<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 NO. 0-10018
____________________
DSC COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE 54-1025763
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 COIT ROAD
PLANO, TEXAS 75075
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (972) 519-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK,
$.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
As of March 3, 1997, 117,338,563 shares of DSC Communications
Corporation Common Stock, $.01 par value, were outstanding, and the
aggregate market price of the shares held by nonaffiliates was
approximately $2,393,362,373. (Solely for the purposes of calculating the
preceding amount, all directors and officers of the registrant are
deemed to be affiliates.)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive proxy material for the 1997
Annual Meeting of Stockholders are incorporated by reference in
Items 10, 11, 12, and 13 of Part III of this report.
Certain portions of the Annual Report to Shareholders for the
year ended December 31, 1996 are incorporated by reference in Item
1 of Part I, Items 6, 7, and 8 of Part II, and Item 14 of Part IV
of this report.
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DSC COMMUNICATIONS CORPORATION
ANNUAL REPORT
ON
FORM 10-K
YEAR ENDED DECEMBER 31, 1996
PART I
ITEM 1. BUSINESS
GENERAL
DSC Communications Corporation was incorporated under the laws of the
State of Delaware in 1976. As used herein, the term "Company" refers to
DSC Communications Corporation and, unless the context clearly indicates
otherwise, all of its subsidiaries. The Company's executive offices are
located at 1000 Coit Road, Plano, Texas 75075. Its telephone number is
(972) 519-3000.
The Company designs, develops, manufactures, and markets digital
switching, access, transport, and private network system products for the
worldwide telecommunications marketplace. These products allow
telecommunications service providers to build and upgrade their networks to
support a wide range of voice, data, and video services. The Company offers a
comprehensive product line including digital switching systems, intelligent
network products, cellular switching systems, digital loop carrier products,
digital cross-connect products, and optical transmission systems and related
advanced network management systems. The Company develops such systems to meet
American and international telecommunications standards, and the specific
requirements of the operating companies of the Regional Holding Companies
("RHCs"), independent telephone companies, long-distance carriers, private
networks, and companies operating public and private communications networks in
other countries.
The Company acquired NKT Elektronik A/S (subsequently renamed DSC
Communications A/S), a Copenhagen, Denmark-based manufacturer of optical
transmission equipment, for approximately
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$149 million in cash in November, 1994. The operating results of DSC
Communications A/S are reported as part of the Company's Transport Systems
Group.
The Company supplies products to a domestic and international
customer base, including local exchange telephone companies, long-distance
carriers, cellular telephone companies, international telephone companies,
various Fortune 1000 companies, and utility companies. Its domestic
customers include the RHCs and most major domestic independent telephone
and long-distance companies, including MCI Communications Corporation,
U.S. Sprint Communications Company L.P., GTE Communications Systems
Corporation, and LDDS/WorldCom, Inc. (formerly LDDS Communications, Inc.).
The Company is also a major manufacturer of high-capacity cellular
switches for Motorola, Inc. ("Motorola"), a leading supplier of wireless
communication systems throughout the world. International customers
include DDI Corporation ("DDI") of Japan, Tele Danmark, Deutsche Telekom in
Germany, Mercury Communications, Ltd., a subsidiary of Cable & Wireless PLC in
the United Kingdom, British Telecommunications PLC, Telefonos de Mexico, S.A. de
C.V., and AAP Communications, Pty. Ltd. of Australia.
PRODUCTS
The percentage of consolidated revenue from the Company's product
groups was as follows:
<TABLE>
Year Ended December 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Switch systems 42% 48% 52%
Access systems 33% 28% 27%
Transport systems 23% 23% 19%
</TABLE>
SWITCH SYSTEMS. The Company develops, manufactures and markets advanced
switching and intelligent network systems for the worldwide telecommunications
marketplace. These systems connect and route calls and provide the application
intelligence for intelligent network management and signaling for wireline and
wireless networks, long distance switching, and switching for the support of
high-speed communications such as data, image and video. The Company's
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primary switching and intelligent network products include the INfusion
Intelligent Network Product family, as well as tandem and cellular switching
equipment.
THE INfusion (TM) PRODUCT LINE. The Company's INfusion family of
intelligent network products covers the full range of intelligent network
("IN") functionality including signaling, service creation and management
and service delivery. To minimize development time and allow rapid
introduction of IN services, the Company also provides a variety of
pre-packaged wireline and wireless applications. With this compatible
family of IN products, wireline and wireless service providers can
significantly reduce the time required to introduce new services into the
network and can cost-effectively evolve to a large-scale service
implementation.
The INfusion product family includes the INfusion SCE, SMS, SCP,
ISP and STP. The INfusion SCE (Service Creation Environment), a
platform providing the capability to create services from a library
of reusable components, is used to develop and test Intelligent
Network services and their supporting logic. The INfusion SMS
(Service Management System) provides the tools to deploy, provision,
and activate SCE-created IN services. The INfusion SCP (Service
Control Point) and SCP/m are scaleable, fault-tolerant service
delivery platforms that execute SCE-created services. Designed to
allow multiple services on a single platform, the INfusion SCP and
SCP/m support a variety of database-related IN services such as
number translation, calling card validation, virtual private network
and Home Location Register. Another service delivery platform, the
INfusion ISP (Intelligent Service Peripheral) executes SCE-created
services that require the exchange of information with the caller
(i.e., PIN input, voice-activated dialing) as well as database
look-up (SCP functions).
The INfusion STP (Signal Transfer Point) is a network signaling
hub that provides access to CCS7 common channel signaling networks and
routing of signaling messages between network nodes and other networks.
Supporting both SS7 and C7 signaling protocols, the Company's INfusion STPs
are installed in cellular, long distance and local networks throughout the
world.
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The Company also offers a variety of pre-packaged applications
such as Home Location Register and Short Message Service for wireless
networks, Enhanced 800, Enhanced Routing, and Calling Card and Debit
Card authorization. Providing immediate service deployment in their
"off-the-shelf" state, these SCE-created services can also be
customized by the service provider for specific customers or markets.
TANDEM SWITCHES. As a telephone network becomes increasingly
complex, the number of switching locations grows to a point where it
is not economical to connect every switching point directly to every
other switching point. Intermediate switching points served by a
tandem (or transit) switch solve this problem. The Company offers a
complete line of modular tandem switches that not only fulfill the
intermediate switching function but also provide flexible dialing
plans, service access codes, and customized screening, translation
and routing. The tandem product family also works with the INfusion
ISP to provide intelligent network services. The Company's DEX 600
tandem switching systems are a family of high capacity, modular
tandem switches for the North American market supporting from 10,000
to 120,000 traffic carrying ports. The Company's international
customer base continues to grow with the increasing demand for tandem
switching in foreign countries. Supporting both T1 and E1 trunk
interfaces, the 600GT is a full featured gateway/transit switch for
deployment in international long distance, wireless and private
networks.
WIRELESS SWITCHES. Since 1984, the Company has provided switching
platforms to Motorola which, when augmented with a variety of I/O
peripherals and co-developed mobility management software, produces
wireless switching systems, currently in service in 37 countries worldwide
for both cellular and PCS applications. These applications currently
include both analog and digital modes of operation. The Company's wireless
switch platforms, DSC DEX200C and DSC DEX600C, utilize the same proven
common control elements which are integral to the Company's overall
switching products family, including the large installed base of tandem
switching systems.
BROADBAND PRODUCTS. Broadband products utilize Asynchronous
Transfer Mode ("ATM") technology to enable service providers to offer
the most advanced network capabilities, including multimedia,
high-speed data, voice and interactive video services. The Company's
iMPAX(TM) product is an ATM-based switch that can be located at the
premises of a large corporation to enable the corporation to
transport a variety of communication services throughout its network.
iMPAX can also be deployed in a telephone company's central office
or at the site of an independent service provider. Use of iMPAX will
give service providers and corporations access to network elements
through which they can offer new wideband and broadband services such
as
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LAN-to-LAN inter-networking, video conferencing and supercomputer
connectivity.
The ATM-based technology is expected to be incorporated into the
Company's switching, access and transport products.
The Company's primary competitors in the switching and intelligent
network markets are Northern Telecom Ltd. ("Nortel"), Tandem Computers,
Inc., Lucent Technologies, Inc. ("Lucent") and AB Telefon LM Ericsson
("Ericsson").
ACCESS PRODUCTS. The Company designs, manufactures and markets equipment
for the local loop, that portion of the public telecommunications network which
extends from the local telephone company's central office switch to the
individual home or business user. The demand for access equipment has been
strong in recent years due primarily to the deployment of fiber optics in many
of the networks served by the major service providers in the United States. The
Company believes that software-based access products which support fiber optic
communications will continue to experience growth in demand and accordingly, has
developed a line of access products to serve telecommunications service carriers
in the United States and abroad.
LITESPAN(R)-2000. In 1991, the Company began shipments of
Litespan-2000, an access product which enables local exchange
carriers and other service providers to utilize fiber optics in the
local loop. Over a single pair of optical fibers, Litespan-2000 can
transmit voice, data and video on an integrated basis to as many as
2,000 subscribers. The Litespan-2000 is the world's first digital
loop carrier to meet North American Synchronous Optical Network
("SONET") standards and related fiber optic interface requirements
set forth by the RHCs. The Litespan-2000 allows telecommunications
service providers to introduce the high-capacity technology of fiber
optics into the local loop, while supporting basic services, in a
cost effective manner. The Company believes that the introduction of
multi-media services, such as video on demand, will increase the
demand for fiber optic-related products. The Company currently has
multi-year agreements with six of the seven RHCs for purchases of
Litespan-2000 systems.
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LITESPAN(R)-120. The Company has evolved the Litespan system to
address access applications in international markets. The
Litespan-120 is a flexible access multiplexer that may be deployed as
a loop carrier or primary mux, using copper, fiber or radio feeders and
offers benefits such as integral fiber optic interfaces, software
control and support of a wide range of telephony services in a
compact, cost effective package. Deliveries of Litespan-120 began
during late 1995. Network deployments are taking place in
Latin America and Eastern Europe. There is also additional field
testing under way.
AIRSPAN(TM). Airspan, which is currently undergoing customer
market trials, provides access service over a wireless local loop,
thereby providing users access to the public telecommunications
network without having to install copper wire or fiber lines. The
primary markets for this product are areas where the last link in the
subscriber connection is radio rather than copper or fiber lines.
Airspan is expected to be popular in developing countries where
copper or fiber line access connections can be expensive and time
consuming to install. In addition, Airspan and Multiline, an
application of Airspan integrated with Litespan-120, are cost
effective and quick response alternatives in dense urban environments
of developed countries.
SWITCHED DIGITAL VIDEO. The Company is also currently
developing Switched Digital Video ("SDV") technology to provide an
ATM-based, interactive, fiber switched solution capable of delivering
video, data, and voice services to residences and businesses. The
Company will offer SDV as a migratory path for new and current
Litespan customers as they upgrade to interactive broadband
full-service networks. These new SDV-based networks will enable
carriers to offer a multitude of new revenue-generating services over
a single integrated platform.
Companion products from the Company's access products portfolio
include Starspan(R), which extends the capabilities of the Litespan-2000
to the customer's premises; and Metrospan(R), which is used as a broadband
transport system within a campus-type
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setting or a metropolitan communications network.
New access product offerings in 1996 included the OC-12 Transport
system which provides delivery of very high rate services such as DS3 and
OC3 to end users.
The Company's primary competitors in the access market are Lucent,
Nortel and Fujitsu, Ltd.
TRANSPORT SYSTEMS. Transport equipment includes a vast array of products
that carry signals throughout the telecommunications network. The Company's
transport product portfolio consists of digital cross-connects, high-capacity
fiber optic add/drop and terminal multiplexers, access multiplexers, and network
management systems that route voice, video, and data traffic efficiently through
the network. The Company's products are used by telephone companies, cellular
service providers, and large private or governmental networks to add efficiency,
lower costs, improve network resiliency, and enhance the quality of their
services.
DIGITAL CROSS-CONNECTS. The Company's digital cross-connect family,
comprised of the DEXCS, DEX ECS1 and DEX ECS3 models, has enabled telephone
companies to make their central offices and long distance facilities more
efficient and less labor-intensive.
iDCS (TM) (Integrated Digital Cross-connect System). iDCS addresses
the smaller size transmission requirements for management of voice
and data circuits in the telecommunications network. This product
also meets the
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domestic requirements of SONET and international specifications of
SDH. iDCS provides optical and electrical interfaces to other
telephone company equipment and economically manages the circuit
traffic through the network.
microDX(TM). The microDX offers sophisticated cross-connect features
to sites of varying size and remoteness. For example, with the Company's
microDX, cell sites, wireless hubs, and private networks can inexpensively
incorporate high-end cross-connect features. microDX supports
small-capacity applications that require DSO-level add/drop multiplexing,
as well as RF fingerprinting fraud control interconnect, Cellular Digital
Packet Data, and Rural Service Area cellular hubbing.
iMTN(R) (Integrated Multi-Rate Transport Node). iMTN provides
routing, distribution, and management throughout the network. The
iMTN provides for the public telecommunications network's evolution
to transmission equipment which meets the North American SONET and
international Synchronous Digital Hierarchy ("SDH") fiber optic
standards. Early applications of iMTN include network video
broadcast and high-volume voice/data transfer. The iMTN has been
deployed both domestically and internationally.
LINE TRANSMISSION. The Company's line transmission equipment, which
was acquired as part of the acquisition of DSC Communications A/S at the
end of 1994, includes the FOCUS 2 to 140 and 2 to 150 multiplexers and line
terminals for access networks, and the FOCUS 620 to 2500 terminal
multiplexers and regenerators for high-capacity trunk transmission systems.
These products incorporate plesiochronous digital hierarchy ("PDH")
systems, representing the established embedded base of transmission
technology, and SDH systems, representing new emerging transmission
technology analogous to SONET in the North American market. During the
latter part of 1996, the Company began deliveries of the AC1 add/drop and
terminal SDH multiplexer. Deliveries of AC4, the next of a new generation
of SDH products, should commence in 1997. These products will bring
enhanced features such as add-drop mux and cross-connect capability to
the Company's SDH product line, resulting in a comprehensive and economical
next-generation product offering for the rapidly growing worldwide SDH
transmission market.
The Company also develops, manufactures, and markets a variety of
digital transmission products such as echo cancelers and transcoders, as
well as various customer premises products.
The Company's primary competitors in the digital cross-connect market
are Lucent, Alcatel Network Systems ("Alcatel") and Tellabs, Inc. The
primary competitors in the line transmission equipment market are Alcatel,
Ericsson and Siemens AG.
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REGULATION
The telecommunications industry is subject to regulation in the United
States and other countries. Federal and state regulatory agencies, including
the Federal Communications Commission ("FCC") and the various state Public
Utility Commissions ("PUCs") and Public Service Commissions, regulate most of
the Company's domestic customers. In addition, the RHCs are restricted by the
terms of the Modified Final Judgment which resulted from the court-ordered
divestiture of the RHCs by AT&T Corporation, which prohibited the RHCs from
manufacturing telecommunications equipment and providing interexchange or
long-distance services. In early 1996, the Telecommunications Act of 1996 (the
"1996 Legislation") was passed. The 1996 Legislation contains provisions that
permit the RHCs, subject to satisfying certain conditions, to manufacture
telecommunications equipment. One or more RHCs may decide to manufacture
telecommunications equipment, to design and provide telecommunications software,
or to form alliances with other manufacturers. Any of these developments could
result in increased competition for the Company and reduce the RHCs' purchases
from the Company. The 1996 Legislation also permits local exchange telephone
companies, long-distance carriers, cable television companies and electric
utility companies to compete with each other to provide local and long-distance
telephone and video services. The Company believes that the 1996 Legislation
should increase the demand for systems, software and services as network
operators respond to the changing competitive environment by constructing new or
enhancing existing networks.
In addition, the FCC and a majority of the states have enacted or are
considering regulations based upon alternative pricing methods. Under
traditional rate of return pricing, telecommunications service providers
were limited to a stated percentage profit on their investment. Under the
new method of pricing, many PUCs have entered into agreements with the
local exchange carriers where the PUCs have relaxed or eliminated the
profit cap in return for the carrier's promise to reduce or hold service
prices at current levels. In some states, the PUCs and the carriers have
further agreed, in order to win relaxation of profit limits, that the
carriers would invest large sums to further upgrade the digital and
optical capabilities of the network. The Company believes that the new
methods of price
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regulation could increase the demand for its products which enhance the
efficiency of the network or allow the expedited introduction of new
revenue-producing services.
Outside the United States, telecommunications networks are primarily
owned by the government or are strictly regulated by the government.
Although potential growth rates of some international markets are higher
than those of the United States, access to such markets is often difficult
due to the established relationship between the government-owned or
- -controlled telecommunications operating company and its traditional
indigenous suppliers of telecommunications equipment. However, there has
been a global trend towards privatization and deregulation of the
state-owned telecommunications operations. This trend has found favor in
the industrialized world, the emerging markets of the newly-industrialized
countries, and various developing market countries which want to both
capitalize on the value of the existing network and promote the
development of the telecommunications network as an integral part of the
economic infrastructure. The Company believes that the current trend of
privatization and deregulation will continue, and that such trend could
provide the Company with additional international opportunities.
MARKETING
The Company sells products and services on a domestic and
international basis to both the public and private network markets through
various sales and distribution channels. The Company's internal sales
group is a direct sales force, divided into market business segments. The
Company also sells through third-party distributors such as original
equipment manufacturers ("OEMs"), sales representatives and certain
distributors in foreign countries.
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INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
The information required for this section is set forth in the
"International Operations and Major Customers" footnote on page 38 of the
Company's 1996 Annual Report to Shareholders, which information is
incorporated herein by reference. Customers which accounted for at least 10%
of the Company's consolidated revenue in 1996 included Motorola, MCI, and
Ameritech.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price
of orders received from customers less revenue recognized, was
approximately $811 million and $688 million on December 31, 1996 and
December 31, 1995, respectively. Approximately $189 million of orders
included in the December 31, 1996 backlog are scheduled for delivery after
December 31, 1997. However, all orders are subject to possible
rescheduling by customers. While the Company believes that the orders
included in the backlog are firm, some orders may be canceled by the
customer without penalty, and the Company may elect to permit cancellation
of orders without penalty where management believes that it is in the
Company's best interest to do so.
RESEARCH AND PRODUCT DEVELOPMENT
The industry in which the Company operates is characterized by
rapidly-changing technological and market conditions which may shorten
product life cycles. The Company's future competitive position will
depend not only upon successful production and sales of its existing
products, but also upon its ability to develop and produce, on a timely
basis, new products to meet existing and anticipated industry demands.
The Company is currently engaged in the development of several new
products and enhancements to existing products. During the product
development process, the Company invests a substantial amount of resources
in products which often require extensive field testing and evaluation
prior to actual sales to its customers.
The Company's research and product development costs charged to
expense were $210.1 million, $189.8 million, and $127.3
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million for the years ended December 31, 1996, 1995, and 1994,
respectively. Additionally, approximately $37.0 million, $26.8 million,
and $24.6 million of software development costs were capitalized in the
Consolidated Balance Sheets in 1996, 1995, and 1994, respectively.
COMPETITION
The portions of the telecommunications industry in which the Company
competes are intensely competitive and are characterized by continual
advances in technology. The Company believes that it enjoys a strong
competitive position due to its large installed base, its strong
relationship with key customers, and its technological leadership and new
product development capabilities. However, many of the Company's foreign
and domestic competitors (which are listed in the PRODUCTS section) have
more extensive engineering, manufacturing, marketing, financial and
personnel resources than those of the Company. The Company's ability to
compete is dependent upon several factors, including product features,
innovation, quality, reliability, service support, price and the retention
and attraction of qualified design and development personnel.
MANUFACTURING AND SUPPLIERS
The Company generally uses standard parts and components for its
products, and believes that, in most cases, there are a number of
alternative, qualified vendors for most of those parts and components.
The Company purchases certain custom components and products from single
suppliers. The Company believes that the manufacturers of the particular
custom components and products should be able to meet expected future
demands. Although the Company has not experienced any material adverse
effects from the inability to obtain timely delivery of needed components,
an unanticipated failure of any significant supplier to meet the Company's
requirements for an extended period, or an interruption of the Company's
ability to secure comparable components could have an adverse effect on
the Company's revenue and profitability. In addition, the Company's
products contain a number of subsystems or components acquired from other
manufacturers on an OEM basis. These OEM products are often available
only from a limited number of manufacturers. In the event that an OEM
product was no longer available from a current
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OEM vendor, second sourcing would be required and could delay customer
deliveries which could have an adverse effect on the Company's revenue and
profitability.
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION
The Company has been awarded patents and has patent applications
pending in the United States and certain foreign countries. There can be
no assurance that any of these applications will result in the award of a
patent, or that the Company would be successful in defending its patent
rights in any subsequent infringement actions. Because of the existence
of a large number of third-party patents in the telecommunications field
and the rapid rate of issuance of new patents, some of the Company's
products, or the use thereof, could infringe third-party patents. If any
such infringement exists, the Company believes that, based upon historical
industry practice, it or its customers should be able to obtain any
necessary licenses or rights under such patents upon terms which would not
be materially adverse to the Company.
In addition to the patent protection described above, the Company
protects its software through contractual arrangements with its customers
and through copyright protection procedures.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing operations are subject to numerous
federal, state and local laws and regulations designed to protect the
environment. Compliance with these laws and regulations has not had, and
is not expected to have, a material effect upon the capital expenditures,
earnings, or the competitive position of the Company.
EMPLOYEES
As of December 31, 1996, the Company had a total of 6,367 employees.
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ITEM 2. PROPERTIES
The Company's principal facilities are in the following locations:
<TABLE>
<CAPTION>
Approximate Square
Footage
----------------------
Location Owned Leased Description
- ----------------------- ---------- ---------- ------------------------------
<S> <C> <C> <C>
Plano, Texas 1,295,000 497,000 Corporate offices;
administration; engineering,
research and development;
manufacturing and assembly;
customer service and support;
and warehousing.
Copenhagen, Denmark 223,000 38,000 Administration; engineering,
research and development;
manufacturing and assembly;
and warehousing.
Aguadilla, Puerto Rico -- 164,000 Manufacturing and assembly.
Petaluma, California -- 131,000 Engineering, research and
development; and assembly.
Feltham and Ashford, -- 87,000 Engineering, research and
England development; customer sales
and service; and warehousing.
San Jose, Costa Rica -- 59,000 Manufacturing and assembly.
Drogheda, Ireland -- 122,000 Manufacturing and assembly;
engineering, research and
development; and warehousing.
</TABLE>
The Company owns approximately 281 acres of land in Plano, Texas and
approximately 28 acres of land in Copenhagen, Denmark,
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of which 99 acres have been developed for existing facilities and the
balance is undeveloped. The undeveloped land is expected to be used for
future Company expansion. The Company also has additional leased
facilities, which are primarily sales offices, located in various cities
throughout the world. The Company believes that the above-described
facilities are suitable and adequate to meet the Company's production
requirements.
ITEM 3. LEGAL PROCEEDINGS
On February 14, 1996, the Company joined Bell Atlantic in bringing an
antitrust action against AT&T Corporation ("AT&T") and Lucent alleging the use
of monopoly power in the central office switch market as part of a scheme to
gain an unfair competitive advantage in the remote digital terminal market. In
July 1996, Lucent brought a counterclaim against the Company alleging a "false
advertising" claim under the Lanham Act. On February 18, 1997, the Company and
Bell Atlantic settled their claims against AT&T. The Company, Bell Atlantic and
Lucent settled all claims against each other on March 13, 1997. In conjunction
with these settlements, Bell Atlantic agreed to purchase a significant amount of
product from the Company over a five year period beginning in 1998. The
agreement requires a minimum annual purchase level substantially above the
amount purchased by Bell Atlantic from the Company in 1996 which totaled
approximately $120 million.
On June 11, 1996, a federal court entered a $137.7 million judgment in the
Company's favor and against Next Level Corporation ("Next Level") and two former
Company employees. The Company had filed suit in 1995 alleging theft of trade
secrets and diversion of corporate opportunities. On February 28, 1997, the
Fifth Circuit of Appeals upheld the judgment. Both Next Level and the Company
are appealing to an En Banc panel of judges in the Fifth Circuit. The defendants
are enjoined from disclosing the Company's trade secrets until the judgment is
satisfied.
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
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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 is seeking 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 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 and postponed
entering a judgment pending the outcome of additional mediation.
The Company is also party to other routine legal proceedings
incidental to its business.
Page 16
<PAGE> 18
The Company does not believe the ultimate resolution of the above
litigation will have a material adverse effect on its consolidated
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers are elected annually and serve at the pleasure of
the Board of Directors. No family relationships exist among the executive
officers of the Company. As of March 3, 1997, the executive officers of
the Company are as follows:
NAME AGE PRESENT POSITION(S) WITH COMPANY
---- --- --------------------------------
Allen R. Adams 47 Senior Vice President
Wylie D. Basham 58 Group Vice President
John W. Bischoff 48 Vice President
James L. Donald 65 Chairman of the Board,
President, and Chief Executive
Officer
David L. Hinshaw 55 Group Vice President
Douglas K. Jacobs 53 Vice President
Gerald F. Montry 58 Senior Vice President, Chief
Financial Officer, and Director
Michael J. Myers 50 Group Vice President
George M. Simpson 42 Vice President
Philip A. Wilkinson 49 Senior Vice President
Page 17
<PAGE> 19
Allen R. Adams joined the Company in 1979, as Director of Hardware
and Systems Development. Since 1979, Mr. Adams has held a variety of
project and design engineering positions. In May 1996 he was appointed
Senior Vice President, Corporate Strategic Planning and Business
Development. In February 1997, Mr. Adams was named Senior Vice President,
iMTN Systems/Corporate Strategic Planning and Business Development.
Mr. Adams assumed the added responsibility for the Company's iMTN
operations, overseeing the design and development of the iMTN
transmission system.
Wylie D. Basham joined the Company in February 1983 as Vice President,
Quality and Reliability Assurance. In March 1993 he was appointed Vice
President, Subassembly Operations, and in June of that year given the
added responsibility for the Access Product Division. In August 1996, Mr.
Basham was named Group Vice President, Switch Systems, with responsibility
for the Company's switch, intelligent networking and ATM product activity.
John W. Bischoff joined the Company in August 1989 as Vice President,
Quality and Reliability Assurance. Mr. Bischoff has responsibility for
overseeing the Company's total corporate quality program, including the quality
and reliability of software and hardware.
James L. Donald became President and a Director of the Company in
March 1981. He was elected Chief Executive Officer in August 1981. Mr.
Donald was elected Chairman of the Company's Board of Directors in 1989.
David L. Hinshaw joined the Company in May 1995 as Vice President,
Switch Products. Mr. Hinshaw was appointed Vice President, Transport and
Access Systems Group in October 1996, and currently serves as Group Vice
President, Access Systems. Mr. Hinshaw has the responsibility for the
development and marketing of the Company's access product line.
Douglas K. Jacobs joined the Company in July 1990 as Vice President,
RHC sales, with responsibility for managing the RHC sales force. Mr.
Jacobs was appointed Vice president, Switch Products Domestic Marketing in
October 1991 and in January 1995 assumed the added responsibility of
switch products international marketing. Previously Mr. Jacobs served as
Executive Vice President and Chief Operating Officer for DSC
Communications A/S,
Page 18
<PAGE> 20
the Company's optical transmission business. In January 1997, Mr. Jacobs
was appointed Vice President, North American Sales and Global Customer
Services.
Gerald F. Montry joined the Company in 1986 as Senior Vice President
and Chief Financial Officer. In 1989, Mr. Montry was elected to the
Company's Board of Directors.
Michael J. Myers joined the Company in January 1989 as Vice President,
Finance for the International Division. He served as Vice President, Finance
for the Switch Systems Group from November 1991 until February 1997 when he
was appointed Group Vice President, Transport Systems. Mr. Myers has the
responsibility for the development and marketing of the Company's transport
products.
George M. Simpson joined the Company in December 1982. He has served
in several management positions for the Company including a five-year
assignment as general manager of the Company's operations in Puerto Rico.
In January 1997, Mr. Simpson was appointed Vice President, Operations with
responsibility for the development and execution of the Company's global
manufacturing strategy in support of customer requirements and the
Company's global business objectives.
Philip A. Wilkinson joined the Company in 1995 as Senior Vice
President to lead the Transport Systems Group. In February 1997, Mr.
Wilkinson was appointed Senior Vice President, International Sales/Network
Management Systems. In addition to being responsible for all
international sales activities, Mr. Wilkinson oversees the network
management systems.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock prices are listed daily in The Wall Street
Journal and other publications under the NASDAQ National Market of the
over-the-counter listing with the abbreviation "DSC Commun" or "DSC". The
stock is traded in the NASDAQ National Market with the ticker symbol
"DIGI".
Page 19
<PAGE> 21
The following were the high and low closing prices of the Company's
stock per the NASDAQ National Market:
<TABLE>
<CAPTION>
1996: High Low
---- ---- ---
<S> <C> <C>
4th Quarter $23 1/8 $12 7/8
3rd Quarter 32 3/4 25 1/8
2nd Quarter 35 1/4 24 3/8
1st Quarter 37 1/8 22 7/8
1995: High Low
---- ---- ---
<S> <C> <C>
4th Quarter $58 3/4 $31
3rd Quarter 63 45 5/8
2nd Quarter 46 1/2 31 3/4
1st Quarter 39 31 5/8
</TABLE>
The Company has not paid or declared any cash dividends on the common
stock since its organization. The closing price of the Company's common
stock on March 3, 1997, was $20 5/8 per share. As of December 31, 1996,
there were 5,242 shareholders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth on page 19 of the
Company's 1996 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is set forth in the text on
pages 20 through 23 of the Company's 1996 Annual Report to Shareholders,
which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages 24
through 40 of the Company's 1996 Annual Report to Shareholders, which
information is incorporated herein by reference.
Page 20
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors
and nominees for election to the Board of Directors of the Company is
incorporated by reference from the information set forth on page 1 of the
definitive proxy statement of the Company, filed in connection with
its 1997 Annual Meeting of Stockholders on page 1 under the heading "ELECTION
OF DIRECTORS", and on page 18 of such definitive proxy material under the
heading "DIRECTORS CONTINUING IN OFFICE". The information regarding executive
officers of the Company is contained in Part I of this Annual Report on Form
10-K. The information required by this item regarding compliance with Section
16(a) of the Exchange Act is incorporated by reference from the information set
forth under the heading "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE" on page 20 of the definitive proxy statement of the Company,
filed in connection with its 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the information set forth under the headings "EXECUTIVE COMPENSATION"
on pages 10 through 17, and "Compensation of Directors" and "Non-Employee
Directors Stock Option Plan" on page 19 of the definitive proxy statement
of the Company, filed in connection with its 1997 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference
from the information set forth under the heading
Page 21
<PAGE> 23
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on page
20 of the definitive proxy statement of the Company, filed in connection with
the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the information set forth under the headings "Compensation of
Directors" on page 19 of the definitive proxy statement of the Company,
filed in connection with the 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) The following is a list of the consolidated financial statements and
the financial statement schedule which are included in this Form 10-K
or which are incorporated herein by reference.
1. Financial Statements:
As of December 31, 1996 and 1995: Consolidated Balance Sheets
For the Years Ended December 31, 1996, 1995, and 1994:
- Consolidated Statements of Operations
- Consolidated Statements of Cash Flows
- Consolidated Statements of Changes
in Shareholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedule:
For the Years Ended December 31, 1996, 1995, and 1994:
Page 22
<PAGE> 24
- Schedule II - Valuation and Qualifying Accounts
All other financial statements and financial statement schedules have been
omitted because they are not applicable, or the required information is
included in the consolidated financial statements or notes thereto.
3. Exhibits:
3.1 Certificate of Amendment of
Certificate of Incorporation of the Company dated
April 27, 1994 (9)
3.2 Certificate of Correction of
Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated June 8, 1995
(9)
3.3 Certificate of Amendment of
Restated Certificate of Incorporation of the
Company dated June 8, 1995 (9)
3.4 Amended and Restated By-laws of
the Company (15)
4.3 Rights Agreement, Dated as of
April 25, 1996, Between the Company and KeyCorp
Shareholder Services, Inc., as Rights Agent (12)
4.4 Form of Letter to the Company's
Stockholders, Dated May 8, 1996, Relating
Page 23
<PAGE> 25
to the Adoption of the Rights Agreement
Described in Exhibit 4.3 (12)
10.1 Employment Agreement Between the Company and James L.
Donald, Dated January 1, 1990 (4)
10.2 Executive Income Continuation Plan, Dated January 1, 1990,
Between the Company and James L. Donald (4)
10.3 Insurance Ownership Agreement, Dated January 1, 1990,
Between the Company and James L. Donald (4)
10.4 Management Consulting Agreement Among the Company, Nolan
Consulting, Inc., and James M. Nolan, Dated March 15,
1982 (1)
10.5 The Company's Amended and Restated 1984 Employee Stock
Option Plan (3)
10.6 The Company's Amended and Restated 1988 Employee Stock
Option Plan (3)
10.7 The Company's 1993 Employee Stock Option and Securities
Award Plan (5)
10.8 The Company's 1993 Non-Employee Directors Stock Option
Plan (5)
10.9 Form of Amended and Restated Severance Compensation
Agreement Between the Company and Certain of its
Officers (7)
10.10 Schedule to Form of Amended and Restated Severance
Compensation Agreement Between the Company and Certain of
its Officers (10)
Page 24
<PAGE> 26
10.11 The Company's Restoration Plan, Dated July 1, 1988 (2)
10.12 Form of Indemnification Agreement Between the Company and
its Directors and Senior Officers as Approved by the Board
of Directors and Entered Into on or After January 22,
1990, and the Related Trust Agreement, Dated March 1,
1990, Between the Company and Texas Commerce Bank, N.A.,
as Trustee (3)
10.13 The 1990 Optilink Stock Option and Cash Payment Plan,
Dated May 15, 1990 (4)
10.14 The Company's 1994 Long-Term Incentive Compensation Plan,
Effective as of January 1, 1994 (6)
10.15 DSC Communications Corporation Executive Deferred Income
Plan (7)
10.16 Note Purchase Agreement Between the Company and Certain
Financial Institutions, dated April 15, 1995 (8)
10.17 Consulting Agreement Between the Company and Clement M.
Brown, Jr., Dated January 23, 1986 (10)
Page 25
<PAGE> 27
10.18 Consulting Agreement Between the Company and Sir John
Fairclough, Dated December 31, 1992 (10)
10.19 Consulting Agreement Between the Company and Frank J.
Cummiskey, Dated May 1, 1993 (10)
10.20 Multicurrency Credit Agreement, Dated as of May 8, 1996,
Among the Company and Certain of its Subsidiaries and
Certain Lenders Providing for Unsecured Revolving Credit
(11)
10.21 Promissory Note for 250 Million Danish Kroner dated July
23, 1996 to Den Danske Bank (13)
10.22 Line Letter for 250 Million Danish Kroner dated July 23,
1996 issued by Den Danske Bank (13)
10.23 Promissory Note for 300 Million Danish Kroner dated July
23, 1996 to Den Danske Bank (13)
10.24 Line Letter for 300 Million Danish Kroner dated July 23,
1996 issued by Den Danske Bank (13)
10.25 Guaranty dated July 23, 1996 (13)
10.26 Subordination Agreement dated July 23, 1996 (13)
10.27 First Amendment (Effective September 27, 1996) to the 250
Million Danish Kroner and the 300 Million Danish Kroner
Promissory Notes to Den Danske Bank, Guaranty and
Subordination Agreement dated July 23, 1996 (14)
10.28 First Amendment (Effective September 27, 1996) to
Multicurrency Credit Agreement Dated May 8, 1996 (14)
10.29 Form of Severance Compensation Agreement Between the
Company and Certain of its Officers (15)
10.30 Schedule to Form of Severance Compensation Agreement
Between the Company and Certain of its Officers (15)
11.1 Statement re: Computation of Per Share Earnings (15)
13.1 1996 Annual Report to Shareholders (for EDGAR filing
purposes only)
21.1 Subsidiaries of the Registrant (15)
23.1 Consent of Ernst & Young LLP (15)
27.1 Financial Data Schedule (for EDGAR filing purposes only)
MANAGEMENT CONTRACTS OR COMPENSATORY PLANS AND ARRANGEMENTS
The following above-described exhibits are management contracts or
compensatory plans and arrangements: 10.1 Employment Agreement Between
the Company and James L. Donald, Dated January 1, 1990; 10.2 Executive
Income Continuation Plan, Dated January 1, 1990, Between the Company and
James L. Donald; 10.3 Insurance Ownership Agreement, Dated January 1,
1990, Between the Company and James L. Donald; 10.4 Management Consulting
Agreement Among the Company, Nolan Consulting, Inc., and James M. Nolan,
Dated March 15, 1982; 10.5 The Company's Amended and Restated 1984
Employee Stock Option Plan; 10.6 The Company's Amended and Restated 1988
Employee Stock Option Plan; 10.7 The Company's 1993 Employee Stock Option
and Securities Award Plan; 10.8 The Company's 1993 Non-Employee Directors
Stock Option Plan; 10.9 Form of Amended and Restated Severance
Compensation Agreement Between the Company and Certain of its
Page 26
<PAGE> 28
Officers; 10.10 Schedule to Form of Amended and Restated Severance Compensation
Agreement Between the Company and Certain of its Officers; 10.11 The Company's
Restoration Plan, Dated July 1, 1988; 10.12 Form of Indemnification Agreement
Between the Company and its Directors and Senior Officers as Approved by the
Board of Directors and Entered Into on or After January 22, 1990, and the
Related Trust Agreement, Dated March 1, 1990, Between the Company and Texas
Commerce Bank, N.A., as Trustee; 10.14 The Company's 1994 Long-Term Incentive
Compensation Plan, Effective as of January 1, 1994; 10.15 DSC Communications
Corporation Executive Deferred Income Plan; 10.17 Consulting Agreement Between
the Company and Clement M. Brown, Jr., Dated January 23, 1986; 10.18 Consulting
Agreement Between the Company and Sir John Fairclough, Dated December 31, 1992;
10.19 Consulting Agreement Between the Company and Frank J. Cummiskey, Dated May
1, 1993; 10.29 Form of Severance Compensation Agreement Between the Company and
Certain of its Officers; 10.30 Schedule to Form of Severance Compensation
Agreement Between the Company and Certain of its Officers.
(b) Reports on Form 8-K:
None
- -----------------------------------------------------------------
(1) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1981
(2) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1988
Page 27
<PAGE> 29
(3) Incorporated by reference from the definitive proxy
statement of the Company, filed in connection with the 1990
Annual Meeting of Stockholders
(4) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1990
(5) Incorporated by reference from the definitive proxy
statement of the Company, filed in connection with the 1993
Annual Meeting of Stockholders
(6) Incorporated by reference from the definitive proxy
statement of the Company, filed in connection with the 1994
Annual Meeting of Stockholders
(7) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1994
(8) Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995
Page 28
<PAGE> 30
(9) Incorporated by reference from the Company's Registration
Statement on Form S-8, File No. 33-61423, filed with the
Securities and Exchange Commission on July 31, 1995
(10) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995
(11) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996
(12) Incorporated by reference from the Company's Registration Statement on
Form 8-A, filed with the Securities and Exchange Commission on May 9,
1996
(13) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996
(14) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996
(15) Filed herewith
Page 29
<PAGE> 31
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. With the exception of historical information, the
matters discussed or incorporated by reference in this Annual Report on
Form 10-K are forward-looking statements that involve risks and
uncertainties including, but not limited to, economic conditions, product
demand and industry capacity, competitive products and pricing,
manufacturing efficiencies, new product development, ability to enforce
patents, availability of raw materials and critical manufacturing
equipment, new plant startups, the regulatory and trade environment, and
other risks indicated in filings with the Securities and Exchange
Commission.
Page 30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DSC COMMUNICATIONS CORPORATION
(Registrant)
/s/ JAMES L. DONALD
--------------------------------------
James L. Donald,
Chairman of the Board, President,
Chief Executive Officer, and
Director
March 31, 1997
<PAGE> 33
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title Date
------------------- ----
<S> <C>
/s/ JAMES L. DONALD March 31, 1997
- -------------------------------
James L. Donald, Chairman
of the Board, President, Chief
Executive Officer, and Director
(Principal Executive Officer)
/s/ FRANK J. CUMMISKEY March 31, 1997
- -------------------------------
Frank J. Cummiskey
Director
/s/ SIR JOHN FAIRCLOUGH March 31, 1997
- -------------------------------
Sir John Fairclough
Director
/s/ RAYMOND J. DEMPSEY March 31, 1997
- -------------------------------
Raymond J. Dempsey
Director
/s/ JAMES L. FISCHER March 31, 1997
- -------------------------------
James L. Fischer
Director
/s/ ROBERT S. FOLSOM March 31, 1997
- -------------------------------
Robert S. Folsom
Director
/s/ GERALD F. MONTRY March 31, 1997
- -------------------------------
Gerald F. Montry, Senior Vice
President, Chief Financial
Officer, and Director
(Principal Financial Officer)
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
Signature and Title Date
------------------- ----
<S> <C>
/s/ MORTON L. TOPFER March 31, 1997
- -------------------------------
Morton L. Topfer
Director
/s/ KENNETH R. VINES March 31, 1997
- -------------------------------
Kenneth R. Vines
Vice President, Finance
(Principal Accounting Officer)
</TABLE>
<PAGE> 35
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged Deductions Balance at
Beginning Charged to to Other from End of
Receivables of Period Income Accounts Reserves Period
----------- --------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996 $ 6,904 $ 1,381 $ 660 (1) $ 1,883 (2) $ 7,062
Year Ended December 31, 1995 4,012 1,233 4,077 (1) 2,418 (2) 6,904
Year Ended December 31, 1994 3,609 1,222 1,275 (1) 2,094 (2) 4,012
</TABLE>
(1) Both 1995 and 1994 amounts include amounts related to the acquisition of
DSC Communications A/S. Additionally, the 1996 and 1994 amounts include a
transfer from a customer related reserve, which was included in "Accrued
Liabilities", to "Allowance for Doubtful Accounts".
(2) Includes accounts written off, net of collections.
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.4 Amended and Restated Bylaws of the Company
10.29 Form of Severance Compensation Agreement
10.30 Schedule to Form of Severance Compensation Agreement
11.1 Statement re: Computation of Per Share Earnings
13.1 1996 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
DSC COMMUNICATIONS CORPORATION
(AS AMENDED AS OF OCTOBER 28, 1996)
<PAGE> 2
AMENDED AND RESTATED BYLAWS
OF
DSC COMMUNICATIONS CORPORATION
A DELAWARE CORPORATION
PREAMBLE
These Bylaws are subject to, and governed by, the Delaware General
Corporation Law and the Certificate of Incorporation of DSC Communications
Corporation (the "Corporation"). In the event of a direct conflict between the
provisions of these Bylaws and the mandatory provisions of the Delaware General
Corporation Law or the provisions of the Certificate of Incorporation of the
Corporation, such provisions of the Delaware General Corporation Law or the
Certificate of Incorporation, as the case may be, will be controlling.
ARTICLE ONE: OFFICES
1.01 Registered Office and Agent. The registered office and
registered agent of the Corporation shall be as designated from time to time by
the appropriate filing by the Corporation in the office of the Secretary of
State of the State of Delaware.
1.02 Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE TWO: MEETINGS OF STOCKHOLDERS
2.01 Annual Meeting. An annual meeting of stockholders of the
Corporation shall be held each calendar year on such date and at such time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. At such meeting and subject to the provisions in
these Bylaws, the stockholders shall elect directors and transact such other
business as may properly be brought before the meeting.
2.02 Special Meeting. Special meetings of stockholders of
the Corporation for any purpose or purposes may be called only by (i) the Board
of Directors pursuant to a resolution stating the purpose or purposes thereof
approved by a majority of the total number of Directors which the Corporation
would have if there were no vacancies (the "Whole Board"), or (ii) by the
Chairman of the Board of Directors of the Corporation. Only such business
shall be transacted at a special meeting as may be stated or indicated in the
notice of such meeting.
2.03 Place of Meetings. The Board of Directors or the Chairman
of the Board, as the case may be, may designate the place of meeting for any
annual meeting or for any special meeting of the
<PAGE> 3
stockholders. If no designation is so made, the place of meeting shall be the
principal office of the Corporation.
2.04 Notice. Written or printed notice stating the place, date,
and hour of each meeting of the stockholders and, in the case of a special
meeting, the purposes or purposes for which the meeting is called, shall be
given not less than ten or more than sixty (60) days before the date of the
meeting, either personally or by mail, by the Corporation. Any previously
scheduled meeting of the stockholders may be postponed, and any special meeting
of the stockholders may be canceled, by resolution of the Board of Directors
upon public notice given prior to the date previously scheduled for such
meeting of stockholders.
2.05 Voting List. At least ten (10) days before each meeting of
stockholders, the Secretary shall prepare or cause to be prepared a complete
list of shareholders entitled to vote thereat, arranged in alphabetical order,
with the address of, and number of voting shares held by each. For a period of
ten (10) days prior to such meeting, such list shall be kept on file at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of meeting, or, if not so specified, at the place where the
meeting is to be held and shall be subject to inspection by any stockholder
during ordinary business hours. Such list shall be produced at such meeting
and kept at the meeting at all times during such meeting, and shall be subject
to inspection by any stockholder who is present.
2.06 Quorum. The holders of a majority of the outstanding
shares entitled to vote, present in person or by proxy at any meeting of
stockholders, shall constitute a quorum at such meeting, except as otherwise
provided by law, the Certificate of Incorporation, or these Bylaws. If a
quorum shall not be present or represented at any meeting of stockholders, the
stockholders entitled to vote thereat who are present, in person or by proxy,
or, if no stockholder entitled to vote is present, any officer of the
Corporation may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. In addition, The Chairman of the meeting may adjourn the
meeting from time to time, whether or not there is such a quorum. At any
adjourned meeting at which a quorum shall be present, in person or by proxy,
any business may be transacted which may have been transacted at the original
meeting had a quorum been present; provided that if the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the adjourned meeting.
2.07 Majority Vote; Withdrawal of a Quorum. When a quorum is
present at any meeting, the vote of the holders of a majority of the
outstanding shares entitled to vote who are present, in person or by proxy,
shall decide any question brought before such meeting, unless the question is
one on which by express provision of statute, the Certificate of Incorporation,
or these Bylaws, a different vote is required, in which case such express
provision shall govern and control the decision of such question. The
stockholders present at a duly constituted meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
2
<PAGE> 4
2.08 Method of Voting; Proxies. Except as otherwise provided in
the Certificate of Incorporation or by law, each outstanding share, regardless
of class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of stockholders. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware (the "DGCL")) by the stockholder, or
by such person's duly authorized attorney in fact.
2.09 Fixing Record Date; Procedure for Consents.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action other than stockholder action by written consent, the
Board of Directors may fix a record date, which shall not precede the date such
record date is fixed and shall not be more than sixty (60) days nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any such other action. If no record date is fixed, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given. The record date for any other purpose other than
stockholder action by written consent shall be at the close of business on the
day on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board
of Directors, and which date shall not be more than ten (10) days after the
date upon which the resolution fixing the record date is adopted by the Board
of Directors. Any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent shall, by written notice
to the Secretary, request the Board of Directors to fix a record date. The
Board of Directors shall promptly, but in all events within ten (10) days after
the date on which such a request is received, adopt a resolution fixing the
record date. If no record date has been fixed by the Board of Directors within
ten (10) days of the date on which such a request is received, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required
by applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of stockholders meetings are recorded,
to the attention of the Secretary of the Corporation. Delivery shall be by
hand or by certified or registered mail, return receipt requested. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by applicable law, the record date for
determining stockholders entitled to consent to corporate action
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in writing without a meeting shall be at the close of business on the date on
which the Board of Directors adopts the resolution taking such prior action.
(c) In the event of the delivery to the Corporation of a written
consent or consents purporting to authorize or take corporate action and/or
related revocations (each such written consent and any revocation thereof is
referred to in this Section 2.09(c) as a "Consent"), the Secretary of the
Corporation shall provide for the safekeeping of such Consents and shall as
soon as practicable thereafter conduct such reasonable investigation as he or
she deems necessary or appropriate for the purpose of ascertaining the validity
of such Consents and all matters incident thereto, including, without
limitation, whether the holders of shares having the requisite voting power to
authorize or take the action specified in the Consents have given consent;
provided, however, that if the corporate action to which the Consents relate is
the removal or election of one or more members of the Board of Directors, the
Secretary of the Corporation shall designate an independent, qualified
inspector with respect to such Consents and such inspector shall discharge the
functions of the Secretary of the Corporation under this Section 2.09(c). If
after such investigation the Secretary or the inspector (as the case may be)
shall determine that any action purportedly taken by such Consents has been
validly taken, that fact shall be certified on the records of the Corporation
kept for the purpose of recording the proceedings of meetings of the
stockholders and the Consents shall be filed with such records. In conducting
the investigation required by this Section 2.09(c), the Secretary or the
inspector may, at the expense of the Corporation, retain to assist them special
legal counsel and any other necessary or appropriate professional advisors, and
such other personnel as they may deem necessary or appropriate.
2.10 Conduct of Meeting. The date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced at the meeting by the person presiding over the
meeting. The Board of Directors of the Corporation may adopt by resolution such
rules and regulations for the conduct of the meeting of stockholders as it
shall deem appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the Board of Directors, the chairman of any meeting
of stockholders shall have the rights and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
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2.11 Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of
stockholders (a) pursuant to the Corporation's notice of meeting
delivered pursuant to Section 2.04 of these Bylaws, (b) by or at the
direction of the Chairman or the Board of Directors or (c) by any
stockholder of the Corporation who is entitled to vote at the meeting,
who complied with the notice procedures set forth in clauses (2) and
(3) of this paragraph (A) and this Section 2.11 and who was a
stockholder of record at the time such notice is delivered to the
Secretary of the Corporation.
(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause
(c) of paragraph (A)(1) of this Section 2.11, the stockholder must
have given timely notice thereof in writing to the Secretary of the
Corporation and such other business must otherwise be a proper matter
for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not less than seventy (70) days nor more than ninety (90)
days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than twenty (20) days, or delayed
by more than seventy (70) days, from such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the
close of business on the later of the seventieth day prior to such
annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors in
an election contest, or is otherwise required, in each case pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder, including
such persons's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected; (b) as to any
other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder
and the beneficial owner, if any, on whose behalf the nomination or
proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owners, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder, as they
appear on the Corporation's books, and of such beneficial owner and
(ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial
owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 2.11 to the contrary, in the event
that the number of directors to be elected to the Board of Directors
of the Corporation is increased and there is no public announcement
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naming all of the nominees for director or specifying the size of the
increased Board of Directors made by the Corporation at least eighty
(80) days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice required by this Section 2.11
shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered
to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the tenth day following the
day on which such public announcement is first made by the
Corporation.
(B) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting pursuant to
Section 2.04 of these Bylaws. Nominations of persons for election to the Board
of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) by any stockholder of
the Corporation who is entitled to vote at the meeting, who complies with the
notice procedures set forth in this Section 2.11 and who is a stockholder of
record at the time such notice is delivered to the Secretary of the
Corporation. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as are specified in the Corporation's
notice of meeting, if the stockholder's notice as required by paragraph (A)(2)
of this Section 2.11 shall be delivered to the Secretary at the principal
executive offices of the Corporation not earlier than the ninetieth day prior
to such special meeting and not later than the close of business on the later
of the seventieth day prior to such special meeting or the tenth day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a stockholder's
notice as described above.
(C) General.
(1) Only persons who are nominated in accordance with the
procedures set forth in this Section 2.11 shall be eligible to serve
as director and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Section 2.11. Except
as otherwise provided by law, the Certificate of Incorporation or
these Bylaws, the chairman of the meeting shall have the power and
duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures
set forth in this Section 2.11 and if any proposed nomination or
business is not in compliance with this Section 2.11, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 2.11, "public
announcement" shall mean disclosure in a press release reported by the
Dow Jones News Service, Associated Press or comparable national news
service or in a document publicly filed by the Corporation with
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the Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this
Section 2.11, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section 2.11.
Nothing in this Section 2.11 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE THREE: DIRECTORS
3.01 Management. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors, and subject to
the restrictions imposed by law, the Certificate of Incorporation, or these
Bylaws, the Board of Directors may exercise all the powers of the Corporation.
3.02 Number; Qualification; Election; Term. The number of
directors which shall constitute the entire Board of Directors shall be not
less than seven nor more than fifteen. Within the limit above specified, the
number of directors shall be determined by resolution adopted by a majority of
the directors holding office at such time; provided, however, that no decrease
in the number of directors constituting the Board of Directors shall shorten
the term of any incumbent director. None of the directors need be a
stockholder of the Corporation or a resident of the State of Delaware. Each
director must have attained the age of majority. In all elections of
directors, the persons receiving a plurality of the votes cast at any such
meeting in such election shall be elected if a quorum is present at such
meeting.
The Board of Directors is divided into three classes, Class I, Class
II, and Class III. Such classes shall be as nearly equal in number of
directors as possible. Each director shall serve for a term ending on the
third annual meeting following the annual meeting at which such director was
elected; provided, that each director shall serve until a successor shall have
been elected and qualified, unless he shall resign, become disqualified,
disabled, or shall otherwise be removed.
At each annual election of directors, the directors chosen to succeed
those whose terms then expire shall be of the same class as the directors they
succeed, unless, by reason of any intervening changes in the authorized number
of directors, the Board shall designate one or more directorships whose term
then expires as directorships of another class in order to more nearly achieve
equality of number of directors among the classes.
Notwithstanding the rule that the three classes of directors shall be
as equal in number of directors as possible, in the event of any change in the
authorized number of directors, each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a member
until the expiration of his current term, or his prior death, resignation or
removal.
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Subject to the rights of holders of any class or series of stock
having a preference over the common stock as to dividends or upon liquidation,
nominations for the election of directors may be made by the Board of Directors
or a committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of directors generally. However, any
stockholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at an annual meeting or
special meeting called for that purpose only if written notice of such
stockholder's intent to make such nomination or nominations has been given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the Corporation not later than thirty (30) days prior to such
meeting. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (e) the consent of each nominee.
3.03 Change in Number. No decrease in the number of directors
constituting the entire Board of Directors shall have the effect of shortening
the term of any incumbent director.
3.04 Vacancies. Newly created directorships resulting from
any increase in the number of Directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause shall be filled by the affirmative vote of a majority of the remaining
Directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any Director elected in accordance
with the preceding sentence shall hold office for the remainder of the full
term of the class of Directors in which the new directorship was created or the
vacancy occurred and until such Director's successor shall have been duly
elected and qualified. No decrease in the number of Directors constituting the
Board of Directors shall shorten the term of any incumbent Director.
3.05 Place of Meeting. The directors may hold their meetings,
except as otherwise provided by law, in such place or places, within or without
the State of Delaware, as the Board of Directors may from time to time
determine or as shall be specified in the notice or waiver of notice of such
meeting.
3.06 First Meeting. Each newly elected Board of Directors may
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as
each Annual Meeting of Stockholders, and no notice of such meeting shall be
necessary.
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3.07 Election of Officers. At the first meeting of the Board of
Directors after each Annual Meeting of Stockholders at which a quorum shall be
present, the Board of Directors shall elect the officers of the Corporation.
3.08 Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as shall be designated from time to time
by resolution of the Board of Directors. Notice of such regular meetings shall
not be required.
3.09 Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, the President, or
by a majority of the Board of Directors then in office.
3.10 Notice. The Secretary shall give notice of each special
meeting to each director. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
3.11 Quorum; Majority Vote. At all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business, but if at any meeting of the Board of
Directors there be less than a quorum present, a majority of those present or
any director solely present may adjourn the meeting from time to time without
further notice if the time and place to which the meeting is adjourned are
announced at the meeting. At any adjourned meeting at which a quorum is
present, any business may be transacted that may have been transacted at the
meeting originally called. The act of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of
Directors, unless the act of a greater number is required by law, the
Certificate of Incorporation of these Bylaws.
3.12 Procedure. At meetings of the Board of Directors, business
shall be transacted in such order as from time to time the Board of Directors
may determine. The Chairman of the Board, if such office has been filled, and,
if not or if the Chairman of the Board is absent or otherwise unable to act, a
chairman selected among the directors present shall preside. The Secretary of
the Corporation shall act as the Secretary of the meetings of the Board of
Directors unless the Board of Directors appoints another person to act as
Secretary of the meeting. The Board of Directors shall keep regular minutes of
its proceedings which shall be placed in the minute book of the Corporation.
3.13 Compensation. The Board of Directors shall have authority to
fix the compensation, including fees and reimbursement of expenses, paid to
directors for attendance at regular or special meetings of the Board of
Directors or for other service to the corporation; provided, that nothing
contained herein shall be construed to preclude any director from serving the
Corporation in any other capacity or receiving compensation therefore.
3.14 Telephone Meetings. Members of the Board of Directors, and
members of any committee of the Board of Directors, may participate in and hold
a meeting of the Board of Directors, or such committee, by means of a
conference telephone or similar communications
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equipment by means of which persons participating in the meeting can hear each
other, and participation in such a meeting pursuant to this Section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
3.15 Action Without a Meeting. Any action required or
permitted to be taken at a meeting of the Board of Directors, or any committee
thereof, may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the directors, or all of the
committee members, as the case may be, and such consent shall have the same
force and effect as a vote of such directors, or committee members, as the case
may be, at a meeting fully called and held and may be stated as such in any
articles or document filed with the Secretary of State of the State of Delaware
or in any certificate delivered to any person.
3.16. Removal. Any Director may be removed from office only for
cause by the affirmative vote of the holders of at least a majority of the
voting power of all voting stock then outstanding, voting together as a single
class.
ARTICLE FOUR: EXECUTIVE AND OTHER COMMITTEES
4.01 Designation. The Board of Directors may, by resolution
passed by a majority of the Whole Board, designate an executive and/or other
committees.
4.02 Number; Qualification; Term. Each committee shall consist of
one or more directors appointed by resolution adopted by a majority of the
entire Board of Directors. The Board of Directors may designate one or more
directors as alternate members of any committee and such alternate members may
replace any absent or disqualified member at any meeting of that committee.
Further, in the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. The number of committee members may be
increased or decreased from time to time by resolution adopted by a majority of
the entire Board of Directors. Each committee member and alternate committee
member shall serve as such until the expiration of his term as a director or
his earlier resignation, unless sooner removed as a committee member, alternate
committee member, or director.
4.03 Authority. Each committee of the Board of Directors shall
have and may exercise only the authority granted to such committee in a
resolution adopted by a majority of the entire Board of Directors; provided
that no such committee shall have the authority of the Board of Directors in
reference to amending the Certificate of Incorporation, adopting an agreement
of merger or consolidation recommending to the stockholders the sale, lease, or
exchange of all or substantially all of the property and assets of the
corporation, recommending to the stockholders a dissolution of the corporation
or a revocation thereof, or amending, altering, or repealing these Bylaws or
adopting new Bylaws for the Corporation.
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4.04 Vacancies. Any vacancy in any committee of the Board of
Directors may be filled by resolution passed by a majority of the Board of
Directors remaining in office.
4.05 Regular Meetings. Regular meetings of any committee of the
Board of Directors may be held without notice at such time and place as shall
be determined from time to time by such committee and communicated to all
members thereof.
4.06 Special Meetings. Special meetings of any committee of the
Board of Directors may be called by the Chairman of that committee or any
member thereof at anytime by giving notice to each member, either personally or
by mail, telephone or telegraph.
4.07 Quorum. A majority of the members of any committee of the
Board of Directors shall be necessary to constitute a quorum for the
transaction of business. Any questions coming before any committee of the
Board of Directors shall be determined by a majority of those present.
4.08 Procedure. Each committee of the Board of Directors shall
keep minutes of its proceedings and report the same to the Board of Directors
at the Board of Directors' next meeting. The minutes of the proceedings of
each such committee shall be placed in the minute book of the corporation.
4.09 Removal. Any member of any committee of the Board of
Directors may be removed by the Board of Directors by the affirmative vote of a
majority of the number of directors fixed in the manner provided in these
Bylaws whenever in the judgment of the Board of Directors the best interest of
the Corporation will be served thereby.
ARTICLE FIVE: NOTICE
5.01 Method. Whenever by law, the Certificate of Incorporation, or
these Bylaws, notice is required to be given to any committee member, director
or stockholder and no provision is made as to how such notice shall be given,
such provision shall not be construed to mean personal notice, but any such
notice may be given (a) in writing, by mail, postage prepaid, addressed to such
member, director, or stockholder at his address as it appears on the books or,
in the case of a stockholder, the stock transfer records of the Corporation; or
(b) by any other method permitted by law (including but not limited to
telegram). Any notice required or permitted to be given by mail shall be
deemed to be delivered and given at the time transmitted with all charges
prepaid and addressed as aforesaid.
5.02 Waiver. Whenever any notice is required to be given to any
committee member, stockholder, or director of the Corporation by law, the
Certificate of Incorporation, or these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or
after the time stated therein shall be equivalent to the giving of such notice.
Attendance of a committee member, stockholder, or director at a meeting shall
constitute a waiver of notice of such meeting, except where such person attends
for the express purpose of objecting, at the beginning of
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the meeting, to the transaction of any business on the ground that the meeting
is not lawfully called or convened.
ARTICLE SIX: OFFICERS
6.01 Number; Titles; Term of Office. The officers of the
Corporation shall be a Chairman of the Board and a Vice Chairman of the Board
(if the Board of Directors shall determine the election of such officers to be
appropriate), a President, one or more Vice Presidents (and, in the case of
each Vice President, with such descriptive title, if any, as the Board of
Directors shall determine), a Secretary, a Treasurer, and such other officers
as the Board of Directors may from time to time elect or appoint. Each officer
shall hold office until his successor shall have been duly elected and shall
have qualified, until his death, or until he shall resign or shall have been
removed in the manner hereinafter provided. Any two or more offices may be
held by the same person. None of the officers need be a stockholder or a
director of the Corporation or a resident of the State of Delaware.
6.02 Removal. Any officer or agent elected or appointed by the
Board of Directors may be removed by the affirmative vote of a majority of the
Whole Board whenever in its judgment the best interest of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an
officer or agent shall not of itself create contract rights.
6.03 Vacancies. Any vacancy occurring in an office of the
Corporation (by death, resignation, removal, or otherwise) may be filled by the
Board of Directors.
6.04 Authority. Officers shall have such authority and perform
such duties in the management of the Corporation as are provided in these
Bylaws or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws.
6.05 Compensation. The compensation, if any, of the Corporation's
officers and agents shall be fixed from time to time by the Board of Directors
provided, however, that the Board of Directors may, in its discretion, delegate
the authority to fix compensation of the Corporation's officers and agents to a
Committee of the Board and, provided further, that the President of the
Corporation may fix the salaries of the Corporation's officers (other than
himself) and agents if the Board of Directors and/or any Committee designated
by the Board of Directors fails to do so.
6.06 Chairman of the Board. The Chairman of the Board, if one is
elected by the Board of Directors, shall preside at all meetings of the Board
of Directors and shall have such additional powers and duties as may be
assigned to him by the Board of Directors.
6.07 Vice Chairman of the Board. The Vice Chairman of the Board,
if one is elected by the Board of Directors, shall have such powers and duties
as may be assigned to him by the Board of Directors.
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6.08 President. The President shall be the chief executive and
operating officer of the Corporation and, subject to the Board of Directors, he
shall have general executive charge, management and control of the properties
and operations of the Corporation in the ordinary course of its business, with
all such powers with respect to such properties and operations as may be
reasonably incident to such responsibilities. The President shall also be the
chief administrative officer of the Corporation and, subject to the Board of
Directors, shall have charge of the actual day-to-day operations and
management of the corporation and its properties, with all such powers with
respect to such properties and operations as may be reasonably incident to such
responsibilities. He shall preside at all meetings of stockholders. He may
agree upon and execute all division and transfer orders, bonds, contracts, and
other obligations in the name of the Corporation, and he may sign all
certificates for shares of stock of the Corporation.
6.09 Vice Presidents. Each Vice President shall have such powers
and duties as may be assigned to him by the Board of Directors or the Chairman
of the Board, and (in such order as is determined by the Board of Directors or,
in the absence of such a determination, as determined by the length of time
they have held the office of Vice President) shall exercise the powers of the
President during that officer's absence or inability to act. As between the
Corporation and third parties, any action taken by a Vice President in the
performance of the duties of the President shall be conclusive evidence of the
absence or inability to act of the President at the time such action was taken.
6.10 Treasurer. The Treasurer shall have custody of the
Corporation's funds and securities, shall keep full and accurate account of
receipts and disbursements, shall deposit all monies and valuable effects in
the name and to the credit of the Corporation in such depository or
depositories as may be designated by the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors, the Chairman
of the Board, or the President.
6.11 Assistant Treasurers. Each Assistant Treasurer shall have
such power and duties as may be assigned to him by the Board of Directors, the
Chairman of the Board, or the President. The Assistant Treasurers (in such
order as is determined by the Board of Directors or, in the absence of such a
determination, as determined by the length of time they have held the office of
Assistant Treasurer) shall exercise the powers of the Treasurer during that
officer's absence or inability to act.
6.12 Secretary. Except as otherwise provided in these Bylaws, the
Secretary shall keep the minutes of all meetings of the Board of Directors and
of the stockholders in books provided for that purpose, and he shall attend to
the giving and service of all notices. He may sign with the Chairman of the
Board or President all certificates for shares of stock of the corporation, and
he shall have charge of the certificate books, transfer books, and stock papers
as the Board of Directors may direct, all of which shall at all reasonable
times be open to inspection by any director upon application at the office of
the Corporation during business hours. He shall in general perform all duties
incident to the office of the Secretary, subject to the control of the Board of
Directors, the Chairman of the Board, and the President.
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6.13 Assistant Secretaries. Each Assistant Secretary shall have
such powers and duties as may be assigned to him by the Board of Directors, the
Chairman of the Board, or the president. The Assistant Secretaries (in such
order as is determined by the Board of Directors or, in the absence of such a
determination, as determined by the length of time they have held the office of
Assistant Secretary) shall exercise the powers of the Secretary during that
officer's absence or inability to act.
ARTICLE SEVEN: STOCK CERTIFICATES AND STOCKHOLDERS
7.01 Certificates for Shares. Certificates for shares of stock of
the Corporation shall be in such form as shall be shall be approved by the
Board of Directors. The certificates shall be signed by the Chairman of the
Board or the President or a Vice President and also by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer. Any and all
signatures on the certificate may be a facsimile and each such certificate may
be sealed with the seal of the Corporation or a facsimile thereof. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent, or registrar before such certificate is issued, it may be
issued by the Corporation with the same effect as if he were such officer
transfer agent, or registrar at the date of issue. The certificates shall be
consecutively numbered and shall be entered in the books of the corporation as
they are issued and shall exhibit the holder's name and the number of shares.
7.02 Replacement of Lost or Destroyed Certificates. The Board of
Directors may direct a new certificate or certificates representing shares of
stock be issued in place of a certificate or certificates representing shares
of stock theretofore issued by a Corporation and alleged to have been lost or
destroyed upon the making of an affidavit of that fact by the person claiming
the certificate or certificates representing shares of stock that was or were
lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond of a
surety or sureties satisfactory to the Corporation in such sum as it may direct
as indemnity against any claim, or expense resulting from a claim, that may be
made against the Corporation with respect to the certificate or certificates
alleged to have been lost or destroyed.
7.03 Transfer of Shares. Shares of stock of the Corporation shall
be transferable only on the books of the corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper evidence
of succession, assignment, or authority to transfer, the Corporation or its
transfer agent shall, subject to any applicable restrictions on transfer duly
noted thereon, issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction upon its books.
7.04 Registered Stockholders. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be
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bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
7.05 Regulations. The Board of Directors shall have the power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer, and registration or the replacement of
certificates for shares of stock of the Corporation.
7.06 Legends. The Board of Directors shall have the power and
authority to provide that the certificates representing shares of stock bear
such legends as the Board of Directors deem appropriate to assure that the
Corporation does not become liable for violations of federal or state
securities laws or other applicable law.
ARTICLE EIGHT: INDEMNIFICATION
8.01 Right to Indemnification. The Corporation shall indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (an "Indemnitee") who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Corporation or, while a director or officer of the Corporation is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another Corporation or of a partnership, joint venture trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the
preceding sentence, except as otherwise provided in Section 8.03, the
Corporation shall be required to indemnify an Indemnitee in connection with a
proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors of the Corporation.
8.02 Prepayment of Expenses. The Corporation shall pay the
expenses (including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided, however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an
undertaking by the Indemnitee to repay all amounts advanced if it should be
ultimately determined that the Indemnitee is not entitled to be indemnified
under this Article VIII or otherwise.
8.03 Claims. If a claim for indemnification or payment of expenses
under this Article VIII is not paid in full within sixty (60) days after a
written claim therefor by the Indemnitee has been received by the Corporation,
the Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or payment of expenses under applicable law.
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8.04 Nonexclusivity of Rights. The rights conferred on any
Indemnitee by this Article VIII shall not be exclusive of any other rights
which such Indemnitee may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, these by-laws, agreement, vote
of stockholders or disinterested directors or otherwise.
8.05 Other Sources. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Indemnitee who was or is serving at its
request as a director, officer, employee or agent of another Corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Indemnitee may collect as indemnification or
advancement of expenses from such other Corporation, partnership, joint
venture, trust, enterprise or non-profit enterprise.
8.06 Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VIII shall not adversely affect any right
or protection hereunder of any Indemnitee in respect of any act or omissions
occurring prior to the time of such repeal or modification.
8.07 Other Indemnification and Prepayment of Expenses. This
Article VIII shall not limit the right of the Corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Indemnitees when and as authorized by appropriate corporate action.
ARTICLE NINE: MISCELLANEOUS PROVISIONS
9.01 Dividends. Subject to provisions of law and the Certificate
of Incorporation, dividends may be declared by the Board of Directors at any
regular or special meeting and may be paid in cash, in property, or in
securities of the Corporation. Such declaration and payment shall be at the
discretion of the Board of Directors.
9.02 Reserves. There may be created by the Board of Directors out
of funds of the Corporation legally available therefor such reserve or reserves
as the directors from time to time, in their discretion, consider proper to
provide for contingencies, to equalize dividends, to repair or maintain any
property of the Corporation, or for such other purpose as the Board of
Directors shall consider beneficial to the Corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it was
created.
9.03 Books and Records. The Corporation shall keep correct and
complete books and records of account, shall keep minutes of the proceedings of
its stockholders, Board of Directors, and any committee of the Board of
Directors, and shall keep at its registered office or principal place of
business, a record of its stockholders, giving the name and address of all
stockholders and the number and class of the shares held by each.
9.04 Fiscal Year. The fiscal year of the Corporation shall be
fixed by the Board of Directors; provided, that if such fiscal year is not
fixed by the Board of Directors it shall be the calendar year.
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9.05 Seal. The seal of the Corporation shall be such as from time
to time may be approved by the Board of Directors.
9.06 Resignation. Any committee member or director may resign by
so stating at any meeting of the Board of Directors or any committee member,
director or officer may resign by giving written notice to the Board of
Directors, the Chairman of the Board, the President, or the Secretary. Such
resignation shall take effect at the time specified therein, or immediately if
no time is specified therein. Unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
9.07 Securities of Other Corporations. The Chairman of the Board,
the President or any other officer of the Corporation that the Board of
Directors may designate from time to time shall have the power and authority to
transfer, endorse for transfer, vote, and take any other action with respect to
any securities of another issuer which may be held or owned by the Corporation
and to make, execute, and deliver any waiver, proxy, or consent with respect to
any such securities.
9.08 Amendments of Bylaws. The Bylaws may be altered or repealed
and new Bylaws may be adopted (1) at any annual or special meeting of
stockholders by the affirmative vote of the holders of a majority of the voting
power of the stock issued and outstanding and entitled to vote thereat,
provided, however, that any proposed alteration or repeal of, or the adoption
of any Bylaw inconsistent with, Section 2.02 or 2.11 of Article II or Section
3.02 or 3.04 of Article III of the Bylaws by the stockholders shall require the
affirmative vote of the holders of at least 80% of the voting power of all
voting stock then outstanding, voting together as a single class, and provided,
further, however, that, in the case of any such stockholder action at a special
meeting of stockholders, notice of the proposed alteration, repeal or adoption
of the new Bylaw or Bylaws must be contained in the notice of such special
meeting, or (2) by the affirmative vote of a majority of the Whole Board.
9.09 Invalid Provisions. If any part of these Bylaws shall be held
invalid or inoperative for any reason, the remaining parts, so far as it is
possible and reasonable, shall remain valid and operative.
9.10 Headings. The Headings used in these Bylaws have been
inserted for administrative convenience only and do not constitute matter to be
construed in interpretation.
9.11 References. Whenever herein the singular number is used, the
same shall include the plural where appropriate and words of any gender shall
include each other gender where appropriate.
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EXHIBIT 10.29
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT dated as of __________, between DSC
COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company) and
_______________ (the "Executive").
WHEREAS, the Compensation Committee of the Board of Directors of the
Company has determined that it is appropriate to reinforce and encourage the
continued attention and dedication of members of the Company's management,
including the Executive, to their assigned duties without distraction in
potentially disturbing circumstances arising from the possibility of a change
in control of the Company; and
WHEREAS, the Company's Board of Directors has determined that it is in the
best interest of the Company and its stockholders to enter into this Severance
Compensation Agreement (the "Agreement");
NOW THEREFORE, this Agreement sets forth the severance compensation which
the Company agrees it will pay the Executive if the Executive's employment with
the Company terminates under certain circumstances described herein following a
Change of Control of the Company (as defined herein).
1. TERM.
This Agreement shall terminate, except to the extent that any obligation
of the Company hereunder remains unpaid as of such time, upon the earliest to
occur of (i) the termination of Executive's employment for any reason prior to
a Change in Control; (ii) two years after the date of a Change in Control of
the Company if the Executive has not terminated his employment for Good Reason
(as defined herein) as of such time; and (iii) _______________.
2. CHANGE IN CONTROL.
For the purpose of this Agreement, a "Change of Control" shall mean:
(i) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act") (a "Person"), of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (a) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (b) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that the
<PAGE> 2
following acquisitions shall not constitute a Change in Control: (a) any
acquisition directly from the Company (excluding an acquisition by virtue
of the exercise of a conversion provision), (b) any acquisition by the
Company (excluding any acquisition by any successor of the Company), (c)
any acquisition by an employee benefit plan (or related trust) sponsored
by or maintained by the Company or any corporation controlled by the
Company, or (d) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the condition described in
clauses (a), (b), and (c) of subsection (iii) of this Section 2 are
satisfied; or
(ii) individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors; provided,
however, that any individual becoming a director subsequent to the date
hereof whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds (2/3) of the
directors then constituting the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of either an actual or threatened election
contest subject to Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board of Directors;
or
(iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation, (a) more than sixty percent
(60%) of, respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such
reorganization, merger, or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization,
merger, or consolidation of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be (for purposes
of determining whether such percentage test is satisfied, there shall be
excluded from the number of shares and voting securities of the resulting
corporation owned by the Company's stockholders, but not from the total
number of outstanding shares and voting securities of the resulting
corporation, any shares or voting securities received by any such
stockholder in respect of any consideration other than shares or voting
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securities of the Company), (b) no Person (excluding the Company, any
employee benefit plan (or related trust) of the Company, any qualified
employee benefit plan of such corporation resulting from such
reorganization, merger or consolidation and any Person beneficially
owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, twenty percent (20%) or more of
the Outstanding Company Common Stock or Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, twenty percent (20%) or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of
the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (c) at least a majority
of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization merger or consolidation; or
(iv) (a) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company or (b) the first to occur of
(1) the sale or other disposition (in one transaction or a series of
related transactions) of all or substantially all of the assets of the
Company, or (2) the approval by the stockholders of the Company of any
such sale or disposition, other than, in each case, any such sale or
disposition to a corporation, with respect to which immediately
thereafter, (A) more than sixty percent (60%) of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the
case may be (for purposes of determining whether such percentage test is
satisfied, there shall be excluded from the number of shares and voting
securities of the transferee corporation owned by the Company's
stockholders, but not from the total number of outstanding shares and
voting securities of the transferee corporation, any shares or voting
securities received by any such stockholder in respect of any
consideration other than shares or voting securities of the Company), (B)
no Person (excluding the Company and any employee benefit plan (or
related trust) of the Company, any qualified employee benefit plan of
such transferee corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or
indirectly, twenty percent
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<PAGE> 4
(20%) or more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities, as the case may be) beneficially owns,
directly or indirectly, twenty percent (20%) or more of, respectively,
the then outstanding shares of common stock of such transferee
corporation and the combined voting power of the then outstanding voting
securities of such transferee corporation entitled to vote generally in
the election of directors and (C) at least a majority of the members of
the board of directors of such transferee corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or
action of the board providing for such sale or other disposition of
assets of the Company.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) At any time following a Change in Control of the Company, the
Executive shall be entitled to the compensation provided in Section 5 upon the
occurrence of either of the following:
(i) the termination by the Company of the Executive's employment
with the Company unless such termination is as a result of (w) the
Executive's Retirement (as defined in Section 3(c) below); (x) the
Executive's death; (y) the Executive's Disability (as defined in Section
3(b) below); or (z) the Executive's termination by the Company for Cause
(as defined in Section 3(d) below); or
(ii) the termination by the Executive of the Executive's employment
with the Company for Good Reason (as defined in Section 3(e) below).
(b) Disability. The term "Disability" as used in this Agreement shall
mean the Executive's absence from his duties with the Company for a period of
six months, as a result of the Executive's incapacity due to physical or mental
illness.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established pursuant to this Agreement with the
Executive's consent with respect to the Executive.
(d) Cause For purposes of this Agreement, the Company's termination of
the Executive's employment with the Company shall be considered for "Cause" if
it results from and of the following:
(i) the continuing and material failure by the Executive to fulfill
his employment obligations or willful misconduct or gross neglect in the
performance of such duties,
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<PAGE> 5
(ii) the Executive's committing fraud, embezzlement or
misappropriation in the performance of his duties as an employee of the
Company, or
(iii) The Executive's committing any felony for which he is
convicted and which, as determined in good faith by the Board of
Directors of the Company, constitutes a crime involving moral turpitude
and may result in material harm to the Company.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time following a Change in Control. For purposes of
this Agreement, "Good Reason" shall mean any of the following (without the
Executive's express written consent):
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities or
status with the Company immediately prior to a Change in Control of the
Company, or a change in the Executive's titles or offices as in effect
immediately prior to a Change in Control of the Company, or any removal
of the Executive from or any failure to re-elect the Executive to any of
such positions, except in connection with the termination of his
employment for Disability, Retirement or Cause or as a result of the
Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary as
in effect on the date hereof or as the same may be increased from time to
time during the terms of this Agreement;
(iii) any failure by the Company to continue in effect any benefit
plan or arrangement (including, without limitation, the Company's
Employee Stock Purchase Plan, Employee Thrift Plan, DSC Communications
Corporation Employee Stock Ownership Plan and life insurance, medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company, or any
other plan or arrangement providing the Executive with benefits that are
no less favorable, (hereinafter referred to as "Benefit Plans"), or the
taking of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive or any
material fringe benefit or perquisite of office enjoyed by the Executive
at the time a Change in Control of the Company;
(iv) any failure by the Company to continue in effect any incentive
plan or arrangement (including, without limitation, the Company's bonus
and contingent bonus arrangements, including the supplemental
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<PAGE> 6
compensation policy of the Company, and credits and the right to receive
performance awards and similar incentive compensation benefits) in which
the Executive is participating at the time of a Change in Control of the
Company, or any other plans or arrangements providing him with
substantially similar benefits, (hereinafter referred to as "Incentive
Plans") or the taking of any action by the Company which would adversely
affect the Executive's participation in any such Incentive Plan or reduce
the Executive's benefits under any such Incentive Plan, expressed as a
percentage of his base salary, by more than 10 percentage points in any
fiscal year as compared to the average of the two highest of the three
immediately preceding fiscal years;
(v) any failure by the Company to continue in effect any plan or
arrangement to receive securities of the Company (including, without
limitation, the Company's 1979 Stock Option Plan, 1981 Stock Option Plan,
1984 Stock Option Plan, 1988 Stock Option Plan, 1993 Stock Option and
Securities Award Plan, and any other plan or arrangement to receive and
exercise stock options, stock appreciation rights, restricted stock or
grants thereof in which the Executive is participating at the time of a
Change in Control of the Company, or any other plan or arrangement
providing him with substantially similar benefits, (hereinafter referred
to as "Securities Plans") or the taking of any action by the Company
which would adversely affect the Executive's participation in or
materially reduce the Executive's benefits under any such Securities
Plan;
(vi) a relocation of the Company's principal executive offices to a
location more than fifty (50) miles from the location of the principal
executive offices prior to a Change in Control of the Company, or the
Executive's relocation to any place more than fifty (50) miles from the
location at which the Executive performed the Executive's duties prior to
a Change in Control of the Company, except for required travel by the
Executive on the Company's business to an extent substantially consistent
with the Executive's business travel obligations at the time of a Change
in Control of the Company;
(vii) any failure by the Company to provide the Executive with at
least fifty percent (50%) of the number of annual paid vacation days to
which the Executive is entitled at the time a Change in Control of the
Company occurs;
(viii) any material breach by the Company of any provision of this
Agreement;
(ix) any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company; or
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<PAGE> 7
(x) any purported termination of the Executive's employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no such
purported termination shall be effective.
For purposes of this subsection (e), an isolated, immaterial, and
inadvertent action not taken in bad faith by the Company in violation of
paragraph (ii), (iii), (iv), (v) or (vii) of this subsection that is remedied
by the Company promptly after receipt of notice thereof given by the Executive
shall not be considered Good Reason for the Executive's termination of
employment with the Company. In the event the Executive terminates his
employment for Good Reason hereunder, then notwithstanding that the Executive
may also retire for purposes of the Benefit Plans, Incentive Plans or
Securities Plans, the Executive shall be deemed to have terminated his
employment for Good Reason for purposes of this Agreement.
(f) Notice of Termination. Any termination of the Executive by the
Company pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a
Notice of Termination. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate those specific
termination provisions in this Agreement relied upon and which sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
For purposes of this Agreement, no such purported termination by the Company
shall be effective without such Notice of Termination.
(g) Date of Termination. "Date of Termination" shall mean (i) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (ii) if the Executive's employment is terminated
by the Company for any other reason, the date on which a Notice of Termination
is given; provided, however that if within 30 days after any Notice of
termination is given to the Executive by the Company, the Executive notifies
the Company that a dispute exists concerning the termination, the Date of
Termination shall be the date the dispute is finally determined, whether by
mutual agreement by the parties or upon final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected).
4. TERMINATION UPON DISABILITY. In the event of the termination of the
Executive's employment with the Company by the Company or by the Executive for
Disability, the Executive shall be entitled to continue to receive payment of
his annual base salary, at the then current rate, for a period of two years
following such termination in accordance with the ordinary payroll practices of
the Company, reduced by (i) the amount of any salary replacement payments made
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to Executive under a disability plan of the Company which is provided at no
cost to the Executive and (ii) any social security or other governmental
disability benefits received by the Executive.
5. SEVERANCE COMPENSATION
UPON TERMINATION OF EMPLOYMENT.
If the Company shall terminate the Executive's employment other than as a
result of (i) the Executive's Retirement; (ii) the Executive's death; (iii) the
Executive's Disability; or (iv) the Executive's termination by the Company for
Cause, or if the Executive shall terminate his employment for Good Reason, then
the Company shall pay to the Executive as severance pay in a lump sum, in cash,
on the fifth day following the Date of Termination, an amount equal to three
times the Executive's "base amount" (as defined in Section 280G(b) of the
Internal Revenue Code of 1986, as amended (the "Code")) determined with respect
to a base period ending on the last day of the last fiscal year prior to such
Date of Termination; provided, however, that in no event shall the amount of
such payment be less than three times Executive's annual base salary at the
higher of the rate in effect (i) immediately prior to the Date of Termination
or (ii) on the date six months prior to the Date of Termination.
6. 1994 LONG-TERM INCENTIVE PLAN.
For purposes of the DSC Communications Corporation 1994 Long-Term
Incentive Compensation Plan and the definitions of "Disability" and
"Termination Without Cause" therein, this Agreement shall constitute
Executive's Employment Agreement.
7. EXCISE TAXES.
If the payments made pursuant to paragraph 5 of this Agreement, when
aggregated with any other payments made to Executive, would result in the
imposition of an excise tax under Section 4999 of the Code, the Company shall
pay to the Executive, in addition to amounts otherwise payable under this
Agreement, an amount sufficient, after federal and state income taxes, to pay
the excise tax so payable and all directly related interest and penalties such
that the net amount to the Executive would be the same as if no excise tax had
been imposed. Upon such time as Executive determines that the Company shall
owe Executive money for the payment of excise taxes pursuant to this Section 7,
Executive shall deliver to the Company a completed form of Executive's federal
or state tax return, as applicable, in the form in which it will be filed. The
Company shall, within five days of receiving such tax return, pay to Executive
the amount of any excise tax to be paid by Executive as shown on such
Executive's tax return.
-8-
<PAGE> 9
8. NO OBLIGATION TO MITIGATE DAMAGES;
NO EFFECT ON OTHER CONTRACTUAL RIGHTS.
(a) The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by the Executive as the result
of employment by another employer after the Date of Termination, or otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely
as a result of the passage of time, under any Benefit Plan, Incentive Plan or
Securities Plan, employment agreement or other contract, plan or agreement with
or of the Company.
9. SUCCESSORS.
(a) The Company will require any successor or assign (whether direct or
indirect, by purchase, merger, consolation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession or assignment had taken place. Any failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession or assignment shall be a material breach of this Agreement and shall
entitle the Executive to terminate the Executive's employment for Good Reason
and receive the compensation provided for in Section 5 hereof. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 9 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive
should die while any amounts are still payable to him hereunder all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee or other designee,
or, if there be no such designee, to the Executive's estate.
-9-
<PAGE> 10
10. NOTICE.
For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, as follows:
If to the Company:
DSC Communications Corporation
1000 Coit Road
Plano, TX 75075
Attention: Secretary and General Counsel
If to the Executive:
_____________________
c/o DSC Communications Corporation
1000 Coit Road
Plano, TX 75075
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11. MISCELLANEOUS.
No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
the Executive and the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or in compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
time or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not set forth expressly in this
Agreement. This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas, without giving effect to any principles of
conflicts of law.
12. CONFLICT IN BENEFITS.
Except as otherwise provided in Sections 4 and 6 of this Agreement, this
Agreement is not intended to and shall not affect, limit or terminate any other
agreement or arrangement between the Executive and the Company presently in
effect or hereafter entered into.
-10-
<PAGE> 11
13. VALIDITY.
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
14. LEGAL FEES AND EXPENSES.
The Company shall pay all legal fees and expenses which the Executive may
incur as a result of the Company's contesting the validity, enforceability or
the Executive's interpretation of, or determinations under, this Agreement.
15. EFFECTIVE DATE.
This Agreement shall become effective upon execution.
16. COUNTERPARTS.
This agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
17. NO GUARANTEE OF EMPLOYMENT.
Neither this Agreement or any action taken hereunder shall be construed as
giving the Executive the right to be retained in employment with the Company,
nor shall it interfere with either the Company's right to terminate the
employment of the Executive at any time or the Executive's right to terminate
his employment at any time.
18. NO ASSIGNMENT BY PARTICIPANT.
The Executive's rights and interest under this Agreement shall not be
assignable (in law or in equity) or subject to any manner of alienation, sale,
transfer, claims or creditors, pledge, attachment, garnishment, levy, execution
or encumbrances of any kind, and any attempt by the Executive or other person
to do so shall be void.
19. WAIVER.
The Executive's or the Company's failure to insist upon strict compliance
with any provision of this Agreement shall not be deemed a waiver of such
provision or any other provision of this Agreement. Any waiver of any
provision of this Agreement shall not be deemed to be a waiver of any other
provision, and
-11-
<PAGE> 12
any waiver of default in any provision of this Agreement shall not be deemed to
be a waiver of any later default thereof or of any other provision.
20. WITHHOLDING.
All amounts paid pursuant to this Agreement shall be subject to
withholding for taxes (federal, state, or local or otherwise) to the extent
required by applicable law.
21. HEADINGS.
The headings of this agreement have been inserted for convenience of
reference only and are to be ignored in the construction of the provisions
hereof.
22. NUMBER AND GENDER.
The use of the singular shall be interpreted to include the plural and
plural the singular, as the context requires. The use of the masculine,
feminine or neuter shall be interpreted to include the masculine, feminine or
neuter as the context shall require.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DSC COMMUNICATIONS CORPORATION
By:________________________________
EXECUTIVE:
___________________________________
-12-
<PAGE> 1
EXHIBIT 10.30
Schedule to Severance Compensation Agreement Between the
Company and Certain of its Officers
The Severance Compensation Agreement, substantially in the form as filed
herewith as Exhibit 10.29, was entered on January 27, 1997 with the following
officers of the Company:
John W. Bischoff
David L. Hinshaw
Douglas K. Jacobs
George M. Simpson
<PAGE> 1
Exhibit 11.1
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Computation of Income (Loss) per Share
(In thousands)
The following table sets forth the computation of shares used in the
calculation of income (loss) per share for the years ended December 31, 1996,
1995 and 1994.
Average Shares Used in Income (Loss) per Share Calculation:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ---------------------
Fully Fully Fully
Primary Diluted(B) Primary Diluted(B) Primary Diluted(B)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Weighted average
shares outstanding
during the year................ 116,514 -- 114,681 -- 112,254 --
Common share equivalents
outstanding:
Options and warrants
issued and
contingently issuable........ -- (A) -- 5,271 -- 6,104 --
Assumed purchase of
treasury shares.............. -- (A) -- (1,826) -- (1,469) --
------- ------- ------- ------- ------- -------
Weighted average shares
used in calculation............ 116,514 -- 118,126 -- 116,889 --
======= ======= ======= ======= ======= =======
</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.
(B) Fully diluted income (loss) per share is not shown since the dilutive
effect is less than three percent.
<PAGE> 1
EXHIBIT 13.1
DSC Communications Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996(A) 1995 1994(B) 1993 1992
------- ---- ------- ---- ----
(Dollars in thousands, except per share data)
SUMMARY OF OPERATIONS FOR THE
YEAR:
<S> <C> <C> <C> <C> <C>
Revenue ............................... $ 1,380,891 $ 1,422,018 $ 1,003,125 $ 730,774 $ 536,319
Gross profit .......................... 455,144 685,899 490,392 317,969 202,776
Operating income (loss) ............... (12,043) 279,418 213,999 110,176 42,431
Interest income ....................... 24,146 27,147 16,306 5,691 4,132
Interest expense ...................... (26,355) (18,599) (2,075) (6,256) (21,347)
Net income (loss) ..................... $ (7,555) $ 192,680 $ 162,626 $ 81,660 $ 11,594
=========== =========== =========== =========== ===========
Income (loss) per share (C) ........... $ (0.06) $ 1.63 $ 1.39 $ 0.77 $ 0.12
=========== =========== =========== =========== ===========
FINANCIAL POSITION AT YEAR-END:
Cash and marketable
securities ........................... $ 334,039 $ 569,264 $ 271,322 $ 313,808 $ 69,839
Working capital ....................... 769,956 738,965 393,034 406,752 79,010
Property and equipment,
net .................................. 403,596 370,522 282,963 179,783 149,209
Total assets .......................... 1,925,655 1,865,275 1,268,536 900,417 547,669
Short-term and long-term
debt ................................. 308,580 326,977 82,369 70,412 140,409
Shareholders' equity (D) .............. 1,147,636 1,124,079 851,100 617,800 202,627
OTHER FINANCIAL INFORMATION:
Shareholders' equity
per share of common
stock outstanding (C) ................ $ 9.79 $ 9.72 $ 7.50 $ 5.61 $ 2.30
Return on average
shareholders' equity ................. (0.7%) 19.5% 22.1% 19.9% 6.1%
Ratio of current assets to
current liabilities .................. 2.8 2.5 2.1 3.1 1.4
Ratio of short-term and
long-term debt to
shareholders' equity ................. 26.9% 29.1% 9.7% 11.4% 69.3%
</TABLE>
(Continued)
<PAGE> 2
DSC Communications Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
1996(A) 1995 1994(B) 1993 1992
------- ---- ------- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Shares used to compute
income (loss) per share
(in thousands) (C) ................... 116,514 118,126 116,889 106,650 93,198
Shareholders of record at
year end ............................. 5,242 3,768 3,611 3,462 4,948
Total employees at year
end .................................. 6,367 5,860 5,414 4,041 3,301
</TABLE>
- -------------------------------------------------------------------------------
(A) For the year ended December 31, 1996, the Company recorded non-cash special
charges totaling $96.0 million ($82.5 million reduced gross profit and $13.5
million was charged to operating costs and expenses) related primarily to a
reduction in the carrying value of certain assets for several of the
Company's products. See Notes to Consolidated Financial Statements and
Management's Discussion and Analysis for further discussion.
(B) In November 1994, the Company acquired NKT Elektronik A/S (DSC
Communications A/S). Accordingly, DSC Communications A/S's results of
operations have been included in the Company's consolidated financial data
since the acquisition date. See Notes to Consolidated Financial Statements
for further discussion.
(C) In April 1994, the Board of Directors declared a two-for-one stock split,
effected in the form of a 100% stock dividend, for shareholders of record
on May 11, 1994. All per share amounts prior to 1994 have been restated to
retroactively reflect the stock split.
(D) Since inception, the Company has not declared or paid a cash dividend.
<PAGE> 3
DSC Communications Corporation and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Although the Company ended 1996 with record quarterly revenue and
customer orders for the fourth quarter, overall results for the full-year 1996
were lower than in 1995. Revenue for 1996 of $1.4 billion was 2.9% lower than
in 1995, and as a result of $96.0 million of special charges, the Company
incurred a net loss for 1996 of $7.6 million, or $0.06 per share. Excluding the
special charges, net income would have been $52.0 million, or $0.44 per share.
The special charges related primarily to a reduction in the carrying value of
certain assets for several of the Company's products.
The Company's financial position remained strong at the end of 1996.
Cash and short-term investments exceeded $334.0 million; current assets
exceeded current liabilities by 2.8 times; assets totaled $1.9 billion and debt
was only 27% of shareholders' equity.
FINANCIAL CONDITION AND LIQUIDITY
The Company ended 1996 and 1995 with the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
(in millions)
<S> <C> <C>
Cash and cash equivalents $ 155.1 $ 258.6
Marketable securities 178.9 310.7
Non-debt working capital, excluding
cash and cash equivalents and
marketable securities 469.9 286.2
Short-term debt 0.9 83.4
Long-term debt, including current portion 307.7 243.5
</TABLE>
Cash of $64.8 million was used during the year for operating activities.
This cash usage was primarily the result of growth in receivables and
inventories. Receivables growth of $159.7 million was due primarily to longer
payment terms and payment cycles in the international marketplace and a higher
level of customer financing in the domestic marketplace. Also, during the
fourth quarter of 1995 the Company sold approximately $50 million of trade and
lease receivables with recourse. No receivables were sold in the fourth quarter
of 1996. See "Receivables" and "Commitments and Contingencies" in Notes to
Consolidated Financial Statements for further discussion. Inventories growth,
net of the special charges impact, of $39.6 million was primarily the result of
existing and anticipated customer demand for the Company's products in 1997.
Capital expenditures were $122.4 million during 1996, which included
capital investments related to the establishment of manufacturing operations in
Costa Rica and the completion of new facilities in Denmark. The Company
anticipates that capital expenditures in 1997 could be in the range of $150
million to $170 million. This amount includes expected capital additions
related to an expansion of the Costa Rican manufacturing capacity, the
establishment of additional manufacturing facilities in
<PAGE> 4
Ireland and additional office space at the Plano campus. However, the timing
and extent of any future capital expenditures is dependent upon future
business growth.
During 1996, the Company replaced approximately $95.7 million of
short-term borrowings with two unsecured, long-term loans denominated in Danish
Kroner. These loans require quarterly interest payments with principal payments
beginning in 1999. The interest on the loans is adjustable based upon market
interest rates in Denmark and ranged from 4% to 5% at December 31, 1996. Also
during 1996, the Company repaid $33.1 million of its long-term borrowings,
which included the first $28.1 million scheduled annual principal payment on
the $225.0 million loan obtained during 1995. Annual maturities of long-term
debt for the next five years range from approximately $33 million to $59
million. See "Long-Term Debt" in Notes to Consolidated Financial Statements for
further discussion.
The Company has an unsecured $160.0 million revolving credit agreement
with several banks which 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. At December 31, 1996, outstanding letters
of credit issued under the agreement totaled $29.3 million, and there were no
borrowings under this agreement during the year. Two of the Company's foreign
subsidiaries also have credit agreements providing for borrowings of $9.5
million with local banks, of which $0.9 million was outstanding at December 31,
1996.
The Company's debt agreements contain various financial covenants
including, among others, minimum net worth, maintenance of certain fixed charge
ratios and maximum allowable indebtedness to net worth. The Company believes
that it will continue to be in compliance with the provisions of its loan
agreements. However, if 1997 capital expenditures significantly exceed 1996
levels and the Company's quarterly net earnings are not higher than 1996
quarterly results (before special charges), waivers or amendments to loan
agreements could be required.
The Company is party to certain litigation, as disclosed in "Commitments
and Contingencies" in Notes to Consolidated Financial Statements, the outcome
of which the Company believes will not have a material adverse effect on its
consolidated financial position. As discussed in Notes to Consolidated
Financial Statements, the Federal Court entered a $137.7 million judgment in
the Company's favor associated with the Next Level Corporation litigation. This
judgment was upheld by the Fifth Circuit Court of Appeals in late February
1997. The Company could receive the proceeds from the judgment in the near
future.
The Company believes that its existing cash and short-term investments
and available credit facilities will be adequate to support the Company's
financial resource needs, including working capital requirements, capital
expenditures, operating lease obligations and debt payments. In order to be
competitive in the future, the Company believes that it could become
increasingly necessary to offer financing alternatives to both domestic and
international customers. To the extent such customer financing arrangements
become significant or other business requirements arise, additional financing
could become necessary.
<PAGE> 5
RESULTS OF OPERATIONS
1996 Compared to 1995
Revenue for 1996 was $1,380.9 million compared to $1,422.0 million in
1995, and the Company incurred a net loss during 1996 of $7.6 million, or $0.06
per share, which included special charges totaling $96.0 million before income
taxes. Excluding the effects of the special charges, the Company would have
recorded net income of $52.0 million, or $0.44 per share, compared to $192.7
million, or $1.63 per share, in 1995.
During 1996, the Company reassessed the future business prospects for
several of its products. Management concluded that while the longer-term
outlook for these products was favorable, the forecasted business levels for
the near-term would not support the carrying value of certain assets, including
inventories and deferred development costs, associated with these products. As
a result, the Company recorded non-cash special charges of $96.0 million
primarily to reduce the recorded value of these assets to their net realizable
values. Although not currently anticipated, delays in development or customer
acceptance of products developed in the future could result in adjustments to
carrying values of any assets associated with such new products.
Although revenue levels were comparable in 1996 and 1995, the Company
did experience a shift in the mix of products sold from 1995 to 1996. Switching
products revenue declined 15% from the 1995 level and accounted for 42% of
total consolidated revenue in 1996 compared to 48% in 1995. This decline was
primarily attributable to a reduction in the deliveries of cellular, wireless
and certain intelligent network switching products. Access products revenue
increased 13% over the prior year due primarily to continued strong demand for
the Company's Litespan-2000 product. This increase resulted in access products
accounting for 33% of consolidated revenue in 1996 compared to 28% in 1995.
Revenue from the Company's transport products was 23% of consolidated revenue
in both 1996 and 1995. The Company believes that revenue in 1996 from several
of its more mature products was negatively impacted by pending Federal
Communications Commission rulemaking procedures, associated court challenges of
the recent telecom legislation and mergers and consolidations among the
Company's customer base. The Company could continue to experience delays in
customer purchasing decisions until the uncertainties created by these
situations are resolved.
Gross profit in 1996 was $455.1 million compared to $685.9 million in
1995. Included in Cost of Revenue in 1996 was $82.5 million of the special
charges discussed above. Excluding this portion of the special charges, gross
profit as a percentage of revenue was 39% in 1996 compared to 48% in 1995. This
decrease was due to an overall shift in the mix of products sold, including the
shift in revenue from higher margin switching products to lower margin access
products as discussed above. As was experienced between 1996 and 1995, the
Company's gross margin percentage can vary significantly from period to period
due to changes in the relative mix of product deliveries and software content.
Operating results in future periods could continue to be impacted by these
types of product mix changes.
<PAGE> 6
DSC Communications A/S, which accounted for 9% of consolidated revenue
in 1996 and 1995, incurred additional operating losses during 1996. These
operating losses were due primarily to the delayed introduction of a new
generation of optical transmission equipment. While deliveries of certain of
these new products have begun, the remaining development effort will not be
completed until 1997. Future near-term profitability of the Company's Danish
operations is dependent upon the successful completion and market acceptance of
these products.
Research and development expenses in 1996 increased to $210.1 million,
or 15% of revenue, compared to $189.8 million, or 13% of revenue, in 1995. The
Company continues to make a substantial investment in research and development
to maintain the Company's ongoing development of new products and enhancements
to existing products across all strategic product areas.
Selling, general and administrative expenses totaled $233.6 million, or
17% of revenue, in 1996 compared to $207.2 million, or 15% of revenue, in 1995.
This increase was primarily the result of increased international selling
activities and increased legal expenses. The Company is actively pursuing
claims primarily related to its intellectual property rights, and as a result,
legal expenses may continue to increase as this litigation progresses. See
"Litigation" under "Commitments and Contingencies" in Notes to Consolidated
Financial Statements for further discussion.
Depreciation and amortization expense increased from $81.2 million in
1995 to $94.0 million in 1996. Capital expenditures in 1996 of $122.4 million,
along with expected capital additions in the range of approximately $150
million to $170 million in 1997, will continue to increase depreciation and
amortization expense in 1997 and future years.
Interest expense increased in 1996 as a result of the $225.0 million
loan entered into in April 1995 which bears interest at 9% as well as
borrowings during 1996 under several foreign subsidiary borrowing arrangements.
Other Income (Expense), Net in 1996 includes amounts received from a settlement
of certain litigation during the year. See "Other Income (Expense), Net" in
Notes to Consolidated Financial Statements for further discussion.
The Company provided an income tax benefit at a 38% effective rate for
1996. The Company believes that its existing deferred tax assets included on
the 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.
Should the Company's Danish subsidiary incur additional tax losses in 1997, the
Company's effective tax rate could increase depending on a subsequent review of
the realization of the additional tax loss carryforward.
The Company manages its exposure to fluctuations in foreign currency
exchange rates through the use of forward foreign exchange contracts. These
contracts are primarily entered into to hedge certain receivables and firm
contracts for deliveries of products and services. At December 31, 1996, the
U.S. dollar equivalent of forward foreign exchange contracts outstanding was
approximately $42.1 million. See "Forward Foreign Exchange Contracts" under
"Summary of Significant Accounting Policies" in Notes to Consolidated Financial
Statements for further discussion.
<PAGE> 7
As discussed in "Litigation" under "Commitments and Contingencies" in
Notes to Consolidated Financial Statements, the litigation between the Company,
Bell Atlantic and Lucent Technologies, Inc. was settled on March 13, 1997. In
conjunction with the settlements, Bell Atlantic agreed to purchase a
significant amount of product from the Company over a five year period
beginning in 1998. The agreement requires a minimum annual purchase level
substantially above the amount purchased by Bell Atlantic from the Company in
1996 which totaled approximately $120 million.
The Company's future operating results may be affected by a number of
factors, including introduction and market acceptance of new products on a
timely basis; mix of products sold; the timing and ultimate receipt of orders
from certain customers which continue to constitute a large portion of the
Company's revenue; the successful enhancement of existing products; product
costs; manufacturing lead times; significant fluctuations in foreign currency
exchange rates; and changes in general worldwide economic conditions, any of
which could have an adverse impact on operations.
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which is
effective for transactions which occur beginning January 1, 1997. The Company
believes that this new standard will not have a material impact on the Company.
1995 Compared to 1994
Revenue for 1995 increased 42% to $1,422.0 million compared to $1,003.1
million in 1994. Net income for 1995 was $192.7 million, or $1.63 per share,
compared to net income of $162.6 million, or $1.39 per share, in 1994.
The Company's revenue growth for 1995 was the result of increased
product deliveries across all of the Company's major product lines as well as
the inclusion of revenue from the Company's Danish subsidiary, DSC
Communications A/S, which was acquired in November 1994. Switching products
revenue increased 31% over 1994 and represented 48% of consolidated revenue in
1995 as compared to 52% of consolidated revenue in 1994. This revenue increase
was due primarily to an increase in deliveries of the Company's cellular and
wireless switching products. Access products revenue increased 49% over the
prior year as customer demand for the Litespan product continued to grow, which
resulted in access products accounting for 28% of consolidated revenue in 1995
compared to 27% in 1994. Transport products revenue represented 23% of
consolidated revenue in 1995 as compared to 19% of consolidated revenue in
1994. Revenue from transmission products increased 66% due to the inclusion of
revenue from DSC Communications A/S in addition to revenue from the Company's
new iMTN product.
DSC Communications A/S, which accounted for 9% of consolidated revenue
in 1995, incurred an operating loss during the year due principally to the
delayed introduction of a new generation of optical transmission equipment.
Gross profit of $685.9 million in 1995 represented 48% of revenue
compared to 49% of revenue in 1994. This decline was due primarily to a change
in the mix of products sold during 1995 as compared to 1994. Certain of the
Company's products, including software, typically produce gross margin content
greater than other Company products.
<PAGE> 8
Research and development expenses increased to $189.8 million in 1995
compared to $127.3 million in 1994, representing 13% of revenue for both 1995
and 1994. This growth included the development activities of DSC Communications
A/S as well as the Company's increasing research and development investment
consistent with its ongoing commitment to the development of new products and
to the enhancements of existing products across all strategic product lines.
Selling, general and administrative expenses for 1995 were $207.2
million, or 15% of revenue, compared to $141.9 million, or 14% of revenue, in
1994. This growth is due primarily to the inclusion of expenses of DSC
Communications A/S in 1995, increased international selling and marketing
activities and a growth in legal expenses.
Both interest income and interest expense have increased in 1995 due
primarily to the $225.0 million loan entered into in April 1995 which bears
interest at 9%. The majority of the proceeds from this loan were invested in
short-term investments during 1995. Interest expense has also increased as a
result of borrowings under several new foreign subsidiary borrowing
arrangements entered into during 1995.
The Company's effective income tax rate was 34% for 1995 as compared to
27% in 1994. The higher rate was due primarily to a reduced amount of tax loss
and credit carryforwards in 1995 as compared to 1994. See "Income Taxes" in
Notes to Consolidated Financial Statements for further discussion.
<PAGE> 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue .......................................... $ 1,380,891 $ 1,422,018 $ 1,003,125
Cost of revenue:
Special charges related to inventories
and associated assets ........................ 82,500 -- --
Other .......................................... 843,247 736,119 512,733
----------- ----------- -----------
Total cost of revenue ......................... 925,747 736,119 512,733
----------- ----------- -----------
Gross profit ................................... 455,144 685,899 490,392
----------- ----------- -----------
Operating costs and expenses:
Research and product development ............... 210,091 189,751 127,303
Selling, general and administrative ............ 233,576 207,188 141,934
Special charges for excess facilities
and equipment ................................ 13,500 -- --
Other operating costs .......................... 10,020 9,542 7,156
----------- ----------- -----------
Total operating costs and expenses ........... 467,187 406,481 276,393
----------- ----------- -----------
Operating income (loss) .......................... (12,043) 279,418 213,999
Interest income .................................. 24,146 27,147 16,306
Interest expense ................................. (26,355) (18,599) (2,075)
Other income (expense), net ...................... 2,066 1,984 (5,040)
----------- ----------- -----------
Income (loss) before income taxes .............. (12,186) 289,950 223,190
Income tax expense (benefit) ..................... (4,631) 97,270 60,564
----------- ----------- -----------
Net income (loss) ............................ $ (7,555) $ 192,680 $ 162,626
=========== =========== ===========
Income (loss) per share .......................... $ (0.06) $ 1.63 $ 1.39
=========== =========== ===========
Average shares used in per
share computation ............................... 116,514 118,126 116,889
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 10
DSC Communications Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 155,101 $ 258,565
Marketable securities .................................................... 178,938 310,699
Receivables .............................................................. 411,947 277,006
Inventories .............................................................. 343,566 303,962
Deferred income taxes .................................................... 61,086 27,202
Other current assets ..................................................... 52,240 43,113
----------- -----------
Total current assets ................................................... 1,202,878 1,220,547
----------- -----------
PROPERTY AND EQUIPMENT, NET ................................................ 403,596 370,522
LONG-TERM RECEIVABLES ...................................................... 42,965 17,557
CAPITALIZED SOFTWARE DEVELOPMENT COSTS ..................................... 51,634 43,821
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET ................... 146,025 155,102
OTHER ...................................................................... 78,557 57,726
----------- -----------
Total assets ......................................................... $ 1,925,655 $ 1,865,275
=========== ===========
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Short-term debt .......................................................... $ 906 $ 83,438
Accounts payable ......................................................... 99,824 115,137
Accrued liabilities ...................................................... 297,101 220,679
Income taxes payable ..................................................... 2,019 29,230
Current portion of long-term debt ........................................ 33,072 33,098
----------- -----------
Total current liabilities .............................................. 432,922 481,582
----------- -----------
LONG-TERM DEBT, NET OF CURRENT PORTION ..................................... 274,602 210,441
NONCURRENT INCOME TAXES AND OTHER LIABILITIES .............................. 70,495 49,173
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, issued - 122,241 in 1996 and 120,591 in 1995;
outstanding - 117,252 in 1996 and 115,602 in 1995 ...................... 1,222 1,206
Additional capital ....................................................... 730,743 703,448
Unrealized gains (losses) on securities,
net of income taxes .................................................... (147) 391
Accumulated translation adjustment ....................................... 8,743 4,404
Retained earnings ........................................................ 450,186 457,741
----------- -----------
1,190,747 1,167,190
Treasury stock, at cost, 4,989 shares in 1996 and 1995 ................... (43,111) (43,111)
----------- -----------
Total shareholders' equity ............................................. 1,147,636 1,124,079
----------- -----------
Total liabilities and shareholders' equity ........................... $ 1,925,655 $ 1,865,275
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 11
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................... $ (7,555) $ 192,680 $ 162,626
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Reduction in carrying values of certain
assets and other special charges ................. 96,000 -- --
Depreciation and amortization ..................... 93,982 81,218 53,698
Amortization of capitalized
software development costs ....................... 24,193 21,591 19,460
Deferred income taxes ............................. (50,359) (31,888) --
Income tax benefit related to stock
options .......................................... 6,872 49,987 24,055
Other ............................................. 4,955 938 4,772
Changes in operating assets and liabilities:
Increase in current and
long-term receivables ............................ (159,747) (33,149) (89,616)
Increase in inventories ........................... (95,705) (129,234) (33,188)
Increase in other current assets .................. (20,908) (1,603) (9,265)
Increase in current payables
and accruals ..................................... 23,766 67,178 74,402
Increase in noncurrent income taxes
and other liabilities ............................... 19,726 10,241 15,393
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES .......................... (64,780) 227,959 222,337
--------- --------- ---------
</TABLE>
(Continued)
<PAGE> 12
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisition, net of acquired cash ......... -- -- (135,696)
Purchases of property and equipment ................ (122,419) (154,748) (141,177)
Additions to capitalized software
development costs ................................. (37,006) (26,829) (24,558)
Purchases of marketable securities ................. (1,100,142) (1,014,304) (312,297)
Proceeds from sales and maturities of
marketable securities ............................. 1,233,847 927,234 246,569
Purchase of long-term investment security .......... -- (17,500) (12,500)
Other .............................................. (6,581) (341) (2,980)
----------- ----------- -----------
NET CASH USED FOR INVESTING
ACTIVITIES .................................. (32,301) (286,488) (382,639)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt ............. (82,532) 43,647 39,791
Borrowings under long-term debt
arrangements ...................................... 95,709 241,019 19,919
Payments on long-term debt ......................... (33,065) (42,249) (14,770)
Proceeds from the sale of common stock
under stock programs .............................. 12,458 20,481 13,211
Other .............................................. 1,047 1,254 205
----------- ----------- -----------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES ........................ (6,383) 264,152 58,356
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................... (103,464) 205,623 (101,946)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ............................................ 258,565 52,942 154,888
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ............................................ $ 155,101 $ 258,565 $ 52,942
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ...................................... $ 23,018 $ 12,691 $ 1,114
=========== =========== ===========
Income taxes paid .................................. $ 57,912 $ 64,289 $ 11,930
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 13
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
------------
Unrealized
Shares Par Gains Accumulated Cost of
Out- Value Additional (Losses) on Translation Retained Treasury
standing $0.01 Capital Securities Adjustment Earnings Shares Total
-------- ----- ------- ---------- ---------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 ....... 55,018 $ 600 $558,222 $ -- $ -- $ 102,435 $ (43,457) $ 617,800
Shares issued upon
exercise of options ............ 1,503 15 8,533 -- -- -- -- 8,548
Shares issued under stock
purchase plans ................. 357 3 5,589 -- -- -- 346 5,938
Income tax benefit related
to stock options ............... -- -- 24,055 -- -- -- -- 24,055
Restricted shares issued to
employees, net of
unearned compensation .......... 6 -- 1,597 -- -- -- -- 1,597
Conversion of 80%
subordinated convertible
debentures into
common stock, net of
expenses ....................... 637 7 34,293 -- -- -- -- 34,300
Two-for-one stock split,
effected in the form
of a 100% stock dividend ....... 56,004 560 (560) -- -- -- -- --
Net change in unrealized
gains (losses) on securities,
net of income taxes ............ -- -- -- (3,764) -- -- -- (3,764)
Net income ...................... -- -- -- -- -- 162,626 -- 162,626
------- -------- -------- ------- -------- --------- ----------- -----------
Balances, December 31, 1994 ....... 113,525 1,185 631,729 (3,764) -- 265,061 (43,111) 851,100
Shares issued upon
exercise of options ............ 1,500 15 10,283 -- -- -- -- 10,298
Shares issued under stock
purchase plans ................. 467 5 10,178 -- -- -- -- 10,183
Income tax benefit related
to stock options ............... -- -- 49,987 -- -- -- -- 49,987
Restricted shares issued
to employees, net of
unearned compensation .......... 110 1 1,271 -- -- -- -- 1,272
Net change in unrealized
gains (losses) on securities,
net of income taxes ............ -- -- -- 4,155 -- -- -- 4,155
Translation adjustment .......... -- -- -- -- 4,404 -- -- 4,404
Net income ...................... -- -- -- -- -- 192,680 -- 192,680
------- -------- -------- ------- -------- --------- ----------- -----------
Balances, December 31, 1995 ....... 115,602 1,206 703,448 391 4,404 457,741 (43,111) 1,124,079
Shares issued upon
exercise of options ............ 1,068 10 7,484 -- -- -- -- 7,494
Shares issued under stock
purchase plans ................. 262 3 6,691 -- -- -- -- 6,694
Income tax benefit related
to stock options ............... -- -- 6,872 -- -- -- -- 6,872
Restricted shares issued
to employees, net of
unearned compensation
and forfeitures ................ 320 3 6,248 -- -- -- -- 6,251
Net change in unrealized
gains (losses) on securities,
net of income taxes ............ -- -- -- (538) -- -- -- (538)
Translation adjustment .......... -- -- -- -- 4,339 -- -- 4,339
Net loss ........................ -- -- -- -- -- (7,555) -- (7,555)
------- -------- -------- ------- -------- --------- ----------- -----------
Balances, December 31, 1996 ....... 117,252 $ 1,222 $730,743 $ (147) $ 8,743 $ 450,186 $ (43,111) $ 1,147,636
======= ======== ======== ======= ======== ========= =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 14
DSC Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DSC Communications Corporation (the "Company") is a leading designer,
developer, manufacturer and marketer of digital switching, transport, access
and private network system products for the worldwide telecommunications
marketplace.
Certain prior years' financial statement information has been
reclassified to conform with the current year financial statement presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of the Company and all its majority-owned entities. All significant
intercompany transactions and balances are eliminated.
Revenue Recognition
Revenue is generally recognized when the Company has completed
substantially all manufacturing and/or software development to customer
specifications, factory testing has been completed and the product has been
shipped. Additionally, for systems where installation requirements are the
responsibility of the Company and payment terms are related to installation
completion, revenue is generally recognized when the system has been shipped to
the customer's final site for installation.
Revenue under contracts with customers for development and customization
of software and for certain installation projects is accounted for using the
percentage-of-completion method as certain contractual milestones are
completed. Revenue from technical assistance service contracts is recognized
ratably over the period the services are performed.
Warranty Costs
The Company provides for estimated future warranty costs at the time
revenue is recognized.
Cash and Cash Equivalents
Cash equivalents are primarily short-term, interest bearing, high-credit
quality investments with major financial institutions and are subject to
minimal risk. These investments have maturities at the date of purchase of
three months or less.
<PAGE> 15
Investments in Debt and Equity Securities
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held to maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held to maturity securities are stated at amortized
cost. Debt securities for which the Company does not have the intent or ability
to hold to maturity are classified as available for sale, along with any
investments in equity securities. Securities available for sale are carried at
fair value, with the unrealized gains and losses, net of income taxes, reported
as a separate component of Shareholders' Equity. The Company has had no
investments that qualify as trading.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity or, in the case of asset-backed
securities, over the estimated life of the security. Such amortization and
accretion as well as interest are included in Interest Income. Realized gains
and losses are included in Other Income (Expense), Net in the Consolidated
Statements of Operations. The cost of securities sold is based on the specific
identification method.
The Company's investments in debt and equity securities are diversified
among high-credit quality securities in accordance with the Company's
investment policy.
Inventories
Inventories are valued at the lower of average cost or market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Raw Material .............................. $127,495 $137,002
Work in Process............................ 25,724 20,015
Finished Goods ............................ 190,347 146,945
-------- --------
$343,566 $303,962
======== ========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings......................................... 20-40 Years
Leasehold improvements............................ 1-20 Years
Manufacturing, development and test equipment..... 3-10 Years
Office furniture, equipment and other............. 3-10 Years
</TABLE>
Included in Office furniture, equipment and other are computer equipment
and related purchased software which are generally depreciated over three to
five years. Capital leases and equipment leased to customers under operating
leases are amortized on a straight-line basis over the term of the lease.
Amortization of these leases is included in depreciation expense.
<PAGE> 16
Cost in Excess of Net Assets of Businesses Acquired, Net
Cost in excess of net assets of businesses acquired generally is
amortized on a straight-line basis over 10 to 20 years. When indications of a
possible impairment in carrying value are present, the Company reviews the
original assumptions and rationale utilized in the establishment of the
carrying value and estimated life. The carrying value would be adjusted to fair
value if significant facts and circumstances altered the Company's original
assumptions and rationale.
Cost in Excess of Net Assets of Businesses Acquired, Net was $146.0
million and $155.1 million at December 31, 1996 and 1995, respectively. This
represents the excess of the cost of acquiring businesses over the fair value
of net assets received at the date of acquisition, net of accumulated
amortization of $34.0 million and $24.9 million at December 31, 1996 and 1995,
respectively.
See "Business Acquisition" for further discussion.
Research and Development Expenditures
Certain software development costs are capitalized when incurred.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Amortization of capitalized software development costs is provided on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current revenues for a product to the total of current and anticipated
future revenues or (b) the straight-line method over the remaining estimated
economic life of the product. Generally, an original estimated economic life of
two years is assigned to capitalized software development costs. Capitalized
Software Development Costs were $51.6 million and $43.8 million at December 31,
1996 and 1995, respectively, net of accumulated amortization costs of $33.4
million and $22.5 million, respectively.
All other research and development expenditures are charged to research
and development expense in the period incurred.
Income Taxes
The liability method as prescribed by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
<PAGE> 17
Income tax benefits related to stock option exercises are credited to
Additional Capital when recognized.
Provision is made for U.S. income taxes, net of available credits, on
the earnings of foreign subsidiaries which are in excess of amounts being held
for reinvestment in overseas operations.
Foreign Currency Translation
For those foreign subsidiaries which have a functional currency other
than the U.S. dollar, assets and liabilities are translated using year-end
exchange rates, and revenue and expense items are translated at the average
exchange rates in effect during the year. The resulting translation adjustments
for these subsidiaries are included in Shareholders' Equity.
For the Company's foreign subsidiaries which have the U.S. dollar as
their functional currency, monetary assets and liabilities are translated at
year-end exchange rates while non-monetary items are translated at historical
rates. Revenue and expense items are translated at the average exchange rates
in effect during the year, except for depreciation and cost of revenue, which
are translated at historical rates. The resulting translation adjustments are
included in Other Income (Expense), Net in the Consolidated Statements of
Operations and were not material in 1996, 1995 or 1994.
Forward Foreign Exchange Contracts
The Company is exposed to foreign currency exchange rate risk when the
Company or its majority-owned entities enter into transactions denominated in
currencies other than their functional currency. The Company, in management of
this exposure, enters into forward foreign exchange contracts for firm purchase
commitments denominated in a foreign currency. The forward contracts are not
held for trading purposes.
The contracts generally have maturities of one year or less and contain
an element of risk that the counterparty may be unable to meet the terms of the
agreement. However, the Company minimizes such risk by limiting the
counterparty to major financial institutions. Management believes the risk of
incurring such losses is remote, and any losses therefrom would not be
material.
Gains and losses on forward contracts are included as part of the value
of the underlying transaction being hedged.
At December 31, 1996, the U.S. dollar equivalent of the forward foreign
exchange contracts outstanding was $42.1 million. Of the contracts held at
December 31, 1996, the following is a summary by currency: Japanese Yen - $38.6
million; Australian Dollar - $2.9 million; and other - $0.6 million.
Income (Loss) Per Share
Income (loss) per share is based upon weighted average common shares
outstanding and common stock equivalents. Common stock equivalents have been
determined assuming the exercise of all dilutive stock options adjusted for the
assumed repurchase of common stock, at the average market price, from the
exercise proceeds. In periods in which a net loss has been incurred, all common
stock equivalents are considered antidilutive. The
<PAGE> 18
fully diluted per share computation assumes the repurchase of common stock at
the ending market price. Primary and fully diluted income (loss) per share are
essentially the same for all periods presented. On April 27, 1994, the Board of
Directors declared a two-for-one stock split, effected in the form of a 100%
stock dividend, to shareholders of record on May 11, 1994. All income (loss)
per share and average shares used in per share computation amounts prior to
1994 have been restated to retroactively reflect the stock split.
Employee Stock-Based Compensation
The Company accounts for employee stock-based compensation under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Accounting for the issuance of stock options
under the provisions of APB 25 typically does not result in compensation
expense for the Company as the exercise price of options are normally
established at the market price of the Company's common stock on the date of
award.
SPECIAL CHARGES
During 1996, the Company reassessed the business prospects of certain of
its products, including Airspan, Litespan-120 and iMTN. Management concluded
that although the longer-term outlook for these products was favorable,
forecasted business levels in the near-term would not sustain the carrying
values of certain assets. As a result, the Company recorded non-cash special
charges totaling $96.0 million, including $82.5 million (Cost of Revenue)
related primarily to provisions for excess and obsolete inventories, deferred
development costs and associated assets. Additionally, $13.5 million was
included in operating expenses for provisions for excess equipment and
facilities.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The following is a summary of the investments in debt securities
classified as current assets (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Available for sale securities:
U.S. Treasury securities
and obligations of U.S.
government agencies ....................... $ 90,114 $198,509
Corporate debt securities .................. 74,676 103,537
Asset-backed securities .................... 14,148 8,653
-------- --------
$178,938 $310,699
======== ========
</TABLE>
The amortized cost of available for sale securities approximated their
fair value at both December 31, 1996 and 1995. Gross realized gains and losses
on sales of available for sale securities were immaterial in 1996, 1995 and
1994.
<PAGE> 19
The estimated fair value of available for sale securities by contractual
maturity at December 31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Due in one year or less ....................... $ 79,910
Due after one year through three years ........ 80,770
Due after three years ......................... 18,258
--------
$178,938
========
</TABLE>
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
Investments in debt securities classified as held to maturity consisted
of collateralized bank obligations with an amortized cost of $30.0 million at
both December 31, 1996 and 1995. The amortized cost of these investments, which
mature in March 1999 and December 2000, approximated their fair market value.
These investments are included in Other Noncurrent Assets on the Consolidated
Balance Sheets.
RECEIVABLES
Receivables consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Current:
Trade................................ $ 402,906 $ 277,521
Leases and notes..................... 14,356 5,355
--------- ---------
417,262 282,876
Allowance for doubtful accounts...... (5,315) (5,870)
--------- ---------
$ 411,947 $ 277,006
========= =========
Long-term:
Leases, notes and other.............. $ 44,711 $ 18,591
Allowance for doubtful accounts...... (1,746) (1,034)
--------- ---------
$ 42,965 $ 17,557
========= =========
</TABLE>
<PAGE> 20
To meet market competition, the Company finances sales of equipment to
certain of its customers through sales-type and operating leases and notes
receivable. The repayment terms vary from one to seven years.
In December 1995, the Company sold certain trade and lease receivables
with recourse for $50.1 million. A portion of the proceeds from the sale of
these receivables was used to repay $9.1 million of long-term installment notes
payable which had been secured by certain of the receivables sold. See
"Contingent Liabilities" under "Commitments and Contingencies" for further
discussion.
The components of the receivables from sales-type leases and notes
receivable are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Total minimum lease
payments receivable ...................... $ 73,403 $ 25,589
Less: Unearned income ..................... (14,390) (4,705)
-------- --------
Total receivables .......................... 59,013 20,884
Less: Current receivables ................. (14,356) (5,355)
-------- --------
Total long-term receivables ................ $ 44,657 $ 15,529
======== ========
</TABLE>
Future minimum lease payments to be received on sales-type leases and
notes receivable are as follows (in thousands):
<TABLE>
<S> <C>
1997 .................................. $ 15,856
1998 .................................. 14,560
1999 .................................. 14,185
2000 .................................. 13,935
2001 .................................. 11,434
Thereafter ............................. 3,433
--------
$ 73,403
========
</TABLE>
PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Land ................................... $ 49,052 $ 49,052
Buildings and leasehold
improvements ..................... 190,731 167,178
Manufacturing, development and
test equipment ................... 301,576 268,115
Office furniture, equipment
and other ........................ 223,312 191,380
--------- ---------
764,671 675,725
Less: Accumulated depreciation
and amortization ................. (361,075) (305,203)
--------- ---------
$ 403,596 $ 370,522
========= =========
</TABLE>
<PAGE> 21
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Warranty and related ........................ $ 76,739 $ 61,839
Payroll and related ......................... 49,137 59,894
Taxes other than income ..................... 31,277 18,787
Customer prepayments and advances ........... 42,489 9,378
Other ....................................... 97,459 70,781
-------- --------
$297,101 $220,679
======== ========
</TABLE>
CREDIT AGREEMENTS AND SHORT-TERM DEBT
In May 1996, the Company entered into a five-year, unsecured $160.0
million revolving credit facility with several banks. This new facility, which
replaced the existing $50.0 million domestic credit facility, provides for
borrowings and issuances of letters of credit in multiple currencies.
Borrowings under this facility bear interest at various rates, including the
prime rate or 0.25% to 0.70% above the LIBOR rate. A commitment fee of 0.10% to
0.23% on the daily average unused portion of the facility is also assessed. 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
value of outstanding letters of credit issued under this facility at December
31, 1996 was $29.3 million, including $27.6 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 1996.
During 1996, two of the Company's foreign subsidiaries repaid
outstanding borrowings under short-term credit agreements with long-term
borrowings totaling $95.7 million. The short-term arrangements were entered
into during 1995, and the interest rates on these agreements were floating
market rates which ranged from 4.5% to 7.5% at December 31, 1995. Available
borrowings under the foreign subsidiary credit agreements totaled approximately
$9.5 million at December 31, 1996, of which $0.9 million was outstanding. The
weighted average interest rate on borrowings outstanding under these agreements
was 5.1% and 5.6% at December 31, 1996 and 1995, respectively.
<PAGE> 22
LONG-TERM DEBT
Total long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
-------- --------
<S> <C> <C>
Fixed rate:
Unsecured 9.0% notes,
due 1996 - 2003 ..................... $196,875 $225,000
Unsecured 8.75% note,
due 1995 - 2000 ..................... 11,988 13,973
Variable rate:
Unsecured note,
due 2000 - 2001 ..................... 50,649 --
Unsecured note,
due 1999 - 2011 ..................... 42,208 --
Other .................................. 5,954 4,566
-------- --------
Total ............................... 307,674 243,539
Less: Current maturities ............... 33,072 33,098
-------- --------
Total long-term debt ................ $274,602 $210,441
======== ========
</TABLE>
The variable rate notes were entered into during 1996 and are
denominated in Danish Kroner. The notes bear interest, at the Company's option,
at either the lender's base rate or at current market rates in Denmark plus
0.56% to 0.69%. The interest rates are adjusted to market rates at the end of
each interest period, as defined. At December 31, 1996, these rates ranged from
4.2% to 5.0%.
The aggregate maturities of long-term debt for the next five years are
as follows: 1997 - $33.1 million; 1998 - $32.7 million; 1999 - $33.4 million;
2000 - $59.1 million; 2001 - $57.0 million; thereafter - $92.4 million.
The majority of the Company's long-term debt agreements contains various
financial covenants, including among other things, minimum net worth,
maintenance of certain fixed charge ratios and maximum allowable indebtedness
to net worth.
<PAGE> 23
INCOME TAXES
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ........................... $ 35,169 $ 115,193 $ 45,189
Puerto Rico and State ............. 5,656 9,057 7,450
Foreign ........................... 4,903 4,908 7,925
--------- --------- ---------
Total current ................. 45,728 129,158 60,564
--------- --------- ---------
Deferred:
Federal ........................... (33,766) (27,202) --
Foreign ........................... (16,593) (4,686) --
--------- --------- ---------
Total deferred ................ (50,359) (31,888) --
--------- --------- ---------
Total tax expense (benefit) ... $ (4,631) $ 97,270 $ 60,564
========= ========= =========
</TABLE>
The income tax benefits related to the exercise of stock options of $6.9
million, $50.0 million and $24.1 million in 1996, 1995 and 1994, respectively,
reduced taxes currently payable and were credited to Additional Capital.
Included in the $50.0 million benefit recognized in 1995 is $36.0 million of
benefits related to exercises prior to 1995.
Income (loss) before income taxes for the year ending December 31, 1996
includes U.S. pretax income of $34.9 million and foreign pretax losses of $47.1
million. Foreign pretax earnings in 1995 and 1994 were less than five percent
of total income before income taxes.
<PAGE> 24
The effective income tax rate on pretax income differed from the federal
income tax statutory rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax charge (credit):
At statutory rate ............ $ (4,265) $ 101,483 $ 78,117
Foreign and U.S. tax
effects attributable
to foreign operations ...... (1,135) 1,363 4,113
Tax credit utilization ....... -- (4,606) (3,810)
Net operating losses
utilized ................... -- (3,500) (40,615)
State income taxes,
net of federal
tax effect ................. 769 2,530 2,015
Federal alternative
minimum tax ................ -- -- 20,744
--------- --------- ---------
$ (4,631) $ 97,270 $ 60,564
========= ========= =========
</TABLE>
<PAGE> 25
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax asset as of December
31, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets
Asset valuation reserves not yet
deductible for tax ........................... $ 46,752 $ 15,453
Accrued liabilities not yet
deductible for tax ........................... 54,384 37,087
Federal and foreign loss carryforwards ......... 19,185 12,961
Tax credit carryforwards ....................... 4,749 5,740
Other .......................................... 3,093 3,474
--------- ---------
Deferred asset ............................. 128,163 74,715
--------- ---------
Deferred Tax Liabilities
Capitalized software development
costs ........................................ (25,138) (20,227)
Deferred revenue ............................... (4,955) (8,101)
Depreciation ................................... (6,580) (4,464)
Other .......................................... (9,243) (10,035)
--------- ---------
Deferred liability ......................... (45,916) (42,827)
--------- ---------
Net deferred tax asset .................. $ 82,247 $ 31,888
========= =========
</TABLE>
Of the Company's $82.2 million net deferred tax asset at December 31,
1996, $61.1 million is shown separately as part of current assets in the
Consolidated Balance Sheet. The balance is included in other noncurrent assets
and liabilities. The Company expects to have sufficient taxable earnings in the
future to realize its net deferred tax asset at December 31, 1996, and as a
result, the Company believes that a deferred tax asset valuation allowance is
not required at December 31, 1996.
Included in Noncurrent Income Taxes and Other Liabilities at December
31, 1996 and 1995 are $45.9 million and $36.6 million, respectively, for
noncurrent taxes related primarily to foreign jurisdictions.
At December 31, 1996, the Company had foreign net operating loss
carryforwards of approximately $55.0 million which expire in the years 2000 and
2001. Also, the Company has approximately $1.7 million foreign tax credit
carryforwards and $4.8 million alternative minimum tax credits. The foreign tax
credits expire from 1998 to 2001. Alternative minimum tax credits do not
expire.
Certain of the Company's subsidiaries operating in non-U.S.
jurisdictions have been granted specific tax exemptions from local income
taxes. These exemptions vary in amount and expire beginning in the year 2005
through 2008. Undistributed earnings of foreign subsidiaries are not material.
<PAGE> 26
INCENTIVE COMPENSATION
The Company has an Incentive Awards Plan (the "Plan") administered by
the Compensation Committee of the Board of Directors which provides for payment
of cash and stock awards to officers and key employees based upon achievement
of specific goals by the Company and the participating executives. No payments
were made under the Plan in 1996. In 1995, cash of approximately $6.4 million
and approximately 74,000 shares of restricted stock (valued at approximately
$2.5 million and vesting over two years) were awarded under the Plan. In 1994,
cash awards of approximately $7.0 million were charged to income under the
Plan. The Company also had a 1990 Long-Term Incentive Compensation Plan
("LTIP") which awards performance units to certain key executives. Certain
officers were awarded units in 1990 under the Company's 1990 LTIP by the
Compensation Committee of the Board of Directors. The units vested to the
officers over six years through December 31, 1995, and the value of a unit was
determined annually based on the Company's operating performance, as defined in
the plan. The total value of the units included amounts payable in cash which
were charged to operations in 1995 and 1994 (approximately $7.2 million and
$6.9 million, respectively) and approximately 146,000 shares of restricted
stock issued in January 1996. The restricted shares, which vest in equal annual
increments over two years, were valued at $5.4 million at the date of award, of
which $2.7 million was charged to operations during 1996. Also, during 1995 and
early 1996, 177,000 units were awarded by the Compensation Committee of the
Board of Directors to certain key executives under the Company's 1994 LTIP. The
units vest to the officers over five years beginning in 1996, and the value of
a unit is determined annually beginning in 1996 based on the Company's
operating performance, as defined in the plan. These units had no value as of
December 31, 1996, and no amounts were charged to operations during the year.
COMMON AND PREFERRED STOCK
Description and Dividends
At December 31, 1996, the Company was authorized to issue 500 million
shares of common stock, $0.01 par value, and 5 million shares of preferred
stock, $1.00 par value. Since inception, the Company has not declared or paid a
cash dividend.
On April 27, 1994, the Board of Directors declared a two-for-one stock
split, effected in the form of a 100% stock dividend, to shareholders of record
on May 11, 1994. The stock split resulted in the issuance of approximately
56,004,000 new shares of common stock and the transfer of $0.6 million from
Additional Capital to Common Stock, representing the par value of the shares
issued. All average share and income (loss) per share data prior to 1994 were
restated to retroactively reflect the stock split.
<PAGE> 27
On April 25, 1996, the Board of Directors declared a dividend of one
preferred stock purchase right on each outstanding share and each subsequently
issued share of the Company's common stock. The rights will become exercisable
only on the close of business ten days following a public announcement that a
person or group has acquired 15% or more of the common stock of the Company or
a public announcement or commencement of a tender or exchange offer which would
result in the offeror's acquiring 15% or more of the outstanding shares of
common stock of the Company. Once exercisable, each right would entitle a
holder to buy 1/1000 of a share of the Company's Series B Junior Participating
Preferred Stock at an exercise price of $175.00. The Company may redeem the
rights, which expire on April 25, 2006, for $0.01 per right prior to the rights
becoming exercisable. These rights replaced the existing stock purchase rights
which expired during 1996.
Stock Purchase Plans
Under provisions of the Company's employee stock purchase plans,
employees can purchase the Company's common stock at a specified price through
payroll deductions during an offering period, currently established on an
annual basis. In August 1996, approximately 262,000 shares were issued to
employees under the employee stock purchase plans. At December 31, 1996,
approximately $4.4 million had been contributed by employees that will be used
to purchase shares at the end of the offering period in August 1997. At
December 31, 1996, the Company could issue up to 6,979,000 shares under the
employee stock purchase plans of which approximately 4,718,000 shares had been
purchased and issued and approximately 504,000 shares were subscribed for
issuance in August 1997 assuming no further withdrawals from the plans.
Stock Options
At the April 25, 1996 Annual Shareholders' Meeting, the shareholders
approved an increase of 6 million shares of common stock authorized for
issuance under one of the Company's stock option plans. This increase provided
additional shares to support the 1995 grant of 2,000,000 options to one of the
Company's executive officers. All 1995 information presented has been adjusted
to reflect this grant. The plans provide for the issuance of both incentive
stock options and nonqualified stock options exercisable for a period of ten
years, as well as restricted stock issuances. The plans cover 24,244,000 shares
of common stock. At December 31, 1996, plan options covering 9,350,000 shares
had been granted and were outstanding, options granted under the plans covering
11,423,000 shares had been exercised, 1,078,000 restricted shares had been
issued (net of forfeitures), 901,000 shares had expired and options covering
1,492,000 shares were available for grant. The exercise prices of stock options
granted were at the market value of the Company's common stock at the date of
grant or issuance. Options issued under these plans allow optionees the ability
to exercise at any time subsequent to grant. Restricted stock is issued for any
such exercises of stock options prior to their vesting date.
In the event of discontinuation of service by the optionees, all or a
portion of the shares acquired pursuant to these options can be repurchased by
the Company, at its option, based on the vesting terms in the option
agreements.
<PAGE> 28
On October 28, 1996, the Board of Directors approved a plan to reprice a
portion of the Company's outstanding stock options, excluding options held by
certain executive officers. As a result, 2,957,000 options with exercise prices
ranging from $23.88 to $52.25 per share were repriced at $13.50 per share, the
fair market value on the date of repricing. For any unvested options included
in this repricing, the vesting schedule was amended to coincide with the stock
option repricing date. This repricing has been reflected in the table below as
part of the options granted and canceled during 1996.
<PAGE> 29
Outstanding options are summarized as follows:
<TABLE>
<CAPTION>
Options
-------
Plans Other
----- -----
<S> <C> <C>
December 31, 1993--
Shares issuable
upon exercise ................ 3,382,000 34,000
Price per share ................ $0.01-$67.00 $12.13-$17.00
Average price
per share .................... $14.07 $13.56
Expiration ..................... 1994-2003 1994-1997
1994 Transactions
Issuances from stock split ..... 3,234,000 20,000
Price per share ................ $0.01-$33.50 $6.06-$8.50
Issuances and grants ........... 333,000 --
Price per share ................ $23.88-$62.88 --
Exercises and
forfeitures .................. 1,687,000 34,000
Price per share ................ $0.01-$32.38 $6.06-$12.13
December 31, 1994--
Shares issuable
upon exercise ................ 5,262,000 20,000
Price per share ................ $0.01-$33.50 $8.50
Average price
per share .................... $10.02 $8.50
Expiration ..................... 1995-2004 1997
1995 Transactions
Issuances and grants ........... 3,380,000 --
Price per share ................ $29.25-$52.25 --
Exercises and
forfeitures .................. 1,577,000 --
Price per share ................ $0.01-$52.25 --
December 31, 1995--
Shares issuable
upon exercise ................ 7,065,000 20,000
Price per share ................ $0.01-$52.25 $8.50
Weighted-average exercise
price per share .............. $22.44 $8.50
Expiration ..................... 1996-2005 1997
1996 Transactions
Issuances and grants ........... 7,248,000 --
Price per share .............. $13.50-$37.13 --
Weighted-average exercise
price per share ............ $21.67 --
Exercises ...................... 1,048,000 20,000
Price per share .............. $0.01-$28.63 $8.50
Weighted-average exercise
price per share ............ $5.34 $8.50
Forfeitures and expirations .... 3,915,000 --
Price per share .............. $0.01-$37.88 --
Weighted-average exercise
price per share ............ $29.38 --
December 31, 1996--
Shares issuable
upon exercise ................ 9,350,000 --
Price per share ................ $2.31-$52.25 --
Weighted-average exercise
price per share .............. $20.85 --
Expiration ..................... 1997-2006 --
</TABLE>
<PAGE> 30
Restricted Stock
The Company's Board of Directors authorized the issuance of restricted
shares of the Company's common stock to certain key employees under its 1993,
1988 and 1984 employee stock option plans. Holders of restricted stock retain
all rights of a shareholder, except the shares cannot be sold until they are
vested. Upon employee termination other than retirement, all unvested shares
are forfeited to the Company. The shares vest annually through 1999.
The Company issued 338,000, 110,000 and 6,000 shares of restricted stock
to employees in 1996, 1995 and 1994, respectively, and increased common stock
and additional capital by the fair market value of the stock at the date of
issuance ($11.3 million, $3.8 million and $0.2 million in 1996, 1995 and 1994,
respectively), net of unearned compensation. At December 31, 1996, 1995 and
1994, unearned compensation related to the restricted shares was $8.7 million,
$4.3 million and $1.8 million, respectively. The unearned compensation will be
charged to expense ratably over the vesting period. Approximately 18,000, 2,000
and 14,000 restricted shares were forfeited in 1996, 1995 and 1994,
respectively, totaling $0.5 million, $0.03 million and $0.2 million,
respectively.
Reserved Stock
Common stock has been reserved for the following purposes (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Options outstanding .................... 9,350 5,085
Options available for grant
under the stock option plans ......... 1,492 1,513
Stock purchase plans ................... 2,261 2,523
------ ------
13,103 9,121
====== ======
</TABLE>
<PAGE> 31
Pro Forma Disclosures
Although the Company has elected to continue to apply the provisions of
APB 25 for expense recognition purposes, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", ("FAS 123")
requires disclosure of pro forma information which provides the effects on Net
Income (Loss) and Income (Loss) Per Share as if the Company had accounted for
its employee stock awards under the fair value method prescribed by FAS 123.
The fair value of the Company's employee stock awards was estimated using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.9%
and 6.5%; stock price volatility factors of 56% and 61%; and expected option
lives of 3 years and 7 years. The Company does not have a history of paying
dividends, and none have been assumed in estimating the fair value of the
options. The weighted-average fair value per share of options granted in 1996
was $8.94.
The Company does not believe that the pro forma disclosures required by
FAS 123 provide meaningful or useful information to financial statement users.
In addition, the Company does not believe that the impact on net income (loss)
shown in the pro forma disclosures below is indicative of operating performance
of the Company.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Option valuation models also require the input of
highly subjective assumptions such as expected option life and expected stock
price volatility. Because the Company's employee stock-based compensation plans
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the Company believes that the existing option valuation
models do not necessarily provide a reliable measure of the fair value of
awards from those plans.
Pro Forma Required Disclosures:
1996 1995
---- ----
(in millions, other than per share data)
Net income (loss) $ (25.9) $ 187.4
Income (loss) per share $ (0.22) $ 1.60
As required by FAS 123, only awards granted in 1995 and 1996 have been included
in determining the amount of additional compensation expense for those years.
As such, the effects of applying FAS 123 on 1996 and 1995 results are not
necessarily representative of the additional compensation expense which will be
included in future years' pro forma disclosures as more than two years of
awards will be considered.
At December 31, 1996, approximately 5,425,000 of the Company's
outstanding stock options with exercise prices ranging from $2.31 to $18.00 per
share had a weighted-average exercise price per share of $12.15 and a
weighted-average remaining contractual life of 8 years. The remaining options
outstanding had a weighted-average exercise price of $32.88 per share with a
weighted-average remaining contractual life of 9 years.
<PAGE> 32
OTHER INCOME (EXPENSE), NET
Other Income (Expense), Net for the year ended December 31, 1996
included approximately $10 million of proceeds related to the settlement of
litigation between the Company and Advanced Fibre Communications, Inc. ("AFC").
Other Income (Expense), Net also included the litigation expenses and
applicable costs associated with this litigation. As part of the litigation
settlement, the Company also received 719,424 shares of non-marketable AFC
common stock in July 1996 which the Company recorded in the Consolidated
Balance Sheet at no value due to contractual registration and selling
restrictions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments", requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, accounts receivable,
short-term debt, accounts payable and accrued liabilities are reflected in the
financial statements at fair value. Investments in debt and equity securities
classified as available for sale have been recorded in the financial statements
at current market values. Current market values of investments in debt
securities classified as held to maturity are disclosed in the "Investments in
Debt and Equity Securities" footnote. The fair value of the Company's long-term
debt at December 31, 1996 and 1995 was approximately $320.6 million and $265.2
million, respectively. The fair values of the Company's off-balance-sheet
financial instruments are based on current settlement values (forward foreign
exchange contracts) and fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing (guarantees and letters of credit). There were
no significant differences between the carrying amounts and fair values of any
off-balance-sheet financial instruments at December 31, 1996 and 1995. See
"Commitments and Contingencies" for the carrying amounts of the Company's
off-balance-sheet financial instruments.
COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain facilities and equipment which require future
rental payments. These rental arrangements do not impose any financing or
dividend restrictions on the Company or contain contingent rental provisions.
Certain of these leases have renewal and purchase options generally at the fair
value at the renewal or purchase option date.
<PAGE> 33
Future minimum rental commitments under operating leases with
noncancelable lease terms in excess of one year were as follows at December 31,
1996 (in thousands):
<TABLE>
<S> <C>
1997 ....................................... $ 24,225
1998 ....................................... 18,018
1999 ....................................... 13,337
2000 ....................................... 11,538
2001 ....................................... 9,672
Thereafter .................................. 26,140
--------
$102,930
========
</TABLE>
Operating lease rental expense was $27.5 million, $28.9 million and
$24.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
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 December 31,
1996. The Company also has guarantees of approximately $26.9 million
outstanding at December 31, 1996, supporting Company and third-party
performance bonds to customers and others, of which approximately $1.7 million
was 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.
At December 31, 1996, the Company had forward foreign exchange contracts
of $42.1 million. See "Forward Foreign Exchange Contracts" under "Summary of
Significant Accounting Policies" for further discussion.
<PAGE> 34
Litigation
On February 14, 1996, the Company joined Bell Atlantic in bringing an
antitrust action against AT&T Corporation ("AT&T") and Lucent Technologies,
Inc. ("Lucent") alleging the use of monopoly power in the central office switch
market as part of a scheme to gain an unfair competitive advantage in the
remote digital terminal market. In July 1996, Lucent brought a counterclaim
against the Company alleging a "false advertising" claim under the Lanham Act.
On February 18, 1997, the Company and Bell Atlantic settled their claims
against AT&T. The Company, Bell Atlantic and Lucent settled all claims against
each other on March 13, 1997. In conjuction with these settlements, Bell
Atlantic agreed to purchase a significant amount of product from the Company
over a five year period beginning in 1998. The agreement requires a minimum
annual purchase level substantially above the amount purchased by Bell Atlantic
from the Company in 1996 which totaled approximately $120 million.
On June 11, 1996, a federal court entered a $137.7 million judgment in
the Company's favor and against Next Level Corporation ("Next Level") and two
former Company employees. The Company had filed suit in 1995 alleging theft of
trade secrets and diversion of corporate opportunities. On February 28, 1997,
the Fifth Circuit of Appeals upheld the judgment. The defendants are enjoined
from disclosing the Company's trade secrets until the judgment is satisfied.
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 is seeking 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 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
<PAGE> 35
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 and
postponed entering a judgment pending the outcome of additional mediation.
The Company is also party to other routine legal proceedings incidental
to its business.
The Company does not believe the ultimate resolution of the above
litigation will have a material adverse effect on its consolidated financial
position.
<PAGE> 36
INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
International Operations
The Company operates in a single industry segment, the
telecommunications equipment marketplace.
A summary of the Company's operations by geographic area is presented
below (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue from unaffiliated
customers:
United States ............................... $ 1,163,520 $ 1,188,357 $ 908,664
Europe ...................................... 145,850 155,562 47,287
Other International ......................... 71,521 78,099 47,174
Eliminations ................................ -- -- --
----------- ----------- -----------
Consolidated ................................ $ 1,380,891 $ 1,422,018 $ 1,003,125
=========== =========== ===========
Intercompany revenue between geographic areas:
United States ............................... $ 73,002 $ 65,856 $ 63,871
Europe ...................................... 30,171 15,357 11,473
Other International ......................... 47,720 5,373 4,301
Eliminations ................................ (150,893) (86,586) (79,645)
----------- ----------- -----------
Consolidated ................................ $ -- $ -- $ --
=========== =========== ===========
Operating income (loss):
United States ............................... $ 23,674 $ 284,525 $ 215,280
Europe ...................................... (46,292) (14,090) 2,509
Other International ......................... 10,345 4,139 505
Eliminations ................................ 230 4,844 (4,295)
----------- ----------- -----------
Consolidated ................................ $ (12,043) $ 279,418 $ 213,999
=========== =========== ===========
Identifiable assets at December 31:
United States ............................... $ 1,496,663 $ 1,546,378 $ 1,012,006
Europe ...................................... 362,329 296,157 234,983
Other International ......................... 67,781 22,916 27,715
Eliminations ................................ (1,118) (176) (6,168)
----------- ----------- -----------
Consolidated ................................ $ 1,925,655 $ 1,865,275 $ 1,268,536
=========== =========== ===========
</TABLE>
The information presented above may not be indicative of results if the
geographic areas were independent organizations. Intercompany transactions are
made at established transfer prices.
Revenue generated from export sales was less than 10% of consolidated
revenue in 1996, 1995 and 1994.
<PAGE> 37
Major Customers
Three customers accounted for at least 10% of the Company's consolidated
revenue in 1996, 1995 and 1994. In the aggregate, the revenue from these
customers was 39%, 42% and 46% of consolidated revenue in 1996, 1995 and 1994,
respectively. These customers included two major telecommunications service
providers and a major electronics manufacturer.
BUSINESS ACQUISITION
In November 1994, the Company acquired all of the outstanding stock of
NKT Elektronik A/S, a Copenhagen, Denmark-based manufacturer of optical
transmission equipment, for $149.4 million in cash. The acquisition cost was
funded with existing cash and approximately $62 million in short-term
borrowings. Following the acquisition, the name of NKT Elektronik A/S was
changed to DSC Communications A/S. The Company's consolidated results include
the operations of DSC Communications A/S from the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price has been allocated to
the net assets acquired based on their estimated fair values with the balance
of the purchase price ($117.3 million in 1995) included in Cost in Excess of
Net Assets of Businesses Acquired, Net. The cost in excess of net assets of
business acquired is being amortized over 20 years.
<PAGE> 38
To the Board of Directors and Shareholders
of DSC Communications Corporation:
We have audited the accompanying consolidated balance sheets of DSC
Communications Corporation and subsidiaries (the "Company") as of December 31,
1996 and 1995 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
January 23, 1997
<PAGE> 39
DSC Communications Corporation and Subsidiaries
QUARTERLY RESULTS
(Unaudited) (In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- ------------------------------------------
Fourth Third(A)(B) Second(B) First Fourth Third Second First
------ ----------- --------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ............... $ 390,560 $ 326,003 $ 356,431 $ 307,897 $ 373,891 $ 370,119 $ 360,011 $ 317,997
Gross profit .......... 150,202 28,457 147,019 129,466 175,097 174,406 177,726 158,670
Net income (loss) ..... $ 17,548 $ (57,890) $ 21,262 $ 11,525 $ 49,442 $ 49,367 $ 51,955 $ 41,916
========= ========= ========= ========= ========= ========= ========= =========
Income (loss)
per share ............ $ 0.15 $ (0.49) $ 0.18 $ 0.10 $ 0.42 $ 0.42 $ 0.44 $ 0.36
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
(A) The 1996 third quarter results included non-cash special charges of $96.0
million ($82.5 million reduced gross profit and $13.5 million was charged
to operating costs and expenses) related primarily to a reduction in the
carrying value of certain assets for several of the Company's products. See
"Special Charges" in Notes to Consolidated Financial Statements and
Management's Discussion and Analysis for further discussion.
(B) In the second and third quarter of 1996, the Company received a total of
approximately $10.0 million of proceeds related to the settlement of certain
litigation. Approximately $3.0 million was recorded in the second quarter of
1996 with the remaining $7.0 million recorded in the third quarter of 1996.
Also included in the second and third quarter of 1996 were the litigation
expenses and applicable costs associated with this litigation. See "Other
Income (Expense), Net" in Notes to Consolidated Financial Statements for
further discussion.
<PAGE> 1
Exhibit 21.1
DSC COMMUNICATIONS CORPORATION
Subsidiaries Incorporated in
------------ ---------------
DSC Communications (Asia Pacific) PTE LTD Singapore
DSC Communications (Cayman) Ltd. Cayman Islands
DSC Communications (Far East) Limited Hong Kong
DSC Communications A/S Denmark
DSC Communications Canada Inc. Canada
DSC Communications Dedicom A/S Denmark
DSC Communications France S.A. France
DSC Communications (India) Private Limited India
DSC Communications Ireland Ireland
DSC Communications Ireland Holdings Ltd. Ireland
DSC Communications Italia S.r.l. Italy
DSC Communications Limited United Kingdom
DSC Communications (Nederland) B.V./ (1)
Sildor Investments B.V.
DSC Communications Polska Sp.Z.o.o. Poland
DSC Communications PTY. Ltd. Australia
DSC Communications Technics Ltd. United Kingdom
DSC Communicaciones de Costa Rica, S.A. Costa Rica
DSC Communicaciones de Mexico, S.A. Mexico
DSC Communicacoes Ltda. Brazil
DSC Finance Corporation Delaware
DSC Finance PTY Ltd. Australia
DSC Global Export Ltd. Barbados
DSC International Corporation Delaware
DSC Japan Inc.(2) Japan
DSC Kommunikationsdienste GmbH Germany
DSC Korea, Inc. Delaware
DSC Local Networks (Europe) Limited United Kingdom
DSC Marketing Services, Inc. Delaware
DSC of Purerto Rico, Inc. Delaware
DSC of the Virgin Islands, Inc. Virgin Islands
DSC Taiwan, Inc. Delaware
DSC Telecom Inc. Nevada
DSC Telecommunications Corporation Delaware
Fibcom India Limited(3) India
Netman A/S(4) Denmark
TMN A/S(5) Denmark
TMN Udvikling I/S Denmark
- -------------
(1) Incorporated in The Netherlands and Delaware; name changed in The
Netherlands 10/11/96; name change in Delaware in process
(2) Jointly-owned with Mitsubishi Corporation
(3) Jointly-owned company with Indian Telephone Industries Ltd. and The
Industrialisation Fund for Developing Countries
(4) Jointly-owned company with Digital Equipment Corporation
(5) Participant in a partnership, TMN Udvikling I/S, with Copenhagen Telephone
and Jutland Telephone
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of DSC Communications Corporation of our report dated January 23, 1997 included
in the 1996 Annual Report to Shareholders of DSC Communications Corporation.
Our audit also included the financial statement schedule of DSC Communications
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-83398, 2-95833, 33-17459, 33-22745, 33-38544,
33-65212, 33-65214, 33-64784, 33-49718, 33-61423, and 33-61425) of our report
dated January 23, 1997 with respect to the financial statements and schedule of
DSC Communications Corporation incorporated by reference in this Annual Report
(Form 10-K).
Ernst & Young LLP
Dallas, Texas
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 155,101
<SECURITIES> 178,938
<RECEIVABLES> 411,947
<ALLOWANCES> 0
<INVENTORY> 343,566
<CURRENT-ASSETS> 1,202,878
<PP&E> 764,671
<DEPRECIATION> 361,075
<TOTAL-ASSETS> 1,925,655
<CURRENT-LIABILITIES> 432,922
<BONDS> 274,602
0
0
<COMMON> 1,222
<OTHER-SE> 1,146,414
<TOTAL-LIABILITY-AND-EQUITY> 1,925,655
<SALES> 1,380,891
<TOTAL-REVENUES> 1,380,891
<CGS> 843,247
<TOTAL-COSTS> 925,747
<OTHER-EXPENSES> 233,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,355
<INCOME-PRETAX> (12,186)
<INCOME-TAX> (4,631)
<INCOME-CONTINUING> (7,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,555)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
