (14,631) (11,391) (38,208)
Income tax benefit......................... (4,631) -- (3,032)(g) (7,663)
---------- ---------- ---------- ----------
Net loss.............................. $ (7,555) $ (14,631) $ (8,359) $ (30,545)
========== ========== ========== ==========
Loss per share........................ $ (0.06) $ (2.69) $ (0.26)
========== ========== ==========
Average shares used in per share
computation.............................. 116,514 5,502 116,658
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
<PAGE> 4
DSC COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (UNAUDITED)
----------------------------------------------------
DSC CELCORE ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 409,341 $ 619 $ (145,096)(a) $ 262,028
(2,836)(c)
Marketable securities............................. 268,768 -- -- 268,768
Receivables....................................... 406,174 4,769 -- 410,943
Inventories....................................... 370,338 5,629 -- 375,967
Deferred income taxes............................. 60,429 -- -- 60,429
Other ............................................ 72,911 818 -- 73,729
---------- ---------- ---------- ----------
Total current assets...................... 1,587,961 11,835 (147,932) 1,451,864
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET......................... 443,664 5,017 -- 448,681
LONG-TERM RECEIVABLES............................... 46,321 639 -- 46,960
CAPITALIZED SOFTWARE DEVELOPMENT COSTS.............. 66,900 -- -- 66,900
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
NET............................................... 141,906 -- 16,530(b) 158,436
OTHER .............................................. 119,404 481 12,200(b) 132,085
---------- ---------- ---------- ----------
Total assets.............................. $2,406,156 $ 17,972 $ (119,202) $2,304,926
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term debt................................... $ 126 $ 450 $ (450)(c) $ 126
Accounts payable.................................. 116,911 4,841 -- 121,752
Accrued liabilities............................... 264,449 3,058 21,071 (i) 288,578
Income taxes payable.............................. 30,558 -- -- 30,558
Current portion of long-term debt................. 32,497 2,386 (2,386)(c) 32,497
---------- ---------- ---------- ----------
Total current liabilities................. 444,541 10,735 18,235 473,511
---------- ---------- ---------- ----------
LONG-TERM DEBT...................................... 632,825 -- -- 632,825
NONCURRENT INCOME TAXES AND OTHER LIABILITIES....... 84,528 -- -- 84,528
REDEEMABLE PREFERRED STOCK.......................... -- 39,439 (39,439)(d) --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock................................... -- 450 (450)(d) --
Common stock...................................... 1,229 559 (559)(d) 1,229
Additional capital................................ 748,330 -- 4,800 (h) 753,130
Unrealized gains on securities, net of income
taxes.......................................... 265 -- -- 265
Accumulated translation adjustment................ 930 -- -- 930
Retained earnings (deficit)....................... 536,619 (33,211) (101,789)(d) 401,619
---------- ---------- ---------- ----------
1,287,373 (32,202) (97,998) 1,157,173
Treasury stock...................................... (43,111) -- -- (43,111)
---------- ---------- ---------- ----------
Total shareholders' equity (deficit)...... 1,244,262 (32,202) (97,998) 1,114,062
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity (deficit)........................ $2,406,156 $ 17,972 $ (119,202) $2,304,926
========== ========== ========== ==========
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
<PAGE> 5
DSC COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The unaudited pro forma combined statements of operations for all periods
presented and the pro forma combined balance sheet at September 30, 1997 of
DSC and CELCORE have been prepared based upon the purchase method of
accounting.
NOTE 2: PURCHASE PRICE OF CELCORE
The estimated purchase price of the acquisition is approximately $167 million,
including transaction costs and other acquisition related costs of approximately
$6.6 million. The preliminary purchase price includes the cash consideration
paid of approximately $145.1 million and the valuation of the CELCORE options
assumed by DSC and the promissory notes issued to certain individuals of $15.7
million.
NOTE 3: PRO FORMA ADJUSTMENTS
Adjustments included in the unaudited pro forma combined financial
statements are as follows:
(a) Record the acquisition of CELCORE using $145.1 million in existing
cash.
(b) Reflects the remaining excess of the purchase price of CELCORE over
its net book value. See Note 4.
(c) CELCORE and a subsidiary of DSC entered into a revolving credit
agreement under which CELCORE can borrow up to $10 million for working
capital purposes. For purposes of calculating the pro forma
adjustments, all of CELCORE's short-term borrowings were eliminated
with a corresponding reduction in cash and cash equivalents. The
impact on net financing costs was minimal.
(d) Reflects the elimination of CELCORE capital stock and accumulated
deficit. Also reflects the write-off of in-process research and
development, as discussed in Note 4. This charge has been excluded
from the unaudited pro forma statements of operations as it was
considered a non-recurring charge.
(e) Reflects amortization expense for Acquired Technology and Costs in
Excess of Net Assets of Businesses Acquired, Net. The estimated useful
lives average eight years.
(f) Record a reduction to interest income to reflect the cash funding of
the acquisition. This was calculated based on DSC's average rate of
earnings for each respective period.
(g) Record the estimated income tax effect of the pro forma adjustments
related to a reduction in interest income. No tax benefit was
recognized for the amortization of Costs in Excess of Net Assets of
Businesses Acquired, Net.
(h) Reflects the vested portion of the CELCORE options assumed by DSC.
(i) Reflects the unvested portion of the CELCORE options assumed by DSC
as well as the promissory notes issued to certain individuals which
are payable in DSC common stock. Also includes the estimated
transaction costs related to the acquisition.
NOTE 4: IN-PROCESS RESEARCH AND DEVELOPMENT
A preliminary estimate of the intangible assets acquired aggregated
approximately $163.7 million. DSC received a preliminary appraisal of the
intangible assets which indicates that approximately $135 million of the
acquired intangible assets consists of in-process research and development.
Because there can be no assurance that DSC will be able to successfully complete
the development and integration of CELCORE's products or that the acquired
technology has any alternative future use, the acquired in-process research and
development was charged to expense by DSC in the fourth quarter of 1997 when
the acquisition was consummated. The remaining intangible assets of $28.7
million were assigned to Acquired Technology and Costs in Excess of Net Assets
of Businesses Acquired, Net and will be amortized on a straight-line basis over
their estimated useful lives. Management believes that the unamortized balance
is recoverable through future operating results. These estimates could change
as the estimates of the fair value of assets acquired and liabilities assumed
are finalized and the appraisal of in-process research and development is
completed.
<PAGE> 6
NOTE 5: PRO FORMA NET INCOME (LOSS) PER SHARE
The pro forma combined net income (loss) per share is based on the combined
weighted average number of common and dilutive equivalent shares outstanding of
DSC and shares issued and dilutive equivalent shares assumed in connection with
the acquisition. Common equivalent shares are excluded from the computation
when the effect is antidilutive.
